Omnova debt increases to $197.9 million as company faces inflationary, economic challenges

By Jennifer Lanning Drey

Portland, Ore., June 17 - Omnova Solutions Inc. ended the second quarter with total debt of $197.9 million, up $24.9 million from the company's debt balance at the end of the second quarter of 2007, Kevin McMullen, chief executive officer of Omnova, said Tuesday during the company's quarterly earnings conference call.

The debt increase included $32.4 million of borrowings used to fund the Decorative Products Asian joint venture acquisitions in January, partially offset by $7.5 million of debt reduction made using cash from operations.

Based on its historic cash flow trends, the company expects to reduce debt by between $10 million and $20 million in the second half of fiscal 2008, depending on profitability, McMullen said.

The company had $13.1 million of cash and cash equivalents at May 31. The cash is primarily located in the United Kingdom but is unrestricted and can be brought back to the United States with modest taxes associated, he said.

Omnova ended the second quarter with $27.8 million of available liquidity under its revolving credit facility. The company's term loan B covenant leverage ratio of net debt to EBITDA was 4.4% at the end of the quarter. The maximum leverage ratio allowed under the term loan B covenant is 5.5%.

Inflation, economy impact results

During the second quarter, Omnova was significantly impacted by increased raw materials costs as well as weak demand in some of its end use markets, particularly those linked to the housing industry.

"While Omnova continues to demonstrate topline strength, our priority to improve profitability remains challenged by the extreme inflation in our raw material costs," McMullen said.

The company reported a second-quarter net loss of $3.1 million, compared to a net loss of $9.8 million for the same period of 2007. Net sales increased to $219.7 million in the second quarter, compared to $188.0 million in the 2007 period.

The company implemented price increases within its Decorative Products and Performance Chemicals businesses during the second quarter and plans additional pricing increases for the third quarter as fuel costs continue to rise.

Omnova has also implemented cost savings initiatives, which are having less of an impact than planned due to the other headwinds, McMullen said.

"The tremendous inflation and weak market conditions have masked some of the many improvements we have made to our cost structure, which excluding raw materials, is lower than at any other time since our formation in 1999," he said.

The CEO said the pricing initiatives are expected to boost profitability in the second half of the year.

Omnova is a Fairlawn, Ohio, provider of emulsion polymers and specialty chemicals.

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