OM Group, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
Commission file number 001-12515
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OM GROUP, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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52-1736882 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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127 Public Square, |
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1500 Key Tower, |
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Cleveland, Ohio
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44114-1221 |
(Address of principal executive offices)
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(Zip Code) |
216-781-0083
Registrants telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Act).
Yes o No þ
As of
April 30, 2007 there were 29,809,587 shares of Common Stock, par value $.01 per share,
outstanding.
OM Group, Inc.
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION |
Item 1. |
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Unaudited Financial Statements |
2 |
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Item 2. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
18 |
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Item 3. |
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Quantitative and Qualitative Disclosures about Market Risk |
24 |
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Item 4. |
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Controls and Procedures |
24 |
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PART II OTHER INFORMATION |
Item 1A. |
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Risk Factors |
25 |
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Item 6. |
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Exhibits |
25 |
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Signatures |
26 |
1
Part I FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
OM Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
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March 31, |
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December 31, |
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2007 |
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2006 |
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(In thousands, except share data) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
326,823 |
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$ |
282,288 |
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Accounts receivable, less allowances |
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110,217 |
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82,931 |
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Inventories |
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245,906 |
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216,492 |
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Receivable from Norilsk Nickel |
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84,997 |
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Other current assets |
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47,525 |
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30,648 |
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Assets of discontinued operations |
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597,682 |
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Total current assets |
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815,468 |
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1,210,041 |
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Property, plant and equipment, net |
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207,174 |
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210,953 |
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Goodwill |
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137,774 |
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137,543 |
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Notes receivable from joint venture partner, less allowance
of $5,200 in 2007 and 2006 |
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24,179 |
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24,179 |
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Other non-current assets |
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28,313 |
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35,508 |
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Total assets |
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$ |
1,212,908 |
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$ |
1,618,224 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Short-term debt |
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$ |
330 |
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$ |
326 |
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Current portion of long-term debt |
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155 |
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167 |
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Debt to be redeemed |
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402,520 |
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Accounts payable |
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124,407 |
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90,768 |
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Accrued income taxes |
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62,666 |
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17,497 |
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Accrued employee costs |
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19,084 |
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28,806 |
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Other current liabilities |
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41,067 |
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42,057 |
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Liabilities of discontinued operations |
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167,148 |
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Total current liabilities |
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247,709 |
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749,289 |
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Long-term debt |
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1,204 |
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1,224 |
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Deferred income taxes |
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3,989 |
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4,118 |
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Minority interests |
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43,868 |
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43,286 |
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Other non-current liabilities |
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40,036 |
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38,228 |
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Stockholders equity: |
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Preferred stock, $.01 par value: |
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Authorized 2,000,000 shares, no shares issued or outstanding |
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Common stock, $.01 par value: |
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Authorized 60,000,000 shares; issued 29,861,794
in 2007 and 29,801,334 shares in 2006 |
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298 |
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|
297 |
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Capital in excess of par value |
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538,582 |
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|
533,818 |
|
Retained earnings |
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|
335,627 |
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|
221,310 |
|
Treasury stock (61,541 shares in 2007 and 2006, at cost) |
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(2,239 |
) |
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(2,239 |
) |
Accumulated other comprehensive income |
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3,834 |
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|
28,893 |
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Total stockholders equity |
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876,102 |
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782,079 |
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Total liabilities and stockholders equity |
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$ |
1,212,908 |
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$ |
1,618,224 |
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See accompanying notes to unaudited condensed consolidated financial statements.
2
OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Income
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Three Months Ended March 31, |
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(In thousands, except per share data) |
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2007 |
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2006 |
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Net sales |
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$ |
216,196 |
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$ |
142,447 |
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Cost of products sold |
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143,952 |
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108,293 |
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Gross profit |
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72,244 |
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34,154 |
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Selling, general and administrative expenses |
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25,432 |
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22,573 |
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Income from operations |
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46,812 |
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11,581 |
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Other income (expense): |
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Interest expense |
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(7,105 |
) |
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(9,742 |
) |
Loss on redemption of Notes |
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(21,733 |
) |
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Foreign exchange gain |
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|
468 |
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|
662 |
|
Other income, net |
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|
4,952 |
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|
1,362 |
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|
|
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(23,418 |
) |
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(7,718 |
) |
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Income from continuing operations before income taxes, minority interest and
cumulative effect of change in accounting principle |
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23,394 |
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|
3,863 |
|
Income tax expense |
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(39,974 |
) |
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(1,722 |
) |
Minority interest share of (income) loss |
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(1,961 |
) |
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|
603 |
|
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Income (loss) from continuing operations before cumulative effect of change in
accounting principle |
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(18,541 |
) |
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2,744 |
|
Discontinued operations |
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Income from discontinued operations, net of tax |
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|
61,019 |
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15,142 |
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Gain on sale of discontinued operations, net of tax |
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72,289 |
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Total income from discontinued operations, net of tax |
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133,308 |
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|
15,142 |
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Income before cumulative effect of change in
accounting principle |
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114,767 |
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|
17,886 |
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Cumulative effect of change in accounting principle |
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|
287 |
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Net income |
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$ |
114,767 |
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$ |
18,173 |
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Net income (loss) per common share basic: |
