NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
As of
February 28, 2019
(Dollars In Millions, Except Share Data)
Note A – Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the OMNOVA Solutions Inc. (“OMNOVA Solutions”, "OMNOVA", the “Company”, "we", "us" or "our") Annual Report on Form 10-K for the year ended
November 30, 2018
, previously filed with the Securities and Exchange Commission (“SEC”).
The consolidated financial statements as of
February 28, 2019
have been derived from the unaudited interim consolidated financial statements at that date and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
These interim consolidated financial statements reflect all adjustments that are, in the opinion of Management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature except as disclosed herein. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year.
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires Management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
The consolidation method is followed to report investments in subsidiaries. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Inter-company accounts and transactions are eliminated during the consolidation process of these accounts.
A detailed description of the Company’s significant accounting policies and Management judgments is located in the audited consolidated financial statements for the year ended
November 30, 2018
, included in the Company’s Form 10-K filed with the SEC.
Description of Business
– The Company is an innovator of emulsion polymers, specialty chemicals and engineered surfaces for a variety of commercial, industrial and residential end uses. The Company's products provide a variety of important functional and aesthetic benefits to hundreds of products that people use daily. The Company holds leading positions in key market categories, which have been built through innovative products, customized product solutions, strong technical expertise, well-established distribution channels, recognized brands, and long-standing customer relationships. The Company utilizes strategically-located manufacturing, technical and other facilities in North America, Europe, China, and Thailand to service a broad customer base. The Company has
two
business segments: Specialty Solutions, which is focused on the Company's higher growth specialty businesses, and Performance Materials, which is focused on the Company’s more mature businesses.
Specialty Solutions
– The Specialty Solutions segment develops, designs, produces, and markets a broad line of specialty polymers for use in coatings, adhesives, sealants, elastomers, nonwovens, and oil & gas products, as well as laminates and films. These products are used in numerous applications, including architectural and industrial coatings; nonwovens used in hygiene products, filtration and construction; drilling additives for oil and gas exploration and production; elastomeric modification of plastic casings and hoses used in household and industrial products and automobiles; tapes and adhesives; sports surfaces; textile finishes; commercial building refurbishment; new construction; residential cabinets; flooring; ceiling tile; furnishings; manufactured housing; health care patient and common area furniture; and a variety of industrial films applications. The segment's products enhance our customers’ products performance, including stain, rust and aging resistance; surface modification; gloss; softness or hardness; dimensional stability; high heat and pressure tolerance; and binding and barrier (e.g. moisture, oil) properties.
The Specialty Solutions segment consists of Specialty Coatings & Ingredients, Oil & Gas, and Laminates & Films. The Specialty Coatings & Ingredients business line encompasses products that have applications for specialty coatings, nonwovens (such as disposable hygiene products, engine filters, roofing mat, and scrub pads), construction, adhesives, sealants, tape, floor care, textiles, graphic arts, and various other specialty applications. Oil & Gas applications include drilling fluid additives, which provide fluid loss control and sealing to enhance wellbore integrity, as well as cement additives for gas migration and fluid loss. The Laminates & Films product line applications include kitchen and bath cabinets, wall surfacing, manufactured
housing and recreational vehicle interiors, flooring, commercial and residential furniture, retail display fixtures, home furnishings, commercial appliances, and a variety of industrial film applications.
Performance Materials
– The Performance Materials segment serves mature markets with a broad range of emulsion polymers based primarily on styrene butadiene (SB), styrene butadiene acrylonitrile (SBA), styrene butadiene vinyl pyridine, high styrene pigments, polyvinyl acetate, acrylic, styrene acrylic, calcium stearate, glyoxal, and bio-based chemistries. Performance Materials' custom-formulated products are tailored latexes, resins, binders, antioxidants, hollow plastic pigment, coated fabrics, and rubber reinforcing which are used in tire cord, polymer stabilization, industrial rubbers, carpet binders, paper coatings, and various other applications. Its products provide a variety of functional properties to enhance the Company’s customers’ products, including greater strength, adhesion, dimensional stability, ultraviolet resistance, improved processibility, and enhanced appearance.
The Performance Materials segment encompasses performance additives, paper coatings, carpet binders, and coated fabrics. This segment includes products that have applications in the paper coatings, paperboard, carpet binders, polymer stabilization, industrial rubbers, and tire cord industries. Paper and paperboard coatings are used in magazines, catalogs, direct mail advertising, brochures, printed reports, food cartons, household, and other consumer and industrial packaging. Carpet binders are used to secure carpet fibers to carpet backing and meet stringent manufacturing, environmental, odor, flammability, and flexible installation requirements. Tire cord is used in automotive tires. The Coated Fabrics product line applications include upholstery used in refurbishment and new construction for the commercial office, hospitality, health care, retail, education and restaurant markets, marine and transportation seating, commercial and residential furniture, automotive soft tops, and automotive after-market applications.
