OMNOVA Solutions Inc.
Annual Report 2003

Plain-text annual report

A D A P T. A D VA N C E . 2 0 0 3 A N N U A L R E P O R T A N D 10 K A D A P T. A D VA N C E . D E A R S H A R E H O L D E R In 20 03, your Company faced and took action on a number of challenges in one of the most dif ficult operating environments our businesses have ever confronted. Major challenges included dramatic raw material inflation, 30- year lows in key markets, the economic impact from the war on terrorism and the lingering ef fects of September 11. Our actions to address these dif ficult realities have improved our position in the shor t term and will provide us with even greater operating leverage as our markets improve. Make no mistake, OMNOVA Solutions’ financial results in 2003 were disappointing. Our businesses have the capability to generate significantly better returns. Despite the challenging environment, real progress was made in areas that will contribute to enhancing shareholder value, including reduced costs, increased produc- tivity, improved cash flow, lower average debt, increased share in key markets, strengthened leadership and the introduction of many exciting, innovative products. Also in 2003, we established a new capital structure which provides long-term financial flexibility for OMNOVA. These actions have already created momentum for stronger results in 2004. Performance Chemicals Despite the challenging market conditions, our Performance Chemicals segment grew sales by over 9%. Unfortunately, this growth did not translate into higher profitability because of severe inflation in our oil-based raw materials. Not since the 1980s have these costs remained so high for so long. Styrene and butadiene costs hit 13- and 15-year highs, respectively, during the second quarter of the year and remained stubbornly elevated throughout 2003. Performance Chemicals responded to raw material inflation of $31 million during the year by aggressively implementing approxi- mately $20 million in product pricing improvements. In 2003, the segment also drove a nearly 5% increase in productivity through our LEAN SixSigma initiatives and other operational improve- ments. We continue to seek price and productivity improvements to further bridge the margin gap caused by raw material inflation. Within our paper and carpet chemicals business, we continued to expand our position in the carpet chemicals product line as customers enthusiastically embraced new products such as ammonia-free and moisture-resistant latexes for carpet backing. Our carpet team’s unwavering commitment to the customer and tight alignment of technical, sales, marketing and manufacturing activities drove this growth and serves as a model for excellence across the Company. Continued on page 2 F I N A N C I A L H I G H L I G H T S OMNOVA SOLUTIONS INC. ) ) $ $ $ $ $ $ $ $ $ YEARS ENDED NOVEMBER 30, (Dollars in millions, except per-share data) 2003 2002 2001 NET SALES Performance Chemicals 327.0 299.4 320.9 Decorative Products 257.6 288.7 302.8 Building Products 98.0 93.1 113.3 682.6 681.2 737.0 SEGMENT OPERATING (LOSS) PROFIT Performance Chemicals 14.5 19.9 18.8 Decorative Products (9.3 7.2 17.8 ) Building Products 3.1 (4.9 (4.5 ) Restructuring and severance (8.8 2.3 (13.7 Goodwill and indefinite lived trademark impairments (49.6 – – Idle fixed assets, obsolete inventory and intangible asset write-offs (5.7 – – (55.8 24.5 18.4 ) Interest expense (15.3 (8.1 (14.0 ) Corporate expenses (10.0 (9.2 (11.3 ) Restructuring and severance (.2 .3 (3.9 ) Deferred financing costs write-off (3.1 – (.1 Income tax benefit (expense) .6 (.5 4.2 (Loss) Income before cumulative effect of accounting change (83.8 7.0 (6.7 Cumulative effect of accounting change – (142.5 – NET LOSS (83.8 (135.5 (6.7 BASIC LOSS PER SHARE (Loss) Earnings before cumulative effect of accounting change (2.10 .18 (.17 Cumulative effect of accounting change – (3.60 – Net Loss Per Basic Share (2.10 (3.42 (.17 DILUTED LOSS PER SHARE (Loss) Earnings before cumulative effect of accounting change (2.10 .18 (.17 Cumulative effect of accounting change – (3.58 – Net Loss Per Diluted Share (2.10 (3.40 (.17 OTHER DATA Capital expenditures 8.8 11.1 19.5 Depreciation and amortization 33.7 28.8 34.3 Number of employees at year-end 2,100 2,400 2,500 Number of outstanding shares for diluted EPS (millions) 39.9 39.8 39.6 ) ) ) ) ) ) ) ) $ $ $ $ $ $ ) ) ) ) ) ) ) ) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ ) ) ) ) ) ) ) ) ) ) ) ) ) PRO-FORMA DATA Management believes that adjusted net (loss) income provides a more accurate basis for comparing results year-over-year. The following table reconciles the Company’s net loss to adjusted net (loss) income: Net Loss (83.8 (135.5 (6.7 Items added back net of tax: Cumulative effect of accounting change – 142.5 – Restructuring and severance 9.0 (2.4 10.8 Goodwill and indefinite lived trademark impairments 49.6 – – Idle fixed assets, obsolete inventory and intangible asset write-offs 5.7 – – Deferred financing costs write-off 3.1 – .1 Adjusted net (loss) income (16.4 4.6 4.2 Adjusted (loss) earnings per share (.41 .12 .10 $ $ $ $ $ $ ) ) $ $ $ ) ) ) ) Certain information included in the Annual