Material Sciences Corporation

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Material Sciences Corporation

2200 E. Pratt Boulevard
Elk Grove Village, Illinois 60007
U.S.A.
Telephone: (847) 439-8270
Fax: (847) 439-0737
Web site: http://www.matsci.com

Public Company
Incorporated: 1971
Employees: 740
Sales: $266.8 million (2003)
Stock Exchanges: New York
Ticker Symbol: MSC
NAIC: 332812 Metal Coating, Engraving (Except Jewelry and Silverware), and Allied Services to Manufacturers

Material Sciences Corporation (MSC) is a publicly traded company based in Elk Grove, Illinois. It designs, manufactures, and markets materials-based solutions for electronic, acoustical/thermal, and coated metal applications. MSC's metal laminate product, NRGDamp, is used in the electronics industry to reduce noise and vibrations in hard disk drives. The company also produces Quiet Steel, used by the auto industry to reduce noise and vibration. The material has been applied primarily in dash panels but is also being used in an increasing number of other applications such as wheel wells and floor pans. In addition, MSC's high-speed coated metal operation produces painted and electrogalvanized sheet metal for use in building and construction products, automobile exterior panels, and appliances such as refrigerators and freezers. MSC also makes sensors and switches, relying on its patented field effect technology, for the automotive, recreational vehicle, marine, and consumer electronics markets.

Founding the Company in 1971

MSC was founded in 1971 as a holding company to acquire businesses involved in advanced materials technologies. The most important of these companies, and the only one in the fold when the company went public in 1984, was Pre Finish Metals. It was originally known as All Weather Steel Products, founded in Chicago in 1951 by Roy Crabtree. The company started out applying protective aluminum paint to sheets of metal, used to make air ducts for heating and air conditioning systems. The demand for the product grew so rapidly that All Weather soon dropped sheet processing in favor of continuous coil coating. In 1954 the operation was transferred to a converted mushroom barn in Des Plaines, Illinois, where new coil processing equipment was installed to meet ever increasing demand. Then, in May 1958, sawdust insulation in the roof ignited spontaneously and the subsequent explosion and fire completely destroyed the building. All Weather's management took immediate steps to establish a new production facility and preserve the company's customer base. Three competitors agreed to fill outstanding orders, with All Weather's personnel dispatched to oversee production. A new 16,000-square-foot building was quickly constructed in Elk Grove, Illinois—just 40 days after ground was broken, the roof of the structure was being completed. In the meantime, other All Weather personnel were combing the country for a coil line that was available for sale. A two-year-old 18-foot line was found in Tampa, Florida, bought for $75,000, and then dismantled and shipped to Elk Grove, where it was assembled even as the construction of the building was underway. As a result of these efforts, All Weather was able to retain about 95 percent of its customers, and less than three months after the fire, the company was once again producing its own coils of coated metal.

All Weather continued to prosper in its new plant, so much so that another 16-foot coating line and a 20-foot slitting line were added. Because the company was now able to broaden its product offerings, the board of directors in March 1959 decided to change the name to Pre Finish Metals Incorporated. Moreover, the new name was more in keeping with the direction that the metal coating industry was taking in general. Two-coat equipment was becoming more prevalent in order to handle printing, the embossing of heavy plastics, and film laminating. To keep pace, the Elk Grove plant was expanded in 1960 to accommodate a new 48-foot slitting line, which was soon joined by a 48-foot tandem coating line, the first wide two-coat line in the United States.

Throughout the 1960s Pre Finish added production capacity to fuel even greater growth in sales and profits. A new 28-foot coating line was added in 1965, followed by the introduction of a cut-to-length line and square shear line, which allowed the company to make and sell pre-coated steel sheet for use in the manufacture of small appliances. In 1966 Pre Finish expanded to the West Coast by opening a new plant in Vernon, California, where the company's original 18-foot coating line was installed, plus a 48-foot slitter. Two years later, a new high-speed tandem 54-foot line was installed in a new building located in Cucamonga, California, and the equipment in the Vernon plant was subsequently relocated here. Back in Elk Grove, in the meantime, Pre Finish began construction on a second plant, where in 1967 a 54-foot high-speed tandem coating line was installed (followed several months later by a 48-foot electro-galvanizing line, which was in fact owned and operated by CM Products Company). In 1968 a high-speed 54-foot slitter was added to the new facility.

Pre Finished Metals was acquired by MSC in November 1971, and as part of the deal the California operation was sold off. Crabtree would remain in charge of the business until his death later in the decade. The new corporate parent added to the technical as well as marketing departments to spur further growth. As part of a 42,500-square-foot addition to Plant #2 in 1973, a 5,000-square-foot laboratory facility was built. A year later, warehouse and office space were also added, so that this plant now boasted 162,500 square feet of occupied space. Beginning in 1975 Pre Finish invested $2 million to boost the production of its 54-foot coating line by 65 percent. It was during this period that parent company MSC began receiving greater funding from the venture capital fund owned by E.F. "Ned" Heizer, who became a director in 1976 and whose fund became the principal owner.