Accounting Standards Adopted in 2019
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers Accounting Standards Codification ("ASC") Topic 606, which clarified existing accounting literature relating to how and when a company recognizes revenue. This standard prescribes a five-step model for recognizing revenue, the application of which will require a certain amount of judgment. The provisions of this ASU may be applied retroactively or on a modified retrospective (cumulative effect) basis. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Accounting Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to fiscal 2019. The standard requires additional disclosures in the notes to the consolidated financial statements, including qualitative and quantitative disclosures identifying the nature, amount, timing and significant judgments impacting revenue from contracts with customers. The Company adopted ASU 2014-09 during the first quarter of fiscal year 2019 and utilized the modified retrospective approach and recorded a cumulative effect adjustment to retained earnings of
$0.5 million
for the accounting impact of certain previously capitalized contract costs as of December 1, 2018.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this ASU also allow only the service cost component to be eligible for capitalization when applicable. ASU 2017-07 must be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic benefit cost in assets. The Company adopted ASU 2017-17 during the first quarter of fiscal year 2019. The Company elected to use the practical expedient to use amounts disclosed in the first quarter 2018 consolidated financial statements as an estimate for applying the retrospective presentation requirements. As a result, selling, general, and administrative expense ("SG&A") increased by
$0.5 million
and other (income) expense increased by
$0.5 million
in the first quarter of fiscal 2019 and 2018. Other than this reclassification, the adoption of ASU 2017-07 did not have an impact on the Company’s consolidated financial statements as of and for the quarter ended February 28, 2019 and 2018.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which clarifies existing guidance related to accounting for cash receipts and cash payments and classification on the statement of cash flows. The amendments in this ASU should be applied using a retrospective transition method to each period presented. The Company adopted the amendments of this ASU effective December 1, 2018, and this ASU did not have an impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU should be applied using a retrospective transition method to each period presented. The Company adopted the amendments of this ASU effective December 1, 2018, and this ASU did not have an impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which clarified existing guidance on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the amendments of this ASU effective December 1, 2018, and this ASU did not have an impact on the Company's consolidated financial statements.
Accounting Standards Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Loss), which allow a reclassification from accumulated other comprehensive income (loss) to retained earnings for standard tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted in any interim period. The Company is currently evaluating the potential impact on its consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging, which applies targeted improvements to the hedge accounting guidance, including removing the requirement to record the ineffective portion of a hedging instrument in current period income. The guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted in any interim period. Amendments from this ASU are to be applied prospectively, with a cumulative effect adjustment recorded to retained earnings. The Company is currently evaluating the potential impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (ASC Topic 842), which requires a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. The new guidance is effective for the Company’s fiscal year that begins on December 1, 2019. The Company will elect the optional transition method to the adoption for lessees related to finance and operating leases existing at, or entered into after, December 1, 2019, and the Company will record a cumulative effect adjustment to retained earnings on the same date, if necessary. This optional transition method will not require any restatements prior to the Company's 2020 fiscal year. The Company has developed a project plan, assembled a project team and formalized a project timeline for the adoption of ASC 842. The Company is currently evaluating certain practical expedients available. The Company is implementing controls to support recognition and disclosure under ASC 842. As the implementation project progresses, the Company will determine the extent of the impact on its consolidated financial statements and related disclosures.
Note B – Revenue Recognition
The Company recognizes revenues when control of the promised goods is transferred to customers, in an amount that reflects the consideration expected to be received in exchange for those goods in accordance with ASC 606. When recognizing revenue, the Company applies the following five-step approach: 1) identify the contract with a customer, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when a performance obligation is satisfied.
The Company considers confirmed customer purchase orders, which are typically governed by master sales agreements, to be the contracts, from an accounting perspective, with its customers. Under the Company's standard contract terms and conditions, the only performance obligation is the delivery of products and the performance obligation is satisfied at a point in time when the Company transfers control of the products to its customers. The Company may receive orders for products to be delivered over multiple dates that may extend across several reporting periods. The Company invoices its customers for each order and recognizes revenue for each distinct product upon shipment, once transfer of control has occurred. Payment terms used are standard for the industry and jurisdictions in which the Company operates. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment, to determine the net consideration to which the Company expects to receive. Discounts or rebates are specifically stated in customer contracts or invoices, and are recorded as a reduction of revenue in the period the related revenue is recognized. Rebates are estimated based on sales terms and past experience and typically are credited to customers based on achieving certain defined volume levels. The product price, as specified on the customer confirmed orders, is considered the standalone selling price. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. The Company reviews material contracts to determine transfer of control based upon the business practices and legal requirements of each country.
The Company enters into various payment terms with its customers by the type and location of the customer and the products offered. Generally, the time between when revenue is recognized and when payment is due is not significant. The amount of shipping and handling fees invoiced to our customers at the time our product is shipped is included in net sales as we are the principal in those activities. Sales tax, valued-added tax, and other taxes collected from the Company's customers and remitted to governmental authorities, where applicable, are excluded from net sales. The Company records returns as a reduction to sales when incurred. Generally, customers do not have a unilateral right to return products. The Company primarily offers an assurance-type standard warranty that the product will conform to the specifications as designed for a period of time or period of usage after delivery. These warranties do not represent a separate performance obligation.
There were no changes in amounts previously reported in the Company’s consolidated financial statements due to the adoption of ASC 606.
The following table summarizes disaggregated net sales by geographic region and reportable segment for the
three months ended February 28, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Asia
|
|
Europe
|
|
Total
|
|
|
(Dollars in millions)
|
|
Specialty Solutions
|
$
|
70.4
|
|
|
$
|
7.6
|
|
|
$
|
34.7
|
|
|
$
|
112.7
|
|
|
Performance Materials
|
33.3
|
|
|
11.2
|
|
|
11.7
|
|
|
56.2
|
|
|
Total net sales
|
$
|
103.7
|
|
|
$
|
18.8
|
|
|
$
|
46.4
|
|
|
$
|
168.9
|
|
Note C – Financial Instruments and Fair Value Measurements
Financial Risk Management Objectives and Policies
The Company is exposed primarily to credit, interest rate, and foreign currency rate risks, which arise in the normal course of business.