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Continuing operations |
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$ |
(.63 |
) |
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$ |
0.09 |
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Discontinued operations |
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4.48 |
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|
0.52 |
|
Cumulative effect of change in accounting principle |
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|
0.01 |
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Net income |
|
$ |
3.85 |
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$ |
0.62 |
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Net income (loss) per common share assuming dilution: |
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Continuing operations |
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$ |
(.63 |
) |
|
$ |
0.09 |
|
Discontinued operations |
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4.48 |
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|
0.52 |
|
Cumulative effect of change in accounting principle |
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|
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|
0.01 |
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|
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Net income |
|
$ |
3.85 |
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|
$ |
0.62 |
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Weighted average shares outstanding |
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Basic |
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29,771 |
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|
29,312 |
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Assuming dilution |
|
|
29,771 |
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|
29,334 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Cash Flows
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Three Months Ended March 31 |
|
(In thousands) |
|
2007 |
|
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2006 |
|
Operating activities |
|
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Net income |
|
$ |
114,767 |
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|
$ |
18,173 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
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|
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Income from discontinued operations |
|
|
(61,019 |
) |
|
|
(15,142 |
) |
Gain on sale of discontinued operations |
|
|
(72,289 |
) |
|
|
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|
Income from cumulative effect of change in accounting principle |
|
|
|
|
|
|
(287 |
) |
Loss on redemption of Notes |
|
|
21,733 |
|
|
|
|
|
Depreciation and amortization |
|
|
8,065 |
|
|
|
7,870 |
|
Share-based compensation expense |
|
|
1,513 |
|
|
|
1,168 |
|
Foreign exchange gain |
|
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(468 |
) |
|
|
(662 |
) |
Minority interest share of income (loss) |
|
|
1,961 |
|
|
|
(603 |
) |
Other non-cash items |
|
|
(6,080 |
) |
|
|
(7,682 |
) |
Changes in operating assets and liabilities |
|
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|
|
|
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Accounts receivable |
|
|
(27,413 |
) |
|
|
4,895 |
|
Inventories |
|
|
(29,414 |
) |
|
|
7,036 |
|
Accounts payable |
|
|
33,638 |
|
|
|
5,247 |
|
Other, net |
|
|
20,160 |
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|
8,417 |
|
|
|
|
|
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Net cash provided by operating activities |
|
|
5,154 |
|
|
|
28,430 |
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|
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Investing activities |
|
|
|
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Expenditures for property, plant and equipment |
|
|
(3,660 |
) |
|
|
(2,058 |
) |
Proceeds from joint venture partner loan |
|
|
3,104 |
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|
|
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|
Proceeds from the sale of the Nickel business |
|
|
411,142 |
|
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|
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|
Loans to non-consolidated joint ventures |
|
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|
|
(2,830 |
) |
Acquisition of businesses, net of cash acquired |
|
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|
|
|
|
(5,394 |
) |
Expenditures for software |
|
|
(795 |
) |
|
|
(322 |
) |
|
|
|
|
|
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|
Net cash provided by (used for) investing activities |
|
|
409,791 |
|
|
|
(10,604 |
) |
|
|
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|
|
|
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Financing activities |
|
|
|
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|
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|
Payments of long-term debt |
|
|
(400,000 |
) |
|
|
(1,438 |
) |
Premium for redemption of Notes |
|
|
(18,500 |
) |
|
|
|
|
Distribution to joint venture partners |
|
|
(1,350 |
) |
|
|
|
|
Proceeds from exercise of stock options |
|
|
248 |
|
|
|
167 |
|
|
|
|
|
|
|
|
Net cash used for financing activities |
|
|
(419,602 |
) |
|
|
(1,271 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
1,109 |
|
|
|
896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Increase (decrease) from continuing operations |
|
|
(3,548 |
) |
|
|
17,451 |
|
Discontinued operations net cash provided by operating activities |
|
|
49,623 |
|
|
|
22,347 |
|
Discontinued operations net cash used for investing activities |
|
|
(1,540 |
) |
|
|
(1,596 |
) |
Balance at the beginning of the period |
|
|
282,288 |
|
|
|
114,618 |
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
326,823 |
|
|
$ |
152,820 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements
4
OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Stockholders Equity
|
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|
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|
Three Months Ended March 31, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
Common Stock Shares Outstanding, net of Treasury Shares |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
29,740 |
|
|
|
29,307 |
|
Shares issued under share-based compensation plans |
|
|
60 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
29,800 |
|
|
|
29,316 |
|
|
|
|
|
|
|
|
Common Stock Dollars |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
297 |
|
|
$ |
293 |
|
Shares issued under share-based compensation plans |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298 |
|
|
|
293 |
|
|
|
|
|
|
|
|
Capital in Excess of Par Value |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
533,818 |
|
|
|
516,510 |
|
Shares issued under share-based compensation plans |
|
|
2,583 |
|
|
|
167 |
|
Share-based compensation |
|
|
2,181 |
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
538,582 |
|
|
|
517,675 |
|
|
|
|
|
|
|
|
Retained Earnings |
|
|
|
|
|
|
|
|
Beginning balance, as originally reported |
|
|
221,310 |
|
|
|
6,811 |
|
Adoption of FIN No. 48 in 2007 and EITF 04-6 in 2006 |
|
|
(450 |
) |
|
|
(1,574 |
) |
|
|
|
|
|
|
|
Beginning balance, as adjusted for the adoption of FIN No. 48 and EITF 04-6 |
|
|
220,860 |
|
|
|
5,237 |
|
Net income |
|
|
114,767 |
|
|
|
18,173 |
|
|
|
|
|
|
|
|
|
|
|
335,627 |
|
|
|
23,410 |
|
|
|
|
|
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
(2,239 |
) |
|
|
(2,226 |
) |
|
|
|
|
|
|
|
|
|
|
(2,239 |
) |
|
|
(2,226 |
) |
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
28,893 |
|
|
|
15,145 |
|
Foreign currency translation |
|
|
(15,165 |
) |
|
|
(3,794 |
) |
Reclassification of hedging activities into earnings, net of tax |
|
|
(9,824 |
) |
|
|
(954 |
) |
Unrealized gain (loss) on cash flow hedges, net of tax expense (benefit)
of $(25) in 2007 and $916 in 2006 |
|
|
(70 |
) |
|
|
2,605 |
|
Unrealized gain on available-for-sale securities |
|
|
|
|
|
|
6,998 |
|
|
|
|
|
|
|
|
|
|
|
3,834 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
$ |
876,102 |
|
|
$ |
559,152 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements
5
Notes to Unaudited Condensed Consolidated Financial Statements
OM Group, Inc. and Subsidiaries
(In thousands, except as noted and per share amounts)
Note 1 Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of OM
Group, Inc. and its subsidiaries (the Company). These financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and do not include all of the information and footnotes required by
U.S. generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair financial presentation of the financial position of the Company at March 31, 2007 and the
results of its operations, cash flows and changes in stockholders equity for the three months
ended March 31, 2007 and 2006 have been included. The balance sheet at December 31, 2006 has been
derived from the audited consolidated financial statements at that date but does not include all of
the information or notes required by U.S. generally accepted accounting principles for complete
financial statements. Past operating results are not necessarily indicative of the results which
may occur in future periods, and the interim period results are not necessarily indicative of the
results to be expected for the full year. These Unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the consolidated financial statements and notes
thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.
Unless otherwise indicated, all disclosures and amounts in the Notes to Unaudited Condensed
Consolidated Financial Statements relate to the Companys continuing operations.
On November 17, 2006, the Company entered into a definitive agreement to sell its Nickel business
to Norilsk Nickel (Norilsk). As a result, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the
Unaudited Condensed Consolidated Financial Statements and accompanying notes reflect the Nickel
business as a discontinued operation for all periods presented.
Certain prior period amounts have been reclassified to conform to the current periods
presentation.
Note 2 Discontinued Operations and Disposition of Nickel Business
On November 17, 2006, the Company entered into a definitive agreement to sell its Nickel business
to Norilsk. As a result, the Nickel business is classified as a discontinued operation in
accordance with SFAS No. 144 in the Unaudited Condensed Consolidated Financial Statements for all
periods presented. The Nickel business consisted of the Harjavalta, Finland nickel refinery, the
Cawse, Australia nickel mine and intermediate refining facility, a 20% equity interest in MPI
Nickel Pty. Ltd. and an 11% ownership interest in Talvivaara Mining Company, Ltd. The transaction
closed on March 1, 2007 and at closing the Company received net cash proceeds of $411.1 million. In
addition the agreement provided for a working capital adjustment related to the net assets sold,
which the Company has determined to be $83.3 million and which is recorded in the Receivable from
Norilsk Nickel on the Unaudited Condensed Consolidated Balance
Sheets. The receivable was collected on May 2, 2007.
The Company recognized a pretax and after-tax gain on the sale of the Nickel business of $77.0
million and $72.3 million, respectively.
The agreement also provides for interest on the working capital adjustment from the transaction
closing date. For the three months ended March 31, 2007, the Company recorded interest income of
$0.6 million, which is included in Other income, net on the Unaudited Condensed Statements of
Consolidated Income.
Discontinued operations includes share-based incentive compensation expense related to Nickel
management. No interest expense has been allocated to discontinued operations.
6
Income from discontinued operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
193,091 |
|
|
$ |
152,162 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and cumulative
effect of change in accounting principle |
|
$ |
80,503 |
|
|
$ |
19,397 |
|
Income tax expense |
|
|
19,484 |
|
|
|
4,255 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
61,019 |
|
|
|
15,142 |
|
Gain on sale of discontinued operations, net of tax |
|
|
72,289 |
|
|
|
|
|
|
|
|
|
|
|
|
Total income from discontinued operations |
|
$ |
133,308 |
|
|
$ |
15,142 |
|
|
|
|
|
|
|
|
Assets and liabilities of discontinued operations at December 31, 2006 were as follows:
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
Accounts receivable |
|
$ |
97,050 |
|
Inventories |
|
|
191,380 |
|
Property, plant and equipment, net |
|
|
149,857 |
|
Goodwill |
|
|
46,481 |
|
Other current assets |
|
|
112,914 |
|
|
|
|
|
Assets of discontinued operations |
|
$ |
597,682 |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
100,644 |
|
Other current liabilities |
|
|
66,504 |
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
167,148 |
|
|
|
|
|
Note 3
Debt
On February 2, 2007, the Company notified its noteholders that it had called for the redemption of
the entire $400.0 million of its outstanding 9.25% Senior Subordinated Notes due 2011 (the
Notes). The Notes were redeemed on March 7, 2007 at a redemption price of 104.625% of the
principal amount, or $418.5 million, plus accrued interest of $8.4 million. The cost to redeem the
Notes was $21.7 million, and consists of the premium of $18.5 million plus related deferred
financing costs of $5.7 million less a deferred net gain on terminated interest rate swaps of $2.5
million.
