OM Group, Inc. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-12515
OM GROUP, INC.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
52-1736882 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
|
|
|
127 Public Square |
|
|
1500 Key Tower |
|
|
Cleveland, Ohio
|
|
44114-1221 |
(Address of principal executive offices)
|
|
(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
,a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
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
May 1, 2008 there were 30,537,345 shares of Common Stock, par value $.01 per share,
outstanding.
OM Group, Inc.
TABLE OF CONTENTS
1
Part I FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
OM Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands, except share data) |
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
74,890 |
|
|
$ |
100,187 |
|
Accounts receivable, less allowances |
|
|
237,672 |
|
|
|
178,481 |
|
Inventories |
|
|
497,643 |
|
|
|
413,434 |
|
Other current assets |
|
|
87,293 |
|
|
|
60,655 |
|
Interest receivable from joint venture partner |
|
|
|
|
|
|
3,776 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
897,498 |
|
|
|
756,533 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
277,665 |
|
|
|
288,834 |
|
Goodwill |
|
|
339,267 |
|
|
|
322,172 |
|
Notes receivable from joint venture partner, less allowance of $5,200 in 2008 and 2007 |
|
|
19,665 |
|
|
|
24,179 |
|
Other non-current assets |
|
|
68,309 |
|
|
|
77,492 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,602,404 |
|
|
$ |
1,469,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
363 |
|
|
$ |
347 |
|
Current portion of long-term debt |
|
|
147 |
|
|
|
166 |
|
Accounts payable |
|
|
247,386 |
|
|
|
214,244 |
|
Accrued income taxes |
|
|
30,481 |
|
|
|
32,040 |
|
Accrued employee costs |
|
|
27,676 |
|
|
|
34,707 |
|
Other current liabilities |
|
|
26,697 |
|
|
|
25,435 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
332,750 |
|
|
|
306,939 |
|
|
Long-term debt |
|
|
48,169 |
|
|
|
1,136 |
|
Deferred income taxes |
|
|
24,524 |
|
|
|
29,645 |
|
Minority interests |
|
|
50,124 |
|
|
|
52,314 |
|
Other non-current liabilities |
|
|
51,305 |
|
|
|
50,790 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value: |
|
|
|
|
|
|
|
|
Authorized 2,000,000 shares, no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, $.01 par value: |
|
|
|
|
|
|
|
|
Authorized 60,000,000 shares; issued 30,144,004 in 2008 and 30,122,209 shares in 2007 |
|
|
301 |
|
|
|
301 |
|
Capital in excess of par value |
|
|
558,004 |
|
|
|
554,933 |
|
Retained earnings |
|
|
522,753 |
|
|
|
467,726 |
|
Treasury stock (61,541 shares in 2008 and 2007, at cost) |
|
|
(2,239 |
) |
|
|
(2,239 |
) |
Accumulated other comprehensive income |
|
|
16,713 |
|
|
|
7,665 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,095,532 |
|
|
|
1,028,386 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,602,404 |
|
|
$ |
1,469,210 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
2
OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands, except per share data) |
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
480,795 |
|
|
$ |
216,196 |
|
Cost of products sold |
|
|
344,129 |
|
|
|
143,952 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
136,666 |
|
|
|
72,244 |
|
Selling, general and administrative expenses |
|
|
42,032 |
|
|
|
25,432 |
|
|
|
|
|
|
|
|
Operating profit |
|
|
94,634 |
|
|
|
46,812 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(360 |
) |
|
|
(7,105 |
) |
Interest income |
|
|
466 |
|
|
|
5,198 |
|
Loss on redemption of Notes |
|
|
|
|
|
|
(21,733 |
) |
Foreign exchange gain |
|
|
646 |
|
|
|
468 |
|
Other income (expense), net |
|
|
90 |
|
|
|
(246 |
) |
|
|
|
|
|
|
|
|
|
|
842 |
|
|
|
(23,418 |
) |
|
|
|
|
|
|
|
Income from continuing operations before income taxes and minority interest |
|
|
95,476 |
|
|
|
23,394 |
|
Income tax expense |
|
|
(27,145 |
) |
|
|
(39,974 |
) |
Minority partners share of income |
|
|
(12,742 |
) |
|
|
(1,961 |
) |
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
55,589 |
|
|
|
(18,541 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
(369 |
) |
|
|
61,019 |
|
Gain on sale of discontinued operations, net of tax |
|
|
|
|
|
|
72,289 |
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations, net of tax |
|
|
(369 |
) |
|
|
133,308 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
55,220 |
|
|
$ |
114,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic: |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.85 |
|
|
$ |
(0.63 |
) |
Discontinued operations |
|
|
(0.01 |
) |
|
|
4.48 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1.84 |
|
|
$ |
3.85 |
|
|
|
|
|
|
|
|
Net income (loss) per common share assuming dilution: |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.82 |
|
|
$ |
(0.63 |
) |
Discontinued operations |
|
|
(0.01 |
) |
|
|
4.48 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1.81 |
|
|
$ |
3.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic |
|
|
30,074 |
|
|
|
29,771 |
|
Assuming dilution |
|
|
30,460 |
|
|
|
29,771 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
55,220 |
|
|
$ |
114,767 |
|
Adjustments to reconcile net income to net cash provided by (used for) operating activities: |
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations |
|
|
369 |
|
|
|
(61,019 |
) |
Gain on sale of discontinued operations |
|
|
|
|
|
|
(72,289 |
) |
Loss on redemption of Notes |
|
|
|
|
|
|
21,733 |
|
Depreciation and amortization |
|
|
13,365 |
|
|
|
8,065 |
|
Share-based compensation expense |
|
|
2,231 |
|
|
|
1,513 |
|
Excess tax benefit on exercise of stock options |
|
|
(23 |
) |
|
|
|
|
Foreign exchange gain |
|
|
(646 |
) |
|
|
(468 |
) |
Minority partners share of income |
|
|
12,742 |
|
|
|
1,961 |
|
Unrealized gain on cobalt forward purchase contracts |
|
|
(5,782 |
) |
|
|
|
|
Interest income received from consolidated joint venture partner |
|
|
3,776 |
|
|
|
|
|
Other non-cash items |
|
|
(2,753 |
) |
|
|
(6,080 |
) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(59,656 |
) |
|
|
(27,413 |
) |
Inventories |
|
|
(86,921 |
) |
|
|
(29,414 |
) |
Accounts payable |
|
|
33,080 |
|
|
|
33,638 |
|
Other, net |
|
|
(18,652 |
) |
|
|
20,160 |
|
|
|
|
|
|
|
|
Net cash (used for) provided by operating activities |
|
|
(53,650 |
) |
|
|
5,154 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment |
|
|
(6,725 |
) |
|
|
(3,660 |
) |
Proceeds from loans to consolidated joint venture partner |
|
|
4,514 |
|
|
|
|
|
Proceeds from loans to non-consolidated joint ventures |
|
|
|
|
|
|
3,104 |
|
Net proceeds from the sale of the Nickel business |
|
|
|
|
|
|
411,142 |
|
Transaction fees paid related to acquisitions made in prior periods |
|
|
(3,375 |
) |
|
|
|
|
Expenditures for software |
|
|
(601 |
) |
|
|
(795 |
) |
|
|
|
|
|
|
|
Net cash (used for) provided by investing activities |
|
|
(6,187 |
) |
|
|
409,791 |
|
|
Financing activities |
|
|
|
|
|
|
|
|
Payments of revolving line of credit and long-term debt |
|
|
(23,046 |
) |
|
|
(400,000 |
) |
Borrowings from revolving line of credit |
|
|
70,000 |
|
|
|
|
|
Premium for redemption of Notes |
|
|
|
|
|
|
(18,500 |
) |
Distributions to joint venture partners |
|
|
(14,934 |
) |
|
|
(1,350 |
) |
Proceeds from exercise of stock options |
|
|
818 |
|
|
|
248 |
|
Excess tax benefit on exercise of stock options |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
|
32,861 |
|
|
|
(419,602 |
) |
Effect of exchange rate changes on cash |
|
|
1,679 |
|
|
|
1,109 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Decrease from continuing operations |
|
|
(25,297 |
) |
|
|
(3,548 |
) |
Discontinued operations net cash provided by operating activities |
|
|
|
|
|
|
49,623 |
|
Discontinued operations net cash used for investing activities |
|
|
|
|
|
|
(1,540 |
) |
Balance at the beginning of the period |
|
|
100,187 |
|
|
|
282,288 |
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
74,890 |
|
|
$ |
326,823 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements
4
OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Common Stock Shares Outstanding, net of Treasury Shares |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
30,061 |
|
|
|
29,740 |
|
Shares issued under share-based compensation plans |
|
|
21 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
30,082 |
|
|
|
29,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Dollars |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
301 |
|
|
$ |
297 |
|
Shares issued under share-based compensation plans |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
301 |
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in Excess of Par Value |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
554,933 |
|
|
|
533,818 |
|
Shares issued under share-based compensation plans employees |
|
|
817 |
|
|
|
2,583 |
|
Shares issued under share-based compensation plans non-employee directors |
|
|
102 |
|
|
|
|
|
Excess tax benefit on the exercise of stock options |
|
|
23 |
|
|
|
|
|
Share-based compensation |
|
|
2,129 |
|
|
|
2,181 |
|
|
|
|
|
|
|
|
|
|
|
558,004 |
|
|
|
538,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
467,726 |
|
|
|
221,310 |
|
Adoption of EITF No. 06-10 in 2008 and FIN No. 48 in 2007 |
|
|
(193 |
) |
|
|
(450 |
) |
Net income |
|
|
55,220 |
|
|
|
114,767 |
|
|
|
|
|
|
|
|
|
|
|
522,753 |
|
|
|
335,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
(2,239 |
) |
|
|
(2,239 |
) |
|
|
|
|
|
|
|
|
|
|
(2,239 |
) |
|
|
(2,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
7,665 |
|
|
|
28,893 |
|
Foreign currency translation |
|
|
9,381 |
|
|
|
(15,165 |
) |
Reclassification of hedging activities into earnings, net of tax |
|
|
|
|
|
|
(9,824 |
) |
Unrealized loss on cash flow hedges, net of tax benefit of $117 and $25 in 2008 and 2007, respectively |
|
|
(333 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
16,713 |
|
|
|
3,834 |
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
$ |
1,095,532 |
|
|
$ |
876,102 |
|
|
|
|
|
|
|
|
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
OM Group, Inc. (OMG or the Company) is a diversified global developer, producer and marketer of
value-added specialty chemicals and advanced materials that are essential to complex chemical and
industrial processes.