Credit Risk
Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations with the Company as and when they fall due. The primary credit risk for the Company is its accounts receivable, which are generally unsecured. The Company has established credit limits for customers and monitors their balances to mitigate its risk of loss. Concentrations of credit risk with respect to accounts receivable are generally limited due to the wide variety of customers and markets using the Company's products. There was no single customer that represented more than
10%
of the Company’s consolidated net sales during the three month periods ending
February 28, 2019
and
2018
. There was no single customer who represented more than
10%
of the Company’s net trade receivables at
February 28, 2019
or
November 30, 2018
.
Interest Rate Risk
The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s
$350.0 million
Term Loan B (balance of
$301.3 million
at
February 28, 2019
), its Senior Secured Revolving Credit Facility, and various foreign subsidiary borrowings, all of which bear interest at variable rates, approximating market interest rates.
Foreign Currency Rate Risk
The Company incurs foreign currency rate risk on sales and purchases denominated in other than the functional currency. The currencies giving rise to this risk are primarily the Euro, Great Britain Pound Sterling, Renminbi, and Thai Baht.
Foreign currency exchange contracts are used by the Company to manage risks from the change in market exchange rates on cash payments by the Company's foreign subsidiaries and U.S. Dollar cash holdings in foreign locations. These forward contracts are used on a continuing basis for periods of approximately
30
days, consistent with the underlying hedged transactions. Hedging intends to offset the impact of foreign exchange rate movements on the Company’s operating results. The counterparties to these instruments are investment-grade financial institutions and the Company does not anticipate any non-performance. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased or sold for trading purposes. These contracts are not designated as hedging instruments and changes in fair value of these instruments are recognized in earnings immediately. Foreign currency transaction gains and losses, including the impact of foreign currency contracts, that were recorded in the Consolidated Statements of Operations, as a component of other income (loss), were losses of
$0.2 million
for each of the
three
-month periods ending
February 28, 2019
and
2018
.
Derivative Instruments
The Company recognizes the fair value of qualifying derivative instruments as either an asset or a liability within its Consolidated Balance Sheets. For derivative instruments not designated as hedges, the change in fair value of the derivative is recognized in earnings each reporting period. The Company defines fair value as the price that would be received to transfer an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a hierarchy of valuation inputs to measure fair value.
The hierarchy prioritizes the inputs into three broad levels:
Level 1 inputs—Quoted market prices in active markets for identical assets or liabilities.
Level 2 inputs—Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 inputs—Unobservable inputs that are not corroborated by market data.
Fair Value Measurements
The Company uses the market approach and the income approach to value assets and liabilities as appropriate. The following financial assets and liabilities are measured and presented at fair value on a recurring basis as of
February 28, 2019
and
November 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(Dollars in millions)
|
|
Fair value measurements - February 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
$
|
17.0
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
Total assets
|
$
|
17.0
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
(1)
|
$
|
—
|
|
|
$
|
.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.7
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements - November 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
$
|
16.5
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
Total assets
|
$
|
16.5
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
(1)
|
$
|
—
|
|
|
$
|
.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.6
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.6
|
|
(1)
Contingent consideration obligations arise from business or product line acquisitions. The fair values are based on a probability weighted discounted cash flow analysis reflecting an estimated achievement of specified performance measures of the acquired product lines. Contingent consideration is classified in the consolidated balance sheets as other current liabilities or other non-current liabilities based on contractual payment dates.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis during the
first three months
of
2019
are summarized as follows:
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
|
(Dollars in millions)
|
|
Balance at November 30, 2018
|
$
|
.6
|
|
|
Additions and adjustments
|
.1
|
|
|
Balance at February 28, 2019
|
$
|
.7
|
|
There were no transfers into or out of Level 3 during the
first three months
of
2019
or
2018
.
The fair value of the Company’s Term Loan B at
February 28, 2019
approximated
$299.4 million
, which is slightly
less
than its book value of
$301.3 million
as a result of prevailing market rates on the Company’s debt. The fair value of the Term Loan B is based on market price information and is measured using the last available trade of the instrument on a secondary market in each respective period and therefore is considered a Level 2 measurement. The fair value is not indicative of the amount that the Company would have to pay to redeem these instruments since they are infrequently traded and are not callable at this value. The carrying value of the Senior Secured Revolving Credit Facility approximates fair value. The fair value of the Company's capital lease obligation approximates its carrying amount based on estimated borrowing rates to discount the future cash flows to their present value.
Note D - Restructuring and Severance
The following table is a summary of restructuring and severance charges for the
three months ended February 28, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28,
|
|
|
2019
|
|
2018
|
|
|
(Dollars in millions)
|
|
Severance Expense:
|
|
|
|
|
Specialty Solutions
|
$
|
—
|
|
|
$
|
.7
|
|
|
Performance Materials
|
.7
|
|
|
—
|
|
|
Corporate
|
—
|
|
|
.6
|
|
|
Total Severance Costs
|
.7
|
|
|
1.3
|
|
|
Facility Closure Costs:
|
|
|
|
|
Performance Materials
|
.4
|
|
|
—
|
|
|
Total Restructuring and Severance Costs
|
$
|
1.1
|
|
|
$
|
1.3
|
|
Costs for restructuring plans are recognized as a component of restructuring and severance expense within the consolidated statements of operations. The Company initiated the following restructuring plans:
2018 Restructuring Plan
During the third quarter of fiscal 2018, the Company announced its plan to close its styrene butadiene manufacturing facility in Green Bay, Wisconsin, moving production to its Mogadore, Ohio facility. The Company recorded
$1.0 million
of restructuring and severance expenses in the first quarter of 2019 related to this plan. Total estimated restructuring and severance costs for this plan are expected to be between
$5.0 million
to
$8.0 million
. Total expense incurred to date for this plan is
$2.8 million
, of which
$1.1 million
has been paid as of
February 28, 2019
. The plan is expected to be completed no later than the third quarter of 2019.