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Senior Subordinated Notes |
|
$ |
|
|
|
$ |
400,000 |
|
Notes payable bank |
|
|
1,689 |
|
|
|
1,717 |
|
Deferred gain on termination of fair value hedges |
|
|
|
|
|
|
2,520 |
|
|
|
|
|
|
|
|
|
|
|
1,689 |
|
|
|
404,237 |
|
Less: Short-term debt |
|
|
330 |
|
|
|
326 |
|
Less: Current portion of long-term debt |
|
|
155 |
|
|
|
167 |
|
Less: Debt to be redeemed |
|
|
|
|
|
|
402,520 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
1,204 |
|
|
$ |
1,224 |
|
|
|
|
|
|
|
|
7
Note 4 Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Raw materials and supplies |
|
$ |
150,669 |
|
|
$ |
138,913 |
|
Work-in-process |
|
|
19,590 |
|
|
|
17,265 |
|
Finished goods |
|
|
75,647 |
|
|
|
60,314 |
|
|
|
|
|
|
|
|
|
|
$ |
245,906 |
|
|
$ |
216,492 |
|
|
|
|
|
|
|
|
Note 5
Acquisition in the First Quarter of 2006
On March 21, 2006, the Company completed the acquisition of Plaschem Specialty Products Pte Ltd.
and its subsidiaries (Plaschem). Plaschem develops and produces specialty chemicals for printed
circuit board chemistries, semiconductor chemistries and general metal finishing with integrated
manufacturing, research and technical support facilities in Singapore and the Shanghai area of
China. Plaschem had sales of approximately $11.0 million in 2005. In connection with the
acquisition, the Company paid $5.2 million in cash, net of cash acquired and issued a $0.5 million
note payable maturing in June 2007. The Company incurred fees of approximately $0.2 million
associated with this transaction. Additional contingent consideration, up to a maximum of $2.0
million, is due to the seller if certain specified financial performance targets of the acquired
business are met over the three-year period following the acquisition. Goodwill of $1.3 million
was recognized as a result of this acquisition. Plaschem is included in the Electronic Chemicals
product line grouping of the Specialties segment results of operations since the date of
acquisition.
Note 6 Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and
various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years
before 2002.
The Companys interim income tax provisions are based on the application of an estimated annual
effective income tax rate applied to year-to-date pre-tax income. In determining the estimated
annual effective income tax rate, the Company analyzes various factors, including forecasts of the
Companys annual earnings, taxing jurisdictions in which the earnings will be generated, the
Companys ability to use tax credits and net operating loss carryforwards, and available tax
planning alternatives. The tax effects of discrete items, including the effect of changes in tax
laws, tax rates, certain circumstances with respect to valuation allowances or other unusual or
non-recurring items are reflected in the period in which they occur as an addition to, or reduction
from, the income tax provision, rather than included in the estimated annual effective income tax
rate.
Income (loss) from continuing operations before income taxes, minority interest and cumulative
effect of change in accounting principle consists of the following for the three months ended March
31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
United States |
|
$ |
(30,539 |
) |
|
$ |
(14,436 |
) |
Outside the United States |
|
53,933 |
|
|
18,299 |
|
|
|
$ |
23,394 |
|
|
$ |
3,863 |
|
|
|
|
|
|
|
|
Prior to December 31, 2006, the Company had recorded a valuation allowance against its U.S. net
deferred tax assets, primarily related to net operating loss carryforwards, because it was more
likely than not that those deferred tax assets would not be realized. However, due primarily to
the redemption of the Notes in March 2007, the Company decided to repatriate the undistributed
earnings of certain European subsidiaries during the first quarter of 2007. Previously, the Company
had planned to permanently reinvest such undistributed earnings overseas. As a result of the plan
to repatriate, the Company recorded a deferred tax liability and reversed a portion of the
valuation allowance in the fourth quarter of 2006. During the first quarter of 2007, the Company
repatriated $528.5 million and recorded an additional tax liability of $38.8 million. The
additional $38.8 million tax liability recorded in the first quarter
8
of 2007 is due to the repatriation of the proceeds from the sale of the Nickel business and other
cash amounts, which in the aggregate are in excess of unremitted earnings at December 31, 2006.
The Companys effective income tax rates are as follows for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Effective income tax rate |
|
|
170.9 |
% |
|
|
44.6 |
% |
The effective income tax rate for the first quarter of 2007 includes the $38.8 million cost to
repatriate foreign cash in the first quarter of 2007 as described above. The effective income tax
rate for the first quarter of 2007 also includes a tax benefit of $7.6 million associated with the
$21.7 million charge related to the redemption of the Notes. These items are treated as discrete
items in the first quarter of 2007.
Excluding the discrete items in the quarter discussed above, the effective income tax rate is lower
than the United States statutory rate primarily due to a higher proportion of earnings in
jurisdictions having lower statutory tax rates (primarily in Finland, Malaysia and the DRC), and
the recognition of tax benefit for current year domestic losses at 35%.
As discussed in the Companys 2006 Form 10-K, the Malaysian tax holiday expired on December 31,
2006. The Malaysian tax holiday reduced income tax expense by $2.3 million in the three months
ended March 31, 2006. The benefit of the tax holiday on net income per diluted share was
approximately $0.08 in the first quarter of 2006.
The Company adopted the provisions of Financial Accounting Standards Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes on January 1, 2007. As a result of the adoption of FIN
No. 48, the Company recognized a $0.5 million liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007 balance of retained earnings. Including
reserves for tax contingencies previously recorded, the Company has $2.0 million of uncertain tax
positions all of which would affect the Companys effective tax rate if recognized. $1.8 million is
included as a component of other non-current liabilities and $0.2 million is recorded in other
current liabilities on the Unaudited Condensed Consolidated Balance Sheets at March 31, 2007.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a
component of income tax expense. During the quarter ended March 31, 2007, interest and penalties of
$0.1 million were recognized. The Company had $0.6 million and $0.5 million accrued at March 31,
2007 and December 31, 2006, respectively, for the payment of interest and penalties.
Included in the liability for unrecognized tax benefits at March 31, 2007 and December 31, 2006,
are $0.2 million of uncertain tax positions for which it is reasonably possible that the
unrecognized tax position will decrease due to settlement with the tax authorities within the next
12 months.
Note 7 Pension and Other Postretirement Benefit Plans
The Company sponsors a defined contribution plan covering all eligible U.S. employees. To be
eligible for the plan, an employee must be a full-time associate and at least 21 years of age.
Company contributions are determined by the board of directors annually and are computed based upon
participant compensation. Company contributions are directed by the employee into various
investment options. The Company also sponsors a non-contributory, nonqualified supplemental
executive retirement plan for certain employees, providing benefits beyond those covered in the
defined contribution plan.
The Company has a funded non-contributory defined benefit pension plan for certain retired
employees in the United States related to the Companys divested SCM business. Pension benefits
are paid to plan participants directly from pension plan assets. The Company also has an unfunded
supplemental executive retirement plan (SERP) for the former Chief Executive Officer and other
unfunded postretirement benefit plans (OPEB), primarily health care and life insurance for
certain employees and non-employees in the United States. The Company uses an October 31
measurement date for both its pension and postretirement benefit plans.
9
Set forth below is a detail of the net periodic pension expense for the defined benefit plans
for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Pension Benefits |
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
334 |
|
|
$ |
306 |
|
Amortization of unrecognized net loss |
|
|
75 |
|
|
|
67 |
|
Expected return on plan assets |
|
|
(197 |
) |
|
|
(228 |
) |
|
|
|
|
|
|
|
Total expense |
|
$ |
212 |
|
|
$ |
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
21 |
|
|
$ |
33 |
|
Interest cost |
|
|
66 |
|
|
|
60 |
|
Amortization of unrecognized prior service cost |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Total expense |
|
$ |
97 |
|
|
$ |
103 |
|
|
|
|
|
|
|
|
Note 8 Earnings Per Share
The following table sets forth the computation of basic and diluted income (loss) per common share
from continuing operations before cumulative effect of change in accounting principle for the three
months ended March 31,:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Income (loss) from continuing operations before
cumulative effect of change in accounting principle |
|
$ |
(18,541 |
) |
|
$ |
2,744 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
29,771 |
|
|
|
29,312 |
|
Dilutive effect of stock options and restricted stock |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution |
|
|
29,771 |
|
|
|
29,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share from continuing
operations before cumulative effect of change in
accounting principle basic |
|
$ |
(0.63 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share from continuing
operations before cumulative effect of change in
accounting principle assuming dilution |
|
$ |
(0.63 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
10
The following table sets forth the computation of basic and diluted net income per common share for
the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
114,767 |
|
|
$ |
18,173 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
29,771 |
|
|
|
29,312 |
|
Dilutive effect of stock options and restricted stock |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution |
|
|
29,771 |
|
|
|
29,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
3.85 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share assuming dilution |
|
$ |
3.85 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
Note 9 Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, Net |
|
|
|
|
|
|
Accumulated |
|
|
|
Foreign |
|
|
on Cash Flow |
|
|
Pension and |
|
|
Other |
|
|
|
Currency |
|
|
Hedging |
|
|
Post-Retirement |
|
|
Comprehensive |
|
|
|
Translation |
|
|
Derivatives |
|
|
Obligation |
|
|
Income (Loss) |
|
Balance at December 31, 2006 |
|
$ |
29,094 |
|
|
$ |
9,824 |
|
|
$ |
(10,025 |
) |
|
$ |
28,893 |
|
Current period credit (charge) |
|
|
314 |
|
|
|
2,395 |
|
|
|
|
|
|
|
2,709 |
|
Disposal of Nickel business |
|
|
(15,479 |
) |
|
|
(12,289 |
) |
|
|
|
|
|
|
(27,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
13,929 |
|
|
$ |
(70 |
) |
|
$ |
(10,025 |
) |
|
$ |
3,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of related tax effects, for the three months ended March 31, 2007 and
2006 was $89.7 million and $23.0 million, respectively.