The consolidated financial statements include OMG and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation. The Company has a 55% interest in a joint
venture that has a smelter in the Democratic Republic of Congo (the DRC). The joint venture is
consolidated because the Company has a controlling interest in the joint venture. Minority interest
is recorded for the remaining 45% interest.
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 presentation of the financial position of the
Company at March 31, 2008 and the results of its operations, its cash flows and changes in
stockholders equity for the three months ended March 31, 2008 and 2007 have been included. The
balance sheet at December 31, 2007 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, 2007.
On October 1, 2007, the Company completed the acquisition of Borchers GmbH (Borchers). On
December 31, 2007, the Company completed the acquisition of the Electronics businesses (REM) of
Rockwood Specialties Group, Inc. The financial position, results of operations and cash flows of
Borchers are included in the Unaudited Condensed Consolidated Financial Statements from the date of
acquisition. The financial position of REM was included in the Companys balance sheet at December
31, 2007. The results of operations and cash flows of REM are included in the Unaudited Condensed
Consolidated Financial Statements from January 1, 2008.
Unless otherwise indicated, all disclosures and amounts in the Notes to Unaudited Condensed
Consolidated Financial Statements relate to the Companys continuing operations.
Note 2 Recently Issued Accounting Standards
Accounting Standards adopted in 2008:
SFAS No. 157: In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This
Statement clarifies the definition of fair value, establishes a framework for measuring fair value,
and expands the disclosures on fair value measurements. SFAS No. 157 does not require any new fair
value measurements. It only applies to accounting pronouncements that already require or permit
fair value measures, except for standards that relate to share-based payments (SFAS No. 123R Share
Based Payment.)
SFAS No. 157s valuation techniques are based on observable and unobservable inputs. Observable
inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect
market assumptions. SFAS No. 157 classifies these inputs into the following hierarchy:
Level 1 Inputs Quoted unadjusted prices for identical instruments in active markets to
which the Company has access at the date of measurement.
Level 2 Inputs Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in
6
markets that are not active; and model-derived valuations whose inputs are observable or
whose significant value drivers are observable.
Level 3 Inputs Model derived valuations in which one or more significant inputs or
significant value drivers are unobservable. Unobservable inputs are those inputs that reflect
the Companys own assumptions that market participants would use to price the asset or
liability based on the best available information.
In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, The Effective Date of
FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS No. 157
for non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually).
As of January 1, 2008, in accordance with this FSP, the Company has adopted the provisions of
SFAS No. 157 with respect to financial assets and liabilities that are measured at fair value
within the financial statements. The adoption of SFAS No. 157 did not have a material impact on the
Companys results of operations or financial position. The provisions of FAS 157 have not been
applied to non-financial assets and non-financial liabilities. The Company is currently assessing
the impact of SFAS No. 157 for non-financial assets and non-financial liabilities on its results of
operations, financial position and related disclosure.
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 does not affect any existing
pronouncements that require assets and liabilities to be carried at fair value, nor does it
eliminate disclosure requirements included under existing pronouncements. The Company adopted SFAS
No. 159 on January 1, 2008 and did not elect to report any additional assets or liabilities at fair
value that were not already reported at fair value. Therefore, the adoption of SFAS No. 159 did not
have any impact on the Companys results of operations, financial position or related disclosures.
EITF No. 06-4: In June 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF
No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements, which requires the application of the provisions of SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions to endorsement
split-dollar life insurance arrangements. SFAS No. 106 requires the Company to recognize a
liability for the discounted future benefit obligation that the Company will have to pay upon the
death of the underlying insured employee. An endorsement-type arrangement generally exists when the
Company owns and controls all incidents of ownership of the underlying policies. The Company
adopted EITF No. 06-4 on January 1, 2008. The adoption did not impact have any impact on the
Companys results of operations, financial position or related disclosures.
EITF No. 06-10: In November 2006, the FASB issued EITF Issue No. 06-10, Accounting for Deferred
Compensation and Postretirement Benefits Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements. This Statement establishes that an employer should recognize a liability
for the postretirement benefit related to a collateral assignment split-dollar life insurance
arrangement in accordance with either FASB Statement No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, or Accounting Principles Board Opinion No. 12,
Omnibus Opinion, if, based on the substantive agreement with the employee, the employer has agreed
to maintain a life insurance policy during the postretirement period or provide a death benefit.
The EITF also concluded that an employer should recognize and measure an associated asset based on
the nature and substance of the collateral assignment split-dollar life insurance arrangement. The
Company has one arrangement with a former executive under which the Company has agreed to fund a
life insurance policy during the former executives retirement. The insurance policy is a
collateral assignment split-dollar agreement owned by a trust established by the former executive.
The collateral assignment provides the Company with an interest in the policy equal to its
cumulative premium payments. The Company adopted EITF No. 06-10 on January 1, 2008. The effect of
adoption was a $0.2 million cumulative effect adjustment to retained earnings at January 1, 2008.
Accounting Standards Not Yet Adopted
SFAS No. 158: In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and
132(R). The Company adopted the requirement to recognize the funded status of a defined benefit
postretirement plan as an asset or liability in its Consolidated Balance Sheet as of December 31,
2006. The additional requirement to measure plan assets and benefit obligations as of the date of
the employers fiscal
7
year-end consolidated balance sheet is effective for fiscal years ending after December 15, 2008.
The Company currently uses October 31st as the measurement date and will change to December
31st, the date of its fiscal year-end, during the fourth quarter of 2008.
SFAS No. 158 allows employers to choose one of two transition methods to adopt the measurement date
requirement. The Company chose to adopt the measurement date requirement in 2008 using the 14-month
approach. Under this approach, an additional two months of net periodic benefit cost covering the
period between the previous measurement date and the December 31st measurement date will
be recognized as an adjustment to equity in the fourth quarter of 2008. The adoption of this
measurement date requirement is not expected to have a material impact on the Companys results of
operations, financial position and related disclosure.
SFAS No. 160: In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51. SFAS No.
160 requires (i) that noncontrolling (minority) interests be reported as a component of
shareholders equity, (ii) that net income attributable to the parent and to the noncontrolling
interest be separately identified in the consolidated statement of operations, (iii) that changes
in a parents ownership interest while the parent retains its controlling interest be accounted for
as equity transactions, (iv) that any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair value, and (v) that sufficient
disclosures are provided that clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. SFAS No. 160 is effective for annual periods
beginning after December 15, 2008 and should be applied prospectively. However, the presentation
and disclosure requirements of the statement shall be applied retrospectively for all periods
presented. The Company has not determined the effect, if any, the adoption of SFAS No. 160 will
have on its results of operations, financial position and related disclosure.
SFAS No. 161: On March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities an Amendment of FASB Statement 133. SFAS No. 161 enhances
required disclosures regarding derivatives and hedging activities, including enhanced disclosures
regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related
hedged items are accounted for under SFAS No.133, Accounting for Derivative Instruments and
Hedging Activities; and (c) derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 will
change the disclosures related to derivative instruments held by the Company.
