Net sales increased $41.8 million, or 22.5%, to $227.9 million for the third quarter of 2010, compared to $186.1 million for the third quarter of 2009. The third quarter increase in net sales was the result of improved volumes of $7.4 million and higher selling prices of $35.0 million partially offset by unfavorable foreign currency translation effects of $0.6 million. Gross profit declined to $39.1 million, with margins of 17.2%, in the third quarter of 2010, compared to $44.0 million and margins of 23.6% in the third quarter of 2009. Included in gross profit in the third quarter of 2010 is $2.6 million of strike-related costs. The decline in gross profit margin percentage was primarily due to a change in product mix, higher manufacturing costs as a result of the strike, and the effect of index pricing, in which higher raw materials are passed through without any gross margin benefit.
"In OMNOVA's third quarter, our underlying business continued to post strong operating performance considering that results were adversely impacted by nearly $7 million of non-recurring expenses. Cash flow was strong, and our balance sheet continues to improve. We have made significant progress on many fronts, including the introduction of numerous innovative products, penetration into new, adjacent markets, the continued globalization of our business and aggressive productivity gains and cost reductions," said Kevin McMullen, OMNOVA Solutions' Chairman and Chief Executive Officer.
"Overall, volume expansion continued despite weakness in commercial wallcovering and carpet chemicals, which remain impacted by the slow down in commercial and residential construction and refurbishment activity. Specialty chemicals and domestic laminates had double-digit volume gains. After several years of adjusting our business model and cost structure in the face of reduced market demand, we have strong operating leverage as volumes outpaced last year's levels," McMullen added.
"On September 22, 2010, the Company announced its intention to purchase Eliokem International (Eliokem), a business that will significantly enhance and grow our Performance Chemicals business. This acquisition will transform OMNOVA Solutions into a much larger, more diverse specialty chemical and functional surfaces company with significantly enhanced global capability. It is an excellent fit with OMNOVA's strategy to grow in existing markets, penetrate new adjacent markets and globalize our Company," said McMullen.
Selling, general and administrative expenses in the third quarter of 2010 were $24.4 million, or 10.7% of sales, compared to $25.7 million, or 13.8% of sales, in the third quarter of 2009. Despite rising volumes, selling, general and administrative expenses decreased due to the Company's focused ongoing efforts to control costs.
Other expense (income), net totaled $4.3 million for the third quarter and included non-recurring expense of $1.9 million for the pending Eliokem acquisition, $1.3 million of strike-related costs and $0.8 million for the foreign import duty claim.
Interest expense in the third quarter of 2010 was $1.9 million, a decrease of $0.1 million, as a result of lower average debt, compared to the third quarter of 2009. The weighted average cost of borrowing during the third quarter of 2010 was 4.6%, the same as the third quarter of 2009.
The Company's tax expense for the third quarter of 2010 was $0.1 million, compared to a benefit of $0.1 million in the third quarter of 2009. The consolidated tax rate is substantially lower than the statutory rate because of the utilization of domestic federal net operating loss carryforwards with offsetting valuation allowances. The Company has approximately $137.8 million of domestic federal net operating loss carryforwards, with expiration dates between 2021 and 2030.
The Company's net debt (total debt less cash) was $84.7 million at August 31, 2010, an improvement of $17.4 million during the quarter due to strong cash flow from operations. Debt of $144.4 million was primarily comprised of a term loan facility with $141.2 million outstanding and maturing in 2014. On August 31, 2010, there was no outstanding debt on the Company's revolving asset-based credit facility and the available borrowing capacity was $79.6 million. The August 31, 2010 consolidated cash balance was $59.7 million, a quarter-over-quarter increase of $17.7 million. Total liquidity, comprised of unused borrowing capacity and cash on hand, was $139.3 million as of August 31, 2010.
Proposed Acquisition - On September 22, 2010, the Company announced its intention to purchase Eliokem International, a global chemicals manufacturer with sales of approximately $277 million for the last twelve months ended August 31, 2010. The Company will pay 227.5 million euros for Eliokem or approximately $300 million at current exchange rates. Eliokem is a worldwide producer of specialty polymers and chemicals, including coating resins, elastomeric modifiers, antioxidants, rubber reinforcing resins, oil and gas drilling chemicals, and latices for specialty applications. Eliokem has manufacturing sites in Caojing and Ningbo, China; Valia, India; Le Havre, France; and Akron (Ohio), USA. Eliokem also has regional sales offices in Akron, Singapore, Shanghai and Mumbai. The company employs approximately 630 people worldwide.
Closing of the proposed transaction is subject to consultation with Eliokem's Works Council in France, completion of a definitive agreement, regulatory approvals, financing and other customary conditions. Subject to these conditions, the Company anticipates completion of the transaction by the end of 2010.
Performance Chemicals - Net sales during the third quarter of 2010 increased 39.2%, to $145.3 million, compared to $104.4 million in the third quarter of 2009. The improvement was primarily driven by volume increases of $7.5 million, or 7.2%, and higher selling prices of $34.1 million partially offset by unfavorable foreign currency translation effects of $0.7 million. Segment operating profit was $15.2 million for the third quarter of 2010 as compared to $14.8 million in the third quarter of 2009, an increase of $0.4 million. The year-over-year operating profit improvement was driven by higher volumes and selling price increases which were partially offset by higher raw material costs of $34.5 million and reduced operating costs.
During the quarter, specialty and paper market volumes increased as compared to a year ago, while carpet volumes were down. The Company's industry-leading technology led to new business wins in most of its markets. August was the thirteenth consecutive month of year-over-year volume growth as the general markets continued to recover. Also, several customers are now operating production lines that had been idled in 2009.
Decorative Products - Net sales were $82.6 million during the third quarter of 2010, an increase of $0.9 million, or 1.1%, compared to the third quarter of 2009. Sales improved in decorative laminates, coated fabrics and the Asian businesses, while commercial wallcovering declined. Segment operating loss was $4.9 million in the third quarter of 2010, compared to income of $0.6 million for the third quarter of 2009. Included in the loss were expenses totaling $4.8 million related to the strike in Columbus, Mississippi, a foreign import duty claim, and restructuring and severance actions. Excluding these items, Decorative Products was nearly breakeven in the third quarter of 2010.
Prior to August 1, 2009, the Company reported results for the Asian businesses on a one-month lag. Beginning in the third quarter of 2009, the Asian businesses began reporting on the same fiscal basis and, accordingly, the third quarter of 2009 includes four months of financial results. The sales and segment operating profit from the additional month were approximately $8.0 million and $0.2 million, respectively.
On May 20, 2010, the Columbus, Mississippi United Steelworkers Local 748-L voted against ratification of a new contract proposal and subsequently went on strike on May 21, 2010. During the quarter, the Company's salaried workforce and contract labor continued to operate the plant and meet customers' requirements. Late in the quarter, the Company transitioned from contract labor to locally hired replacement workers. As a result, strike-related costs, which were $3.9 million in the third quarter, are expected to decline significantly in the fourth quarter to approximately $0.9 million to $1.2 million.