2017 Restructuring Plan
The Company incurred
$0.1 million
of restructuring and severance expenses in the first
three
months of
2019
related to the One OMNOVA initiative announced during the first quarter of 2017. This initiative was focused on improving functional excellence in marketing, sales, operations, supply chain and technology, as well as various corporate functions. The plan was designed to reduce complexity and drive consistency across the global enterprise through a standardized, integrated business system. Total expense incurred for this initiative was
$5.3 million
, all of which has been paid as of
February 28, 2019
. This plan is substantially complete.
The following table summarizes the Company's liabilities related to restructuring and severance activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2018
|
|
2019
|
|
February 28, 2019
|
|
|
Provision
|
|
Payments
|
|
|
|
(Dollars in millions)
|
|
Total
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
.5
|
|
|
$
|
1.7
|
|
The Company may incur future costs related to its restructuring activities, as processes are continually evaluated to enhance the efficiency and cost effectiveness of its operations, and to ensure competitiveness across its businesses and across geographic areas. Future costs could include costs related to closed facilities and restructuring plan implementation costs and these will be recognized as incurred.
Note E – Income Taxes
On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Job Act (the “Tax Act”) was signed into law which, among other changes: reduced the U.S. corporate income tax rate effective January 1, 2018 from
35%
to
21%
; repealed the Alternative Minimum Tax (“AMT”); imposed a one-time transition tax on accumulated foreign earnings not previously subject to U.S. taxation; provides a U.S. federal tax exemption on future distributions of foreign earnings; and beginning in fiscal 2019, creates a new minimum tax on certain foreign-sourced earnings.
The Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. Potential impacts of GILTI can either be treated as a period expense in the period incurred or considered in the determination of the Company’s deferred tax balances. The Company will account for GILTI in the year the tax is incurred as a period cost.
At November 30, 2018, the Company had provisionally estimated minimal income inclusion for the transition tax related to foreign earnings on which U.S. income taxes were previously deferred. As permitted under SAB 118 guidance, the Company adjusted the income inclusion related to transition tax to
$27.7 million
during the first quarter of 2019. The adjustment was the result of additional analysis, changes in interpretation and assumptions, as well as additional regulatory guidance that was issued subsequent to the Tax Act enactment. The Company completed the analysis of the impact of the Tax Act in accordance with SAB 118 and the amount is no longer considered provisional. The Company intends to utilize existing net operating loss carryforwards to offset the income inclusion, and therefore will have no cash taxes related to the transition tax.
For each interim reporting period, the Company makes an estimate of the effective tax rate it expects to be applicable to the full fiscal year for its operations, adjusted quarterly for discrete items. This estimated effective tax rate is used in recording income taxes on a year-to-date basis. The Company recorded income tax benefits of
$0.8 million
and
$5.1 million
for the three months ended February 28, 2019 and 2018, respectively. The Company’s effective tax rate for the first quarter of 2019 was different than the U.S. federal statutory tax rate primarily due to losses in jurisdictions in which no tax benefit was recognized. The Company’s effective tax rate for the first three months of 2018 was different than its U.S. federal statutory rate primarily due to discrete items related to the Tax Act. These items included a
$4.1 million
income tax benefit related to the re-measurement of the U.S. deferred taxes as the U.S. federal tax rate was reduced from 35.0% to 21.0% and a
$0.9 million
income tax benefit associated with the reversal of the valuation allowance against the existing AMT credit carryforward as it is refundable under the Tax Act. In addition, during the first quarter of 2018, the Company recognized a
$0.8 million
income tax benefit related to the impact of a French tax rate change on the Company’s deferred tax liabilities. The French tax rate was reduced to 25.0% beginning in 2022 and the Company's deferred tax liabilities were reduced to appropriately reflect this legislation as a current period tax benefit. These discrete tax benefits were partially offset by losses in jurisdictions in which no tax benefit was recognized.
As of February 28, 2019, the Company has
$65.4 million
of U.S. federal net operating loss carryforwards ("NOLC's"),
$8.1 million
of U.S. federal capital loss carryforwards,
$0.1 million
of foreign tax credit carryforwards,
$0.3 million
of AMT credit carryforwards, and
$78.9 million
of state net operating loss carryforwards. The $65.4 million of U.S. federal net operating loss carryforward reflects the impact of the $27.7 million utilization for transition tax as part of U.S. tax reform. Due to the net operating loss carryforwards, cash tax payments in the U.S. are expected to be minimal for the foreseeable future. The majority of the federal, state, and local NOLC's will expire in tax years 2024 through 2034 while the foreign tax credit carryforwards will expire in the tax years 2020 through 2022, and the capital loss will expire beginning in tax year 2022. The Company has a valuation allowance against the U.S. federal and state NOLC's and the U.S. federal capital loss carryforward. As of November 30, 2018, the Company had approximately
$42.3 million
of foreign NOLC's of which
$30.5 million
have an indefinite carryforward period. The Company has recognized a valuation allowance against the $30.5 million foreign NOLC's which have an indefinite carryforward period as the Company does not anticipate utilizing these carryforwards.