SFAS No. 141R: In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations. SFAS No. 141R will change how business acquisitions are accounted for and will
impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures the
identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141R requires restructuring and acquisition-related costs to be
recognized separately from the acquisition and establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS No. 141R is
effective for fiscal years beginning after December 15, 2008. SFAS No. 141R must be applied
prospectively to business combinations for which the acquisition date is on or after the adoption
date. Early adoption is not permitted.
Note 3 Acquisitions
On December 31, 2007, the Company completed the acquisition of REM. The REM businesses, which
had combined sales of approximately $200 million in 2007 and employ approximately 700 people
worldwide, include its Printed Circuit Board (PCB) business, its Ultra-Pure Chemicals (UPC)
business, and its Photomasks business. The acquired REM businesses supply customers with chemicals
used in the manufacture of semiconductors and printed circuit boards as well as photo-imaging masks
primarily for semiconductor and photovoltaic manufacturers and have locations in the United States,
the United Kingdom, France, Taiwan, Singapore and China. The acquisition of REM also provides new
products and expanded distribution channels for the Companys Electronic Chemicals offerings.
PCB produces specialty and proprietary chemicals used in the manufacture of printed circuit boards
widely used in computers, communications, military/aerospace, automotive, industrial and consumer
electronics applications. UPC develops and manufactures a wide range of ultra-pure chemicals used
in the manufacture of electronic and computer components such as semiconductors, silicon chips,
wafers and liquid crystal displays. Photomasks manufactures photo-imaging masks (high-purity quartz
or glass plates containing precision, microscopic images of integrated circuits) and reticles for
the semiconductor, optoelectronics and microelectronics industries under the Compugraphics brand
name.
8
The total purchase price of $321.0 million, net of cash acquired and including $4.9 million of
transaction fees, was funded with existing cash. The purchase price is subject to customary
post-closing adjustment.
Under SFAS No. 141, Business Combinations, the cost of the acquired business was allocated to the
assets acquired and liabilities assumed. In connection with this allocation, the Company recorded a
step-up to fair value related to acquired inventories of $1.7 million to reflect manufacturing
profit in inventory at the date of the acquisition. This amount was expensed in the first quarter
of 2008 as the acquired inventory was sold in the normal course of business.
The excess of the total purchase price over the estimated fair value of the net assets acquired has
been allocated to goodwill and is estimated to be approximately $197.6 million as of March 31,
2008. The allocation of the purchase price to the assets acquired and liabilities assumed is
preliminary. When the Company completes its evaluation of the fair value of assets acquired and
liabilities assumed, including the valuation of any specifically identifiable intangible assets,
the allocation will be adjusted accordingly. Goodwill is not deductible for tax purposes.
The preliminary allocation at March 31, 2008 is summarized below:
|
|
|
|
|
Accounts receivable |
|
$ |
45,973 |
|
Inventory |
|
|
20,409 |
|
Other current assets |
|
|
23,612 |
|
Property, plant and equipment |
|
|
72,656 |
|
Other intangibles |
|
|
28,246 |
|
Other assets |
|
|
269 |
|
Goodwill |
|
|
197,572 |
|
|
|
|
|
Total assets acquired |
|
|
388,737 |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
24,446 |
|
Other current liabilities |
|
|
12,017 |
|
Other liabilities |
|
|
15,489 |
|
|
|
|
|
Total liabilities assumed |
|
|
51,952 |
|
|
|
|
|
Net assets acquired |
|
$ |
336,785 |
|
|
|
|
|
Cash acquired |
|
|
15,754 |
|
|
|
|
|
Purchase price, net of cash acquired |
|
$ |
321,031 |
|
|
|
|
|
On October 1, 2007, the Company completed the acquisition of Borchers, a European-based specialty
coatings additive supplier, with locations in France and Germany for approximately $20.7 million,
net of cash acquired. The Company incurred fees of approximately $1.2 million associated with this
transaction.
Note 4 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. 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 cash proceeds of $413.3 million. In addition, the
agreement provided for a final purchase price adjustment (primarily related to working capital for
the net assets sold), which was determined to be $83.2 million, and was received by the Company in
the second quarter of 2007.
The following table sets forth the components of the proceeds from the sale of the Nickel business:
9
|
|
|
|
|
Initial proceeds |
|
$ |
413.3 |
|
Final purchase price adjustment |
|
|
83.2 |
|
Transaction costs |
|
|
(6.5 |
) |
|
|
|
|
|
|
$ |
490.0 |
|
|
|
|
|
The agreement also provided 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 Interest income on the Unaudited Condensed Statements of
Consolidated Income.
In the three months ended March 31, 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.
Discontinued operations includes share-based incentive compensation expense related to Nickel
management that previously had been included in corporate expenses. No interest expense has been
allocated to discontinued operations.
Income (loss) from discontinued operations consisted of the following for the three months ended
March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
|
|
|
$ |
193,091 |
|
|
Income (loss) before income taxes and minority interest |
|
$ |
(243 |
) |
|
$ |
80,503 |
|
Income tax expense |
|
|
126 |
|
|
|
19,484 |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
(369 |
) |
|
|
61,019 |
|
Gain on sale of discontinued operations, net of tax |
|
|
|
|
|
|
72,289 |
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations |
|
$ |
(369 |
) |
|
$ |
133,308 |
|
|
|
|
|
|
|
|
The loss from discontinued operations for the three months ended March 31, 2008 is primarily due to
translating Euro-denominated liabilities to US dollars.
Note 5 Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials and supplies |
|
$ |
235,963 |
|
|
$ |
199,901 |
|
Work-in-process |
|
|
43,847 |
|
|
|
32,565 |
|
Finished goods |
|
|
217,833 |
|
|
|
180,968 |
|
|
|
|
|
|
|
|
|
|
$ |
497,643 |
|
|
$ |
413,434 |
|
|
|
|
|
|
|
|
Note 6 Debt
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 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. During the
first quarter of 2008, the Company borrowed under the Revolver. The outstanding Revolver balance
was $47.0 million at March 31, 2008. The Revolver provides for interest-only payments during its
term, with principal due at maturity on December 20, 2010.
10
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 $1.3 million at March 31,
2008 and December 31, 2007. The Company also had a $0.4 million and $0.3 million short-term note
payable at March 31, 2008 and December 31, 2007, respectively.
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Revolving credit agreement |
|
$ |
47,000 |
|
|
$ |
|
|
Notes payable bank |
|
|
1,679 |
|
|
|
1,649 |
|
|
|
|
|
|
|
|
|
|
|
48,679 |
|
|
|
1,649 |
|
Less: Short-term debt |
|
|
363 |
|
|
|
347 |
|
Less: Current portion of long-term debt |
|
|
147 |
|
|
|
166 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
48,169 |
|
|
$ |
1,136 |
|
|
|
|
|
|
|
|
On March 7, 2007, the Company redeemed the entire $400.0 million of its outstanding 9.25% Senior
Subordinated Notes due 2011 (the Notes) at a redemption price of 104.625% of the principal
amount, or $418.5 million, plus accrued interest of $8.4 million. The loss on redemption of the
Notes was $21.7 million, and consisted 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.
Note 7 Financial Instruments
Cash Flow Hedges
The Company has certain copper swaps that are designated as cash flow hedges. The Company must
assess, both at inception of the hedge transaction and on an ongoing basis, whether the hedge is
highly effective in offsetting change in the cash flow of the hedged item. The effective portion of
the gain or loss from the financial instrument is initially reported as a component of Accumulated
other comprehensive income in stockholders equity and subsequently reclassified to earnings when
the hedged item affects income. Any ineffective portions of such cash flow hedges are recognized
immediately in earnings. In the first three months of 2008 and 2007, there was no impact on
earnings resulting from hedge ineffectiveness. The estimated fair value of open contracts at March
31, 2008, generated an unrealized loss of approximately $0.3 million (net of $0.1 million deferred
tax asset), which is included in Accumulated other comprehensive income. At March 31, 2008, the
notional quantity of open contracts designated as cash flow hedges under SFAS No. 133 was 1.3
million pounds. The Company had no cash flow hedges at December 31, 2007. At March 31, 2008, the
related payable is recorded in Other current liabilities in the Unaudited Condensed Consolidated
Balance Sheet. All open contracts at March 31, 2008 mature no later than the second quarter of
2008.
Fair Value Hedges
The Company has certain cobalt forward purchase contracts that are designated as fair value hedges.