Note 10 Commitments and Contingencies
During the first quarter of 2007, the Company entered into five-year supply agreements with Norilsk
for up to 2,500 metric tons per year of cobalt metal, up to 2,500 metric tons per year of cobalt in
the form of crude cobalt hydroxide concentrate, up to 1,500 metric tons per year of cobalt in the
form of crude cobalt sulfate, up to 5,000 metric tons per year of copper in the form of copper cake
and various other nickel-based raw materials used in the Companys electronic chemicals business.
In addition, the Company entered into two-year agency and distribution agreements for nickel salts.
The SECs Division of Enforcement is conducting an informal investigation resulting from the self
reporting by the Company of the internal investigation conducted in 2003 and 2004 by the audit
committee of the Companys board of directors in connection with the previously filed restatement
of the Companys financial results for periods prior to December 31, 2003. The Company is
cooperating fully with the SEC informal investigation.
During 2005, the Company reversed a $5.5 million tax contingency accrual that was originally
established in July 2003 upon the sale of the Companys Precious Metals Group (PMG) as the
liability is no longer probable. Such amount had previously been included in Retained Liabilities
of Businesses Sold. The contingency relates to a tax matter in Brazil for which the Company has
indemnified the PMG buyer under terms of the PMG sale agreement. Although the contingency is no
longer probable, the likelihood of an unfavorable outcome of this contingency is reasonably
possible based on the length of time expected before the matter is closed and the inherent risk of
changes in the political or legal situation in Brazil. If the ultimate outcome of this contingency
is unfavorable, the loss based on exchange rates at March 31, 2007 would be $6.2 million.
11
During the first quarter of 2007, the Company became aware of two additional contingent liabilities
related to the Companys former PMG operations in Brazil. The contingencies, which remain the
responsibility of OMG to the extent the matters relate to the period from 2001-2003 during which
the Company owned PMG, are potential assessments by Brazilian taxing authorities related to duty
drawback tax for items sold by PMG during 2001-2003, and certain VAT and/or Service Tax
assessments. The Company has assessed the likelihood of an unfavorable outcome of these
contingencies and concluded that they are reasonably possible but not probable. If the ultimate
outcome of these contingencies is unfavorable, the loss would be up to $13.4 million and would be
recorded in discontinued operations.
The Company is a party to various other legal proceedings incidental to its business and is subject
to a variety of environmental and pollution control laws and regulations in the jurisdictions in
which it operates. As is the case with other companies in similar industries, the Company faces
exposure from actual or potential claims and legal proceedings involving environmental matters. A
number of factors affect the cost of environmental remediation, including the determination of the
extent of contamination, the length of time the remediation may require, the complexity of
environmental regulations, and the continuing improvements in remediation techniques. Taking these
factors into consideration, the Company has estimated the undiscounted costs of remediation, which
will be incurred over several years. The Company accrues an amount consistent with the estimates of
these costs when it is probable that a liability has been incurred. At March 31, 2007 and December
31, 2006 the Company has recorded environmental liabilities of $6.8 million and $8.0 million,
respectively, primarily related to remediation and decommissioning at the Companys closed
manufacturing sites in Newark, New Jersey and Vasset, France.
Although it is difficult to quantify the potential impact of compliance with or liability under
environmental protection laws, the Company believes that any amount it may be required to pay in
connection with environmental matters, as well as other legal proceedings arising out of operations
in the normal course of business, is not reasonably likely to exceed amounts accrued by an amount
that would have a material adverse effect upon its financial condition, results of operations or
cash flows.
Note 11 Share-Based Compensation
The Companys 2002 Stock Incentive Plan authorizes the grant of options and restricted stock to
employees, and the grant of options to outside directors, of up to 1,400,000 shares, with a limit
of 200,000 shares to a single individual in any year. The Plan also limits the total number of
shares subject to the Plan that may be granted in the form of restricted stock. The Companys 1998
Long-Term Incentive Compensation Plan authorizes the annual grant of options, and stock
appreciation rights, restricted stock awards and phantom stock to employees, and the grant of
options to outside directors, of up to one and one-half percent of the number of outstanding shares
of common stock of the Company on the prior December 31, plus unused shares and shares relating to
terminated awards from prior years, subject to an overall annual maximum of 2% of common stock
outstanding. This plan also limits awards to a single individual to 200,000 shares in any year.
All options granted under both plans have 10-year terms. Options have an exercise price equal to
the average of the high and low price of our common stock on the NYSE on the date of grant except
for the options granted to the current Chief Executive Officer (the CEO) upon his hiring in June
2005, some of which have exercise prices set above the market price on the date of grant.
The Unaudited Condensed Statements of Consolidated Income include share-based compensation expense
as a component of selling, general and administrative expenses of $1.5 million and $1.2 million in
the first quarter of 2007 and 2006, respectively. In connection with the sale of the Nickel
business, the Company entered into agreements with certain Nickel employees that provided for the
acceleration of vesting for all unvested stock options and time-based and performancebased
restricted stock previously granted to those employees. The Unaudited Condensed Statements of
Consolidated Income include share-based compensation expense as a component of discontinued
operations of $0.7 million and $0.1 million in the first quarter of 2007 and 2006, respectively.
The Company adopted SFAS No. 123R on January 1, 2006. The adjustment to apply estimated
forfeitures to previously recognized share-based compensation was accounted for as a cumulative
effect of a change in accounting principle and increased net income by $0.3 million, or $.01 per
basic and diluted share.
At March 31, 2007, there was $12.3 million of total unrecognized compensation expense related to
nonvested share-based awards. That cost is expected to be recognized as follows: $5.0 million in
the remaining nine months of 2007, $4.7 million in 2008, $2.4 million in 2009 and $0.2 million in
2010. There is no unrecognized compensation expense related to the Nickel business. Unearned
compensation expense is recognized over the vesting period for the particular grant.
12
The Company received cash payments of $0.2 million and recorded a receivable of $2.4 million in the
first quarter of 2007 in connection with the exercise of stock options by a non-executive officer.
The Company received cash payments of $0.2 million in the first quarter of 2006 for stock option
exercises. The Company issues new shares to satisfy stock option exercises and restricted stock
awards. The Company does not settle share-based payment obligations for cash.
Stock Options
Options granted generally vest in equal increments over a three-year period from the grant date.
The Company accounts for options that vest over more than one year as one award and recognizes
expense related to those awards on a straight-line basis over the vesting period. During the first
quarter of 2007, the Company granted stock options to purchase 184,750 shares of common stock.
Upon any change in control of the Company, as defined in the applicable plan, the stock options
become 100% vested and exercisable.
The fair value of options granted during the first quarter of 2007 was estimated at the date of
grant using a Black-Scholes options pricing model with the following weighted-average assumptions:
|
|
|
|
|
Risk-free interest rate |
|
|
4.7 |
% |
Dividend yield |
|
|
|
|
Volatility factor of Company common stock |
|
|
0.47 |
|
Weighted-average expected option life (years) |
|
|
6.0 |
|
Weighted-average grant-date fair value |
|
$ |
26.24 |
|
The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for
the term of the options being valued. The dividend yield assumption is zero, as the Company intends
to continue to retain earnings for use in the operations of the business and does not anticipate
paying dividends in the foreseeable future. Expected volatilities are based on historical
volatility of the Companys common stock. The expected term of options granted is determined using
the shortcut method allowed by Staff Accounting Bulletin (SAB) No. 107. Under this approach, the
expected term is presumed to be the mid-point between the vesting date and the end of the
contractual term.