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by various tax authorities. With limited exceptions, the Company is no longer open to audits by U.S. and foreign jurisdictions for years prior to 2013.
Note F – Earnings Per Share
The following table summarizes the computation of earnings per common share and earnings per common share, assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28,
|
|
|
|
2019
|
|
2018
|
|
|
|
(Dollars and shares in millions, except per share data)
|
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4.6
|
)
|
|
$
|
7.3
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator for basic earnings (loss) per share - weighted average shares outstanding
|
|
44.7
|
|
|
44.6
|
|
|
Effect of dilutive securities
|
|
—
|
|
|
.4
|
|
|
Denominator for dilutive earnings (loss) per share - adjusted weighted average shares and assumed conversions
|
|
44.7
|
|
|
45.0
|
|
|
|
|
|
|
|
|
Net income (loss) per share - Basic and Diluted
|
|
$
|
(.10
|
)
|
|
$
|
.16
|
|
Anti-dilutive share equivalents related to share-based incentive compensation are excluded from the computation of dilutive weighted-average shares and were not material for all periods presented. Anti-dilutive share equivalents related to share-based incentive compensation consisted of
0.2 million
and
0.1 million
shares during the first quarters of 2019 and 2018.
Note G – Accumulated Other Comprehensive Income (Loss)
The following tables reflect the changes in the components of accumulated other comprehensive income (loss), net of tax, for the
three
months ended
February 28, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended February 28, 2019 and 2018
|
Foreign Currency Items
|
|
Defined Benefit Plans
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
(Dollars in millions)
|
|
Balance November 30, 2018
|
$
|
(32.6
|
)
|
|
$
|
(89.8
|
)
|
|
$
|
(122.4
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
3.8
|
|
|
—
|
|
|
3.8
|
|
|
Amounts reclassified to earnings
(a)
|
—
|
|
|
.6
|
|
|
.6
|
|
|
Balance February 28,
2019
|
$
|
(28.8
|
)
|
|
$
|
(89.2
|
)
|
|
$
|
(118.0
|
)
|
|
|
|
|
Foreign Currency Items
|
|
Defined Benefit Plans
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
(Dollars in millions)
|
|
Balance November 30, 2017
|
$
|
(23.1
|
)
|
|
$
|
(102.2
|
)
|
|
$
|
(125.3
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
6.3
|
|
|
—
|
|
|
6.3
|
|
|
Amounts reclassified to earnings
(a)
|
—
|
|
|
1.1
|
|
|
1.1
|
|
|
Balance February 28, 2018
|
$
|
(16.8
|
)
|
|
$
|
(101.1
|
)
|
|
$
|
(117.9
|
)
|
(a)
Amounts reclassified from accumulated other comprehensive income (loss) related to defined benefit plans were included in net periodic benefit expense.
Note H – Shareholders' Equity
The following tables reflect the changes in shareholders' equity for the three months ended February 28, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Common Shares Outstanding
|
Common Stock
|
Additional Contributed Capital
|
Retained Deficit
|
Treasury Stock
|
Accumulated Other Comprehensive Income (Loss)
|
Total Shareholders' Equity
|
|
|
(Dollars and shares in millions)
|
|
Balance November 30, 2018
|
44.9
|
|
$
|
4.8
|
|
$
|
345.9
|
|
$
|
(145.4
|
)
|
$
|
(25.3
|
)
|
$
|
(122.4
|
)
|
$
|
57.6
|
|
|
Net income (loss)
|
|
|
|
(4.6
|
)
|
|
|
(4.6
|
)
|
|
Foreign currency translations
|
|
|
|
|
|
3.8
|
|
3.8
|
|
|
Adjustment for accounting change
|
|
|
|
(.5
|
)
|
|
|
(.5
|
)
|
|
Post-retirement benefit plans
|
|
|
|
|
|
.6
|
|
.6
|
|
|
Share-based compensation
|
|
|
.3
|
|
|
|
|
.3
|
|
|
Other
|
(.1
|
)
|
|
|
|
(.2
|
)
|
|
(.2
|
)
|
|
Balance February 28, 2019
|
44.8
|
|
$
|
4.8
|
|
$
|
346.2
|
|
$
|
(150.5
|
)
|
$
|
(25.5
|
)
|
$
|
(118.0
|
)
|
$
|
57.0
|
|
|
|
|
|
|
|
|
|
|
|
Balance November 30, 2017
|
44.8
|
|
$
|
4.8
|
|
$
|
343.4
|
|
$
|
(159.2
|
)
|
$
|
(25.5
|
)
|
$
|
(125.3
|
)
|
$
|
38.2
|
|
|
Net income (loss)
|
|
|
|
7.3
|
|
|
|
7.3
|
|
|
Foreign currency translations
|
|
|
|
|
|
6.3
|
|
6.3
|
|
|
Adjustment for accounting change
|
|
|
|
(6.9
|
)
|
|
|
(6.9
|
)
|
|
Post-retirement benefit plans
|
|
|
|
|
|
1.1
|
|
1.1
|
|
|
Share-based compensation
|
|
|
.5
|
|
|
|
|
.5
|
|
|
Other
|
|
|
.5
|
|
|
(.5
|
)
|
|
—
|
|
|
Balance February 28, 2018
|
44.8
|
|
$
|
4.8
|
|
$
|
344.4
|
|
$
|
(158.8
|
)
|
$
|
(26.0
|
)
|
$
|
(117.9
|
)
|
$
|
46.5
|
|
Note I – Inventories
Inventories are stated at lower of cost or net realizable value. U.S. inventories are valued using the last-in, first-out (“LIFO”) method and represented approximately
$44.2 million
, or
38.6%
, and
$47.6 million
, or
45.9%
, of gross inventories at
February 28, 2019
and
November 30, 2018