For fair value hedges, changes in the fair value of the derivative instrument will be offset
against the change in fair value of the hedged item through earnings. Any ineffective portions of
such fair value hedges are recognized immediately in earnings. In the first three months of 2008
and 2007, there was no impact on earnings resulting from hedge ineffectiveness. At March 31, 2008,
the notional quantity of open contracts designated as fair value hedges under SFAS No. 133 was 0.4
million pounds. The Company had no fair value hedges at December 31, 2007. The related $0.1 million
receivable is recorded in Other current assets in the Unaudited Condensed Consolidated Balance
Sheets. All open contracts at March 31, 2008 mature no later than the third quarter of 2008.
Other Forward Contracts
During 2007, the Company entered into cobalt forward purchase contracts to establish a fixed margin
and mitigate the risk of price volatility related to the planned sale during the second quarter of
2008 of cobalt-containing finished products that are priced based on a formula which includes a
fixed cobalt price component. These forward purchase contracts have not been designated as hedging
instruments under SFAS No. 133. Accordingly, these contracts, with a notional quantity of 0.6 million
pounds, are adjusted to fair value as of the end of each reporting period, with the gain or loss
recorded in cost of products sold. Fair value is estimated based on the expected future cash flows
discounted to present value. Future cash flows are estimated using a theoretical forward price when
quoted forward prices are not available. The Company recorded a $5.8 million gain in the three
months ended March 31, 2008, in addition to
11
the $6.7 million gain in the fourth quarter of 2007, related to these contracts. These adjustments
to fair value had no cash impact in 2007 or 2008 as the contracts will be net settled with the
counterparty in the second quarter of 2008. These contracts will continue to be marked to fair
value until settlement, resulting in additional gains or losses based on changes in the cobalt
reference price. The ultimate gain or loss on the forward purchase contracts will be realized upon
the net settlement with the counterparty in the second quarter of 2008 when the underlying
transactions are scheduled to occur.
Note 8 Fair Value Disclosures
The fair values of derivative assets and liabilities based on the level of inputs are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable |
|
Description |
|
March 31, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
Inputs (Level 3) |
|
Derivative Assets |
|
$ |
12,540 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,540 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical Liabilities |
|
|
Observable Inputs |
|
|
Unobservable |
|
Description |
|
March 31, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
Inputs (Level 3) |
|
Derivative Liabilities |
|
$ |
(449 |
) |
|
$ |
|
|
|
$ |
(449 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(449 |
) |
|
$ |
|
|
|
$ |
(449 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses significant other observable inputs to value derivative instruments used to hedge
copper price volatility and therefore they are classified within Level 2 of the valuation
hierarchy. Cobalt forward purchase contracts are classified as Level 3 as their valuation is based
on the expected future cash flows discounted to present value. Future cash flows are estimated
using a theoretical forward price as quoted forward prices are not available.
The following table provides a reconciliation of derivatives measured at fair value on a recurring
basis which used Level 3 or significant unobservable inputs for the period of January 1, 2008 to
March 31, 2008:
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Significant Unobservable Inputs |
|
|
|
(Level 3) |
|
|
|
Derivatives |
|
January 1, 2008 |
|
$ |
6,734 |
|
Total gains or losses (realized or unrealized): |
|
|
|
|
Included in earnings |
|
|
5,806 |
|
Included in other comprehensive income |
|
|
|
|
Purchases, issuances, and settlements |
|
|
|
|
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
|
|
March 31, 2008 |
|
$ |
12,540 |
|
|
|
|
|
12
The $5.8 million of unrealized gains presented in the table above relate to derivatives that are
still held at March 31, 2008, and are included in Cost of products sold in the Unaudited Condensed
Consolidated Statement of Consolidated Income.
Note 9 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 income from continuing operations before income
taxes and minority interest. 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 from continuing operations before income taxes and minority interest consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
577 |
|
|
$ |
(30,539 |
) |
Outside the United States |
|
|
94,899 |
|
|
|
53,933 |
|
|
|
|
|
|
|
|
|
|
$ |
95,476 |
|
|
$ |
23,394 |
|
|
|
|
|
|
|
|
The Companys effective income tax rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
Effective income tax rate |
|
|
28.4 |
% |
|
|
170.9 |
% |
The effective income tax rate for the first quarter of 2007 included discrete items related to the
repatriation of foreign earnings and the redemption of the Notes. Specifically, 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 Companys effective income tax rate would have been 19.5% for the first quarter
2007. Excluding the discrete items, the effective income tax rates for 2007 and 2008 are lower
than the U.S. Statutory rate due primarily to income earned in foreign tax jurisdictions with lower
statutory tax rates than the U.S., (primarily Finland), tax holidays in Malaysia and China, and the
recognition of tax benefits for domestic losses. In the first quarter of 2008, these factors were
partially offset by tax expense related to planned foreign earnings repatriation during 2008.
In connection with an investment incentive arrangement, the Company had a tax holiday from income
taxes in Malaysia that expired on December 31, 2006. During the second quarter of 2007, the
Malaysian tax holiday was extended for an additional five years, retroactive to January 1, 2007.
The tax holiday reduced income tax expense for the first quarter of 2008 by $1.9 million. Had the
tax holiday been in effect in the first quarter 2007, it would have reduced tax expense in that
quarter by $2.7 million. The benefit of the tax holiday on net income per diluted share was
approximately $0.06 in the first quarter 2008.
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, the
Company recognized a $0.5 million liability 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 $10.4 million of uncertain tax positions, all of which would affect the Companys
effective income tax rate if recognized, and of which $10.2 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 Sheet at March 31, 2008. There were no material changes to
the liability for uncertain tax positions in the three months ended March 31, 2008.
13
The Company accrues interest related to uncertain tax positions and penalties as a component of
income tax expense. The Company had $0.7 million and $0.6 million accrued at March 31, 2008 and
December 31, 2007, respectively, for the payment of interest and penalties.
Included in the liability for uncertain tax positions at March 31, 2008, is $0.2 million for which
it is reasonably possible that the liability will decrease due to settlement with the tax
authorities and expiration of statutes of limitation within the next 12 months.
Note 10 Pension and Other Postretirement Benefit Plans
The Company sponsors a defined contribution plan covering substantially all U.S. employees. Under
this plan, the Company contributes 3.5% of employee compensation unconditionally and matches 100%
of participants contributions up to the first three percent of contributions and 50% on the next
2% of participants contributions. Contributions are directed by the employee into various
investment options. The Company maintains additional defined contribution plans in certain
locations outside the United States. The Company also sponsors an unfunded 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. Certain non-U.S. employees are
covered under defined benefit plans. These non-U.S. plans are not significant and relate to
liabilities of the acquired Borchers entities and one REM location. 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 retirees in the United States. The Company uses an October 31 measurement
date for both its pension and postretirement benefit plans.
14
Set forth below is a detail of the net periodic expense for the pension and other postretirement
defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Pension Benefits |
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
362 |
|
|
$ |
334 |
|
Service cost |
|
|
28 |
|
|
|
|
|
Amortization of unrecognized net loss |
|
|
70 |
|
|
|
75 |
|
Expected return on plan assets |
|
|
(224 |
) |
|
|
(197 |
) |
|
|
|
|
|
|
|
Total expense |
|
$ |
236 |
|
|
$ |
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
28 |
|
|
$ |
21 |
|
Interest cost |
|
|
81 |
|
|
|
66 |
|
Amortization of unrecognized net loss |
|
|
11 |
|
|
|
|
|
Amortization of unrecognized prior service cost |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Total expense |
|
$ |
130 |
|
|
$ |
97 |
|
|
|
|
|
|
|
|
Note 11 Earnings Per Share
The following table sets forth the computation of basic and diluted income per common share from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Income (loss) from continuing operations |
|
$ |
55,589 |
|
|
$ |
(18,541 |
) |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
30,074 |
|
|
|
29,771 |
|
Dilutive effect of stock options and restricted stock |
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution |
|
|
30,460 |
|
|
|
29,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share from continuing operations basic |
|
$ |
1.85 |
|
|
$ |
(0.63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share from continuing operations assuming dilution |
|
$ |
1.82 |
|
|
$ |
(0.63 |
) |
|
|
|
|
|
|
|
15
The following table sets forth the computation of basic and diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
55,220 |
|
|
$ |
114,767 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
30,074 |
|
|
|
29,771 |
|
Dilutive effect of stock options and restricted stock |
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution |
|
|
30,460 |
|
|
|
29,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
1.84 |
|
|
$ |
3.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share assuming dilution |
|
$ |
1.81 |
|
|
$ |
3.85 |
|
|
|
|
|
|
|
|
Note 12 Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, Net |
|
|
|
|
|
|
Accumulated |
|
|
|
Foreign |
|
|
on Cash Flow |
|
|
Pension and |
|
|
Other |
|
|
|
Currency |
|
|
Hedging |
|
|
Post-Retirement |
|
|
Comprehensive |
|
|
|
Translation |
|
|
Derivatives |
|
|
Obligation |
|
|
Income |
|
Balance at December 31, 2007 |
|
$ |
18,080 |
|
|
$ |
|
|
|
$ |
(10,415 |
) |
|
$ |
7,665 |
|
Current period credit (charge) |
|
|
9,381 |
|
|
|
(333 |
) |
|
|
|
|
|
|
9,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
$ |
27,461 |
|
|
$ |
(333 |
) |
|
$ |
(10,415 |
) |
|
$ |
16,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of related tax effects, for the three months ended March 31, 2008 and
2007 was $64.3 million and $89.7 million, respectively.