The following table sets forth the number and weighted-average grant-date fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average Fair |
|
|
|
|
|
|
Value at Grant |
|
|
Shares |
|
Date |
Non-vested at December 31, 2006
|
|
|
439,008 |
|
|
$ |
11.60 |
|
Non-vested at March 31, 2007
|
|
|
596,590 |
|
|
$ |
16.02 |
|
Granted during the first quarter of 2007
|
|
|
184,750 |
|
|
$ |
26.24 |
|
Vested during the first quarter of 2007
|
|
|
27,166 |
|
|
$ |
14.18 |
|
Forfeited during the first quarter of 2007
|
|
|
|
|
|
$ |
|
|
The total intrinsic value of options exercised during the first quarter of 2007 was $0.4 million.
13
A summary of the Companys stock option activity for the first quarter of 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at January 1, 2007 |
|
|
894,703 |
|
|
$ |
32.40 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
184,750 |
|
|
|
51.16 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(60,450 |
) |
|
|
42.75 |
|
|
|
|
|
|
|
|
|
Expired unexercised |
|
|
(2,000 |
) |
|
|
59.20 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
1,017,003 |
|
|
$ |
35.14 |
|
|
|
7.97 |
|
|
$ |
12,295,116 |
|
Vested or expected to vest at March 31, 2007 |
|
|
991,507 |
|
|
$ |
35.04 |
|
|
|
7.95 |
|
|
$ |
12,086,709 |
|
Exercisable at March 31, 2007 |
|
|
420,413 |
|
|
$ |
34.26 |
|
|
|
6.71 |
|
|
$ |
5,775,541 |
|
Restricted Stock Performance-Based Awards
During the first quarter of 2007, the Company awarded a total of 86,854 shares of performance-based
restricted stock that vest subject to the Companys financial performance. The total number of
shares of restricted stock that ultimately vest is based upon the Companys achievement of specific
measurable performance criteria. A recipient of performance-based restricted stock may earn a total
award ranging from 0% to 100% of the initial grant. Of the 86,854 shares awarded during the first
quarter of 2007, 80,600 shares will vest upon the satisfaction of established performance criteria
based on consolidated operating profit and average return on net assets over a three-year
performance period ending December 31, 2009. The remaining 6,254 shares will vest if the Company
meets an established earnings target for the Specialties business segment during any one of the
years in the three-year period ending December 31, 2009.
The value of the performance-based restricted stock award was based upon the market price of an
unrestricted share of the Companys common stock at the date of grant. The Company recognizes
expense related to performance-based restricted stock ratably over the requisite service period
based upon the number of shares that are anticipated to vest. The number of shares anticipated to
vest is evaluated quarterly and compensation expense is adjusted accordingly. Upon any change in
control of the Company, as defined in the plan, the shares become 100% vested. In the event of
death or disability, a pro rata number of shares shall remain eligible for vesting at the end of
the performance period.
A summary of the Companys performance-based restricted stock awards for the first quarter of 2007
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding at January 1, 2007 |
|
|
95,900 |
|
|
$ |
28.93 |
|
Granted |
|
|
86,854 |
|
|
|
42.13 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
182,754 |
|
|
$ |
35.22 |
|
Expected to vest at March 31, 2007 |
|
|
111,231 |
|
|
|
|
|
Restricted Stock Time-Based Awards
During the first quarter of 2007, the Company awarded 24,360 shares of time-based restricted stock
that vest three years from the date of grant subject to the respective recipient remaining employed
by the Company on that date. The value of the restricted stock awards, based upon the market price
of an unrestricted share of the Companys common stock at the date of grant, was $1.2 million.
Compensation expense is being recognized ratably over the vesting period. Upon any change in
control of the Company, as defined in
the plan, the shares become 100% vested. A pro rata number of shares will vest in the event of
death or disability prior to the stated vesting date.
14
A summary of the Companys time-based restricted stock awards for the first quarter of 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding at January 1, 2006 |
|
|
188,494 |
|
|
$ |
25.39 |
|
Granted |
|
|
24,360 |
|
|
$ |
51.16 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
212,854 |
|
|
$ |
28.34 |
|
Expected to vest at March 31, 2007 |
|
|
210,883 |
|
|
|
|
|
Note 12 Reportable Segments
As a result of the sale of the Nickel business during the first quarter of 2007, the Companys
unaudited condensed financial statements, accompanying notes and other information provided in this
Form 10-Q reflect the Nickel segment as a discontinued operation for all periods presented. The
Nickel business consisted of the Harjavalta, Finland nickel refinery, the Cawse, Australia nickel
mine and intermediate refining facility, a 20% equity interest in MPI Nickel Pty. Ltd. and an 11%
ownership interest in Talvivaara Mining Company, Ltd.
After reclassifying the Nickel segment to discontinued operations, the Company has one remaining
operating segment Specialties. The Specialties segment includes products manufactured using
cobalt and other metals including copper, zinc, manganese, and calcium. In late 2005, the Company
began a strategic transformation away from commodity-based businesses and markets to value-added,
specialty businesses and markets. This transformation includes the sale of the Companys Nickel
business, discussed above. Pursuant to the transformation, the Vice President and General Manager
of the Specialties segment organized certain product lines around end markets, thereby creating
three business units that represent product line groupings around end markets: Advanced Organics,
Inorganics and Electronic Chemicals. The Specialties segment also includes certain other
operations, primarily the Democratic Republic of Congo (the DRC) smelter operations, which are
not classified into one of these groupings. The Companys products are sold in various forms such
as solutions, crystals and powders. The Companys products are essential components in numerous
complex chemical and industrial processes, and are used in many end markets.
Corporate is comprised of general and administrative expenses not allocated to Specialties.
While its primary manufacturing site is in Finland, the Company also has manufacturing and other
facilities in the United States, Europe, Asia-Pacific and Canada, and the Company markets its
products worldwide. Further, approximately 37% of the Companys investment in property, plant and
equipment is located in the DRC, where the Company operates a smelter through a 55% owned joint
venture.
15
The following table reflects the results of the segments:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Business Segment Information |
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
Specialties |
|
$ |
216,196 |
|
|
$ |
142,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
Specialties |
|
$ |
55,163 |
|
|
$ |
19,654 |
|
Corporate |
|
|
(8,351 |
) |
|
|
(8,073 |
) |
|
|
|
|
|
|
|
|
|
$ |
46,812 |
|
|
$ |
11,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
(7,105 |
) |
|
$ |
(9,742 |
) |
Loss on redemption of Notes |
|
|
(21,733 |
) |
|
|
|
|
Foreign exchange gain |
|
|
468 |
|
|
|
662 |
|
Other income, net |
|
|
4,952 |
|
|
|
1,362 |
|
|
|
|
|
|
|
|
|
|
$ |
(23,418 |
) |
|
$ |
(7,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes,
minority interest and cumulative effect of change in
accounting principle |
|
$ |
23,394 |
|
|
$ |
3,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant & equipment |
|
|
|
|
|
|
|
|
Specialties |
|
$ |
3,660 |
|
|
$ |
2,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Specialties |
|
$ |
7,827 |
|
|
$ |
7,627 |
|
Corporate |
|
|
238 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
$ |
8,065 |
|
|
$ |
7,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Total assets |
|
|
|
|
|
|
|
|
Specialties |
|
$ |
909,908 |
|
|
$ |
826,488 |
|
Corporate |
|
|
303,000 |
|
|
|
194,054 |
|
Assets of discontinued operations |
|
|
|
|
|
|
597,682 |
|
|
|
|
|
|
|
|
|
|
$ |
1,212,908 |
|
|
$ |
1,618,224 |
|
|
|
|
|
|
|
|
Note 13 Recently Issued Accounting Standards
Accounting Standards adopted in 2007:
FIN No. 48: In July 2006, the Financial Accounting Standards Board (FASB) issued FIN No. 48. FIN
No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN
No. 48 prescribes a recognition threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN
No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosures and transitions. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company adopted FIN No. 48 on January 1, 2007. The transition
provisions require that the effect of applying the provisions of FIN No. 48 be reported as an
adjustment to the opening balance of retained earnings in the year of adoption. The effect of
adoption was a $0.5 million reduction to retained earnings at
January 1, 2007.
16
EITF No. 06-3: In June 2006, the FASB ratified the consensus of Emerging Issues Task Force (EITF)
No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (that is, gross versus net presentation). EITF No. 06-03
indicates that the income statement presentation of taxes within the scope of the Issue on either a
gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to
APB No. 22. The Company has historically accounted for such taxes on a net basis and therefore the
adoption of EITF No. 06-03 in the first quarter of 2007 had no impact on the Companys results of
operations and financial position.