, respectively. The remaining portion of inventories, which are located outside of the U.S., are valued using the first-in, first-out (“FIFO”) or an average cost method. Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to final year-end LIFO inventory valuations. Inventory costs include material, labor, and overhead. Inventories, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
November 30, 2018
|
|
|
(Dollars in millions)
|
|
Raw materials and supplies
|
$
|
35.1
|
|
|
$
|
35.0
|
|
|
Work-in-process
|
6.0
|
|
|
5.3
|
|
|
Finished goods
|
73.4
|
|
|
63.5
|
|
|
Inventories, gross
|
114.5
|
|
|
103.8
|
|
|
LIFO reserve
|
(17.3
|
)
|
|
(18.1
|
)
|
|
Obsolescence reserve
|
(7.5
|
)
|
|
(6.9
|
)
|
|
Inventories, net
|
$
|
89.7
|
|
|
$
|
78.8
|
|
Note J – Debt and Credit Lines
Debt obligations due within the next twelve months consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
November 30, 2018
|
|
|
(Dollars in millions)
|
|
$350 million Term Loan B, due 2023, current portion (interest at 5.75% and 5.55%, respectively)
|
$
|
3.5
|
|
|
$
|
3.5
|
|
|
Capital lease obligations, current portion
|
.8
|
|
|
.7
|
|
|
Total
|
$
|
4.3
|
|
|
$
|
4.2
|
|
The Company’s long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
November 30, 2018
|
|
|
(Dollars in millions)
|
|
$350 million Term Loan B, due 2023 (interest at 5.75% and 5.55%, respectively)
|
$
|
301.3
|
|
|
$
|
302.1
|
|
|
Senior Secured Revolving Credit Facility, due 2021 (interest at 4.00% and 3.88%, respectively)
|
11.0
|
|
|
12.0
|
|
|
Capital lease obligations
|
15.4
|
|
|
15.6
|
|
|
Gross debt
|
327.7
|
|
|
329.7
|
|
|
Less: current portion
|
(4.3
|
)
|
|
(4.2
|
)
|
|
Unamortized original issue discount
|
(2.0
|
)
|
|
(2.1
|
)
|
|
Debt issuance costs
|
(4.4
|
)
|
|
(4.7
|
)
|
|
Total long-term debt, net of current portion
|
$
|
317.0
|
|
|
$
|
318.7
|
|
The weighted-average interest rate on the Company’s short-term debt was
5.71%
and
5.70%
during the
first
quarters of
2019
and
2018
, respectively.
Term Loan
The Company's
$350.0 million
Term Loan B ("Term Loan B") matures on August 26, 2023 and is primarily secured by all real property, plant, and equipment of the Company's U.S. facilities and fully and unconditionally and jointly and severally guaranteed by the material U.S. subsidiaries of the Company. The Term Loan B contains affirmative and negative covenants, including a requirement to maintain a net debt leverage ratio of 5.0 to 1.0, limitations on additional debt, certain investments, and acquisitions outside of the Company’s line of business. The Company is in compliance with its Term Loan B covenants as of
February 28, 2019
.
The Company's Term Loan B has an interest rate of LIBOR plus
3.25%
for Eurodollar rate loans and
2.25%
for base rate loans. The Term Loan B agreement permits the Company to request additional term loans or incremental equivalent debt borrowings (the “Additional Term Loans”) in a maximum aggregate amount equal to the greater of (a)
$120.0 million
and (b) an aggregate principal amount such that, on a pro forma basis (giving effect to any Additional Term Loans), the Company’s senior secured net debt leverage ratio will not exceed
4.0
to 1.0.
Senior Secured Revolving Credit Facility
The Company has a Senior Secured Revolving Credit Facility (the "Facility") which matures on
August 26, 2021
. The Facility is secured by U.S. accounts receivable, inventory, and intangible assets. The Facility contains affirmative and negative covenants, similar to the Term Loan B, including limitations on additional debt, certain investments and acquisitions outside of the Company’s line of business. If the average excess availability of the Facility falls below
$25.0 million
during any fiscal quarter, the Company must then maintain a fixed charge coverage ratio greater than
1.1
to 1.0 as defined in the agreement. The Company was in compliance with this requirement at
February 28, 2019
. At
February 28, 2019
there was a balance of
$11.0 million
borrowed under the Facility and the amount available for borrowing under the Facility was
$51.7 million
.
Eurodollar Revolving Loan
The Company has a
€16.0 million
Eurodollar Revolving Loan ("Revolver") to provide additional liquidity and working capital flexibility in Europe. The terms of the Revolver are similar to the Company's U.S. Facility, including the maturity date of August 26, 2021. The Revolver contains a
€9.0 million
expansion feature the Company may exercise in the future to gain additional liquidity should secured collateral of accounts receivable increase. At
February 28, 2019
there were
no
amounts borrowed under the Revolver and the amount available for borrowing under the Revolver was
€11.5 million
.