Note 13 Commitments and Contingencies
The Companys joint venture in the DRC received a letter, dated February 11, 2008, from the
Ministry of Mining of the government of the DRC. The letter contains the results of an
inter-ministerial review of the joint ventures contracts, which review was undertaken as part of a
broader examination of mining contracts in the DRC to determine whether any such contracts need to
be revisited and whether adjustments are recommended to be made. The joint venture has submitted
its response to the inquiries of the Ministry of Mining. The Company believes that any potential
adjustments are not reasonably likely to have a material adverse effect on its financial condition,
results of operations or cash flows.
During 2007, the Company became aware of two 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, and
certain VAT and/or Service Tax assessments. The Company has assessed the current 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, based on
exchange rates at March 31, 2008, would be up to $27.3 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
16
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, 2008 and December 31, 2007 the Company has recorded environmental
liabilities of $4.2 million and $4.9 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 14 Share-Based Compensation
On May 8, 2007, the stockholders of the Company approved the 2007 Incentive Compensation Plan (the
2007 Plan). The 2007 Plan supersedes and replaces the 1998 Long-Term Incentive Compensation Plan
(the 1998 Plan) and the 2002 Stock Incentive Plan (the 2002 Plan). The 1998 Plan and 2002 Plan
terminated upon stockholder approval of the 2007 Plan, such that no further grants may be made
under either the 1998 Plan or the 2002 Plan. The terminations will not affect awards already
outstanding under the 1998 Plan or the 2002 Plan, which consist of options and restricted stock
awards. All options outstanding under each of the 1998 Plan and the 2002 Plan have 10-year terms
and have an exercise price of not less than the per share fair market value, measured by the
average of the high and low price of the Companys common stock on the NYSE on the date of grant.
Under the 2007 Plan, the Company may grant stock options, stock appreciation rights, restricted
stock awards and phantom stock and restricted stock unit awards to selected employees and
non-employee directors. The 2007 Plan also provides for the issuance of common stock to
non-employee directors as all or part of their annual compensation for serving as directors, as may
be determined by the board of directors. The total number of shares of common stock available for
awards under the 2007 Plan (including any annual stock issuances made to non-employee directors) is
3,000,000. The 2007 Plan provides that no more than 1,500,000 shares of common stock may be the
subject of awards that are not stock options or stock appreciation rights. In addition, no more
than 250,000 shares of common stock may be awarded to any one person in any calendar year, whether
in the form of stock options, restricted stock or another form of award. The 2007 Plan provides
that all options granted must have an exercise price of not less than the per share fair market
value on the date of grant and that no option may have a term of more than ten years.
The Unaudited Condensed Statements of Consolidated Income include share-based compensation expense
for option grants and restricted stock awards granted to employees as a component of Selling,
general and administrative expenses of $2.1 million and $1.5 million for the three months ended
March 31, 2008 and 2007, 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 of all unvested stock options and time-based and performance-based 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
for the three months ended March 31, 2007.
At March 31, 2008, there was $13.2 million of total unrecognized compensation expense related to
nonvested share-based awards. That cost is expected to be recognized as follows: $5.5 million in
the remaining nine months of 2008, $5.3 million in 2009, $2.1 million in 2010 and $0.3 million in
2011. There is no unrecognized compensation expense related to the Nickel business. Unearned
compensation expense is recognized over the vesting period for the particular grant. Total
unrecognized compensation cost will be adjusted for future changes in actual and estimated
forfeitures.
The Company received cash payments of $0.8 million and $0.2 million in the first three months of
2008 and 2007, respectively, in connection with the exercise of stock options. 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.
Beginning in the third quarter of 2007, non-employee directors of the Company are paid a portion of
their annual retainer in unrestricted shares of common stock. For purposes of determining the
number of shares of common stock to be issued, the 2007 Plan provides that shares are to be valued
at the average of the high and low sale price of the Companys common stock on the NYSE on the last
trading day of the quarter. The Company issued 1,778 shares to non-employee directors during the
first three months of 2008.
17
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. The Company
granted stock options to purchase 163,675 and 184,750 shares of common stock during the first three
months of 2008 and 2007, respectively. 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 three months of 2008 and 2007 was estimated at
the date of grant using a Black-Scholes options pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Risk-free interest rate |
|
|
2.6 |
% |
|
|
4.7 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
Volatility factor of Company common stock |
|
|
0.47 |
|
|
|
0.47 |
|
Weighted-average expected option life (years) |
|
|
6.0 |
|
|
|
6.0 |
|
Weighted-average grant-date fair value |
|
$ |
28.09 |
|
|
$ |
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 simplified method allowed by Staff Accounting Bulletin (SAB) No. 110 as historical data was
not sufficient to provide a reasonable estimate. 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, 2007 |
|
|
364,343 |
|
|
$ |
18.46 |
|
Granted during the first quarter of 2008 |
|
|
163,675 |
|
|
$ |
28.09 |
|
Granted during the first quarter of 2007 |
|
|
184,750 |
|
|
$ |
26.24 |
|
Vested during the first quarter of 2008 |
|
|
70,450 |
|
|
$ |
30.92 |
|
Vested during the first quarter of 2007 |
|
|
27,166 |
|
|
$ |
14.18 |
|
Non-vested at March 31, 2008 |
|
|
457,568 |
|
|
$ |
20.67 |
|
Non-vested at March 31, 2007 |
|
|
596,590 |
|
|
$ |
16.02 |
|
The total intrinsic value of options exercised was $0.4 million during the first three months of
2008 and 2007. The intrinsic value of an option represents the amount by which the market value of
the stock exceeds the exercise price of the option.
18
A summary of the Companys stock option activity for the first three months of 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at January 1, 2008 |
|
|
755,682 |
|
|
$ |
34.88 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
163,675 |
|
|
|
58.46 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(20,017 |
) |
|
|
40.85 |
|
|
|
|
|
|
|
|
|
Expired unexercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
899,340 |
|
|
$ |
39.04 |
|
|
|
7.92 |
|
|
$ |
14,700,361 |
|
Vested or expected to vest at March 31, 2008 |
|
|
885,610 |
|
|
$ |
38.86 |
|
|
|
7.90 |
|
|
$ |
14,622,171 |
|
Exercisable at March 31, 2008 |
|
|
441,772 |
|
|
$ |
32.92 |
|
|
|
7.11 |
|
|
$ |
9,708,599 |
|
Restricted Stock Performance-Based Awards
During the first three months of 2008, the Company awarded a total of 57,550 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. The shares
awarded during the first three months of 2008 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, 2010.
During the first three months of 2007, the Company awarded a total of 86,854 shares of
performance-based restricted stock that vest subject to the Companys financial performance. Of
such shares, 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 during any one of the years in the three-year period ending
December 31, 2009.
The value of the performance-based restricted stock awards 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 applicable 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 three months of
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Non-vested at January 1, 2008 |
|
|
171,064 |
|
|
$ |
35.46 |
|
Granted |
|
|
57,550 |
|
|
|
58.41 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2008 |
|
|
228,614 |
|
|
$ |
41.24 |
|
Expected to vest at March 31, 2008 |
|
|
178,716 |
|
|
|
|
|
19
Restricted Stock Time-Based Awards
The Company awarded 16,675 and 24,360 shares of time-based restricted stock during the first three
months of 2008 and 2007, respectively, which shares 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 respective dates of grant, was $1.0 million for the 2008 awards and $1.2
million for the 2007 awards. Compensation expense is being recognized ratably over the vesting
period. Upon any change in control of the Company, as defined in the applicable 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.
A summary of the Companys time-based restricted stock awards for the first three months of 2008 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2008 |
|
|
209,504 |
|
|
$ |
28.25 |
|
Granted |
|
|
16,675 |
|
|
|
58.42 |
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2008 |
|
|
226,179 |
|
|
$ |
30.47 |
|
Expected to vest at March 31, 2008 |
|
|
225,398 |
|
|
|
|
|
Note 15 Reportable Segments
To better
align its transformation and growth strategy, including two strategic
acquisitions completed in 2007, the Company, effective January 1,
2008, reorganized its management structure and external reporting
around two segments: Advanced Materials and Specialty Chemicals. The
Advanced Materials segment consists of Inorganics, the DRC smelter
joint venture and metal resale. The Specialty Chemicals segment is
comprised of Electronic Chemicals, Ultra Pure Chemicals, Photomasks
and Advanced Organics. The corresponding information for 2007 has
been reclassified to conform to the current year reportable segment
presentation.
