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TMCNet:  OMNOVA SOLUTIONS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[January 24, 2014]

OMNOVA SOLUTIONS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Overview The Company is an innovator of emulsion polymers, specialty chemicals, and engineered surfaces for a variety of commercial, industrial and residential end uses. As discussed in Item 1. Business, the Company operates two reportable business segments: Performance Chemicals and Engineered Surfaces. The Performance Chemicals segment produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene (SB), styrene butadiene acrylonitrile (SBA), styrene butadiene vinyl pyridine, nitrile butadiene (NBR), polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal, fluorochemicals and bio-based chemistries. Performance Chemicals' custom-formulated products include hollow plastic pigment, resins, binders, adhesives, specialty rubbers, antioxidants and elastomeric modifiers which are used in paper and packaging, specialty coatings, carpet, nonwovens, construction, oil/gas drilling and recovery, adhesives, tape, tires, floor care, textiles, graphic arts, polymer stabilization, industrial rubbers & hoses, bio-based polymers and various other specialty applications. The Engineered Surfaces segment develops, designs, produces and markets a broad line of functional and decorative surfacing products, including coated fabrics, surface laminates and performance films. These products are used in numerous applications, including commercial building refurbishment, remodeling and new construction, kitchen and bath cabinets, transportation including automotive, bus and other mass transit, marine and motorcycle, recreational vehicles and manufactured housing, flooring, commercial and residential furniture, retail display fixtures, home furnishings and commercial appliances, and performance films for pool liners, banners, tents, ceiling tiles and medical devices. Please refer to Item 1. Business, of this Annual Report on Form 10-K for further description of and background on the Company's operating segments.


The Company primarily sells its products directly to manufacturers.

The Company has strategically located manufacturing facilities in the United States, France, China, India and Thailand.

The Company has historically experienced stronger sales and income in its second, third and fourth quarters, comprised of the three-month periods ending May 31, August 31, and November 30. The Company's performance in the first quarter (December through February) has historically been weaker and less profitable due to generally lower levels of customer manufacturing, construction and refurbishment activities during the holidays and cold weather months.

The Company's chief operating decision maker, its CEO, evaluates performance and allocates resources by operating segment. Segment information has been prepared in accordance with authoritative guidance promulgated by the Financial Accounting Standards Board ("FASB"). The Company's two operating segments were determined based on products and services provided. Accounting policies of the segments are the same as those described in Note A-Significant Accounting Policies, of the Company's Consolidated Financial Statements. For a reconciliation of the Company's segment operating performance information, please refer to Note R of the Company's Consolidated Financial Statements.

A majority of the Company's raw materials are derived from petrochemicals and chemical feedstocks whose prices are cyclical and volatile. Generally, the Company attempts to pass along increased raw material prices to customers in the form of price increases of its products, however, due to sales contracts with certain customers, there may be a time delay between increased raw material prices and the Company's ability to increase the prices of its products.

Additionally, the Company may also experience, from time to time, competitive price pressures and other factors which may not allow it to increase the prices of its products.

OMNOVA's Performance Chemicals segment had sales price index contracts related to approximately 44% of its sales in 2013 and 2012 and approximately 45% for 2011. Customers with sales price index contracts are primarily in the Performance Materials product line. The index is generally comprised of a negotiated fixed amount per pound and the market price of key raw materials (i.e., styrene and butadiene). The contract mechanisms generally allow for the pass-through of the changes, either increases or decreases, in the prices of key raw materials within a 30 to 60 day period. Contracts vary in length from 12 to 36 months.

The remainder of Performance Chemicals' sales are not indexed. OMNOVA periodically negotiates with each customer regarding pricing changes based on the raw material components and the value-added and performance attributes of OMNOVA's product. OMNOVA's pricing objective, which may or may not be met, is to recover raw material price increases within a 30 to 60 day period.

Styrene, a key raw material component, is generally available worldwide, and OMNOVA has supply contracts with several producers. OMNOVA believes there is adequate global capacity to serve demand. OMNOVA's styrene purchases for 2010 through 2013 and an estimated range of market prices are as follows: Pounds Purchased (in millions) Market Price Range Per Pound 2013 172 $0.71 - $0.93 2012 177 $0.57 - $0.78 2011 205 $0.65 - $0.77 2010 180 $0.54 - $0.68 16-------------------------------------------------------------------------------- Table of Contents Butadiene, a key raw material component, is generally available worldwide, but its price is volatile. OMNOVA has supply contracts with several producers. At times, when the demand of butadiene exceeds supply, it is sold on an allocated basis. OMNOVA's butadiene purchases for 2010 through 2013 and an estimated range of market prices are as follows: Pounds Purchased (in millions) Market Price Range Per Pound 2013 139 $0.44 - $1.01 2012 158 $0.84 - $1.98 2011 175 $0.86 - $1.77 2010 135 $0.63 - $0.94 OMNOVA's Engineered Surfaces segment does not utilize sales price index contracts with its customers; rather, it negotiates pricing with each customer.

OMNOVA's pricing objective, which may or may not be met, is to recover raw material price increases within a 90 day period. Key raw materials utilized by the Engineered Surfaces segment include polyvinyl chloride (PVC) resins, textiles and plasticizers. These raw materials are generally readily available worldwide from multiple suppliers.

Key Indicators Key economic measures relevant to the Company include global economic growth rates, discretionary spending for durable goods, print advertising, oil and gas drilling levels, U.S. commercial real estate occupancy rates, U.S. office furniture sales, manufactured housing shipments, housing starts and sales of existing homes and forecasts of raw material pricing for certain petrochemical feed stocks. Key OEM industries which provide a general indication of demand drivers to the Company include paper, commercial and residential construction and refurbishment, automotive and tire products, furniture manufacturing, flooring manufacturing and ABS manufacturing. These measures provide general information on trends relevant to the demand for the Company's products but the trend information does not necessarily directly correlate with demand levels in the markets which ultimately use the Company's products.