Other Debt
The Company has borrowing facilities at certain of its foreign subsidiaries, which consist of overdraft lines, working capital credit lines, and facilities for the issuance of letters of credit and short-term borrowing needs. Total borrowing capacity for these facilities was
$10.2 million
and
$7.0 million
as of
February 28, 2019
and
November 30, 2018
, respectively. These facilities support commitments made in the ordinary course of business.
Capital Lease Obligations
At
February 28, 2019
, the Company had net assets under capital leases totaling
$14.5 million
, which are included in property, plant, and equipment in the accompanying Consolidated Balance Sheets.
The following is a schedule by year of future minimum lease payments under the Company's capital leases together with the present value of the net future minimum lease payments as of
February 28, 2019
:
|
|
|
|
|
|
|
|
Year Ending November 30:
|
(Dollars in millions)
|
|
2019
|
$
|
1.1
|
|
|
2020
|
1.5
|
|
|
2021
|
1.5
|
|
|
2022
|
1.4
|
|
|
2023
|
1.4
|
|
|
Thereafter
|
15.2
|
|
|
Total minimum lease payments
|
22.1
|
|
|
Less: Amount representing estimated executory costs
|
(.5
|
)
|
|
Net minimum lease payments
|
21.6
|
|
|
Less: Amount representing interest
|
(6.2
|
)
|
|
Present value of minimum lease payments
|
$
|
15.4
|
|
Debt Issuance Costs and Original Issue Discounts
Debt issuance costs and original issue discounts incurred in connection with the issuance of the Company's debt are being amortized over the respective terms of the underlying debt, including any amendments. Total amortization expense of debt issuance costs and original issue discounts is included as a component of interest expense and was
$0.4 million
and
$0.3 million
for the
three months ended February 28, 2019 and 2018
, respectively.
During the quarter ended February 28, 2018, the Company made a
$40.0 million
prepayment and determined that this constituted a partial extinguishment of debt and as such, wrote-off
$0.8 million
of debt issuance costs and original issue discounts.
Note K – Share-Based Employee Compensation
The Company provides compensation benefits to employees under the OMNOVA Solutions 2017 Equity Incentive Plan (the “Plan”), which was approved by shareholders on March 22, 2017. The Plan permits the Company to grant to officers, key employees and non-employee directors of the Company incentives directly linked to the price of OMNOVA Solutions’ common shares. The Plan authorizes the issuance of Company common shares in the aggregate for (a) awards of options rights to purchase Company common shares, (b) performance shares and performance units, (c) restricted shares, (d) restricted share units, or (e) appreciation rights. Shares granted under the Plan may be either newly issued shares or treasury shares or both. As of
February 28, 2019
, approximately
1.9 million
Company common shares remained available for grants under the Plan. All options granted under the Plan are granted at exercise prices equal to the market value of the Company’s common shares on the date of grant. Additionally, the Plan provides that the term of any option granted under the Plan may not exceed
10 years
. Prior to March 22, 2017, the Company granted equity compensation under the OMNOVA Solutions Third Amended and Restated 1999 Equity and Performance Incentive Plan, which had substantially similar features.
The Company grants Performance Share Units ("PSU's") to its executive officers. The PSU's provide recipients the right to receive the Company's common shares if specified performance goals, including a performance goal relative to peers, are met over a three fiscal year measurement period. Each grantee receives a target grant of PSU's, but may earn between
0%
and
200%
(or in the case of the Company's Chief Executive Officer, between
0%
and
160%
for awards granted prior to 2019, and between
0%
and
143%
for grants made in 2019) of the target grant depending on the Company's performance against the stated performance goals.
Share-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period). The fair value of Restricted Share Awards ("RSA's"), Restricted Share Units ("RSU's"), and PSU's are determined based on the closing market price of the Company’s ordinary shares at the date of grant. RSU's entitle the holder to receive one ordinary share for each RSU at vesting, generally over a three year period from the date of grant. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.
Compensation expense for all share-based payments included in general and administrative expense was
$0.3 million
and
$0.5 million
for the
first three months
of
2019
and
2018
respectively.
As of
February 28, 2019
, there was
$3.0 million
of unrecognized compensation cost related to non-vested share-based compensation arrangements.
A summary of the RSA, RSU, and PSU activity for
2019
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Share Awards & Units
|
|
Weighted-Average Grant Date Fair Value per Share
|
|
Nonvested at December 1, 2018
|
689,848
|
|
|
$
|
8.81
|
|
|
Granted
|
3,000
|
|
|
$
|
8.19
|
|
|
Vested
|
(92,066
|
)
|
|
$
|
4.98
|
|
|
Canceled and Forfeited
|
(13,667
|
)
|
|
$
|
8.40
|
|
|
Nonvested at February 28, 2019
|
587,115
|
|
|
$
|
9.42
|
|
The Company also provides eligible employees the opportunity to purchase Company common shares through payroll deductions under the OMNOVA Solutions Employee Share Purchase Plan (the "ESPP"). The purchase price for common shares purchased from the Company will be
85%
of the closing price of the common shares on the New York Stock Exchange ("NYSE") on the investment date. Participants may contribute funds to the ESPP, not to exceed twenty-five thousand dollars in any calendar year. If a participant terminates his or her employment with the Company or its subsidiaries, the participant's participation will immediately terminate, uncommitted funds will be remitted to the participant, and the participant's account will be converted to a regular brokerage account. As of
February 28, 2019
, there were approximately
36,000
shares held by eligible participants through the ESPP.