Corporate is comprised of general and administrative expenses not allocated to the Advanced
Materials or Specialty Chemicals segments.
As a result of the sale of the Nickel business on March 1, 2007, the Companys Unaudited Condensed
Consolidated 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.
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 24% 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.
20
The following table reflects the results of the Companys current reportable segments:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Business Segment Information |
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
Advanced Materials |
|
$ |
332,385 |
|
|
$ |
151,432 |
|
Specialty Chemicals |
|
|
149,114 |
|
|
|
66,719 |
|
Eliminations |
|
|
(704 |
) |
|
|
(1,955 |
) |
|
|
|
|
|
|
|
|
|
$ |
480,795 |
|
|
$ |
216,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
Advanced Materials |
|
$ |
95,319 |
|
|
$ |
47,201 |
|
Specialty Chemicals |
|
|
8,454 |
|
|
|
7,976 |
|
Corporate |
|
|
(9,439 |
) |
|
|
(8,351 |
) |
Eliminations |
|
|
300 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
$ |
94,634 |
|
|
$ |
46,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
(360 |
) |
|
$ |
(7,105 |
) |
Interest income |
|
|
466 |
|
|
|
5,198 |
|
Loss on redemption of Notes |
|
|
|
|
|
|
(21,733 |
) |
Foreign exchange gain |
|
|
646 |
|
|
|
468 |
|
Other income (expense), net |
|
|
90 |
|
|
|
(246 |
) |
|
|
|
|
|
|
|
|
|
$ |
842 |
|
|
$ |
(23,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and minority interest |
|
$ |
95,476 |
|
|
$ |
23,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant & equipment |
|
|
|
|
|
|
|
|
Advanced Materials |
|
|
4,879 |
|
|
|
3,019 |
|
Specialty Chemicals |
|
|
1,846 |
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
$ |
6,725 |
|
|
$ |
3,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Advanced Materials |
|
$ |
6,389 |
|
|
$ |
6,223 |
|
Specialty Chemicals |
|
|
6,716 |
|
|
|
1,604 |
|
Corporate |
|
|
260 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
$ |
13,365 |
|
|
$ |
8,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Total assets |
|
|
|
|
|
|
|
|
Advanced Materials |
|
$ |
879,875 |
|
|
$ |
756,938 |
|
Specialty Chemicals |
|
|
668,812 |
|
|
|
680,139 |
|
Corporate |
|
|
53,868 |
|
|
|
32,581 |
|
Eliminations |
|
|
(151 |
) |
|
|
(448 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,602,404 |
|
|
$ |
1,469,210 |
|
|
|
|
|
|
|
|
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a diversified global developer, producer and marketer of value-added specialty
chemicals and advanced materials that are essential to complex chemical and industrial processes.
The Company believes it is the worlds largest refiner of cobalt and producer of cobalt-based
specialty products.
The Company is executing a deliberate and aggressive strategy to grow through continued product
innovation, as well as tactical and strategic acquisitions. The strategy is part of a
transformational process to leverage the Companys core strengths in developing and producing
value-added specialty products for dynamic markets while reducing the impact of metal price
volatility on financial results.
The strategy is designed to allow the Company to deliver sustainable and profitable volume growth
in order to drive consistent financial performance and enhance the Companys ability to continue to
build long-term shareholder value. During 2007, the Company completed three important transactions
in connection with this long-term strategy:
|
|
|
On March 1, 2007, the Company completed the sale of its Nickel business. |
|
|
|
|
On October 1, 2007, the Company completed the acquisition of Borchers. |
|
|
|
|
On December 31, 2007, the Company completed the acquisition of REM. |
To better
align its transformation and growth strategy, including two strategic
acquisitions completed in 2007, the Company, effective January 1,
2008, reorganized its management structure and external reporting
around two segments: Advanced Materials and Specialty Chemicals. The
Advanced Materials segment consists of Inorganics, the DRC smelter
joint venture and metal resale. The Specialty Chemicals segment is
comprised of Electronic Chemicals, Ultra Pure Chemicals, Photomasks
and Advanced Organics. The corresponding information for 2007 has
been reclassified to conform to the current year reportable segment
presentation.
The Advanced Materials segment manufactures inorganics products using unrefined cobalt and other
metals and serves the battery, powder metallurgy, ceramic and chemical end markets by providing
functional characteristics critical to the success of our customers products. These products
improve the electrical conduction of rechargeable batteries used in cellular phones, video cameras,
portable computers, power tools and hybrid electrical vehicles, and also strengthen and add
durability to diamond and machine cutting tools and drilling equipment use in construction, oil and
gas drilling, and quarrying.
The Specialty Chemicals segment consists of the following:
|
|
|
Electronic Chemicals: Electronic Chemicals develops products for the electronic packaging,
memory disk, general metal finishing and printed circuit board finishing markets and includes
the REM Printed Circuit Board (PCB) business. The acquired PCB business develops and
manufactures chemicals for the printed circuit board industry, such as oxide treatments,
electroplating additives, etching technology and electroless copper processes used in the
manufacture of printed circuit boards widely used in computers, communications,
military/aerospace, automotive, industrial and consumer electronics applications. Memory disk
products include electroless nickel solutions and preplate chemistries for the computer and
consumer electronics industries and for the manufacture of hard drive memory disks used for
memory and data storage applications. Memory disk applications include computer hard drives,
digital video recorders, MP3 players, digital cameras, and business and enterprise servers. |
|
|
|
|
Ultra Pure Chemicals: Ultra Pure Chemicals (UPC) develops and manufactures a wide range of
ultra-pure chemicals used in the manufacture of electronic and computer components such as
semiconductors, silicon chips, wafers and liquid crystal displays. These products include
chemicals used to remove controlled portions of silicon and metal, cleaning solutions,
photoresist strippers, which control the application of certain light-sensitive chemicals,
edge bead removers, which aid in the uniform application of other chemicals, and solvents.
UPC also develops and manufactures a broad range of chemicals used in the manufacture of
photomasks and provides a range of analytical, logistical and development support services to
the semiconductor industry. These include Total Chemicals Management under which the Company
manages the clients entire electronic process chemicals operations, including coordination
of logistics services, development of application-specific chemicals, analysis and control of
customers chemical distribution systems and quality audit and control of all inbound
chemicals. |
22
|
|
|
Photomasks: Photomasks manufactures photo-imaging masks (high-purity quartz or glass plates
containing precision, microscopic images of integrated circuits) and reticles for the
semiconductor, optoelectronics and microelectronics industries under the Compugraphics brand
name. Photomasks are a key enabling technology to the semiconductor and integrated circuit
industries and perform a function similar to that of a negative in conventional photography. |
|
|
|
|
Advanced Organics: Advanced Organics offers products for the tire, coating and inks,
additives and chemical markets. These products promote adhesion of metal to rubber in tires
and faster drying of paints, coatings, and inks. Within the additives and chemical markets,
these products catalyze the reduction of sulfur dioxide and other emissions and also
accelerate the curing of polyester resins found in reinforced fiberglass. The Borchers
acquisition, which has been integrated into Advanced Organics, offers products to enhance the
performance of coatings and ink systems from the production stage through customer end use. |
The Companys products are sold in various forms such as solutions, crystals, cathodes and powders.
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,
concentrate, slag and scrap. The Company attempts to mitigate changes in availability of raw
materials by maintaining adequate inventory levels and long-term supply relationships with a
variety of suppliers. The cost of the Companys raw materials fluctuates due to actual or perceived
changes in supply and demand of raw materials, changes in cobalt reference price and changes in
availability from suppliers. 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 a significant portion 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 Companys 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.
Because the Company changed the structure of its internal organization in a manner that caused its
reportable segments to change, the corresponding information for prior periods has been
reclassified to conform to the current year reportable segment presentation.
Consolidated results of operations are set forth below and are followed by a more detailed
discussion of each segment.