Key operating measures utilized by the business segments include orders, sales and pricing, working capital turnover, inventory, productivity, new product vitality, cost of quality and order fill-rates which provide key indicators of business trends. These measures are reported on various cycles including daily, weekly and monthly depending on the needs established by operating management.

Key financial measures utilized by management to evaluate the results of its businesses and to understand the key variables impacting the current and future results of the Company include: sales and pricing; gross profit; selling, general and administrative expenses; adjusted operating profit; adjusted net income; and consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") as set forth in the Net Leverage Ratio in the Company's $200,000,000 Term Loan Credit Agreement, working capital, operating cash flows, capital expenditures, cash interest expense and adjusted earnings per share, including applicable ratios such as inventory turnover, working capital turnover, return on sales and assets and leverage ratios. These measures, as well as objectives established by the Board of Directors of the Company, are reviewed at monthly, quarterly and annual intervals and compared with historical periods.

Results of Operations of 2013 Compared to 2012 The Company's net sales in 2013 were $1,018.1 million compared to $1,125.5 million in 2012. The Performance Chemicals business segment revenue decreased by 10.6% and the Engineered Surfaces business segment revenue decreased 6.1%.

Contributing to the net sales decrease in 2013 were reduced volumes of $50.5 million, or 4.5%, and reduced pricing of $58.3 million, partially offset by favorable currency exchange translation effects of $1.4 million. Lower pricing in Performance Chemicals, which was due to lower year-over-year raw material costs, was partially offset by improved pricing in Engineered Surfaces.

Gross profit in 2013 was $212.7 million with a gross profit margin of 20.9% compared to gross profit of $227.2 million and a gross profit margin of 20.2% in 2012. The increase in gross profit margin was primarily due to better sales mix and cost reduction actions.

Selling, general and administrative expense in 2013 decreased $3.1 million, to $118.1 million, or 11.6% of sales, compared to $121.2 million, or 10.8% of net sales in 2012. The decrease in 2013 was primarily due to lower employee headcount and reduced annual incentive compensation expense.

Interest expense was $31.9 million and $36.5 million for 2013 and 2012, respectively. The decrease is primarily due to lower borrowing spreads as a result of a March 2013 refinancing and lower foreign borrowings. Also, included in interest expense for 2012 is approximately $1.3 million related to an expired interest rate swap.

Income tax expense was $6.0 million in 2013, a 22.6% effective income tax rate, compared to income tax expense of $11.2 million, or a 30.3% effective tax rate in 2012. The lower rate in 2013 was primarily due to income in foreign jurisdictions where the rate is lower than the U.S. domestic federal statutory rate, one-time tax benefits relating to operations that were sold, other discrete foreign tax items and a U.S. item, all of which totaled $2.4 million.

Cash tax payments in the U.S. are expected to be minimal for the next few years as the Company has $113.6 million of U.S. federal net operating loss carryforwards, $108.9 million of state and local net operating loss carryforwards, $0.4 million of foreign tax credit carryforwards and $0.2 million of AMT credit carryforwards. The majority of the federal, state and local net operating loss carryforwards expire between 2022 and 2032.

The Company has not provided for U.S. income taxes on certain of its non-U.S.

subsidiaries' undistributed earnings as such amounts are considered permanently reinvested outside the U.S. To the extent that foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.

However, based on the Company's policy of permanent reinvestment, it is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested. As of November 30, 2013, the non-U.S. subsidiaries have a cumulative unremitted foreign earnings income position of $62.5 million.

17 -------------------------------------------------------------------------------- Table of Contents The Company generated income from continuing operations of $20.5 million or $0.44 per diluted share in 2013 compared to $25.7 million or $0.56 per diluted share in 2012. Included in 2013 are gains on asset sales of $4.9 million primarily due to the sale of the Company's Taicang, China facility and Columbus, Mississippi property, plant and equipment, and a write-off of deferred financing fees of $1.5 million as a result of refinancing actions and an impairment charge of $0.9 million on a note receivable. Included in 2012 are asset impairment charges of $1.0 million relating to equipment at the Columbus, Mississippi and Taicang, China facilities.

Segment Discussion The following Segment Discussion presents information used by the Company in assessing the results of operations by business segment. The Company believes that this presentation is useful for providing the investor with an understanding of the Company's business and operating performance because these measures are used by the chief operating decision maker, the CEO, in evaluating performance and allocating resources.

The following table reconciles segment sales to consolidated net sales and segment operating profit (loss) to consolidated income before income taxes. The Company's commercial wallcovering businesses, which have historically been included in the Engineered Surfaces segment, have been reclassified to discontinued operations due to actions taken by the Company to sell those businesses and, as such, the following discussion does not include results of operations for the commercial wallcovering businesses.

Year Ended November 30, 2013 2012 (Dollars in millions) Segment Sales: Performance Chemicals Performance Materials $ 272.2 $ 343.2 Specialty Chemicals 500.8 521.3 Total Performance Chemicals $ 773.0 $ 864.5 Engineered Surfaces Coated Fabrics $ 108.9 $ 117.0 Laminates and Performance Films 136.2 144.0 Total Engineered Surfaces 245.1 261.0 Consolidated Net Sales $ 1,018.1 $ 1,125.5 Segment Gross Profit: Performance Chemicals $ 155.4 $ 177.2 Engineered Surfaces 57.3 50.0 Consolidated Gross Profit $ 212.7 $ 227.2 Segment Operating Profit: Performance Chemicals $ 64.1 $ 89.6 Engineered Surfaces 15.6 3.8 Interest expense (31.9 ) (36.5 ) Corporate expense (19.8 ) (20.0 ) Deferred financing fees write-off (1.5 ) - Consolidated income from continuing operations before income tax $ 26.5 $ 36.9 Performance Chemicals Performance Chemicals' net sales decreased $91.5 million to $773.0 million during 2013 compared to $864.5 million during 2012. The decrease was primarily due to reduced customer pricing of $61.1 million, or 7.1%, as a result of lower raw material costs and their impact on index pricing as well as competitive pricing pressure in Performance Materials product lines. Also impacting net sales were reduced volumes of $29.8 million, or 3.4%, and unfavorable foreign currency translation effects of $0.6 million. Net sales for the Performance Materials product line decreased $71.0 million to $272.2 million during 2013 compared to $343.2 million during 2012 driven by lower volumes in both paper and chemical markets of $41.3 million and reduced pricing of $29.7 million. Net sales for the Specialty Chemicals product line decreased $20.5 million to $500.8 million during 2013 compared to $521.3 million during 2012 due to reduced customer pricing of $31.4 million and unfavorable foreign currency translation, partially offset by improved volumes of $11.5 million as sales increased in oilfield solutions, coatings, nonwovens and antioxidants.

