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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 2002 Commission File Number 1-15147
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OMNOVA Solutions Inc.
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(Exact name of registrant as specified in its charter)
Ohio 34-1897652
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(State of Incorporation) (I.R.S. Employer Identification No.)
175 Ghent Road Fairlawn, Ohio 44333-3300
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 869-4200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO__
---
At September 30, 2002, there were 39,743,906 outstanding shares of OMNOVA
Solutions' Common Stock, par value $0.10.
OMNOVA SOLUTIONS INC.
Table of Contents
Part I. Financial Information Page No.
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Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended August 31, 2002 and 2001 -3-
Condensed Consolidated Balance Sheets -
August 31, 2002 and November 30, 2001 -4-
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended August 31, 2002 and 2001 -5-
Notes to the Unaudited Interim Condensed Consolidated
Financial Statements as of August 31, 2002 -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -13-
Item 3. Quantitative and Qualitative Disclosure About Market Risk -17-
Item 4. Controls and Procedures -17-
Part II. Other Information
Item 1. Legal Proceedings -18-
Item 6. Exhibits and Reports on Form 8-K -18-
Signatures -19-
Certifications -20-
-2-
Part I. Financial Information
Item 1. Financial Statements
OMNOVA SOLUTIONS INC.
Condensed Consolidated Statements of Operations
(Dollars in Millions, Except Per-Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 177.6 $ 199.9 $ 508.9 $ 555.2
Costs and Expenses
Cost of products sold 132.3 146.3 367.5 412.4
Selling, general and administrative 35.0 36.7 106.1 107.7
Depreciation and amortization 7.3 8.5 21.8 26.3
Interest expense 1.7 3.8 6.1 11.0
Other (income) expense, net 1.0 .3 2.7 .8
Unusual and nonrecurring items - (income) expense (.2) -- (2.2) 16.5
---------- ---------- ---------- ----------
177.1 195.6 502.0 574.7
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes .5 4.3 6.9 (19.5)
Income tax provision (benefit) -- 1.7 .4 (7.8)
---------- ---------- ---------- ----------
Income (Loss) Before Cumulative Effect of Accounting Change .5 2.6 6.5 (11.7)
Cumulative Effect of Accounting Change -- -- (142.5) --
---------- ---------- ---------- ----------
Net Income (Loss) $ .5 $ 2.6 $ (136.0) $ (11.7)
========== ========== ========== ==========
Per Share Data:
Basic earnings (loss) per common share:
Before cumulative effect of accounting change $ .01 $ .06 $ .17 $ (.30)
Cumulative effect of accounting change -- -- (3.60) --
---------- ---------- ---------- ----------
Net income (loss) $ .01 $ .06 $ (3.43) $ (.30)
========== ========== ========== ==========
Diluted earnings (loss) per common share:
Before cumulative effect of accounting change $ .01 $ .06 $ .17 $ (.30)
Cumulative effect of accounting change -- -- (3.60) --
---------- ---------- ---------- ----------
Net income (loss) $ .01 $ .06 $ (3.43) $ (.30)
========== ========== ========== ==========
Average shares outstanding (in millions)
- Basic 39.7 39.6 39.6 39.6
- Diluted 39.9 39.8 39.6 39.6
Cash dividends declared $ -- $ -- $ -- $ .10
See notes to the unaudited interim condensed consolidated financial statements.
-3-
OMNOVA SOLUTIONS INC.
Condensed Consolidated Balance Sheets
(Unaudited)
August 31, November 30,
2002 2001
---------- -----------
(Dollars in millions)
ASSETS:
Current Assets
Cash and cash equivalents $ 8.6 $ 8.5
Accounts receivable, net 51.5 51.9
Inventories 55.2 56.7
Deferred income taxes, net 12.5 12.8
Prepaid expenses and other 3.8 4.9
--------- ---------
Total Current Assets 131.6 134.8
Property, plant and equipment, net 199.1 208.9
Goodwill, net 41.1 142.7
Patents and other intangible assets, net 36.4 77.4
Prepaid pension 54.1 49.1
Other assets 28.6 26.2
--------- ---------
Total Assets $ 490.9 $ 639.1
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities
Notes payable $ 2.0 $ 3.5
Accounts payable 92.3 92.2
Accrued payroll and personal property taxes 13.9 15.2
Other current liabilities 14.7 15.1
--------- ---------
Total Current Liabilities 122.9 126.0
Long-term debt 146.5 157.8
Postretirement benefits other than pensions 50.8 50.5
Deferred income taxes 11.7 14.4
Other liabilities 12.2 12.3
Shareholders' Equity
Preference stock - $1.00 par value; 15 million shares authorized;
none outstanding -- --
Common stock - $0.10 par value; 135 million shares authorized;
41.8 million shares outstanding 4.2 4.2
Additional contributed capital 309.4 308.7
Retained deficit (148.5) (12.5)
Accumulated other comprehensive loss (4.4) (8.2)
Treasury stock at cost; 2.2 million shares (13.9) (14.1)
--------- ---------
Total Shareholders' Equity 146.8 278.1
--------- ---------
Total Liabilities and Shareholders' Equity $ 490.9 $ 639.1
========= =========
See notes to the unaudited interim condensed consolidated financial statements.