Accounting Standards Not Yet Adopted
SFAS No. 159: In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS No. 159
permits entities to choose to measure many financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis (the fair value option). Unrealized
gains and losses on items for which the fair value option has been elected are to be recognized in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Company has not determined the effect, if any, the adoption of this
statement will have on its results of operations or financial position.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a leading, vertically integrated international producer and marketer of value-added,
metal-based specialty chemicals and related materials. The Company applies proprietary technology
to unrefined cobalt and other raw materials to market more than 775 different product offerings to
approximately 1,900 customers in over 40 industries.
The Companys business is critically connected to both the price and availability of raw materials.
The primary raw material used by the Company is unrefined cobalt. Cobalt raw materials include ore,
concentrates, slag and scrap. The cost of the Companys raw materials fluctuates due to actual or
perceived changes in supply and demand, changes in cobalt reference prices and changes in
availability from suppliers. The Company attempts to mitigate changes in availability by
maintaining adequate inventory levels and long-term supply relationships with a variety of
producers. Fluctuations in the price of cobalt have been significant in the past and the Company
believes that cobalt price fluctuations are likely to continue in the future. The Company attempts
to pass through to its customers increases in raw material prices by increasing the prices of its
products. The Companys profitability is largely dependent on the Companys ability to maintain the
differential between its product prices and product costs. Certain sales contracts and raw material
purchase contracts contain variable pricing that adjusts based on changes in the price of cobalt.
During periods of rapidly changing metal prices, however, there may be price lags that can impact
the short-term profitability and cash flow from operations of the Company both positively and
negatively. Reductions in the price of raw materials or declines in the selling prices of the
Companys finished goods could also result in the Companys inventory carrying value being written
down to a lower market value.
The Company has manufacturing and other facilities in North America, Europe, Africa and
Asia-Pacific, and markets its products worldwide. Although most of the Companys raw material
purchases and product sales are based on the U.S. dollar, prices of certain raw materials, non-U.S.
operating expenses and income taxes are denominated in local currencies. As such, the results of
operations are subject to the variability that arises from exchange rate movements (particularly
the Euro). In addition, fluctuations in exchange rates may affect product demand and profitability
in U.S. dollars of products provided by the Company in foreign markets in cases where payments for
its products are made in local currency. Accordingly, fluctuations in currency prices affect the
Companys operating results.
On March 1, 2007, the Company completed the sale of its Nickel business, as discussed in Note 2 to
the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q. As a result, the
Companys financial statements, accompanying notes and other information provided in this Form 10-Q
reflect the Nickel business as a discontinued operation for all periods presented. The Nickel
business consisted of the Harjavalta, Finland nickel refinery, the Cawse, Australia nickel mine and
intermediate refining facility, a 20% equity interest in MPI Nickel Pty. Ltd. and an 11% ownership
interest in Talvivaara Mining Company, Ltd.
After reclassifying the Nickel business to discontinued operations, the Company has one operating
segment Specialties. The Specialties segment includes products manufactured using cobalt and
other metals including copper, zinc, manganese, and calcium. In late 2005, the Company began a
strategic transformation away from commodity-based businesses and markets to value-added, specialty
businesses and markets. Pursuant to the transformation, the Vice President and General Manager of
the Specialties segment organized certain product lines around end markets, thereby creating three
business units that represent product line groupings around end markets: Advanced Organics,
Inorganics and Electronic Chemicals. The Specialties segment also includes certain other
operations, primarily the DRC smelter operations, which are not classified into one of these
groupings. The Companys products are sold in various forms such as solutions, crystals and
powders. The Companys products are essential components in numerous complex chemical and
industrial processes, and are used in many end markets.
18
The following table sets forth information regarding the Companys product line groupings:
|
|
|
|
|
Product Line Grouping |
|
End Markets/Applications |
|
Product Attributes |
Advanced Organics
|
|
Tires
|
|
Promotes bonding of
metal-to-rubber in
radial tires |
|
|
|
|
|
|
|
Coatings and paints
|
|
Promotes faster
drying in such
products as house
paints (exterior
and interior) and
industrial and
marine coatings |
|
|
|
|
|
|
|
Printing Inks
|
|
Promotes faster drying in various printing inks |
|
|
|
|
|
|
|
Petrochemical Refining
|
|
Catalyzes reduction
of sulfur dioxide
and nitrogen
emissions |
|
|
|
|
|
|
|
Polyester Resins
|
|
Accelerates the
curing of polyester
resins found in
reinforced
fiberglass boats,
storage tanks,
bathrooms, sports
equipment,
automobile and
truck components |
|
|
|
|
|
Inorganics
|
|
Rechargeable Batteries
|
|
Improves the
electrical
conduction of
rechargeable
batteries used in
cellular phones,
video cameras,
portable computers,
power tools and
hybrid electric
vehicles |
|
|
|
|
|
|
|
Ceramics and Glassware
|
|
Provides color for
pigments,
earthenware and
glass and
facilitates
adhesion of
porcelain to metal |
|
|
|
|
|
|
|
Catalysts
|
|
Reduces emissions
from petrochemical
refining and
enables the
production of
cleaner-burning
fuels |
|
|
|
|
|
|
|
Construction Equipment and Cutting Tools
|
|
Strengthens and
adds durability to
diamond and machine
cutting tools and
drilling equipment
used in
construction, oil
and gas drilling,
and quarrying |
|
|
|
|
|
Electronic Chemicals
|
|
Memory Disks
|
|
Enhances
information storage
on disks for
computers and
consumer
electronics |
|
|
|
|
|
|
|
General Metal Finishing
|
|
Impart corrosion
protection and wear
resistance to
electrical
connectors,
microwave housings,
valves and pump
bodies, printer
shafts and
hard-drive computer
components |
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires the Companys management to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying Unaudited Condensed Consolidated
Financial Statements. In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the Unaudited Condensed Consolidated
Financial Statements, giving due consideration to materiality. The application of these accounting
policies involves the exercise of judgment and use of assumptions as to future uncertainties and,
as a result, actual results could differ from these estimates. In addition, other companies may
utilize different estimates, which may impact the comparability of the Companys results of
operations to similar businesses. There have been no changes to our critical accounting policies as
stated in our Annual Report on Form 10-K for the year ended December 31, 2006 other
19
than the adoption of FIN No. 48, as discussed in Note 13 to the Unaudited Condensed Consolidated
Financial Statements in this Form 10-Q.