Performance Chemicals' gross profit was $155.4 million with a gross profit margin of 20.1% in 2013 compared to $177.2 million with a gross profit margin of 20.5% in 2012. Better sales mix and lower raw material costs were offset by reduced pricing and decreased volumes. Raw material costs decreased $40.6 million during 2013.

18 -------------------------------------------------------------------------------- Table of Contents This segment generated an operating profit of $64.1 million in 2013 compared to $89.6 million in 2012. The decrease in segment operating profit was primarily due to lower customer pricing and the incremental margin impact of the lower sales volume in Performance Materials, partially offset by lower raw material costs and cost reduction actions. The segment operating profit also includes items which management excludes when evaluating the results of the Company's segments. Those items for 2013 include $2.1 million of severance costs, $1.0 million of accelerated depreciation expense related to assets for which production will be transferred to another Performance Chemicals facility, a non-cash intangible asset impairment charge of $0.2 million and a gain of $0.3 million on an asset sale. In July, 2013, the Company announced a plan to transfer the manufacture of styrene acrylics and other latices from its Akron, Ohio facility to its Mogadore, Ohio facility in an effort to consolidate, upgrade and improve this process. As a result, certain styrene butadiene (SB) latex capacity at the Mogadore, Ohio facility will be re-purposed to the production of styrene acrylic and other specialty emulsion polymer chemistries.

This project is expected to be completed near the end of 2014 and will require an estimated $11.0 million in capital investments while generating expected annual savings of $4.0 million after completion.

Engineered Surfaces Engineered Surfaces' net sales decreased $15.9 million, or 6.1%, to $245.1 million in 2013 from $261.0 million in 2012 primarily due to lower volumes of $20.7 million, or 7.9%, which was partially offset by positive pricing actions of $2.8 million, or 1.1%, and favorable foreign currency translation effects of $2.0 million. Coated Fabrics net sales decreased to $108.9 million in 2013, compared to $117.0 million in 2012 due to the lower sales volumes. Net sales for the Laminates and Performance Films product lines decreased to $136.2 million during 2013, compared to $144.0 million million during 2012, as sales were lower across most markets.

Engineered Surfaces' gross profit was $57.3 million with a gross profit margin of 23.4% during 2013, compared to $50.0 million and a gross profit margin of 19.2% in 2012. The improvement in 2013 was primarily due to positive pricing actions, lower raw material costs and improved product mix.

Segment operating profit was $15.6 million for 2013 compared to $3.8 million for 2012. The improvement was primarily due to better sales mix, lower raw material costs, positive pricing actions and cost reduction actions. Segment operating profit also includes items which management excludes when evaluating the results of the Company's segments. Those items for 2013 include gains on asset sales of $5.1 million, workforce reduction and other costs of $3.0 million, and facility closure and transition costs of $3.3 million and a non-cash impairment charge of $0.9 million on a note receivable. Those items for 2012 include facility closure and transition costs of $4.0 million, workforce reduction costs of $1.0 million, non-cash asset impairment charges of $1.0 million and net charges relating to a non-product claim against the Company of $0.5 million (see Item 3 Legal Proceedings).

Interest and Corporate Interest expense was $31.9 million and $36.5 million for 2013 and 2012, respectively. The decrease is primarily due to lower borrowing spreads as a result of a March 2013 refinancing and lower foreign borrowings. Also, included in interest expense for 2012 is approximately $1.3 million related to an expired interest rate swap.

Corporate expenses were $19.8 million in 2013 compared to $20.0 million in 2012.

Results of Operations of 2012 Compared to 2011 The Company's net sales in 2012 were $1,125.5 million compared to $1,201.1 million in 2011. The Performance Chemicals business segment revenue decreased by 9.2% while the Engineered Surfaces business segment revenue increased 4.7%.

Contributing to the net sales decrease in 2012 were reduced volumes of $60.4 million, or 5.0%, and unfavorable currency exchange translation effects of $16.0 million, or 1.3%, partially offset by pricing improvements of $0.8 million.

Lower pricing in Performance Chemicals, which was due to lower year-over-year raw material costs as well as reduced volumes for that segment, were offset by improved pricing and volumes in Engineered Surfaces.

Gross profit in 2012 was $227.2 million with a gross profit margin of 20.2% compared to gross profit of $218.6 million and a gross profit margin of 18.2% in 2011. The increase in gross profit margin was primarily due to better sales mix and lower raw material costs, which were partially offset by a decline in selling prices during the second half of 2012.

Selling, general and administrative expense in 2012 increased $12.6 million, to $121.2 million, or 10.8% of sales, compared to $108.6 million, or 9.0% of net sales in 2011. The increase in 2012 was primarily due to increased staffing and employment costs, higher expenditures related to information technology system enhancements and research and development.

Other income was $1.4 million in 2012 compared to income of $0.8 million in 2011.

Interest expense was $36.5 million for 2012, compared to $38.0 million in 2011.