23
Results of Operations
First Quarter of 2008 Compared With First Quarter of 2007
Consolidated Results of Operations
Consolidated results of operations are set forth below and are followed by a more detailed
discussion of each business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
(thousands of dollars & percent of net sales) |
|
2008 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
Net sales |
|
$ |
480,795 |
|
|
|
|
|
|
$ |
216,196 |
|
|
|
|
|
Cost of products sold |
|
|
344,129 |
|
|
|
|
|
|
|
143,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
136,666 |
|
|
|
28.4 |
% |
|
|
72,244 |
|
|
|
33.4 |
% |
Selling, general and administrative expenses |
|
|
42,032 |
|
|
|
8.7 |
% |
|
|
25,432 |
|
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
94,634 |
|
|
|
19.7 |
% |
|
|
46,812 |
|
|
|
21.7 |
% |
Other income (expense), net (including interest expense) |
|
|
842 |
|
|
|
|
|
|
|
(23,418 |
) |
|
|
|
|
Income tax expense |
|
|
(27,145 |
) |
|
|
|
|
|
|
(39,974 |
) |
|
|
|
|
Minority partners share of income |
|
|
(12,742 |
) |
|
|
|
|
|
|
(1,961 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
55,589 |
|
|
|
|
|
|
|
(18,541 |
) |
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
(369 |
) |
|
|
|
|
|
|
61,019 |
|
|
|
|
|
Gain on sale of discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
72,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
55,220 |
|
|
|
|
|
|
$ |
114,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased to $480.8 million in the first three months of 2008 from $216.2 million in the
first three months of 2007. The $264.6 million increase was primarily due to a $109.6 million
increase from product selling prices in the Advanced Materials segment, which benefited from a
$20.37 per pound increase in the average cobalt reference price in the first three months of 2008
compared with the first three months of 2007, and a $61.3 million increase from the resale of
cobalt metal. In addition, the REM and Borchers acquisitions contributed $67.0 million in the
first quarter of 2008. The remaining increase in net sales was due to increased volumes in the
Advanced Materials segment which contributed $22.6 million and favorable pricing in the Specialty
Chemicals segment contributed $16.0 million.
Gross profit increased to $136.7 million in the first three months of 2008, compared with $72.2
million in the first three months of 2007. The $64.4 million increase in gross profit was
primarily due to the impact of the higher cobalt reference price and the resulting increase in
sales discussed above partially offset by the increase in cobalt raw material costs. The REM and
Borchers acquisitions contributed $13.4 million in the first
quarter of 2008, which included a $1.7
million charge related to the step-up to fair value of inventory acquired and sold in the ordinary course of
business. Gross profit was also favorably impacted by improved volume in the Advanced Materials
segment and a $5.8 million unrealized gain on cobalt forward purchase contracts, which are
discussed below under Advanced Materials. The decrease in gross profit as a percentage of sales
(28.4% in the first three months of 2008, 33.4% in the first three months of 2007) was primarily
due to higher cobalt metal resale volume, which generally generates a lower margin percentage.
Selling, general and administrative expenses (SG&A) increased to $42.0 million in the first three
months of 2008, compared with $25.4 million in the first three months of 2007. The $16.6 million
increase was primarily due to $10.9 million of REM and Borchers SG&A expenses. SG&A was also
impacted by an increase in employee incentive and share-based compensation and the unfavorable
impact of the weakening U.S. dollar.
The increase in operating profit for the first three months of 2008 as compared to the first three
months of 2007 was due to the factors discussed above.
Other income (expense), net (including interest expense) increased to income of $0.8 million in the
first quarter of 2008 compared with expense of $23.4 million in the first quarter of 2007. The
following table summarizes the components of Other income (expense), net:
24
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Interest expense |
|
$ |
(360 |
) |
|
$ |
(7,105 |
) |
Interest income |
|
|
466 |
|
|
|
5,198 |
|
Loss on redemption of Notes |
|
|
|
|
|
|
(21,733 |
) |
Foreign exchange gain |
|
|
646 |
|
|
|
468 |
|
Other income, net |
|
|
90 |
|
|
|
(246 |
) |
|
|
|
|
|
|
|
|
|
$ |
842 |
|
|
$ |
(23,418 |
) |
|
|
|
|
|
|
|
The $6.7 million decrease in interest expense was primarily due to the redemption on March 7, 2007
of the $400.0 million of 9.25% Senior Subordinated Notes due 2011(the Notes). The first quarter
of 2008 was also impacted by a $4.7 million decrease in interest income due to the lower average
cash balance in the first quarter of 2008 compared with the first quarter of 2007 as the
acquisition of REM on December 31, 2007 was funded with existing cash. See additional discussion
below under Liquidity and Capital Resources. The $21.7 million loss on redemption of the Notes
is discussed below under Debt and Other Financing Activities.
Income tax
expense in the first quarter of 2008 was $27.1 million on pre-tax income of $95.5
million, or 28.4%, compared to income tax expense in the first quarter of 2007 of $40.0 million on
pre-tax income of $23.4 million. The first quarter of 2007 included discrete items related to the
repatriation of foreign earnings and the redemption of the Notes. Specifically, 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 effective income tax rate would have been 19.5% in the first quarter of 2007. The
effective income tax rates are lower than the U.S. statutory rate due primarily to income earned in
foreign tax jurisdictions with lower statutory tax rates than the U. S. (primarily Finland), tax
holidays in Malaysia and China, and the recognition of tax benefits for domestic losses.
Minority partners share of income relates to the Companys 55%-owned smelter joint venture in the
DRC. The increase in the minority partners income in the first quarter of 2008 compared with the
first quarter of 2007 is primarily due to higher cobalt prices and timing of deliveries. The
increase is partially offset by increased income tax expense in the first quarter of 2008. During
the fourth quarter of 2007, the Company was informed by the DRC taxing authority that its tax
holiday had expired. As a result, the first quarter of 2008 includes income tax
expense related to income earned in the DRC. No income tax expense was recorded by the joint
venture in the first quarter of 2007.
Income from continuing operations was $55.6 million in the first quarter of 2008 compared with an
$18.5 million loss in the first quarter of 2007 due primarily to the aforementioned factors.
The loss from discontinued operations in the first quarter of 2008 of $0.4 million resulted from
the translation adjustments of retained liabilities of businesses sold denominated in a foreign
currency. Total income from discontinued operations of $133.3 million for the first quarter of
2007 primarily related to the operations of the Nickel business and the $72.3 million gain on the
sale of the Nickel business.
Net income was $55.2 million, or $1.81 per diluted share, in the first quarter of 2008 compared
with net income of $114.8 million, or $3.85 per diluted share, in the first quarter of 2007, due
primarily to the aforementioned factors.
Segment Results and Corporate Expenses
Advanced Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
(millions of dollars) |
|
2008 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
Net sales |
|
$ |
332.4 |
|
|
|
|
|
|
$ |
151.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
95.3 |
|
|
|
|
|
|
$ |
47.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
The following table reflects the volumes in the Advanced Materials segment for the three months
ended March 31,
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Volumes |
|
|
|
|
|
|
|
|
Sales volume metric tons |
|
|
8,541 |
|
|
|
6,167 |
|
Cobalt refining volume metric tons |
|
|
2,376 |
|
|
|
2,186 |
|
* Sales volume includes cobalt metal resale and copper by-product sales and excludes volume related
to specialty nickel salts sales under the Norilsk distribution agreement, as explained below.
The following table summarizes the percentage of sales dollars by end market for the three months
ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Batteries |
|
|
42 |
% |
|
|
47 |
% |
Chemical |
|
|
16 |
% |
|
|
18 |
% |
Powder Metallurgy |
|
|
10 |
% |
|
|
13 |
% |
Ceramics |
|
|
4 |
% |
|
|
6 |
% |
Other |
|
|
28 |
% |
|
|
16 |
% |
The following table summarizes the percentage of sales dollars by region for the three months ended
March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Americas |
|
|
10 |
% |
|
|
10 |
% |
Asia |
|
|
45 |
% |
|
|
56 |
% |
Europe |
|
|
45 |
% |
|
|
34 |
% |
The following table summarizes the average quarterly reference price per pound of low grade cobalt
(as published in Metal Bulletin magazine):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
First Quarter |
|
$ |
46.19 |
|
|
$ |
25.82 |
|
Second Quarter |
|
|
n/a |
|
|
$ |
28.01 |
|
Third Quarter |
|
|
n/a |
|
|
$ |
25.84 |
|
Fourth Quarter |
|
|
n/a |
|
|
$ |
32.68 |
|
Full Year |
|
|
n/a |
|
|
$ |
27.99 |
|
Net sales increased to $332.4 million in the first three months of 2008 from $151.4 million in the
first three months of 2007. The primary reason for the $181.0 million increase was increased
product selling prices ($109.6 million) which benefited from a $20.37 per pound increase in the
average cobalt reference price in the first three months of 2008 compared with the first three
months of 2007. The resale of cobalt metal resulted in $61.3 million of the increase to net sales
in the first three months of 2008 compared with the first three months of 2007 and increased volume
contributed $22.6 million.
In connection with the sale of the Nickel business to Norilsk, the Company entered into two-year
agency and distribution agreements for certain specialty nickel salts products. Under the
contracts, the Company now acts as a distributor of these products on behalf of Norilsk and records
the related commission revenue on a net basis. Prior to March 1, 2007, the Company was the primary
obligor for these sales and recorded the revenue on a gross basis. This change resulted in a $14.4
million decrease in net sales in the first quarter of 2008 compared with the first quarter of 2007.