Note L – Employee Benefit Plans
The Company maintains a number of defined benefit and defined contribution plans to provide retirement benefits for employees. These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”), local statutory law, or as determined by the Board of Directors. The plans generally provide benefits based upon years of service and compensation. Pension plans are funded except for a U.S. non-qualified pension plan for certain key employees and certain foreign plans. Future service benefits are frozen for all participants under the Company's U.S. defined benefit plan. All benefits earned by affected employees through the dates on which such benefits were frozen have become fully vested with the affected employees eligible to receive benefits upon retirement, as described in the Plan document.
Net periodic benefit cost (income) consisted of the following for the
three
month periods ending
February 28, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plans
|
|
Health Care
Plans
|
|
|
(Dollars in millions)
|
|
Three months ended February 28, 2019 and 2018
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service costs
|
$
|
.7
|
|
|
$
|
.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest costs
|
2.5
|
|
|
2.3
|
|
|
.1
|
|
|
—
|
|
|
Expected return on plan assets
|
(3.9
|
)
|
|
(3.9
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of net actuarial (gain) loss
|
1.1
|
|
|
1.3
|
|
|
(.3
|
)
|
|
(.2
|
)
|
|
Net periodic cost (benefit)
|
$
|
.4
|
|
|
$
|
.3
|
|
|
$
|
(.2
|
)
|
|
$
|
(.2
|
)
|
|
|
Service cost is recorded in SG&A, while other components of net periodic pension costs are recorded in Other (Income) Expense. Service cost represents plan administration expenses. The Company expects to contribute approximately
$6.4 million
to its pension plans during fiscal
2019
. There were
no
contributions made during the first three months of 2019.
The Company also sponsors a defined contribution 401(k) plan. Participation in this plan is voluntary and is available to substantially all U.S. salaried employees and to certain groups of U.S. hourly employees. Company contributions to this plan are based on either a percentage of employee contributions or on a specified amount per hour based on the provisions of the applicable collective bargaining agreement. Company contributions are made in cash. Expense for this plan was
$0.7 million
and
$0.8 million
for the
first three months
of
2019
and
2018
, respectively.
Note M – Contingencies
From time to time, the Company is subject to various claims, proceedings, and lawsuits related to products, services, contracts, employment, environmental, safety, intellectual property, and other matters. The ultimate resolution of such claims,
proceedings, and lawsuits is inherently unpredictable and, as a result, the Company’s estimates of liability, if any, are subject to change. Actual results may materially differ from the Company’s estimates and an unfavorable resolution of any matter could have a material adverse effect on the financial condition, results of operations, and/or cash flows of the Company. However, subject to the above and taking into account such amounts, if any, as are accrued from time to time on the Company’s balance sheet, the Company does not believe, based on the information currently available to it, that the ultimate resolution of these matters will have a material effect on the consolidated financial condition, results of operations or cash flows of the Company.
Note N – Business Segment Information
The Company's
two
reporting segments are Specialty Solutions and Performance Materials. These two reporting segments were determined based on products and services provided as defined under ASC 280, Segment Reporting. Accounting policies of the segments are the same as the Company’s accounting policies. The Company’s reporting segments are strategic business units that offer different products and services. They are managed separately based on certain differences in their operations, technology, and marketing strategies.
Segment operating profit represents net sales less applicable costs, expenses and provisions for restructuring and severance costs, asset write-offs and acquisition and integration related expenses relating to operations. However, Management excludes restructuring and severance costs, asset write-offs, and acquisition and integration related costs when evaluating the results and allocating resources to the segments.
Segment operating profit excludes certain unallocated corporate headquarters expenses. Corporate headquarters expense includes the cost of providing and maintaining the corporate headquarters functions, including salaries, rent, travel and entertainment expenses, depreciation, utility costs, outside services, and amortization of deferred financing costs.
In the first quarter of
2019
, segment operating profit for Performance Materials includes restructuring and severance charges of
$0.7 million
, accelerated depreciation of
$0.6 million
, and facility closure costs of
$0.4 million
. In the first quarter of
2018
, segment operating profit for Specialty Solutions includes restructuring and severance charges of
$0.7 million
and acquisition and integration related expense of
$0.4 million
.
The following table summarizes operations by segment and a reconciliation of segment sales to consolidated sales and segment operating profit to income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28,
|
|
|
2019
|
|
2018
|
|
|
(Dollars in millions)
|
|
Net Sales:
|
|
|
|
|
Specialty Solutions
|
$
|
112.7
|
|
|
$
|
109.2
|
|
|
Performance Materials
|
56.2
|
|
|
69.5
|
|
|
Total Net Sales
|
$
|
168.9
|
|
|
$
|
178.7
|
|
|
Segment Operating Profit:
|
|
|
|
|
Specialty Solutions
|
$
|
9.3
|
|
|
$
|
13.6
|
|
|
Performance Materials
|
(2.8
|
)
|
|
2.1
|
|
|
Total segment operating profit
|
6.5
|
|
|
15.7
|
|
|
Interest expense
|
(5.0
|
)
|
|
(5.1
|
)
|
|
Corporate expenses
|
(6.9
|
)
|
|
(8.4
|
)
|
|
Income (Loss) Before Income Taxes
|
$
|
(5.4
|
)
|
|
$
|
2.2
|
|