Included in interest expense for 2012 and 2011 is approximately $1.3 million and $2.6 million, respectively, related to an interest rate swap that was settled in the fourth quarter of 2010. The interest rate swap settlement was being amortized over the original term of the swap which expired in May 2012.

The Company recorded income tax expense of $11.2 million, or a 30.3% effective income tax rate for 2012, compared to income tax expense of $13.4 million, or a 44.5% effective tax rate in 2011. The lower rate in 2012 was primarily due to income in foreign jurisdictions where the rate is lower than the U.S. domestic federal statutory rate. The higher rate in 2011 was primarily due to losses in jurisdictions where no offsetting tax benefit is recorded due to a valuation allowance position and one-time tax costs associated with the ELIOKEM acquisition. Cash tax payments in the U.S. are expected to be minimal for the next few years as the Company had $116.8 million of U.S. federal net operating loss carryforwards, $90.0 million of state and local net operating loss carryforwards, $0.6 million of foreign tax credit carryforwards and $0.2 million of AMT credit carryforwards. The majority of the federal, state and local net operating loss carryforwards expire between 2022 and 2032.

The Company generated income from continuing operations of $25.7 million or $0.56 per diluted share in 2012 and $16.7 million or $0.37 per diluted share in 2011. The Company reported net income of $27.6 million or $0.60 per diluted share in 2012 compared to net loss of $2.8 million or $0.06 per diluted share in 2011.

19 -------------------------------------------------------------------------------- Table of Contents Segment Discussion The following Segment Discussion presents information used by the Company in assessing the results of operations by business segment. The Company believes that this presentation is useful for providing the investor with an understanding of the Company's business and operating performance because these measures are used by the chief operating decision maker, the CEO, in evaluating performance and allocating resources.

The following table reconciles segment sales to consolidated net sales and segment operating profit (loss) to consolidated income before income taxes. The Company's commercial wallcovering businesses, which have historically been included in the Engineered Surfaces segment have been reclassified to discontinued operations due to the sale of those businesses and, as such, the following discussion does not include results of operations for the commercial wallcovering businesses.

Year Ended November 30, 2012 2011 (Dollars in millions) Segment Sales: Performance Chemicals Performance Materials $343.2 $399.3 Specialty Chemicals 521.3 552.6 Total Performance Chemicals $864.5 $951.9 Engineered Surfaces Coated Fabrics $117.0 $114.3 Laminates and Performance Films 144.0 134.9 Total Engineered Surfaces 261.0 249.2 Consolidated Net Sales $1,125.5 $1,201.1 Segment Gross Profit: Performance Chemicals $177.2 $175.2 Engineered Surfaces 50.0 43.4 Consolidated Gross Profit $227.2 $218.6 Segment Operating Profit (Loss): Performance Chemicals $89.6 $86.5 Engineered Surfaces 3.8 (1.3 ) Interest expense (36.5 ) (38.0 ) Corporate expense (20.0 ) (13.8 ) Deferred financing fees write-off - (1.0 ) Acquisition and integration related expenses - (2.3 ) Consolidated income from continuing operations before income tax $36.9 $30.1 Performance Chemicals Performance Chemicals' net sales decreased $87.4 million to $864.5 million during 2012 compared to $951.9 million during 2011. The decrease was primarily due to reduced volumes of $66.1 million, or 6.9%, lower customer pricing of $4.4 million, or 0.5%, as raw material costs decreased and unfavorable foreign currency translation effects of $16.9 million. Net sales for the Performance Materials product line decreased $56.1 million to $343.2 million during 2012 compared to $399.3 million during 2011 driven by lower volumes in both markets and lower pricing. Net sales for the Specialty Chemicals product line decreased $31.3 million to $521.3 million during 2012 compared to $552.6 million during 2011 driven by a decline in volumes and unfavorable foreign currency translation, partially offset by increased sales in oil and gas drilling chemicals and tape adhesives and improved pricing.

Performance Chemicals' gross profit was $177.2 million with a gross profit margin of 20.5% in 2012 compared to $175.2 million with a gross profit margin of 18.4% in 2011. The improvement in gross profit margin in 2012 was primarily due to better sales mix and lower raw material costs, which were partially offset by lower pricing and decreased volumes. Raw material costs decreased $20.6 million during 2012.

This segment generated an operating profit of $89.6 million in 2012 compared to $86.5 million in 2011. The increase in segment operating profit was primarily due to lower raw material costs, partially offset by lower volumes and lower pricing. The segment operating profit also includes items which management excludes when evaluating the results of the Company's segments. Those items for 2011 include $2.7 million due to a one-time fair value adjustment for ELIOKEM inventory, a trade receivable allowance charge of $0.9 million and workforce reduction costs for ELIOKEM of $1.1 million.

20 -------------------------------------------------------------------------------- Table of Contents Engineered Surfaces Engineered Surfaces' net sales increased $11.8 million, or 4.7%, to $261.0 million in 2012 from $249.2 million in 2011 primarily due to increased volumes of $5.7 million, or 2.3%, positive pricing actions of $5.2 million, or 2.1%, and favorable foreign currency translation effects of $0.9 million. Coated Fabrics net sales increased to $117.0 million in 2012, compared to $114.3 million in 2011 as sales improved in the contract upholstery, transportation and marine markets. Net sales for the Laminates and Performance Films product lines improved to $144.0 million during 2012, compared to $134.9 million million during 2011. Laminates product line sales increased $15.3 million as sales improved in most markets while the Performance Films product line sales declined $6.2 million on weakness in pool liner, medical and films applications.

Engineered Surfaces' gross profit was $50.0 million with a gross profit margin of 19.2% during 2012, compared to $43.4 million and a gross profit margin of 17.4% in 2011. The improvement in 2012 was primarily due to increased volumes and positive pricing actions.