After graduating from Northwestern University, Heizer went to work for Allstate Insurance in 1962, where over the course of the next seven years he built up the company's private placement division, ultimately overlooking $100 million in investments in more than 70 early stage companies. In 1969 he formed a venture capital firm, Heizer Corporation, becoming a pioneer in the venture capital industry by attracting institutional investors in a major way for the first time. He would go on to found the National Venture Capital Association, serving as its first chairman.

Upon Crabtree's death, Heizer was instrumental in bringing in an outside chairman and chief executive officer to head Pre Finish. Although MSC bought a number of cutting edge companies during the 1970s, by 1983 Pre Finish remained the only subsidiary. During that year, MSC was reincorporated in Delaware in preparation for spinning off the business from Heizer Corp. Before then, the company expanded eastward, in the fall of 1983 acquiring coating facilities in Morrisville and Fairless Hills, Pennsylvania. At this point, MSC was generating in excess of $71 million a year in revenues, after posting sales of $26.2 million in 1981, $30 million in 1982, and $43.4 million in 1983.

Going Public in 1984

MSC was spun off from Heiser Corp. in November 1984, as the company was on its way to topping the $100 million sales mark for 1985 (which ended February 28, 1985). Prospects appeared promising for the newly independent public company, which now traded on the American Stock Exchange, as management followed a three-pronged approach to ongoing growth. First the company looked for internal development of the business, spurred by investments in research and development, spending two cents on every sales dollar, which led to the development of lucrative specialty products. It was during the early 1980s, for example, that the company's engineers developed Quiet Steel by spreading a polymer, .001 in thickness, between two sheets of thin metal. The resulting laminate was able to absorb vibrational energy, dissipate heat, and muffle sound. It was discovered to be highly suited to the automotive industry, especially in removing the squeal from disk brakes. It also proved useful in damping the hum of computer disk drives. Another R&D success of the 1980s was the development of Specular, a fluorescent light fixture reflective laminate. The second prong of MSC's strategy for growth was a joint venture it formed with Bethlehem Steel and Inland Steel to provide electro-galvanized steel to the auto industry for making exposed car parts. Finally, MSC was in the market for outside acquisitions, primarily interested in companies involved in constrainedlayered composites, laminates, and specialty adhesives.

In January 1986 MSC completed the first in a pair of acquisitions for the year when it bought San Diego-based Deposition Technology Inc. for nearly $20 million in convertible notes. Deposition was in the business of sputter depositing metals on flexible plastics films, primarily used to produce solar control window films. In July 1986 MSC spent $13.8 million in cash, notes, and stock to acquire Schaar Industries, the nation's largest independent vapor metallizing firm to the packaging and graphics arts markets.

Company Perspectives:

MSC's Strategic vision is to be a leading provider of material-based solutions in every market it serves.

By 1988 MSC was looking to strike a balance between its coating and electroplating sheet metal and laminates business and specialty products such as Speculart and laminates used in microwavable prepared-food packaging (thin sheets of foil or metallized film laminated to cardboard, used to crisp microwave foods). Business appeared to be on the rise, but in 1989 such key industries as automobile and appliances entered into down cycles and drastically cut their orders for MSC products. As a result, MSC lost more than $30 million in 1989, mostly due to writedowns. In February 1990, Schaar was sold for $3 million, more than $10 million less than what MSC paid for the subsidiary three years earlier. Moreover, coil coating caused $5 million in cleanup costs at two Superfund sites in Indiana. The board of directors decided to retain the services of William Blair & Co. to consider all options, including the sale of the business. Likely suitors included joint venture partners Bethlehem Steel or Inland Steel. But nearly a year would pass and the board was unable to sell the company. Instead, new management was installed in the form of turnaround specialist G. Robert Evans, who in February 1991 was named president, chief executive officer, and chairman. Evans had some 40 years of experience, serving in a number of management positions during a 16-year career at United States Gypsum Company, and various stints as a chief executive officer for Arcata Corporation; Southwall Technologies, Inc.; Allstell Inc.; Bemrose Group USA; and Corporate Finance Associates Illinois, Inc.

In a matter of just 18 months, Evans was able to return MSC to fiscal health. In truth, although investors bid down the price of the company's stock, MSC retained the foundation of a very strong business, especially in its Quiet Steel and Speculart products. With some positive developments, the company looked to build on its momentum. The company was able to complete a secondary offering of stock and moved to the New York Stock Exchange. Then, in June 1993, the company once again attempted to grow through acquisitions, paying $14.5 million in cash for Armco Steel Company's coil coating facility in Middletown, Ohio. MSC also was beginning to think internationally, hiring its first international sales executive during this period. In a matter of three years the company grew its international sales from less than 1 percent of revenues to around 10 percent. The company was moving aggressively into Europe and South America, and even shipping its brake dampers to Japanese automakers.