-4-
OMNOVA SOLUTIONS INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
August 31,
------------------
2002 2001
---- ----
(Dollars in millions)
Operating Activities
Net loss $ (136.0) $ (11.7)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change 142.5 --
Unusual and nonrecurring items (3.0) 23.9
Depreciation, amortization and (gain)/loss on sale of fixed assets 22.1 16.0
Changes in operating assets and liabilities net of effects of acquisitions
and dispositions of businesses:
Current assets 4.1 (31.9)
Current liabilities (1.5) (20.5)
Other noncurrent assets (7.5) (9.7)
Other noncurrent liabilities (1.9) 7.9
--------- ---------
Net Cash Provided By (Used In) Operating Activities 18.8 (26.0)
Investing Activities
Capital expenditures (7.7) (15.3)
Business acquisitions/divestitures .8 (.5)
--------- ---------
Net Cash Used In Investing Activities (6.9) (15.8)
Financing Activities
Long-term debt incurred 75.0 107.7
Long-term debt paid (86.3) (62.0)
Net short-term debt paid (1.5) (6.0)
Dividends paid -- (4.0)
Other .7 (.6)
--------- ---------
Net Cash (Used In) Provided By Financing Activities (12.1) 35.1
Effect of exchange rate changes on cash .3 .1
--------- ---------
Net Increase (Decrease) in Cash and Equivalents .1 (6.6)
Cash and equivalents at beginning of year 8.5 11.7
--------- ---------
Cash And Equivalents At End Of Period $ 8.6 $ 5.1
========= =========
Cash paid for interest was $6.4 million for the nine months ended August 31,
2002. No cash was paid for income taxes for the nine months ended August 31,
2002. Cash paid for interest and income taxes was $10.4 million and $1.4
million, respectively, for the nine months ended August 31, 2001.
See notes to the unaudited interim condensed consolidated financial statements.
-5-
OMNOVA SOLUTIONS INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 31, 2002
Note A - Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions to Form 10-Q
and, therefore, do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These interim statements should be read in conjunction with the financial
statements and notes thereto included in the OMNOVA Solutions Inc. (OMNOVA
Solutions or the Company) Annual Report on Form 10-K for the fiscal year ended
November 30, 2001.
OMNOVA Solutions develops, manufactures and markets decorative and building
products, emulsion polymers and specialty chemicals for a variety of industrial,
commercial and consumer markets. The Company was formed as a result of the
spin-off of the OMNOVA Solutions businesses from GenCorp Inc. on September 30,
1999.
All normal recurring accruals and adjustments considered necessary for a fair
presentation of the unaudited results for the nine month periods ended August
31, 2002 and 2001 have been reflected. The results of operations for the nine
month period ended August 31, 2002 are not necessarily indicative, if
annualized, of those to be expected for the full fiscal year.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Segment operating profit represents net sales less applicable costs, expenses
and provisions for unusual and nonrecurring items relating to operations.
Segment operating profit excludes corporate income and expenses and provisions
for unusual and nonrecurring items, interest expense and income taxes.
Certain reclassifications have been made to conform prior year's data to the
current presentation. Corporate expenses allocated to the business segments were
adjusted to better align costs related to the business segments. Also, as a
result of adopting SFAS No. 142, computer application software was reclassified
to property, plant and equipment.
Note B - Accounting Changes
Effective December 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which establishes financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes Accounting Principles Board Opinion 17,
"Intangible Assets". Under SFAS No. 142, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed at least annually for
impairment. Separable intangible assets that have finite useful lives, will
continue to be amortized over their useful lives.
SFAS No. 142 requires that indefinite lived intangibles be tested for
impairment and that goodwill be tested for impairment at the reporting unit
level at the date of adoption and at least annually thereafter. Goodwill is
tested utilizing a two step methodology. The Company determines the fair value
of any indefinite lived intangible assets, compares it to its carrying value and
records an impairment loss if the carrying value exceeds its fair value. After
recording any impairment losses for the indefinite lived intangible assets, the
Company is required to determine the fair value of each reporting unit and
compare it to its carrying value, including goodwill, of such unit (step one).
If the fair value exceeds the carrying value, no impairment loss
-6-
Note B - Accounting Changes (Continued)
would be recognized. However, if the carrying value of the reporting unit
exceeds its fair value, the goodwill of this unit may be impaired. The amount,
if any, of the impairment would then be measured during the second step, which
compares the implied fair value of reporting unit goodwill with the carrying
amount of that goodwill.
As part of adopting this standard as of December 1, 2001, the Company
evaluated the impairment of indefinite lived intangibles and completed step one
of the test for goodwill impairment during the first quarter of 2002 for each of
its reporting units. The Company determined that the Decorative Products
reporting unit had indefinite lived intangible assets that were impaired by
$38.5 million and that the carrying value of the Performance Chemicals reporting
unit exceeded its estimated fair value as determined by utilizing various
valuation techniques including discounted cash flows and comparative market
analysis. Given the indication of a potential impairment, the Company completed
step two for the Performance Chemicals reporting unit, which resulted in an
impairment loss for goodwill of $104 million. In total, a transitional
impairment loss of $142.5 million, or $3.60 per basic and diluted earnings per
share, was recognized as the cumulative effect of an accounting change in the
quarter ended February 28, 2002. Due to the Company's cumulative loss position
over the past three years, a valuation allowance was provided on the domestic
net deferred tax asset created as a result of this accounting change. The
impairment loss resulted primarily from a change in the criteria for the
measurement of an impairment loss from an undiscounted cash flow model, a method
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," to a discounted cash flow and
market multiples of earnings, a method required by SFAS No. 142 and the
development of a purchase price allocation for the assets and liabilities of the
reporting unit. The transitional impairment loss is a one-time noncash charge
and will not have an effect on the Company's business activities. As of August
31, 2002, the Company has $54.4 million of goodwill and indefinite lived
intangible assets which must be tested annually going forward.