Segment operating profit was $3.8 million for 2012 compared to a loss of $1.3 million for 2011. The improvement was primarily due to positive pricing actions, higher volumes and lower raw material costs, partially offset by higher manufacturing and selling expenses. Segment operating profit also includes items which management excludes when evaluating the results of the Company's segments.

Those items for 2012 include workforce reduction costs of $1.0 million, non-cash asset impairment charges of $1.0 million and net charges relating to a non-product claim against the Company of $0.5 million (see Item 3 Legal Proceedings). Those items for 2011 include asset impairment charges of $3.1 million, workforce reduction costs of $0.5 million, plant closure costs of $0.5 million, a tax indemnification charge of $0.2 million and a pension curtailment charge of $0.1 million. Excluding these items, operating profit improved to $6.3 million in 2012 as compared to $3.1 million in 2011.

In November 2011, the Company committed to a plan to exit its North American wallcovering business and move production of its Columbus, Mississippi coated fabrics business to other facilities and, accordingly, recognized an impairment charge on machinery and equipment of $0.7 million. The impairment was caused by the transfer of certain products to other Company facilities to better meet customer demand. In the fourth quarter of 2012, the Company recognized an additional impairment charge of $0.8 million relating to the Columbus, Mississippi facility as a result of weaker real estate market values. The assets were written down to their estimated fair value using a cost approach.

Interest and Corporate Interest expense was $36.5 million and $38.0 million for 2012 and 2011, respectively. The decrease of $1.5 million is due to the completed amortization of an interest rate swap agreement in the second quarter of 2012 and slightly lower pricing for the Term Loan.

Corporate expenses were $20.0 million in 2012 compared to $13.8 million in 2011.

The increase is primarily due to increased staffing and and employment costs, information technology system enhancements and outside services.

Discontinued Operations As part of the Company's strategy to focus on businesses with greater global growth potential, the Company decided in the fourth quarter of 2011 to exit the commercial wallcovering business.

On December 12, 2011, the Company completed the sale of its North American wallcovering business to J. Josephson, Inc., a private commercial wallcovering producer based in New Jersey. The sale included print cylinders, certain equipment, trademarks, contracts and other assets associated with the Company's domestically-produced wallcovering. Under terms of the sale, the Company received $10.0 million in cash and may receive up to three years of royalty payments based on future sales of OMNOVA commercial wallcovering patterns. The Company retained the net working capital, the Columbus, Mississippi manufacturing facility and certain production assets which were also used by its other businesses.

The Company recognized a net after-tax gain of approximately $6.0 million ($9.9 million before tax) from the sale transaction during the first quarter of 2012, which represents the excess of the sale price over the book value of the assets sold.

During 2012 and the first quarter of 2013, the Company continued to manufacture commercial wallcovering products for J. Josephson as part of an orderly transition of production from the Company's Columbus, Mississippi plant to J.

Josephson's plant in New Jersey. The Company completed the transition of production by January 31, 2013. The net cash flows received and paid by the Company relating to the manufacture of commercial wallcovering for J. Josephson during 2013 were not significant.

For the North American wallcovering business, the Company allocated the book value of certain shared manufacturing assets, as well as the associated shared manufacturing and selling costs between the wallcovering products and the coated fabrics products based on the relative shares of manufacturing volume produced in the Columbus, Mississippi facility. The Company transferred the production of certain coated fabrics products to other company facilities. The transfer was completed during the first quarter of 2013.

On March 6, 2012, the Company sold its U.K.-based Muraspec commercial wallcovering business to affiliates of a2e Venture Catalysts Limited and its principal Amin Amiri for $2.4 million in cash and a note receivable for $3.8 million. The note receivable is secured by a first lien on a building owned by the sold business. The Company recognized losses of $0.9 million related to this transaction during 2012 to reflect the fair value of the assets and liabilities sold to the buyer.

Net sales of the discontinued businesses were $2.1 million, $35.9 million and $70.2 million for 2013, 2012 and 2011, respectively. Losses before income taxes for the discontinued businesses were $1.5 million, $5.0 million and $23.3 million for 2013, 2012 and 2011, respectively. The loss from discontinued operations in 2013 includes legal costs of $1.3 million related to a dispute with a former wallcovering customer (see Note P - Contingencies and Commitments). In 2011, the loss from discontinued operations includes long-lived asset impairment charges of $13.6 million and inventory write-downs of $2.9 million.

21 -------------------------------------------------------------------------------- Table of Contents Financial Resources and Capital Spending The following table reflects key cash flow measures from continuing operations: 2013 2012 2011 (Dollars in millions) Cash provided by operating activities $ 45.8 $ 65.3 $ 15.7 Cash used in investing activities $ (22.0 ) $ (20.1 ) $ (42.1 ) Cash (used in) provided by financing activities $ (1.5 ) $ (2.9 ) $ 39.3 Increase in cash and cash equivalents $ 21.9 $ 44.1 $ 27.7 Cash provided by operating activities was $45.8 million in 2013 compared to $65.3 million in 2012 and $15.7 million in 2011. The decrease in 2013 was primarily due to an increase in working capital and contributions to the Company's U.S. defined benefit plan. The increase in 2012 is primarily due to improvements in net income and in working capital, partially offset by higher contributions to the Company's U.S. defined benefit pension plan. Days sales outstanding was 47.8 days in 2013, 45.8 days in 2012 and 47.9 days in 2011. The increase in 2013 is primarily due to an increase in terms at several key customers and a higher mix of receivables in foreign countries where terms are longer. The improvement in days sales outstanding in 2012 was primarily due to improved collection efforts.