Results of Operations
First Quarter of 2007 Compared With First Quarter of 2006
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
(thousands of dollars & percent of net sales) |
|
2007 |
|
|
|
|
|
|
2006 |
|
|
|
|
|
Net sales |
|
$ |
216,196 |
|
|
|
|
|
|
$ |
142,447 |
|
|
|
|
|
Cost of products sold |
|
|
143,952 |
|
|
|
|
|
|
|
108,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
72,244 |
|
|
|
33.4 |
% |
|
|
34,154 |
|
|
|
24.0 |
% |
Selling, general and administrative expenses |
|
|
25,432 |
|
|
|
11.8 |
% |
|
|
22,573 |
|
|
|
15.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
46,812 |
|
|
|
21.7 |
% |
|
|
11,581 |
|
|
|
8.1 |
% |
Other expense, net (including interest expense) |
|
|
(23,418 |
) |
|
|
|
|
|
|
(7,718 |
) |
|
|
|
|
Income tax expense |
|
|
(39,974 |
) |
|
|
|
|
|
|
(1,722 |
) |
|
|
|
|
Minority interest share of (income) loss |
|
|
(1,961 |
) |
|
|
|
|
|
|
603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before cumulative
effect of change in accounting principle |
|
|
(18,541 |
) |
|
|
|
|
|
|
2,744 |
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
|
61,019 |
|
|
|
|
|
|
|
15,142 |
|
|
|
|
|
Gain on sale of discontinued operations, net of tax |
|
|
72,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in
accounting principle |
|
|
114,767 |
|
|
|
|
|
|
|
17,886 |
|
|
|
|
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
114,767 |
|
|
|
|
|
|
$ |
18,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the sales for the product line groupings in the Specialties segment
for the three months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(thousands of dollars) |
|
2007 |
|
|
% |
|
|
2006 |
|
|
% |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inorganics |
|
$ |
146,649 |
|
|
|
68 |
% |
|
$ |
87,530 |
|
|
|
62 |
% |
Advanced organics |
|
|
40,706 |
|
|
|
19 |
% |
|
|
37,303 |
|
|
|
26 |
% |
Electronic chemicals |
|
|
26,013 |
|
|
|
12 |
% |
|
|
17,614 |
|
|
|
12 |
% |
Other |
|
|
2,828 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
216,196 |
|
|
|
|
|
|
$ |
142,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Volumes |
|
|
|
|
|
|
|
|
Inorganics sales volume metric tons |
|
|
6,561 |
|
|
|
5,731 |
|
Advanced organics sales volume metric tons |
|
|
7,240 |
|
|
|
6,726 |
|
Electronic chemicals sales volume gallons (thousands) |
|
|
1,726 |
|
|
|
1,288 |
|
Cobalt refining volume metric tons |
|
|
2,186 |
|
|
|
2,172 |
|
20
The following table summarizes the percentage of sales dollars by region for the first quarter of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
Change |
Americas |
|
|
18 |
% |
|
|
25 |
% |
|
|
-7 |
% |
Asia |
|
|
51 |
% |
|
|
46 |
% |
|
|
5 |
% |
Europe |
|
|
31 |
% |
|
|
29 |
% |
|
|
2 |
% |
The following table summarizes the percentage of sales dollars by end market for the first quarter
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
Change |
Batteries |
|
|
32 |
% |
|
|
28 |
% |
|
|
4 |
% |
Chemical |
|
|
17 |
% |
|
|
14 |
% |
|
|
3 |
% |
Electronic Chemical |
|
|
12 |
% |
|
|
12 |
% |
|
|
|
|
Tire |
|
|
7 |
% |
|
|
10 |
% |
|
|
-3 |
% |
Powder Metallurgy |
|
|
9 |
% |
|
|
10 |
% |
|
|
-1 |
% |
Coatings |
|
|
5 |
% |
|
|
8 |
% |
|
|
-3 |
% |
Other |
|
|
18 |
% |
|
|
18 |
% |
|
|
|
|
The following table summarizes the average quarterly reference price of 99.3% cobalt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
First Quarter |
|
$ |
25.82 |
|
|
$ |
12.43 |
|
|
$ |
17.26 |
|
Second Quarter |
|
|
n/a |
|
|
$ |
14.43 |
|
|
$ |
15.03 |
|
Third Quarter |
|
|
n/a |
|
|
$ |
15.59 |
|
|
$ |
13.41 |
|
Fourth Quarter |
|
|
n/a |
|
|
$ |
18.66 |
|
|
$ |
12.51 |
|
Full Year |
|
|
n/a |
|
|
$ |
15.22 |
|
|
$ |
14.55 |
|
Net sales increased to $216.2 million in the first quarter of 2007 from $142.4 million in the first
quarter of 2006, primarily due to increased product selling prices ($64.7 million). The increase
in product selling prices was primarily caused by the $13.39 increase in the average cobalt
reference price in the first quarter of 2007 compared with the first quarter of 2006.
Gross
profit increased to $72.2 million in the first quarter of 2007, compared with $34.2 million
in the first quarter of 2006, and as a percentage of net sales
increased to 33.4% from 24.0%.
During 2006, the reference price of cobalt increased from an average of $12.43 in the first quarter
to an average of $18.66 in the fourth quarter. This included a 40% increase in December 2006 to an
average of $23.64 from an average of $16.94 in November 2006. The reference price continued to
increase during the first quarter of 2007 to an average of $25.82. Gross profit in the first
quarter of 2007 was higher due to the impact of both the higher reference price and the sale into a
higher price environment of finished products that were manufactured using cobalt raw material that
was purchased at lower prices ($21.4 million). Gross profit was also favorably impacted by
improved volume ($4.3 million), increased operating results at the
smelter in the DRC ($2.9 million), and increased copper by-product sales ($2.5 million). The increase in profit at the DRC
smelter was primarily due to production efficiencies that resulted in increased throughput, as well
as increased shipments and the higher average cobalt reference price.
These positive factors were partially offset by an inventory
adjustment of $4.3 million recorded in the first quarter of 2007
due to loss of cobalt inventory as a result of theft during shipment
along supply lines in the DRC. The Company's 55% share of this loss
is $2.3 million. The Company is seeking insurance recovery for
the loss and will record any recovery when received.
Selling, general and administrative expenses were $25.4 million in the first quarter of 2007
compared with $22.6 million in the first quarter of 2006. The $2.8 million increase was primarily
due to increased selling expenses as a result of the increase in sales. In addition, the first
quarter of 2007 included a full three months of expense relating to Plaschem, which was acquired on
March 21, 2006. Included in SG&A are corporate expenses for the first quarter of 2007 of $8.4
million compared with $8.1 million in the first quarter of 2006. Corporate expenses consist of
unallocated corporate overhead, including legal, finance, human resources, information technology,
strategic development and corporate governance activities, as well as share-based compensation.
Income
from operations for the first quarter of 2007 increased to $46.8 million from $11.6 million
in the first quarter of 2006 due to the factors impacting gross profit and selling general and
administrative expenses discussed above.
21
Interest expense decreased to $7.1 million in the first quarter of 2007 compared with $9.7 million
in the first quarter of 2006 primarily due to the redemption of the $400.0 million of 9.25% Senior
Subordinated Notes due 2011(the Notes). The Notes were redeemed on March 7, 2007 at a redemption
price of 104.625% of the principal amount, or $418.5 million, plus accrued interest of $8.4
million. The cost to redeem the Notes was $21.7 million which includes the premium of $18.5 million
plus related deferred financing costs of $5.7 million less a deferred net gain on terminated
interest rate swaps of $2.5 million.
Other income, net increased to $5.0 million in the first quarter of 2007 compared with $1.4 million
in the first quarter of 2006 primarily due to a $2.6 million increase in interest income due to the
higher average cash balance.
Income tax
expense in the first quarter of 2007 was $40.0 million on
pre-tax income of $23.4
million, due primarily to two discrete items. The Company recorded U.S. income tax expense of
$38.8 million on the repatriation of foreign earnings and proceeds from the sale of the Nickel
business. This expense was partially offset by a $7.6 million income tax benefit related to the
$21.7 million cost to redeem the Notes. Excluding these discrete items, the remaining income tax
expense of $8.8 million represents a lower effective rate than the U.S. statutory rate due
primarily to income earned in tax jurisdictions with lower statutory tax rates (primarily Finland,
Malaysia and the DRC). Income tax expense in the first quarter of 2006 was $1.7 million on pre-tax
income of $3.9 million, which represents a higher effective rate than the U.S. statutory rate due
primarily to the negative impact of losses in the U.S. with no corresponding tax benefit during
that period.
Minority interest share of (income) loss relates to the Companys smelter joint venture in the DRC.
The losses in the first quarter of 2006 were primarily due to logistical issues in the DRC in the
fourth quarter of 2005, which impacted the first quarter of 2006 results.
The $18.5 million loss from continuing operations before cumulative effect of change in accounting
principle in the first quarter of 2007 includes the affect of the $14.1 million cost associated
with the redemption of the Notes (net of the $7.6 million tax benefit) as well as the $38.8 million
tax liability recorded in connection with the repatriation of foreign earnings and of the proceeds
from the sale of the Nickel business.
Income from discontinued operations for the first quarter of 2007 and 2006 primarily related to the
Nickel business.
Total income from discontinued operations for the first quarter of 2007 also included the $72.3
million gain on the sale of the Nickel business.
Net income
was $114.8 million, or $3.85 per diluted share, in the first quarter
of 2007 compared with net income of $18.2 million, or $0.62 per
diluted share, in the first quarter of 2006, due primarily to the
aforementioned factors.