Prior to the adoption of SFAS No. 142, amortization expense was recorded for
goodwill and other intangible assets. The following sets forth a reconciliation
of net income and earnings per share information for the three and nine month
periods ended August 31, 2002 and 2001, adjusted for the nonamortization
provisions of SFAS No. 142:
Reconciliation of Net Income and Earnings Per Share
Three Months Ended Nine Months Ended
August 31, August 31,
(Dollars in millions, except per share data) 2002 2001 2002 2001
-------------------- --------------------
Reported income (loss) before cumulative effect of change in accounting principle $ .5 $ 2.6 $ 6.5 $ (11.7)
Add back goodwill and indefinite lived intangible asset amortization, net of tax -- .8 -- 2.6
------- ------- ------- --------
Adjusted income (loss) before cumulative effect of change in accounting principle $ .5 $ 3.4 $ 6.5 $ (9.1)
Cumulative effect of change in accounting principle -- -- (142.5) --
------- ------- ------- --------
Net income (loss) applicable to shareholders $ .5 $ 3.4 $(136.0) $ (9.1)
======= ======= ======= ========
Basic and Diluted earnings per share:
Reported income (loss) before cumulative effect of change in accounting principle
applicable to common shareholders $ .01 $ .06 $ .17 $ (.30)
Add back goodwill and trademark amortization, net of tax -- .02 -- .07
------- ------- ------- -------
Adjusted income (loss) before cumulative effect of change in accounting principle
applicable to common shareholders $ .01 $ .08 $ .17 $ (.23)
Cumulative effect of change in accounting principle -- -- (3.60) --
------- ------- ------- -------
Adjusted income (loss) applicable to shareholders $ .01 $ .08 $ (3.43) $ (.23)
======= ======= ======= =======
Weighted average shares (in millions):
Basic 39.7 39.6 39.6 39.6
Effect of dilutive stock options .2 .2 -- --
------- ------- ------- -------
Diluted 39.9 39.8 39.6 39.6
======= ======= ======= =======
-7-
Note B - Accounting Changes (Continued)
The changes in the carrying amount of goodwill and indefinite lived
intangible assets for the nine months ended August 31, 2002 are as follows:
Transitional
Balance Impairment Balance
(Dollars in millions) November 30, 2001 Charge Adjustments August 31, 2002
----------------- ------ ----------- ---------------
Goodwill
Decorative & Building Products $ 38.7 $ -- $ 2.4 $ 41.1
Performance Chemicals 104.0 (104.0) -- --
---------- ---------- ------ --------
$ 142.7 $ (104.0) $ 2.4 $ 41.1
Decorative & Building Products' trademarks 51.8 (38.5) -- 13.3
---------- ---------- ------ --------
$ 194.5 $ (142.5) $ 2.4 $ 54.4
========== ========== ====== ========
The following table displays the intangible assets that continue to be
subject to amortization and aggregate amortization expense as well as intangible
assets not subject to amortization as of August 31, 2002 and November 30, 2001:
As of August 31, 2002
-----------------------------------------------------------
Gross Carrying Accumulated Net Carrying
(Dollars in millions) Amount Amortization Amount
------ ------------ ------
Amortized intangible assets
Patents $ 8.3 $ (3.3) $ 5.0
Trademarks 8.0 (2.4) 5.6
Other 18.1 (5.6) 12.5
-------- -------- --------
$ 34.4 $ (11.3) $ 23.1
======== ======== ========
Unamortized intangible assets
Trademarks $ 13.3 $ -- $ 13.3
Goodwill 41.1 -- 41.1
-------- -------- --------
$ 54.4 $ -- $ 54.4
======== ======== ========
As of November 30, 2001
-----------------------------------------------------------
Gross Carrying Accumulated Net Carrying
(Dollars in millions) Amount Amortization Amount
------ ------------ ------
Amortized intangible assets
Patents $ 8.3 $ (2.6) $ 5.7
Trademarks 7.8 (2.0) 5.8
Other 17.9 (4.3) 13.6
-------- --------- --------
$ 34.0 $ (8.9) $ 25.1
======== ========= ========
Unamortized intangible assets
Trademarks $ 56.3 $ (4.5) $ 51.8
Goodwill 157.8 (15.1) 142.7
-------- --------- --------
$ 214.1 $ (19.6) $ 194.5
======== ========= ========
Amortization expense for intangible assets subject to amortization was $2.3
million for the nine months ended August 31, 2002, and is estimated to be
approximately $3.0 million annually for the next five fiscal years.
-8-
Note C - Acquisitions and Other Matters
On April 24, 2001 the Company entered into an agreement to acquire certain
product lines and assets of Decorative Surfaces International, Inc. (DSI).
During the second half of 2001, the Company completed the acquisition of certain
inventory and production equipment for consideration of $6.3 million in interest
bearing promissory notes. On March 8, 2002, the Company completed the
acquisition of certain additional assets of DSI for consideration of $2.0
million in interest bearing notes. The acquisition expanded the Company's
wallcovering, decorative laminates and industrial films product lines.
Promissory notes in the amount of $6.3 million were repaid on May 29, 2002 and
promissory notes in the amount of $2.0 million were repaid on July 22, 2002 with
funds provided by the Company's revolving credit facility. The acquisition has
been accounted for using the purchase method and has been incorporated in OMNOVA
Solutions' results of operations since May 2001.
Note D - Unusual and Nonrecurring Items
In 2001, the Company recognized an expense for unusual and nonrecurring
items of $17.7 million, which related primarily to a restructuring plan of $16.5
million and $2.2 million for anticipated legal settlements, offset by a reversal
of $1.0 million in the first quarter of 2001 for an unused severance reserve
associated with a prior restructuring of one of the Company's businesses.
