Hot Stock under Consideration: OMNOVA Solutions Inc. (NYSE: OMN)

On Tuesday, Shares of OMNOVA Solutions Inc. (NYSE: OMN) declined -0.53% to $7.51. The stock recorded $7.43 as its minimum price and hit the max level of $7.66, during its most recent trading session. It traded total volume of 133,010 shares higher than the average volume of 112.84K shares.

OMNOVA Solutions Inc. (OMN) reports seventh successive quarter of year-over-year growth in Specialty Segment volume in Q3 2018 and acquisition of Portugal-based manufacturer for its Specialty Solutions segment.

For the quarter, Adjusted Segment Operating Profit for Specialty Solutions was $19.70M, up 4.2% from $18.90M last year and representing 90% of Combined Adjusted Segment Operating Profit.  Sales in Specialty Solutions were up 6.1% to $122.10M, representing 63% of total Company sales for the quarter.

Consolidated Results for the Third Quarter of Fiscal 2018

Net sales for the quarter were $193.60M, down 3.6% from last year’s $200.90M.  Net sales in Specialty Solutions increased 6.1% to $122.10M, while net sales in Performance Materials reduced 16.7% to $71.50M.  Overall volume was unfavorable by $12.20M, or 6%, as growth in Specialty Solutions was offset predominantly by the decline in Performance Materials because of the Company’s planned exit from the commodity paper market.  Price and mix had a favorable impact on net sales of $4.10M, or 2%, mainly in Specialty Solutions.  Currency translation was favorable by $1.50M, or 0.7%, chiefly reflecting the strengthening of the Euro.

SG&A in the quarter was $25.90M, down from $28.90M in the same quarter last year.  The primary drivers of the decrease were benefits from the “One OMNOVA” cost reduction programs and reduced incentive compensation expense.

Interest expense for the quarter was $4.70M, contrast to $5.50M last year, reflecting lower average borrowing balances because of the Company’s $400M debt pre-payment in December 2017, but partially offset by rising variable interest rates.

Income tax expense in the quarter was $2.30M contrast to $6.10M in 2017.  Cash taxes were $2.40M for the quarter contrast to $1.30M last year.  The Company has about $91.30M of U.S. federal net operating loss carryforwards and $86.80Mof state and local tax net operating loss carryforwards.

Loss per share for the third quarter ended August 31, 2018 was $0.04, contrast to diluted earnings per share of $0.18 last year.  In the third quarter of 2018, the Company recorded charges of $10.40M mainly for asset writedowns in connection with the Green Bay, Wisconsin plant closure.  In the third quarter of 2017, the Company recorded charges of $1.80M mainly related to the “One OMNOVA” cost reduction program.

Working capital days at the end of the quarter were 50.8, five days better contrast to last year, driven by higher days payable.  Cash offered by operations was $21.60M, contrast to $19.90M last year, reflecting the strong operating performance in Specialty Solutions and working capital favorability.  The Company’s Net Leverage Ratio reduced to 3.0x Adjusted EBITDA, as contrast to 3.3x last year (see Tables E and F), reflecting the benefit from cash generation.

The Company’s €28.50M acquisition of Resiquímica reflects a 7.0x EBITDA multiple before cost synergies.  The transaction was funded with cash on hand and available liquidity from OMNOVA’s senior revolving credit facility, and is anticipated to increase OMNOVA’s annual revenues by about €56.0M, or U.S. $65.0M.  The acquisition is expected to be accretive to earnings and operating margins in 2019.

Specialty Solutions Segment Results

Net sales for Specialty Solutions during the third quarter of 2018 increased $7.00M, or 6.1%, to $122.10M, contrast with $115.10M last year.  The year-over-year improvement was driven by volume increases of $2.30M, or 2.0%, and price and mix improvements of $4.20M, or 3.6%.  Foreign currency translation accounted for the remainder of the increase in net sales.  Volumes were strong in the Company’s coatings, adhesives and sealants, films, elastomeric modifiers, and home & personal care businesses.

Segment operating profit was $19.50M contrast with $18.90M last year.  Adjusted Segment Operating Profit grew 4.2% to $19.70M, or 16.1% of net sales, contrast to $18.90M, or 16.4% of net sales, last year. Increased volume, healthy mix, and cost controls continued to drive the operating profit improvements.

Performance Materials Segment Results

Net sales for Performance Materials during the third quarter of 2018 were $71.50M, down $14.30M from $85.80M last year.  The divested China Coated Fabrics business accounted for $0.70M of net sales in the third quarter of 2017.  Volume, excluding China Coated Fabrics, was down $14.50M, or 16.8% from last year, mainly driven by the Company’s planned exit from the commodity paper market.  Volume in antioxidants and tire cord were favorable and the impact of foreign exchange was slightly favorable.

Performance Materials’ segment operating loss for the quarter was $7.90M, contrast with operating profit of $8.30M last year.  The operating loss this year includes $10.10M of charges mainly related to the closure of the Company’s Green Bay, Wisconsin manufacturing facility.  Adjusted Segment Operating Profit was $2.20M, or 3.1% of net sales, contrast to $8.30M, or 9.7% of net sales, last year.  Last year’s exceptionally high result was driven by margin recovery from noteworthy raw material cost spikes in early fiscal 2017.

OMN has the market capitalization of $344.03M and its EPS growth ratio for the past five years was -40.90%. The return on assets ratio of the Company was -13.50% while its return on investment ratio stands at -22.60%. Price to sales ratio was 0.45 while 94.50% of the stock was owned by institutional investors.

Grover Beam

Grover Beam has over 14 years experience in the financial services industry giving him a vast understanding of how news affects the financial markets. He is an active day trader spending the majority of her time analyzing earnings reports and watching commodities and derivatives. He has a Masters Degree in Economics from Westminster University with previous roles counting Investment Banking.

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