Cash used in investing activities was $22.0 million in 2013, compared to $20.1 million in 2012 and $42.1 million in 2011. Included in 2013 are capital expenditures of $28.9 million which were partially offset by proceeds from the sale of assets of $6.7 million primarily related to sale of the Taicang, China facility and Columbus, Mississippi equipment. Included in 2012 are capital expenditures of $32.8 million partially offset by cash received from the sale of the Company's wallcovering businesses. Included in 2011 is the cash paid for the ELIOKEM acquisition of $301.7 million, less cash acquired in the businesses of $30.1 million. Also included in 2011 was the use of $253.2 million of restricted cash to complete the ELIOKEM acquisition and refinancing of OMNOVA's existing debt on December 9, 2010 and $24.1 million of capital expenditures. Capital expenditures were made and are planned principally for asset replacement, new product capability, cost reduction, safety and productivity improvements and environmental protection. The Company expects capital expenditures to be approximately $50.0 million during 2014. The expected increase in capital expenditures over 2013 is primarily due to expansion of acrylics manufacturing capability at the Company's Mogadore, Ohio plant and construction of the Company's future new corporate headquarters building. The Company plans to fund substantially all of its capital expenditures from cash flow generated from operations.

Cash used for financing activities was $1.5 million in 2013, due primarily to debt payments of $6.5 million and refinancing costs of $0.6 million, partially offset by the release of restricted cash which was previously used as a compensating balance against foreign debt. Cash used in financing activities in 2012 was $2.9 million primarily due to debt payments of $3.6 million, partially offset by cash received from the exercise of the Company's employee stock options of $2.0 million. Cash provided by financing activities in 2011 of $39.3 million was due primarily to the refinancing activities and the increase of the existing term loan from $140.9 million to $200.0 million. Total debt was $446.6 million as of November 30, 2013, which includes outstanding senior notes of $250.0 million, $194.0 million for the term loan and $2.6 million of foreign debt, compared to $453.6 million as of November 30, 2012. OMNOVA's cash balance of $164.9 million at November 30, 2013 consists of $101.8 million in the U.S., $36.4 million in Europe and $26.7 million in Asia. OMNOVA is not aware of any restrictions regarding the repatriation of its non-U.S. cash.

The Company believes that its cash flows from operations, together with existing credit facilities and cash on hand will be adequate to fund its requirements for at least the next twelve months.

Debt - Information regarding the Company's debt is disclosed in Note N to the Company's consolidated financial statements.

Contractual Obligations Payments Due By Period Less More Than 1 2 - 3 4 - 5 Than 5 Total Year Years Years Years (Dollars in millions)Long-term debt and amounts due banks $ 448.6 $ 4.6 $ 4.0 $ 440.0 $ - Capital lease obligations 4.0 - - .4 3.6 Interest payments on long-term debt(1) 133.3 27.9 56.1 49.3 - Operating and financing leases(2) 65.1 5.7 10.4 8.2 40.8 Purchase obligations 1.0 1.0 - - - Pension funding obligations(3) 59.5 5.9 23.5 18.9 11.2 Other long-term liabilities 9.1 - 3.0 3.0 3.1 Total $ 720.6 $ 45.1 $ 97.0 $ 519.8 $ 58.7 (1) Based on outstanding debt balances as of November 30, 2013 and estimated interest rates. As those are based on estimates, actual future payments may be different.

(2) Includes payments on the Company's future corporate headquarters.

(3) Payments are based on Company estimates and current funding laws. Actual results may be different.

22-------------------------------------------------------------------------------- Table of Contents Significant Accounting Estimates and Management Judgments The Company's discussion and analysis of its results of operations, financial condition and liquidity are based upon the Company's consolidated financial statements as of November 30, 2013, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities as of the date of the financial statements. Periodically, the Company reviews its estimates and judgments including those related to product returns, accounts receivable, inventories, litigation, environmental reserves, pensions and income taxes. The Company bases its estimates and judgments on historical experience and on various assumptions that it believes to be reasonable under the circumstances.

Actual results may materially differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements: A) Revenue Recognition The Company recognizes revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred; 3) an established sales price has been set with the customer; 4) collection of the sale revenue from the customer is reasonably assured; and 5) no contingencies exist. Delivery is considered to have occurred when the customer assumes the risk and rewards of ownership. The Company estimates and records provisions for quantity rebates and sales returns and allowances as an offset to revenue in the same period the related revenue is recognized, based upon its experience. These items are included as a reduction in deriving net sales.

B) Allowance For Doubtful Accounts The Company's policy is to identify all customers that are considered doubtful of collection based upon the customer's financial condition, payment history, credit rating and other relevant factors and to reserve the portion of such accounts receivable for which collection does not appear likely. If the financial condition of our customers were to deteriorate, resulting in an inability to make payments, additional allowances may be required. The allowance for doubtful accounts was $2.0 million and $2.2 million at November 30, 2013 and 2012, respectively.

C) Allowance For Inventory Obsolescence The Company's policy is to maintain an inventory obsolescence reserve based upon specifically identified, discontinued or obsolete items and a percentage of quantities on hand compared with historical and forecasted usage and sales levels. The policy has been applied on a consistent basis for all years presented. A sudden and unexpected change in design trends and/or material preferences could impact the carrying value of the Company's inventory and require the Company to increase its reserve for obsolescence. The reserve for inventory obsolescence, which applies primarily to our Engineered Surfaces segment, was $8.2 million at November 30, 2013 and $10.7 million at November 30, 2012.

D) Litigation and Environmental Reserves From time to time, the Company is subject to claims, lawsuits and proceedings related to product liability, product warranty, contract, employment, environmental and other matters. The Company provides a reserve for such matters when it concludes a material loss is probable and the amount can be estimated.

Costs related to environmental compliance are also accrued when it is probable a loss has been incurred and the amount of loss can be estimated.

E) Pensions and Other Post-retirement Plans The Company accounts for its pension and other post-retirement plans by recognizing in its balance sheets the overfunded or underfunded status of defined benefit post-retirement plans, measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement plans). The Company recognizes the change in the funded status of the plan in the year in which the change occurs through Accumulated Other Comprehensive Loss. As of May 2007, the Company's U.S. defined benefits pension plan has been closed to all new hires and since December 1, 2011, future service benefits have been frozen for all participants.