As a result of the restructuring plan implemented in the second quarter of
2001, a nonrecurring charge of $16.5 million ($9.9 million net of tax, or $0.25
per diluted share) was recorded. The charge primarily related to the closure of
the Company's Greensboro, North Carolina facility (Performance Chemicals
segment) and workforce reductions. The implementation of these actions resulted
in the reduction of approximately 90 employees in the Performance Chemicals
segment and Corporate Headquarters. The $16.5 million nonrecurring charge
consisted of $1.2 million for inventory write-downs included in cost of products
sold, $8.5 million in fixed asset write-downs and $2.0 million of shut down
costs related to the Greensboro facility, and $4.8 million for severance and
additional pension expense related to workforce reductions in the Performance
Chemicals segment and Corporate Headquarters. As of August 31, 2002, severance
benefits had been fully utilized, $1.6 million of shut down costs had been
utilized, and the Company had remaining reserves of approximately $0.4 million
for shut down costs. The restructuring is expected to be substantially complete
by the end of fiscal year 2002. In addition, the Company recorded $2.2 million
primarily for anticipated legal settlements of which a reserve of $1.3 million
remains, including a $0.2 million reversal of the reserve in the third quarter
of 2002. For the nine months ended August 31, 2002, the Company recognized
unusual and nonrecurring income of $2.2 million primarily related to the sale of
its Greensboro facility.
Note E - Accounts Receivable Sale
The Company maintains a receivable backed commercial paper program. The
program is a receivables securitization transaction among OMNOVA Receivables
Corporation, as Seller, OMNOVA Solutions Inc., as Originator and Servicer, Bank
One, NA, as the Financial Institution and Agent, and Falcon Asset Securitization
Corporation, a special purpose entity administered by Bank One, NA. Under the
program, the Company may sell up to $60 million of trade receivables through its
wholly-owned subsidiary, OMNOVA Receivables Corp., a qualifying special-purpose
entity (SPE). At August 31, 2002, the program was utilized for $52.6 million. At
November 30, 2001, the program was fully utilized. The allowance for doubtful
accounts has been retained on the Company's Consolidated Balance Sheets. The
sale was reflected as a reduction of trade accounts receivable and the related
recurring costs of the program were recorded as other expense in the
Consolidated Statements of Operations and totaled $0.4 million and $0.7 million
for the quarters ended August 31, 2002 and 2001, respectively. Costs of the
program totaled $1.1 million and $2.6 million for the nine month periods ended
August 31, 2002 and 2001, respectively. The proceeds from the sale were used to
reduce borrowings under committed lines of credit. The Company retains the
servicing responsibilities for the receivables. This program is accounted for as
a sale of receivables under the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
The program is scheduled to expire in June of 2003.
-9-
Note F - Inventories
Inventories are stated at the lower of cost or market value. A portion of
the inventories is priced by use of the last-in, first-out (LIFO) method using
various dollar value pools. Interim LIFO determinations involve management's
judgements of expected year-end inventory levels. Components of inventory are as
follows:
August 31, November 30,
(Dollars in millions) 2002 2001
------------- ---------------
Raw materials and supplies $ 18.7 $ 22.2
Work-in-process 4.3 2.9
Finished products 60.9 61.1
--------- --------
Approximate replacement cost of inventories 83.9 86.2
LIFO reserve (18.1) (18.1)
Other reserves (10.6) (11.4)
--------- --------
Inventories $ 55.2 $ 56.7
========= ========
Note G - Long-Term Debt and Credit Lines
On April 12, 2001, the Company entered into an amended, secured $240 million
revolving credit facility (Facility) which expires in September 2004. The
Facility is collateralized by substantially all of the Company's assets. The
Company pays a variable commitment fee, which is currently 40 basis points, on
the unused balance. At August 31, 2002, the unused and available balance under
the Facility was $91.6 million. Interest rates are variable, primarily based on
LIBOR, and were at an average rate of 4.0 percent at August 31, 2002. The
Facility contains a provision that allows for a swing line of credit for up to
$10 million for daily funding requirements, which was utilized for $2.0 million
at August 31, 2002. The interest rate on the swing line of credit is variable,
primarily based on the prime interest rate, and was 5.25 percent at August 31,
2002. The Company had outstanding letters of credit totaling $3.4 million at
August 31, 2002.
The Facility contains various debt and investment restrictions and
provisions. The Company was required to maintain a consolidated leverage ratio
(Debt/EBITDA) of less than 3.75 to 1.00 and maintain a consolidated interest
coverage ratio (EBITDA/Interest) of at least 2.75 to 1.00 for the quarter ended
August 31, 2002. The Company was also required to maintain a minimum net worth
of $260 million excluding the effects of adopting SFAS No. 142. The Company was
in compliance with all of its covenants at August 31, 2002.
On September 13, 2002, the Company amended its $240 million Facility.
Pursuant to this amendment, the Facility was reduced to $200 million and certain
debt covenants were amended. The Company is required to maintain a consolidated
leverage ratio (Debt/EBITDA) of less than 4.75 to 1.00 for the quarters ending
November 30, 2002 and February 28, 2003, less than 3.75 to 1.00 for the quarter
ending May 31, 2003, and less than 3.25 to 1.00 for the quarter ending August
31, 2003 and thereafter. Additionally, the Minimum Consolidated Interest
Coverage Ratio was amended to 3.00 to 1.00 for November 30, 2002 and thereafter.