External Growth in the 1990s

MSC completed additional acquisitions during the 1990s. In 1995 it paid approximately $8 million for Solar Gard International Inc. The company completed a pair of purchases in 1997, adding Richmond, California-based Pinole Point Steel, a hotdipped galvanizing operation, and affiliated Colorstrip, Inc., a coil coating paint facility. It was also during 1997 that MSC moved into a new 210,000-square-foot headquarters in Elk Grove. In addition, Evans stepped down as CEO, although he stayed on as chairman. Replacing him was Gerald G. Nadig, who had been hired by Evans's predecessor in 1989 with the intention of one day running the company. Because of the difficult period the company suffered in 1989–90, this plan was abandoned. Nevertheless, Nadig remained with MSC and worked his way up, becoming president, chief operating officer, and chairman of the board.

Nadig was quickly faced with an unexpected challenge. On March 31, 1997, the controller for one of the company's subsidiaries announced that he would not be coming into work, saying that "he had been doing things and that it would be discovered." What management soon learned was that net income for fiscal years 1995, 1996, and 1997 was overstated by nearly 10 percent, or some $5 million. Piecing the situation together, it became apparent to management that the controller in late 1995 was unable to reconcile his books, and made some irregular adjustments in order to make a quick fix that he hoped to clean up later. But matters only grew worse, and he ultimately had no choice other than to reveal the problem. Although the management team was not at fault, investors punished the company's stock.

This downturn, however, did not dissuade the company from completing the acquisition of Pinole Point and Colorstrip, although in retrospect MSC would have been better off not making the deal. California suffered through torrential rains, which hurt the construction industry, Pinole Point's primary customers. To make matters worse, Pinole Point locked into raw steel prices that were subsequently undercut by the dumping of Asian steel, putting the subsidiary at a severe competitive disadvantage. MSC replaced the management team, but matters did not improve significantly. More positive developments were the increased usage of Quiet Steel by U.S. automakers and the 2000 acquisition of Goldbach Automobile Consulting, which paved the way for the company's Quiet Steel products being sold in Europe.

In April 2001 Nadig announced that MSC would focus on its businesses with the greatest potential, moving away from such mature businesses as metal coating, which accounted for twothirds of the company's total sales, to smaller yet faster-growing businesses. As a result the MSC Specialty Films division was cut loose, sold to Bekaert Corp. for $122 million in cash. MSC also began looking for a buyer for Pinole Point, while management initiated a reorganization and cost reduction plan. Finally in June 2002 Pinole Point was sold to a Mexican holding company, Grupo IMSA.

Key Dates:

1951:: All Weather Steel Products is formed.
1959:: All Weather is renamed Pre Finish Metals Inc.
1971:: Material Sciences Corporation (MSC) is formed; the company acquires Pre Finish.
1984:: MSC becomes a public company.
1991:: Turnaround specialist G. Robert Evans is named president, CEO, and chairman.
1992:: The company's stock is listed on the New York Stock Exchange.
1997:: MSC moves into a new 210,000-square-foot headquarters in Elk Grove, Illinois; Evans steps down as CEO and is replaced by Gerald G. Nadig.
2002:: Sales fall by nearly 50 percent; CEO Nadig resigns and is replaced by Michael J. Callahan.
2003:: MSC wins the Innovation Award at the International Boatbuilder Exhibition and Conference for its Solidswitch field effect switch developed for the marine market.
2004:: Callahan steps down as president and CEO, replaced by Ronald L. Stewart.

But with the manufacturing sector struggling, MSC continued to struggle. In 2002, the company lost $27 million, with reported sales falling almost 50 percent. The well-known investment fund manager Mario J. Gabelli began to pressure MSC to make changes. In April 2002, Nadig resigned, according to the company, to "spend more time with his family and pursue other opportunities." New independent directors, including a Gabelli ally, were named to the board. The company's new president and CEO, Michael J. Callahan, promised to make a "systemic change in the way we do business." But much of the company's fortunes depended on the increased use of its Quiet Steel product. According to a November 2003 Forbes profile, "If automakers don't clamor for more quiet metal soon, Callahan may be forced to bust up the company. Shares went for a recent $9.80—down 23% in the last year, compared with a 19% run-up in the S&P 500. Gabelli Asset Management, which owns 13% of the stock, thinks all the pieces sold separately—including a unit that makes electronic sensors for liquid-crystal displays—could fetch a total of $15 a share. 'We're examining all alternatives,' says Callahan. Beyond that, he's keeping quiet."

Aside from the potential of Quiet Steel, MSC also had high hopes for its field effect switch technology, which produced an electronic field in front of and behind a panel. Because a finger entering the field triggered the switch, there was less wear and tear on the switch. Moreover, the technology could be finetuned for a number of applications. Toshiba, for instance, decided in January 2003 to use field effect touch switches in new television sets. Later in 2003 MSC won the Innovation Award at the International Boatbuilder Exhibition and Conference for its SolidSwitch field effect switch, which was impervious to the elements and developed for the marine market.

Further management changes occurred in February 2004 when Callahan stepped down as president, CEO, and board member, replaced by Ronald L. Stewart, who had been working with the company as a manufacturing consultant since June 2003. He brought with him more than 30 years of experience with such major companies as Chrysler Motor Corporation, J.I. Case, and Volkswagen of America.