Report is forward-looking and, accordingly, involves estimates, assumptions, judgments and uncertainties. Forward-looking statements may generally be identi- fied by the use of forward-looking terms such as “could,” “may,” “should,” “will,” “expects,” “believes,” “anticipates,” “plans,” “intends,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” “likely,” “would” or similar terms. For information regarding some of the factors that could cause actual results or outcomes to differ materially from those described in the forward-looking statements, see the Forward- Looking Statements section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. A B O U T O M N O VA We design, develop, produce and market decorative and functional surfaces, emulsion polymers and spe- cialty chemicals for a variety of commercial, industrial and residential end uses. Our solutions provide distinctive performance and aesthetic attributes to products that touch people’s lives every day. 1 A D A P T. A D VA N C E . WHY INVEST IN OMNOVA? LE ADING POSITIONS IN DI VERSE MARKE TS That’s a big reason investors are attracted to OMNOVA Solutions. Add a lean cost structure, disciplined pro- cesses, broadening global presence, long track record of success, strengthened management and talented associ- ates all dedicated to increasing shareholder value, and you have another big piece of the story. Perhaps what most defines us is our insatiable drive to delight customers with innovative technologies, products and services that outperform the competition. Here are the major market categories we serve, and a sampling of the myriad product applications ... SPECIALTY/ CONSTRUCTION I N T E R I O R W A L L A N D C E I L I N G S Y S T E M S F L O O R C A R E C H E M I C A L S A N D F L O O R I N G N O N W O V E N C H E M I C A L S We also grew our position as a technology leader in the paper we have, or can develop, a competitive advantage for our customers chemicals product line with the introduction of our advanced, high- and OMNOVA. As a result of their good work, the segment achieved performance technology platforms in both latex and chemical addi- improving performance during the latter part of 2003, a trend we tives. RohmNova, our paper chemical sales, marketing and service expect to build on in 2004. joint venture with Rohm and Haas, had another successful year. Global paper producers appreciate RohmNova’s product offering, Decorative Products which is the broadest in the paper coatings industry, and its strong The Decorative Products markets have been particularly hard hit technical service and support backed by a solid commitment to during the economic downturn, with U.S. hotel occupancy rates technology and innovation. RohmNova continues to provide excit- near 30-year lows, commercial office occupancies at 10-year lows, ing opportunities for enhancing the value we bring to our global continued slowness in office furniture sales, and a drop in manufac- paper customers. tured housing shipments for the fifth consecutive year. Our specialty chemicals business had a number of wins in the During this downturn, we have focused on right-sizing our United States, and also in Europe where sales increased for the fifth costs, enhancing our customer service capability and investing consecutive year. We introduced breakthrough technologies for in new products. Most economic forecasters are predicting im- nonwoven applications such as disposable diapers, air and fluid proved conditions in these markets in 2004. Strengthening market filtration, household scrub pads and roofing mats. OMNOVA’s pro- conditions should only increase the impact of the exciting prod- prietary fluoropolymer, POLYFOX™, continues to generate interest ucts we’ve introduced in the last 18 months, including SURF(x)® in a wide variety of flow and leveling applications, including coat- three-dimensional laminates for furniture and display fixtures, ings, paints, floor care, surface cleaning products and electronic ENDURION™ exceptionally cleanable coated fabrics for furnishings chemicals. POLYFOX fluoropolymers provide improved functional used in the health care, hospitality and commercial segments, performance and are environmentally-preferred substitutes for VIEWNIQUE™ full-wall murals, MEMERASE® II flexible dry-erase sur- other fluorochemicals. faces, MURAGLASS™ decorative films for interior glass partitions, New products from leading technology, backed by strong and GREENGUARD INDOOR AIR QUALITY CERTIFIED® commercial customer and technical service, will continue to play a critical role wallcoverings, to name a few. in growing the Performance Chemicals segment. More than ever, During the year, we exited the heat transfer printing product our associates are focused on technologies and applications where line to focus resources on our more attractive strategic businesses 2 A D A P T. A D VA N C E . FURNITURE AND FURNISHINGS COATED PAPER/ PAPERBOARD CHEMICALS OFFICE, HOTEL, HEALTHCARE D E C O R A T I V E L A M I N A T E S C O A T E D F A B R I C S P A P E R C O A T I N G S W A L L C O V E R I N G S with better long-term prospects. In addition, we enhanced our and are potential substitutes for