-10-
Note H - Comprehensive Income
The components of total comprehensive income (loss) were as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
(Dollars in millions) 2002 2001 2002 2001
---------------------- ----------------------
Net Income (Loss) $ .5 $ 2.6 $ (136.0) $ (11.7)
Foreign currency translation adjustment, net of tax 4.1 (.2) 3.8 (1.2)
--------- -------- ---------- --------
Comprehensive Income (Loss) $ 4.6 $ 2.4 $ (132.2) $ (12.9)
========= ======== ========== ========
Note I - Contingencies
On October 12, 2000, a group of hourly retirees filed a purported class
action lawsuit in Federal District Court against GenCorp Inc. and OMNOVA
Solutions, and certain retiree medical plans of both companies, seeking certain
retiree medical benefits. The retirees seek to certify a class consisting of all
eligible retirees formerly represented by the United Rubber Workers. Recently,
plaintiffs have voluntarily dismissed certain claims that were based on breach
of fiduciary duty and estoppel theories and have filed a motion for summary
judgment specifying the basis for liability as the breach of certain GenCorp
labor agreements, which expired in the mid-1990's. The GenCorp Hourly Retiree
Medical Plan (the "GenCorp Plan") was established in 1993, and from 1993 to 1996
virtually all eligible GenCorp retirees stopped receiving retiree medical
benefits under the GenCorp labor agreements and elected retiree medical coverage
under the GenCorp Plan. At the time of the spin-off of OMNOVA in 1999, the
OMNOVA Solutions Hourly Retiree Medical Plan (the "OMNOVA Plan") was established
providing for retiree medical benefits identical to the benefits specified in
the GenCorp Plan. At the spin-off, the OMNOVA Plan began paying these specified
benefits which had previously been paid under the GenCorp Plan in respect of
certain retirees from locations included in the spin-off.
OMNOVA believes that it is not a proper party to this lawsuit as it is not
a signatory to the GenCorp labor agreements on which plaintiffs' remaining
claims rely. OMNOVA has filed a motion for summary judgment on the basis that,
among other things, it is not a proper party to the lawsuit. Based on the recent
dismissal of certain claims by the plaintiffs and the nature of the plaintiffs'
remaining claims, OMNOVA believes it has meritorious defenses and that the
likelihood that it will incur any liability in this matter is remote.
The Company is subject to various legal actions, governmental
investigations and proceedings relating to a wide range of matters. In the
opinion of management, after reviewing the information which is currently
available with respect to these matters and consulting with legal counsel, any
liability which may ultimately be incurred with respect to these matters will
not materially affect the consolidated financial condition of the Company, other
than the matter discussed above as to which the Company believes it has
meritorious defenses. The effect of resolution of these matters on results of
operations cannot be predicted because any such effect depends on both future
results of operations and the amount and timing of the resolution of such
matters.
-11-
Note J - Segments
The Company operates two business segments, Decorative & Building Products
and Performance Chemicals. The Company's reportable segments are strategic
business units that offer different products and services. They are managed
separately based on fundamental differences in their operations. Decorative &
Building Products designs, manufactures and markets a comprehensive line of
decorative and functional surface products including commercial wallcovering,
coated fabrics, printed and surface laminates, industrial films, transfer
printed products and commercial roofing. These products are used in numerous
applications including commercial building refurbishment, new construction,
furniture, transportation, cabinets, home furnishings and manufactured housing.
The Performance Chemicals segment manufactures a broad line of emulsion polymers
and specialty chemicals used as coatings, binders, adhesives, and additives for
paper, carpet, textiles and nonwovens, construction, floor care and various
other specialty chemical applications.
Segment operating profit represents net sales less applicable costs,
expenses and provisions for unusual and nonrecurring items relating to
operations. Segment operating profit excludes corporate income and expenses,
provisions for unusual and nonrecurring items, interest expense and income
taxes. For 2001, corporate expenses allocated to the business segments were
adjusted by $0.7 million and $2.2 million, respectively, for the three and nine
month periods ended August 31, 2001 to better reflect costs related to the
business segments and for comparability to 2002. No one customer accounted for
10 percent or more of consolidated sales.
The following table sets forth a summary of operations for the three and nine
month periods ended August 31, 2002 and 2001 by segment and a reconciliation to
consolidated income (loss) before taxes:
Three Months Ended Nine Months Ended
August 31, August 31,
(Dollars in millions) 2002 2001 2002 2001
--------- --------- ---------- ----------
Net Sales
Decorative & Building Products $ 101.5 $ 116.2 $ 286.5 $ 311.5
Performance Chemicals 76.1 83.7 222.4 243.7
--------- --------- ---------- ----------
$ 177.6 $ 199.9 $ 508.9 $ 555.2
Income
Decorative & Building Products $ 1.1 $ 2.5 $ 2.7 $ 9.2
Performance Chemicals 3.2 8.4 16.2 9.1
Unusual and nonrecurring items .2 -- 1.9 (13.7)
--------- --------- ---------- ----------
Segment Operating Profit 4.5 10.9 20.8 4.6
Interest expense (1.7) (3.8) (6.1) (11.0)
Corporate other income and (expense), net (1.6) (1.5) (4.4) (4.8)
Corporate expenses (.7) (1.3) (3.7) (4.3)
Unusual and nonrecurring items -- -- .3 (4.0)
--------- --------- ---------- ----------
Income (Loss) before taxes $ .5 $ 4.3 $ 6.9 $ (19.5)
========= ========= ========== ==========
Note K - Subsequent Event
On September 13, 2002, the Company amended its $240 million Facility.
Pursuant to this amendment, the Facility was reduced to $200 million and certain
debt covenants were amended. The Company is required to maintain a consolidated
leverage ratio (Debt/EBITDA) of less than 4.75 to 1.00 for the quarters ending
November 30, 2002 and February 28, 2003, less than 3.75 to 1.00 for the quarter
ending May 31, 2003, and less than 3.25 to 1.00 for the quarter ending August
31, 2003 and thereafter. Additionally, the Minimum Consolidated Interest
Coverage Ratio was amended to 3.00 to 1.00 for the November 30, 2002 and
thereafter.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations Three and Nine Months Ended August 31, 2002 and 2001
Net sales decreased 11 percent in the third quarter of 2002 to $177.6
million compared to $199.9 million during the same period a year ago. The
Company's Decorative & Building Products business segment experienced a 13
percent revenue decline, while the Performance Chemicals business segment
declined 9 percent. The decline in sales was attributable to slowing market
demand in the markets in which the Company's businesses operate. Similarly for
the nine months ended August 31, 2002, sales declined to $508.9 million from
$555.2 million for the same period in the prior year.