Liquidity and Capital Resources
The Companys cash flows from operating, investing and financing activities, as reflected in the
Unaudited Condensed Statements of Consolidated Cash Flows, are summarized in the following table
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
Cash Flow Summary |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
5,154 |
|
|
$ |
28,430 |
|
|
$ |
(23,276 |
) |
Investing activities |
|
|
409,791 |
|
|
|
(10,604 |
) |
|
|
420,395 |
|
Financing activities |
|
|
(419,602 |
) |
|
|
(1,271 |
) |
|
|
(418,331 |
) |
Effect of exchange rate changes on cash |
|
|
1,109 |
|
|
|
896 |
|
|
|
213 |
|
Discontinued operations-operating activities |
|
|
49,623 |
|
|
|
22,347 |
|
|
|
27,276 |
|
Discontinued operations-investing activities |
|
|
(1,540 |
) |
|
|
(1,596 |
) |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
44,535 |
|
|
$ |
38,202 |
|
|
$ |
6,333 |
|
|
|
|
|
|
|
|
|
|
|
The $23.3 million decrease in net cash provided by operating activities was primarily due to the
negative cash flow impact of a loss from continuing operations before
accounting changes of $18.5
million in the first quarter of 2007 compared with income of $2.7 million in the first quarter of
2006; the $21.7 million charge related to the redemption of the Notes that had no impact on cash
flow
from operating activities; and the negative impact ($36.5 million and $32.3 million, respectively)
of an increase in inventories and an increase in accounts receivable during the first quarter of
2007 compared with a decrease in inventories and accounts receivable
22
during the first quarter of
2006. These factors were partially offset by an increase in accounts payable during the first
quarter of 2007 compared to the first quarter of 2006, which resulted in a cash flow change of
$28.4 million. The increases in inventories, accounts receivable and accounts payable in the first
quarter of 2007 were primarily due to higher cobalt metal prices in the first quarter of 2007
compared to the first quarter of 2006.
Net cash provided by investing activities increased $420.4 million in the first quarter of 2007
compared with the first quarter of 2006 primarily due to the $411.1 million of proceeds related to
the disposition of the Nickel business and $3.1 million of proceeds from the repayment of a loan
made to a former Nickel joint venture partner. The first quarter of 2006 included a $5.4 million
payment related to the Plaschem acquisition and a $2.8 million loan to a former Nickel joint
venture partner.
Net cash used in financing activities increased $418.3 million in the first quarter of 2007
compared with the first quarter of 2006 primarily due to the $418.5 million payment to redeem the
Notes during the first quarter of 2007.
Debt and Other Financing Activities
On February 2, 2007, the Company notified its noteholders that it had called for the redemption of
the entire $400.0 million of its outstanding Notes. The Notes were redeemed on March 7, 2007 at a
redemption price of 104.625% of the principal amount, or $418.5 million, plus accrued interest of
$8.4 million. The premium amount of $18.5 million plus related deferred financing costs of $5.7
million less the deferred net gain on terminated interest rate swaps of $2.5 million is included in
Cost of redemption of Notes in the Unaudited Condensed Statements of Consolidated Income.
The Company has a Revolving Credit Agreement (the Revolver) with availability of up to $100.0
million, including up to the equivalent of $25.0 million in Euros or other foreign currencies. The
Revolver includes an accordion feature under which the Company may increase the availability by
$50.0 million to a maximum of $150.0 million subject to certain conditions. Obligations under the
Revolver are guaranteed by each of the Companys U.S. subsidiaries and are secured by a lien on the
assets of the Company and such subsidiaries. The Revolver provides for interest-only payments
during its term, with principal due at maturity. The Company has the option to specify that
interest be calculated based either on LIBOR, plus a calculated margin amount, or a base rate. The
applicable margin for the LIBOR rate ranges from 0.50% to 1.00%. The Revolver also requires the
payment of a fee of 0.125% to 0.25% per annum on the unused commitment. The margin and unused
commitment fees are subject to quarterly adjustment based on a certain debt to adjusted earnings
ratio. The Revolver matures on December 20, 2010 and contains various affirmative and negative
covenants. At March 31, 2007, there were no borrowings outstanding under the Revolver and the
Company was in compliance with all covenants.
The Company has two term loans outstanding that expire in 2008 and 2019 and require monthly
principal and interest payments. The balance of these term loans was $1.4 million at March 31,
2007 and December 31, 2006. At March 31, 2007 and December 31, 2006, the Company also had a $0.3
million short-term note payable.
The Company believes that it will have sufficient cash provided by operations and available from
its credit facility to provide for its working capital, debt service and capital expenditure
requirements during 2007.
Capital Expenditures
Capital expenditures in the first three months of 2007 were $3.7 million, related primarily to
ongoing projects to maintain current operating levels, and were funded through cash flows from
operations. The Company expects to incur capital spending of approximately $33.5 million for the
remainder of 2007 primarily for projects at the Kokkola refinery to expand capacity in selected
product lines, maintain and improve throughput with outlays for sustaining operations, and for
expenditures related to environmental, health & safety compliance, and also for other fixed asset
additions at existing facilities.
During 2005, the Company initiated a multi-year Enterprise Resource Planning (ERP) project that
is expected to be implemented worldwide to achieve increased efficiency and effectiveness in supply
chain, financial processes and management reporting. The new ERP system will replace or complement
existing legacy systems and standardize the global business processes across the enterprise. The
system was implemented at one location in the first quarter of 2007. The Company will continue to
implement the ERP system at
additional locations in a phased approach. The Company anticipates that the ERP system
implementation will be substantially complete by the end of the first quarter of 2009.
23
Contractual Obligations
On March 1, 2007, the Company entered into five-year supply agreements with Norilsk for up to 2,500
metric tons per year of cobalt metal, up to 2,500 metric tons per year of cobalt in the form of
crude cobalt hydroxide concentrate, up to 1,500 metric tons per year of cobalt in the form of crude
cobalt sulfate, up to 5,000 metric tons per year of copper in the form of copper cake and various
other nickel-based raw materials used in the Companys electronic chemicals business. In addition,
the Company entered into two-year agency and distribution agreements for nickel salts.
Since December 31, 2006, there have been no significant changes in the total amount of contractual
obligations or the timing of cash flows in accordance with those obligations, as reported in the
Companys 10-K for the year ended December 31, 2006.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A discussion of market risk exposures is included in Part II, Item 7a, Quantitative and
Qualitative Disclosure About Market Risk, of the Companys 2006 Annual Report on Form 10-K. There
have been no material changes from December 31, 2006 to March 31, 2007.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Management of the Company, under the supervision and with the participation of the Chief Executive
Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of March 31, 2007. As
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act),
disclosure controls and procedures are controls and procedures designed to provide reasonable
assurance that information required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such
information is accumulated and communicated to management, including the Companys Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. The Companys disclosure controls and procedures include components of the Companys
internal control over financial reporting.
Based upon this evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were not effective as of March 31,
2007 solely because of the material weakness identified as of December 31, 2006 relating to
accounting for income taxes, as summarized in the Form 10-K for the year ended December 31, 2006.
In light of this material weakness, the Company performed additional analysis and post-closing
procedures as deemed necessary to ensure that the accompanying Unaudited Condensed Consolidated
Financial Statements were prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q. Accordingly, management
believes that the Unaudited Condensed Consolidated Financial Statements included in this report
present fairly, in all material respects, the Companys financial position as of March 31, 2007,
and the results of its operations, cash flows and changes in stockholders equity for the three
months then ended.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of December 31, 2006, management identified inadequate controls over the Companys accounting
for income taxes. Management believes that the Company has made progress in addressing this
material weakness by identifying additional enhancements to the related control procedures.
However, the improvements in controls have not all been implemented or operating effectively for a
period of time sufficient for the Company to fully evaluate their design and operating
effectiveness.
The Company completed the implementation of a new ERP system at its Kokkola, Finland location
during the first quarter of 2007, which resulted in certain changes to businesses processes and
related internal controls. The implementation is part of a multi-year project that is expected to
be implemented worldwide to achieve increased efficiency and effectiveness in supply chain and
financial processes. The Company will continue to implement the ERP system in a phased approach
through the first quarter of 2009. The Company is taking steps to monitor and maintain appropriate
internal controls during the implementation. The Company performed
24
additional procedures, including performing additional verifications and testing data integrity, to
ensure the financial statements were materially correct for the three months ended March 31, 2007.
The Company continues to review, revise and improve the effectiveness of its internal control over
financial reporting including the controls discussed above. Except as discussed above, there were
no other changes in the Companys internal control over financial reporting in connection with the
Companys first quarter 2007 evaluation, or subsequent to such evaluation, that would materially
affect, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
PART II OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Companys
Annual Report on Form 10-K for the year ended December 31, 2006 except that the risks associated
with any failures or delays in satisfying closing conditions for the sale of the Companys Nickel
business are no longer applicable, as the sale of the Nickel business was consummated on March 1,
2007, as contemplated.
ITEM 6. EXHIBITS
Exhibits are as follow:
|
|
|
31.1
|
|
Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32
|
|
Certification by Chief Executive Officer and Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act (18 U.S.C. Section 1350) |
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
OM GROUP, INC. |
|
|
|
|
|
|
|
Dated May 3, 2007
|
|
By: /s/ Kenneth Haber |
|
|
|
|
|
|
|
|
|
|
Kenneth Haber
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer) |
|
|
26