numerous traditional asphalt roof- Thailand and China manufacturing joint venture capabilities in or- ing products. der to better serve the needs of global customers. There are grow- At the same time, we made significant breakthroughs in im- ing opportunities, especially in the residential furniture industry, to proving productivity at our newest plant in Muscle Shoals, Alabama. leverage our joint ventures to successfully compete for business These operational improvements, along with exciting new products, that is increasingly being produced off-shore. certainly enhance our outlook for the future. Robert Coleman, with over 20 years of management experi- Harry Franze joined OMNOVA in the third quarter as President of ence at Avery Dennison, joined OMNOVA as President of our Decora- our Building Products segment. He brings a wealth of general man- tive Products segment at the end of the third quarter. Bob brings agement and operating experience and is leading a more focused a fresh marketing and operations perspective to the business and and integrated effort by our team to profitably grow the business. has already begun to make critical decisions to position Decorative Products for recovery. Flexibility for Growth Our productivity improvements in 2003 are clear examples of the Building Products power of the LEAN SixSigma operating approach we introduced dur- Building Products achieved significantly improved performance ing the year. Our LEAN SixSigma efforts are making fundamental throughout 2003 as the result of better market conditions for com- and sustainable process changes to eliminate waste (defined as mercial roofing, exciting new products and major gains in manufac- those things not valued by the customer) and dramatically reduce turing productivity. variation (typically the source of most quality problems). We spent Severe weather last winter and an improving economy created the first part of the year training our full-time LEAN SixSigma black- a stronger reroofing market in the second half of the year for our belts and identifying the improvement opportunities in each of our GENFLEX ROOFING SYSTEMS®. In addition, we increased our empha- businesses. As the year progressed, the blackbelts worked closely sis on small to mid-sized contractors to broaden our customer base. with associates on the floor, in our back office operations and in This has opened new opportunities to demonstrate the labor and the field to drive those changes that would add greater value to the energy-saving qualities of our thermoplastic (TPO and PVC) roofing customer and result in cash flow, productivity and operating profit membrane systems. New PEEL & STICK™ TPO roofing systems intro- improvements for OMNOVA Solutions. I could not be more excited duced in 2003 offer significantly easier and lower-cost installation about the power of LEAN SixSigma to have a lasting and meaningful 3 A D A P T. A D VA N C E . CARPET CHEMICALS COMMERCIAL ROOFING TRANSPORTATION C A R P E T B A C K I N G B I N D E R S S I N G L E - P LY M E M B R A N E S Y S T E M S M A R I N E F A B R I C S impact on our Company. In 2003 alone – our start-up year – LEAN performance despite very difficult operating conditions, our associ- SixSigma efforts delivered benefits, primarily in cash flow, of nearly ates are relentlessly focused on delighting customers. Many of $10 million. them have made personal sacrifices to strengthen OMNOVA for the In last year’s report, I mentioned that we had created a new long term. I would like to thank those associates for their hard work, global strategic sourcing organization focused on gaining access commitment and dedication. to lower cost sources around the world and combining material I assure you that OMNOVA Solutions’ associates, with the active needs across the Company to capitalize on purchasing synergies. involvement and guidance of our Board of Directors, are dedicated The team made a solid first step in 2003 and, moving forward, we to creating value for our shareholders. We emerged from 2003 a believe there are significant additional opportunities to improve our stronger Company – we concluded a major cost restructuring, took quality and lower our costs through our global sourcing efforts. aggressive product pricing actions, made leadership changes to In Spring 2003, OMNOVA completed a $165 million, seven-year drive better execution, enhanced the capabilities of our joint ven- bond offering, and a $100 million bank credit facility. These actions tures, and refinanced to improve our capital structure. We enjoy improve the Company’s long-term financial flexibility. leadership positions in most of the market categories we serve, and During the year, we took the difficult but necessary actions to we have introduced and will continue to invest in new products and right-size our cost base. We expect this major restructuring to yield services that offer distinct advantages to our customers. $16 million in additional savings in 2004. As 2003 came to a close, we were encouraged by improvement Late in the year, we were pleased to announce the election in the overall U.S. economy and in several of our served markets. We of David