The Company had a segment operating profit of $4.5 million for the third
quarter of 2002, versus an operating profit of $10.9 million for the third
quarter of 2001. The decrease in operating profit resulted from lower sales
volume, higher raw material costs and higher health care expenses. Segment
operating profit was favorably impacted by unusual and nonrecurring items in the
third quarter of 2002 by $0.2 million. For the nine month period ended August
31, 2002, operating profit increased to $20.8 million compared to $4.6 million
in 2001. Segment operating profit was impacted by unusual and nonrecurring items
favorably in 2002 by $1.9 million and unfavorably in 2001 by $13.7 million. The
unusual and nonrecurring items in both periods related primarily to the shutdown
and sale of a manufacturing facility. Excluding unusual and nonrecurring items,
segment income increased to $18.9 million for the nine month period ended August
31, 2002 from $18.3 million in the same period in 2001. The increase in year to
date operating profit was a result of moderating key raw material prices in the
first half of the fiscal year.
Net sales in the Decorative & Building Products business segment during the
third quarter of 2002 decreased 13 percent to $101.5 million compared to $116.2
million in the third quarter of 2001. Decorative & Building Products' operating
profit declined to $1.1 million, with operating margins of 1.1 percent for the
third quarter of 2002 versus operating profit of $2.5 million and operating
margins of 2.2 percent in the third quarter of 2001. Operating profit was
impacted by lower sales volume, lower pricing in building products and
wallcovering, and higher health care expenses. Similarly, for the nine month
period ended August 31, 2002, total operating profit decreased to $2.7 million
compared to $9.2 million for the same period a year ago.
The significant sales decline in the third quarter of 2002 versus the same
period last year was due in part to lower single-ply roofing membrane activity
in both the new commercial construction and refurbishment markets. Global
wallcovering sales also contributed to the decline as a result of higher vacancy
rates in corporate and professional office real estate and lower occupancy rates
in the hospitality industry. Coated fabrics sales declined modestly during the
quarter due to weak furniture demand while sales of decorative laminates were
flat versus last year, aided by contract wins and new product introductions.
During the quarter, the Company received its first orders on several
recently introduced products, including Surf(x)(TM) decorative laminates and
Endurion(TM) upholstery fabrics. Surf(x)(TM) laminates are a cost effective
replacement for high pressure laminates that offer the added benefit of greater
design flexibility for three-dimensional applications such as rounded corners
and curved edges on office furniture and display fixtures, and Endurion(TM)
fabrics offer comfortable materials that have long-lasting cleanability and
exceptional stain resistance for heavy-traffic environments such as the
hospitality and health care markets.
-13-
Results of Operations Three and Nine Months Ended August 31, 2002 and 2001
(Continued)
Net sales in the Performance Chemicals business segment during the third
quarter of 2002 decreased 9 percent to $76.1 million versus $83.7 million in the
third quarter of 2001, due to weaker sales in paper coatings driven by lower
print advertising market demand and the closure of one customer mill due to
paper industry consolidation. Sales to the carpet industry increased year over
year due to market share increases and new product introductions. In the
specialty chemicals markets, sales of polymers to floor care and coatings
customers were up, while other product line sales were flat to down. Operating
profit totaled $3.2 million in the quarter as compared to operating profit of
$8.4 million in the third quarter of 2001. Operating margins were 4.2 percent
for the quarter versus 10.0 percent during the same period last year. Operating
profit was negatively impacted by rapidly escalating raw material costs for
styrene and butadiene, lower average unit selling prices, and higher health care
expenses. To partially offset increasing raw material costs, Performance
Chemicals has initiated price increases in the paper and carpet markets which
will be phased in over the next few months. For the nine months ended 2002,
operating profit increased to $16.2 million compared to $9.1 million for the
same period one year ago. The increase resulted primarily from moderating key
raw material prices in the first half of 2002.
Products introduced in late 2001 are gaining acceptance in several of the
Performance Chemicals business segment's markets, including floor care, carpet
and specialties. Some applications utilize the Company's proprietary and
environmentally preferred PolyFox(TM) fluorochemical technology.
Interest expense declined 55 percent to $1.7 million for the third quarter
of 2002 compared to $3.8 million for the same period one year ago. The decrease
resulted from lower average borrowing rates and average lower debt levels
achieved through focused cost reduction plans and actions that improve cash
flows. Similarly, for the nine month period ending August 31, 2002 interest
expense decreased to $6.1 million from $11.0 million for the same period in
2001.
Effective December 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142). In accordance with this statement, the
Company ceased amortization of all goodwill and indefinite lived intangible
assets. During 2001, operating profit included additional amortization expenses
of $1.3 million and $4.4 million, for the three and nine month periods ended
August 31, 2001, respectively, and reduced net earnings by $0.8 million ($.02
per diluted share) and $2.6 million ($.07 per diluted share) for the same
periods.
Because of current operating performance, the Company began to reverse a
portion of the previously established tax valuation allowance related to the net
deferred tax assets created in the first quarter of 2002 with the adoption of
SFAS No. 142. The Company's effective tax rate decreased from 40 percent for the
nine months ended August 31, 2001 to 6 percent for the nine months ended August
31, 2002, resulting in an improvement to net income of approximately $2.4
million or $.06 per diluted share.
During the nine months ended August 31, 2002, the Company also completed the
transitional review for goodwill impairments required under this new accounting
pronouncement. The review indicated that goodwill recorded in the Performance
Chemicals segment was impaired as of December 1, 2001. Accordingly, the Company
measured and recognized a transitional goodwill impairment loss of $104 million.