The most significant elements in determining the Company's pension expense are the expected return on plan assets and the discount rate. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. This produces the expected return on plan assets that is included in pension (expense) income. The difference between this expected return and the actual return on plan assets is deferred and amortized over the estimated remaining service life of employees remaining in the plan. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension (expense) income.

The Company recorded pension expense of $4.3 million in 2013 and $4.1 million in 2012. Pension expense is calculated using the discount rate to discount plan liabilities at the prior year measurement date. Discount rates of 4.10% and 5.52% were used to calculate the pension expense in 2013 and 2012, respectively.

The Company anticipates 2014 expense to be approximately $3.8 million based on a discount rate of 4.74%. An increase or decrease of 25 basis points in the discount rate would decrease or increase expense on an annual basis by less than $0.1 million. Cash contributions to the pension plans were $8.8 million in 2013 and $18.4 million in 2012. The higher contributions in 2012 are due to a voluntary contribution made by the Company to its U.S. defined benefit plan and higher required funding resulting from the Pension Protection Act of 2006.

Future pension benefits for U.S. plan members are frozen and fully vested.

Therefore, there is no future service benefit accrual for the Company's U.S.

defined benefit plans.

23 -------------------------------------------------------------------------------- Table of Contents The Company determined the discount rate used to discount the plan liabilities at the plan's measurement date, which was November 30, 2013. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. The discount rate used considers a yield derived from matching projected pension payments with maturities of a portfolio of available non-callable bonds that receive one of the two highest ratings given by a recognized investment ratings agency. Changes in discount rates, as well as the net effect of other changes in actuarial assumptions and experience, have been recognized in Accumulated Other Comprehensive Loss. The Company determined the discount rate used to measure defined benefit pension plan obligations as of November 30, 2013 should be 4.74% compared to 4.14% in 2012. A 25 basis point change in the discount rate would increase or decrease the projected benefit obligation by approximately $8.0 million.

To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target allocation of the pension portfolio. This resulted in the selection of a long-term rate of return on assets assumption of 7.75% for plan years 2013 and 2012. The measurement dates of November 30, 2013 and 2012 were used to determine these rates. A 25 basis point change in the assumed rate of return for assets would increase or decrease pension expense by approximately $0.5 million. Pension plan assets are measured at fair value on the measurement date.

Based on current estimates of pension asset performance, interest and discount rate assumptions and the Company's prior years credit balance carryforwards, the Company anticipates it will be required under the Pension Protection Act of 2006 ("PPA-2006"), to make a cash contribution to its U.S. pension plan of $4.4 million in 2014. The Company, under rules of the PPA-2006, has elected the fifteen year amortization schedule for the period beginning with the 2009 plan year. Total global pension plan contributions for 2014 are expected to be $5.1 million.

Factors that could alter future cash requirements and timing of any such cash equivalents are: • Investment returns which differ materially from the Company's 7.75% return assumption for 2014; • Significant changes in interest rates, affecting the discount rate; and • Opportunities to reduce future cash requirements by accelerating contributions ahead of the minimum required schedule. Voluntary contributions in excess of minimally required amounts may prevent the need for larger contributions in the future.

F) Income Taxes The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using the enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

As of November 30, 2013, the Company had approximately $83.9 million of net deferred tax assets primarily related to federal and state domestic loss carryforwards and $51.9 million of net deferred tax liabilities primarily related to intangible assets and fixed asset depreciation differences.

For the year ended November 30, 2013, the Company considered the positive and negative evidence as required by ASC 740, "Income Taxes," and concluded that it is more likely than not that the Company will realize the benefit from the U.S.

deferred tax assets due to a preponderance of positive evidence, which includes a three year U.S. cumulative income position, predictability of future taxable income and taxable income from the reversal of deferred tax assets and liabilities in future years. However, because of Net Operating Loss Carryforwards ("NOLCs"), the Company does not expect to incur significant cash payments for U.S. taxes over the next several years.

The Company has not provided deferred tax liabilities on certain of its non-U.S.

subsidiaries' undistributed earnings as these undistributed earnings are treated by the Company as being permanently reinvested. To the extent that foreign earnings previously treated as permanently reinvested were to be repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings. However, based on the Company's policy of permanent reinvestment, it is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested. Determination of the amount of unrecognized deferred tax liabilities and related foreign withholding taxes are not practicable due to the complexities associated with this hypothetical calculation and the Company's permanent reinvestment policy. As of November 30, 2013, the non-U.S.

subsidiaries have a cumulative unremitted foreign earnings income position of $62.5 million for which no deferred tax liability has been provided.

The Company utilizes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is more likely than not of being realized upon ultimate settlement.

The Company's accounting policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in tax expense. For the year 2013, the Company recognized an income tax expense related to interest and penalties of $0.4 million.

G) Share-Based Employee Compensation The Company uses the fair value method of recording share-based payments, based on the grant date fair value.

While the Company regularly evaluates the use of share-based payments, its practice has been to issue fewer stock options than have been issued in the past, utilizing other forms of incentives such as restricted stock, which are required to be expensed using the fair value method. See Note Q to the Company's Consolidated Financial Statements for a further discussion of share-based payments.

24 -------------------------------------------------------------------------------- Table of Contents H) Long-Lived Assets Long-lived assets, such as property, plant and equipment, and definite-lived intangibles are stated at historical cost less accumulated depreciation.

Construction in process is not depreciated until the asset is placed in service.

Refurbishment costs that extend the useful life of the asset are capitalized, whereas ordinary maintenance and repair costs are expensed as incurred. Interest expense incurred during the construction phase is capitalized as part of construction in process until the relevant projects are completed and placed into service.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.

I) Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill and other indefinite lived intangible assets are tested for impairment at least annually as of September 1 and whenever events or circumstances indicate that the carrying amount may not be recoverable. The Company performs the impairment analysis at the reporting unit level using a two-step impairment test. The first step identifies potential impairments by comparing the estimated fair value of a reporting unit with its carrying value. Fair value is typically estimated using a market approach method or a discounted cash flow analysis, which requires the Company to estimate future cash flows anticipated to be generated by the reporting unit as well as a discount rate to measure the present value of the anticipated cash flows. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the second step is not necessary. If the carrying value of a reporting unit exceeds the estimated fair value, the second step calculates the possible impairment by comparing the implied fair value of goodwill with the carrying value. If the implied fair value of goodwill is less than the carrying value, an impairment charge is recognized.

The impairment test for indefinite lived intangible assets consists of comparing the fair value of the asset with its carrying value. The Company estimates the fair value of its indefinite lived intangible assets using a fair value model based on a market approach method or discounted future cash flows. If the carrying amounts exceed the estimated fair value, an impairment loss would be recognized in the amount of the excess. During the fourth quarter of 2013, the Company performed its annual impairment test for indefinite lived intangible assets and determined that the expected future discounted cash flows of one of its Performance Chemicals segments' trademarks was lower than its book value by $0.2 million as a result of lower selling prices, and accordingly, recognized an impairment charge of $0.2 million. Key inputs used in determining the fair value of this trademark were expected future revenues and royalty rates. A 1% decrease in the royalty rate would impact the fair value of this trademark by approximately $2.0 million. A 5% decrease in estimated future revenues would impact the fair value of this trademark by approximately $0.3 million.

Estimating future cash flows requires significant judgments and assumptions by management including sales, operating margins, royalty rates, discount rates and future economic conditions. To the extent that the reporting unit is unable to achieve these assumptions, impairment losses may occur.

Finite-lived intangible assets, such as customer lists, patents, trademarks and licenses, are recorded at cost or when acquired as part of a business combination at estimated fair value. Intangible assets with finite lives are amortized over their estimated useful lives with periods ranging from 3 to 30 years. Accumulated amortization of finite lived intangible assets at November 30, 2013 and 2012 was $39.0 million and $32.8 million, respectively.

J) Foreign Currency Translation The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency.

Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted average exchange rates each month during the year. The resulting translation gains and losses on assets and liabilities are recorded in Accumulated Other Comprehensive Income (Loss), and are excluded from net income until realized through sale or liquidation of the investment.

K) Leasing Arrangements Operating leases - Lease expense is recorded on a straight-line basis over the non-cancelable lease term, including any optional renewal terms that are reasonably expected to be exercised. Leasehold improvements related to these operating leases are amortized over the estimated useful life, or the non-cancelable lease term, whichever is shorter.

Capital leases - Capital leases are recorded at the lower of fair market value or the present value of future minimum lease payments with a corresponding amount recorded in property, plant and equipment. Current portions of capital lease payments are included in Amounts due banks and non-current capital lease obligations are included in Long-term debt in our Consolidated Balance Sheets.

25 -------------------------------------------------------------------------------- Table of Contents Environmental Matters The Company's policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes significant resources and management attention to comply with environmental laws and regulations. The Company's Consolidated Balance Sheet as of November 30, 2013 reflects reserves for environmental remediation efforts of $0.6 million.

Capital expenditures for projects related to environmental matters were $0.7 million in 2013, $1.1 million in 2012 and $1.5 million in 2011. During 2013, non-capital expenditures for environmental compliance and protection totaled $7.8 million, all of which were for recurring costs associated with managing hazardous substances and pollution abatement in ongoing operations. Similar non-capital expenditures were $9.4 million and $8.2 million in years 2012 and 2011, respectively. The Company anticipates that non-capital environmental expenditures for the next several years will be consistent with 2013 expenditure levels.

New Accounting Pronouncements-New accounting pronouncements impacting the Company are disclosed in Note A to the Company's consolidated financial statements.

Forward Looking Statements This Annual Report includes forward looking statements as defined by federal securities laws. Please refer to Item 1A. Risk Factors, beginning on page 6 of this Report which is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in interest rates on its long-term debt obligations. As described in Note N to the Consolidated Financial Statements, the Company's Term Loan Facility and non-domestic borrowings bear interest at various rates. Borrowings under the Term Loan and the Facility were $194.0 million as of November 30, 2013. Non-domestic borrowings with banks were $2.6 million as of November 30, 2013. The weighted average effective interest rate of the Company's outstanding debt was 6.44% as of November 30, 2013. A hypothetical increase or decrease of 100 basis points would impact the Company's interest expense on its variable rate debt by approximately $2.0 million annually.

The Company is subject to foreign currency exchange rate risk. The Company has accumulated currency translation gains of $0.2 million as of November 30, 2013, which is included in accumulated other comprehensive loss.

The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.

Management's Assessment of Internal Control Over Financial Reporting Management of OMNOVA Solutions Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). In evaluating the Company's internal control over financial reporting, management has adopted the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 COSO framework) ("COSO").

Under the supervision and with the participation of the Company's management, including the chief executive officer and chief financial officer, the Company conducted an assessment of the effectiveness of the Company's internal control over financial reporting. Management has determined that the Company's internal control over financial reporting is effective as of November 30, 2013.

The effectiveness of the Company's internal control over financial reporting as of November 30, 2013 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

26 -------------------------------------------------------------------------------- Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of OMNOVA Solutions Inc.: We have audited OMNOVA Solutions Inc.'s internal control over financial reporting as of November 30, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). OMNOVA Solutions Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report titled "Management's Assessment of Internal Control Over Financial Reporting." Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, OMNOVA Solutions Inc. maintained, in all material respects, effective internal control over financial reporting as of November 30, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of OMNOVA Solutions Inc. as of November 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended November 30, 2013 and our report dated January 24, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP Akron, Ohio January 24, 2014 27-------------------------------------------------------------------------------- Table of Contents

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