J. D’Antoni to the Board of Directors. Dave is a Senior Vice are optimistic that these positive economic trends will continue and President and Group Operating Officer of Ashland Inc. His expertise are confident in our ability to adapt and thrive in this dynamic busi- in the chemical and building products industries adds to our already ness landscape. We believe OMNOVA Solutions is poised to make a strong group of independent directors. strong advance in our performance in 2004. A Stronger Company OMNOVA’s future is bright because of our people. In 2003, our people tackled a very tough set of operating challenges with enthusiasm and commitment. United by a common cause of achieving improved Kevin M. McMullen Chairman and CEO 4 C O R P O R A T E I N F O R M A T I O N EXECUTIVE OFFICERS Kevin M. McMullen 3 Chairman, Chief Executive Officer Common Stock Listing: BuyDIRECT Contact: The Bank of New York Kevin M. McMullen and President, New York Stock Exchange Dividend Reinvestment Chairman, Chief Executive Officer OMNOVA Solutions Inc. Ticker Symbol: OMN and President Michael E. Hicks Senior Vice President and Steven W. Percy 1 Former Chairman and Chief Executive Officer, Chief Financial Officer; Treasurer BP America Inc. James C. LeMay Senior Vice President, Business Dr. R. Byron Pipes 2,3 Goodyear Professor Development; General Counsel of Polymer Engineering, University of Akron Transfer Agent and Registrar The Bank of New York Shareholder Relations Department 11-E P.O. Box 11258 Church Street Station New York, NY 10286 Send certificates for transfer and address changes to: The Bank of New York Receive and Deliver Department 11-W P.O. Box 11002 Church Street Station New York, NY 10286 Independent Auditors Ernst & Young LLP, Akron, Ohio BuyDIRECT (A direct purchase, sale and dividend reinvestment plan) BuyDIRECT is available to shareholders and inter- ested first-time investors and offers a convenient method of increasing investment in the Company. All brokerage commissions and bank Department P.O. Box 1958 Newark, NJ 07101-9774 1-800-524-4458 Form 10-K Additional copies available after March 1, 2004 on the internet at www.omnova.com or by writing to: OMNOVA Solutions Inc. 175 Ghent Road Fairlawn, Ohio 44333-3300 Attention: Secretary Shareholder Services 1-800-735-5160 Investor Relations Contact Michael E. Hicks Senior Vice President and Chief Financial Officer 330-869-4411 OMNOVA Solutions Foundation 175 Ghent Road Fairlawn, Ohio 44333-3300 330-869-4289 Communications William R. Seelbach 2 President and Chief Executive Officer, Ohio Aerospace Institute COMMITTEES 1 Audit Committee Chairman: Steven W. Percy 2 Compensation and Corporate Governance Committee Chairman: David A. Daberko 3 Executive Committee Chairman: Kevin M. McMullen SHAREHOLDER INFORMATION the participants in connection with Corporate Communications, service fees incurred on behalf of General inquiries, contact: Annual Meeting of Shareholders March 25, 2004 at 9:00 a.m., Akron West Hilton Inn, 3180 West Market Street, Fairlawn, Ohio stock purchases and dividend rein- 330-869-4293. vestments are paid by the Company. Financial literature requests, Subject to terms and conditions of contact World Investor Link, the plan, dividends, together with 1-888-400-7789. optional cash investments of up to $120,000 per year, are used to Internet Website buy more shares of the Company’s www.omnova.com Common Stock. OMNOVA Solutions is an equal oppor- tunity employer. Gregory T. Troy Senior Vice President, Human Resources Douglas E. Wenger Senior Vice President and Chief Information Officer James J. Hohman Vice President; President, Paper & Carpet Chemicals BOARD OF DIRECTORS Edward P. Campbell 1 President and Chief Executive Officer, Nordson Corporation David A. Daberko 2,3 Chairman and Chief Executive Officer, National City Corporation David J. D’Antoni 2 Senior Vice President and Group Operating Officer, Ashland Inc. Diane E. McGarry 1 Chief Marketing Officer, Xerox Corporation n o t a E & x i D y b d e n g s e D i Paper Stock: The cover and inside glossy pages of this report are printed on paper coated with GenFlo® latex. Photos: Folding partition photo (page 2) courtesy of Panelfold, Inc. • Marine fabrics photo (page 4) courtesy of Formula Powerboats • Individual workstation photo (back cover, bottom square) courtesy of The HON Company Back Cover Photos: (left to right, top to bottom) BOLTAFLEX® coated fabrics, LANARK® commercial wallcoverings, POLYFOX™ floor care chemicals, GENFLO® paper chemicals, GENFLEX ROOFING SYSTEMS®, GENFLO® carpet chemicals, SURF(x)® furniture laminates Imagine what we can do together. OMNOVA SOLUTIONS INC. • 175 Ghent Road • Fairlawn, Oh 44333 • Telephone: 330-869-4200 • www.omnova.com GREENGUARD INDOOR AIR QUALITY CERTIFIED is a registered certification mark used under license through the GREENGUARD Environmental Institute. GENFLEX ROOFING SYSTEMS, SURF(x), MEMERASE, BOLTAFLEX, LANARK and GENFLO are registered trademarks of OMNOVA Solutions Inc. PEEL & STICK, MURAGLASS and VIEWNIQUE are trademarks of OMNOVA Solutions Inc. POLYFOX is a trademark used under license by OMNOVA Solutions Inc. 

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