In addition, the review also indicated that intangible assets with indefinite
useful lives in the Decorative & Building Products segment were impaired by
$38.5 million. Upon adoption of SFAS 142, the Company recorded a total noncash
charge of $142.5 million (net loss per share of $3.60) as a cumulative effect of
a change in accounting principle, effective December 1, 2001, in its statement
of operations for the nine months ended August 31, 2002.
Outlook
The Company expects full-year diluted earnings per share from continuing
operations excluding unusual items of $0.07 to $0.12 versus $0.10 in 2001 driven
by higher raw material costs and weak market demand. The previous estimate for
2002 earnings per share was a range of $0.33-$0.40.
-14-
Financial Resources and Capital Spending
Cash flow provided by operating activities for the first nine months of
fiscal 2002 was $18.8 million as compared to cash flow used by operations of
$26.0 million in the first nine months of 2001. The change was primarily due to
aggressive cost reductions and cash management actions taken during the period
and improved results from the Company's businesses. For the first nine months of
2002, $6.9 million was used for investing activities consisting of $7.7 million
for capital expenditures and $2.0 million for an acquisition, offset by proceeds
of $2.8 million from the sale of a closed facility. During the first nine months
of 2001, $15.8 million was used for investing activities primarily for capital
expenditures. For the first nine months of 2002, $12.1 million was used for
financing activities to reduce existing debt and repay promissory notes. For the
same period a year ago, cash flow provided by financing activities was $35.1
million to fund current operations.
As described in Note G, the Company amended its secured $240 million
revolving credit facility which expires in September 2004. At August 31, 2002,
the unused and available balance under this Facility was $91.6 million. The
Company pays a variable commitment fee, which is currently 40 basis points, on
the unused balance. Interest rates are variable, primarily based on LIBOR and
were at an average rate of 4.0 percent at August 31, 2002. The Facility is
available for working capital, capital expenditures and acquisition needs. Total
debt outstanding at the end of the third quarter was $148.5 million and average
debt outstanding during the quarter was $167.9 million.
Based upon current and anticipated levels of operations and plans for
integrating recent acquisitions, management believes that cash flow from
operations, combined with borrowings that are available under the credit
facility, will be sufficient to enable the Company to meet its current and
anticipated cash operating requirements, including scheduled interest and
principal payments, capital expenditures and working capital needs for the next
twelve months. However, actual capital requirements may change, particularly as
a result of any acquisitions which the Company may make. The Company's ability
to meet its current and anticipated operating requirements will be dependent
upon the Company's future performance which, in turn, will be subject to general
economic conditions and to financial, business and other factors, including some
factors beyond the Company's control. Depending on the nature, size and timing
of future acquisitions, the Company may be required to raise additional
financing. Currently, substantially all of the debt of OMNOVA Solutions bears
interest at variable rates; therefore, its liquidity and financial condition are
and will continue to be affected by changes in prevailing interest rates.
Significant Accounting Policies and Management Judgements
Inherent in the Company's results of operations are certain estimates,
assumptions and judgements including assumed rates for customer defaults on
payments, inventory turnover, roofing system repair or replacement obligations
and an assumed rate of return on invested pension assets. The Company maintains
reserves for bad debts, inventory obsolescence and warranty claims that are
reasonable and that are based on the Company's historical experience and current
expectations for future performance of operations. In addition, the Company
provides a valuation allowance against its net deferred tax assets due to the
uncertainty in recovery of such assets.
A sudden and prolonged deterioration in the economy could adversely affect
the Company's customers requiring the Company to increase its reserves for bad
debts. A sudden and unexpected change in design trends and/or preferences for
patterns, colors and/or material could reduce the rate of inventory turnover and
require the Company to increase its reserves for obsolescence. A significant
increase in roofing system repairs or replacements could also require the
Company to increase its reserves for warranty claims. If such adverse conditions
would occur, the Company cannot readily predict the effect on its financial
condition or results of operations as any such effect depends on both future
results of operations and the magnitude and timing of the adverse conditions.
-15-
Significant Accounting Policies and Management Judgements (Continued)
Because of the Company's practice of using a five year smoothing technique
for recognizing pension asset gains or losses, the Company does not believe that
a sudden deterioration in market trends will have a significant impact in the
near term on the reported pension income included in the Company's results of
operations.
As of August 31, 2002, the Company had approximately $56.0 million of net
deferred tax assets primarily related to domestic loss carryforwards that expire
by 2021 and other temporary differences for which a valuation allowance of $56.0
million has been provided.
Environmental Matters
OMNOVA Solutions' policy is to conduct its businesses with due regard for
the preservation and protection of the environment. OMNOVA Solutions devotes
resources and management attention to environmental matters and actively manages
its ongoing processes to comply with extensive environmental laws and
regulations. OMNOVA Solutions' Condensed Consolidated Balance Sheet as of August
31, 2002 reflects environmental reserves of $0.9 million. Management believes,
on the basis of presently available information, that resolution of
environmental matters will not materially affect liquidity, capital resources or
the consolidated financial condition of the Company. The effect of resolution of
these matters on results of operations cannot be predicted because any such
effect depends on both future results of operations and the amount and timing of
the resolution of such matters.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements concerning trends and
other forward-looking information affecting or relating to the Company and its
industries. These statements are intended to qualify for the protections
afforded forward-looking statements under the Private Securities Litigation
Reform Act of 1995. Forward-looking statements may generally be identified by
the use of forward-looking terms such as "could", "may", "will", "expects",
"believes", "anticipates", "plans", "intends", "estimates", "projects",
"targets", "forecasts", "seeks" or similar terms. Forward-looking statements
address the Company's business, results of operations and financial condition,
and include statements based on current expectations, estimates, forecasts and
projections about the economies and markets in which the Company operates and
management's beliefs and assumptions about these economies and markets. In
addition to certain contingency matters and their respective cautionary
statements discussed in the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 2001, the Forward-Looking Statements section of this
Management's Discussion and Analysis indicates there are many risks and
uncertainties that could cause actual results or outcomes to differ materially
from those described in the forward-looking statements, some of which are beyond
the Company's control, including inherent economic risks and changes in
prevailing governmental policies and regulatory actions.
Some important factors that could cause the Company's actual results or
outcomes to differ from those expressed in its forward-looking statements
include, but are not limited to, the following:
. General economic trends affecting OMNOVA Solutions' markets
. Raw material prices for crude oil and chemical feed stocks including
polyvinyl chloride, styrene and butadiene
. Acts of war or terrorism
. Availability of raw material feedstocks to the Company
. Competitive pressure on pricing
. Customer and/or competitor consolidation
-16-
Forward-Looking Statements (Continued)
. Availability of financing to fund operations at anticipated rates and
terms
. The Company's acquisition activities
. A prolonged work stoppage
. Governmental and regulatory policies
. Rapid increases to health care costs
. Fluctuations in exchange rates of foreign currencies and other risks
associated with foreign operations
The Company disclaims any obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in interest rates on
long-term debt obligations. Currently, the Company does not use derivative
financial instruments to manage its interest rate risk. Substantially all of the
Company's long-term debt, which is under the amended revolving credit facility
described in Note G to the Consolidated Financial Statements, matures in the
year 2004 and is variable. The average variable interest rate applicable to this
debt was 4.0 percent as of August 31, 2002. Since the Company's long-term debt
under the Facility bears interest at market rates, the carrying value
approximates fair value.
The Company is subject to foreign currency exchange risk primarily due to
the European wallcovering business. As disclosed in the Condensed Consolidated
Balance Sheet, the Company has experienced an accumulated loss of $4.4 million
as of August 31, 2002 primarily due to the unfavorable currency conversion of
the British pound sterling. To date, the Company has not entered into any
significant foreign currency forward exchange contracts or other derivative
financial instruments to hedge the effects of adverse fluctuations in foreign
currency exchange rates, but will continue to evaluate the future use of these
financial instruments.
Item 4. Controls and Procedures
Controls and Procedures
Management of the Company, including the Chief Executive Officer and the
Chief Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures during the last ninety (90) days and, based
on this evaluation, has determined that the Company's disclosure controls and
procedures are effective. Further, there have been no significant changes in the
system of internal controls or in other factors that could significantly affect
internal controls subsequent to the date of the evaluation.
-17-
Part II. Other Information
Item 1. Legal Proceedings
On October 12, 2000, a group of hourly retirees filed a purported class
action lawsuit in Federal District Court against GenCorp Inc. and OMNOVA
Solutions, and certain retiree medical plans of both companies, seeking certain
retiree medical benefits. The retirees seek to certify a class consisting of all
eligible retirees formerly represented by the United Rubber Workers. Recently,
plaintiffs have voluntarily dismissed certain claims that were based on breach
of fiduciary duty and estoppel theories and have filed a motion for summary
judgment specifying the basis for liability as the breach of certain GenCorp
labor agreements, which expired in the mid-1990's. The GenCorp Hourly Retiree
Medical Plan (the "GenCorp Plan") was established in 1993, and from 1993 to 1996
virtually all eligible GenCorp retirees stopped receiving retiree medical
benefits under the Gencorp labor agreements and elected retiree medical coverage
under the GenCorp Plan. At the time of the spin-off of OMNOVA in 1999, the
OMNOVA Solutions Hourly Retiree Medical Plan (the "OMNOVA Plan") was established
providing for retiree medical benefits identical to the benefits specified in
the GenCorp Plan. At the spin-off, the OMNOVA Plan began paying these specified
benefits which had previously been paid under the GenCorp Plan in respect of
certain retirees from locations included in the spin-off.
OMNOVA believes that it is not a proper party to this lawsuit as it is not a
signatory to the GenCorp labor agreements on which plaintiffs' remaining claims
rely. OMNOVA has filed a motion for summary judgment on the basis that, among
other things, it is not a proper party to the lawsuit. Based on the recent
dismissal of certain claims by the plaintiffs and the nature of the plaintiffs'
remaining claims, OMNOVA believes it has meritorious defenses and that the
likelihood that it will incur any liability in this matter is remote.
The Company is subject to various legal actions, governmental investigations
and proceedings relating to a wide range of matters. In the opinion of
management, after reviewing the information which is currently available with
respect to these matters and consulting with legal counsel, any liability which
may ultimately be incurred with respect to these matters will not materially
affect the consolidated financial condition of the Company other than the matter
discussed above as to which the Company believes it has meritorious defenses.
The effect of resolution of these matters on results of operations cannot be
predicted because any such effect depends on both future results of operations
and the amount and timing of the resolution of such matters.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
99 Certification of CEO and CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
OMNOVA Solutions did not file any reports on Form 8-K during the
quarter ended August 31, 2002.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNOVA SOLUTIONS INC.
Date October 14, 2002 By /s/ M. E. Hicks
------------------------ ---------------------------------------
M. E. Hicks
Senior Vice President and
Chief Financial Officer;
Treasurer (Principal Financial Officer)
Date October 14, 2002 By /s/ J. C. LeMay
------------------------ ---------------------------------------
J. C. LeMay
Senior Vice President, Business
Development;
General Counsel
(Duly Authorized Officer)
-19-
CERTIFICATIONS
I, Kevin M. McMullen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OMNOVA Solutions
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 14, 2002
/s/ K. M. McMullen
---------------------------------------
Chairman, Chief Executive Officer and
President
-20-
CERTIFICATIONS
I, Michael E. Hicks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OMNOVA Solutions
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 14, 2002
/s/ M. E. Hicks
-----------------------------------------
Senior Vice President and Chief Financial
Officer; Treasurer
-21-