The $48.1 million increase in operating profit in the first three months of 2008 as compared to the
first three months of 2007 was due to a $34.9 million net impact of the higher cobalt reference
price and the resulting increase in sales discussed above partially offset by the increase in
cobalt raw material costs. Operating profit was also favorably impacted by improved volume ($11.8
million) (excluding copper by-product and specialty nickel salts) and a $5.8 million unrealized
gain on cobalt forward purchase contracts (see
26
discussion of these contracts in the Advanced Materials segment results section) partially offset
by increased manufacturing costs and an unfavorable currency impact. Operating profit was
negatively impacted by an increase in SG&A expenses to $10.6 million in the first three months of
2008 compared with $8.9 million in the first three months of 2007. The increase was primarily due
to the unfavorable impact of the weakening U.S. dollar ($1.3 million) and an increase in selling
expenses primarily as a result of the increase in sales.
During the fourth quarter of 2007, the Company entered into cobalt forward purchase contracts to
establish a fixed margin and mitigate the risk of price volatility related to the planned sale
during the second quarter of 2008 of cobalt-containing finished products that are priced based on a
formula that includes a fixed cobalt price component. These forward purchase contracts have not
been designated as hedging instruments under SFAS No. 133, Accounting for Derivative and Hedging
Activities. Accordingly, these contracts are adjusted to fair value at the end of each reporting
period, with the gain or loss recorded in cost of products sold. The adjustment to fair value had
no cash impact in the first quarter of 2008 as the contracts will be net settled with the
counterparty in the second quarter of 2008. As noted above, the Company recorded a $5.8 million
gain in the first quarter of 2008 related to these contracts. These contracts will continue to be
marked to fair value until settlement, resulting in additional gains or losses based on changes in
the cobalt reference price.
Specialty Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
(millions of dollars) |
|
2008 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
Net sales |
|
$ |
149.1 |
|
|
|
|
|
|
$ |
66.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
8.5 |
|
|
|
|
|
|
$ |
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the percentage of sales dollars by end market for the three months
ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Semiconductor |
|
|
22 |
% |
|
|
4 |
% |
Coatings |
|
|
20 |
% |
|
|
18 |
% |
Tire |
|
|
15 |
% |
|
|
22 |
% |
PCB |
|
|
14 |
% |
|
|
4 |
% |
Memory Disk |
|
|
13 |
% |
|
|
27 |
% |
Chemical |
|
|
11 |
% |
|
|
16 |
% |
General Metal Finishing |
|
|
3 |
% |
|
|
4 |
% |
Other |
|
|
2 |
% |
|
|
5 |
% |
The following table summarizes the percentage of sales dollars by region for the three months ended
March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Americas |
|
|
28 |
% |
|
|
38 |
% |
Asia |
|
|
38 |
% |
|
|
41 |
% |
Europe |
|
|
34 |
% |
|
|
21 |
% |
The following table reflects the volumes in the Specialty Chemicals segment for the three months
ended March 31,
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Volumes |
|
|
|
|
|
|
|
|
Advanced Organics sales volume metric tons |
|
|
8,386 |
|
|
|
7,240 |
|
Electronic
Chemicals sales volume gallons (thousands) * |
|
|
1,935 |
|
|
|
1,726 |
|
* Sales
volume excludes volume related to the REM PCB business.
27
Net sales increased to $149.1 million in the first three months of 2008 from $66.7 million in the
first three months of 2007. The REM and Borchers acquisitions contributed $67.0 million of the
$82.4 million increase in the first quarter of 2008. The remaining increase in net sales was
primarily due to increased product selling prices ($16.0 million). Favorable pricing in Advanced
Organics was slightly offset by unfavorable pricing in Electronic Chemicals primarily due to a
decline in the price of nickel.
Operating
profit for the first quarter of 2008 increased to $8.5 million
from $8.0 million in the
first quarter of 2007. In connection with the REM acquisition, the Company allocated a portion of the
total purchase price to inventory to reflect manufacturing profit in inventory at the date of the
acquisition. The inventory step-up to fair value totaled
$1.7 million and was recognized as expense in the
first quarter of 2008 as the inventory was sold in the normal course of business. The REM and
Borchers acquisitions contributed $2.5 million, including the inventory fair value step-up expense
of $1.7 million, in the first quarter of 2008. Operating profit was also positively impacted by
favorable pricing of $3.1 million. These positive factors were partially offset by a $1.1 million
increase in certain administrative expenses and a $0.9 million charge for two distributor
terminations. The increase in certain administrative expenses was due primarily to increased
information technology and travel costs associated with the acquisition integration and
Enterprise Resource Planning (ERP) system implementation.
Corporate Expenses
Corporate expenses consist of unallocated corporate overhead supporting both segments, including
legal, finance, human resources and strategic development activities, as well as share-based
compensation. Corporate expenses were $9.4 million in the first quarter of 2008 compared with $8.4
million in the first quarter of 2007. The $1.0 million increase in corporate expenses was
primarily due to an increase in employee incentive and share-based compensation.
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, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Cash Flow Summary |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(53,650 |
) |
|
$ |
5,154 |
|
|
$ |
(58,804 |
) |
Investing activities |
|
|
(6,187 |
) |
|
|
409,791 |
|
|
|
(415,978 |
) |
Financing activities |
|
|
32,861 |
|
|
|
(419,602 |
) |
|
|
452,463 |
|
Effect of exchange rate changes on cash |
|
|
1,679 |
|
|
|
1,109 |
|
|
|
570 |
|
Discontinued operations-operating activities |
|
|
|
|
|
|
49,623 |
|
|
|
(49,623 |
) |
Discontinued operations-investing activities |
|
|
|
|
|
|
(1,540 |
) |
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
(25,297 |
) |
|
$ |
44,535 |
|
|
$ |
(69,832 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used for operations was $53.7 million in the first quarter of 2008 compared with cash
provided by operations of $5.1 million in the first quarter of 2007. This change was primarily due
to an increase in cash used for working capital in the first three months of 2008, which reflected
an increase in inventories and accounts receivable due to the significantly higher cobalt metal
prices in the first three months of 2008 compared to the first three months of 2007. Also impacting
net cash provided by operating activities was the positive cash flow impact of income from
continuing operations of $55.6 million in the first three months of 2008 compared with a loss from
continuing operations of $18.5 million in the first three months of 2007. The first three months
of 2007 included a $21.7 million charge related to the redemption of the Notes. The $21.7 million
charge related to the redemption of the Notes consisted of a cash premium of $18.5 million and
non-cash charges totaling $3.2 million. The $18.5 million cash premium payment is included as a
component of financing activities.
The $416.0 million change in net cash provided by investing activities in the first three months of
2008 compared with the first three months of 2007 was primarily due to the $411.1 million of net
proceeds related to the sale of the Nickel business and $3.1 million of proceeds from the repayment
of a loan made to a former Nickel joint venture partner received in the first quarter of 2007. The
first three months of 2008 includes a $3.1 million increase in capital expenditures and $3.4
million of payments of transaction fees related to the REM and
28
Borchers acquisitions. These uses of cash were partially offset by a $4.5 million repayment
against the Notes receivable from the Companys joint venture partner.
Net cash provided by financing activities was $32.9 million in the first three months of 2008
compared with cash used for financing activities of $419.6 million in the first three months of
2007 primarily due to the $418.5 million payment to redeem the Notes in the first quarter of 2007.
The first three months of 2008 includes the $47.0 million net borrowings on the revolver partially
offset by a $14.9 million distribution to the DRC smelter joint venture partners.
Debt and Other Financing Activities
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, 2008, the Company was in compliance with all covenants. Borrowings
outstanding under the Revolver were $47.0 million at March 31, 2008.
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 $1.3 million at March 31,
2008 and December 31, 2007. The Company also had a $0.4 million and $0.3 million short-term note
payable at March 31, 2008 and December 31, 2007, respectively.
On March 7, 2007, the Company redeemed the entire $400.0 million of its outstanding Notes 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
the Loss on redemption of Notes in the Unaudited Condensed Statements of Consolidated Income.
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 2008.
Capital Expenditures
Capital expenditures in the first three months of 2008 were $6.7 million, which were 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 $30 to $35
million for the remainder of 2008. The primary projects are capacity expansion in selected product
lines at the Kokkola refinery, expenditures to maintain and improve throughput with outlays for
sustaining operations and environmental, health and safety compliance, and other fixed asset
additions at existing facilities.
During 2005, the Company initiated a multi-year 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 implementation
began in the first quarter of 2007, and the Company will continue to implement the ERP system at
additional locations in a phased approach through 2009.
Contractual Obligations
During the first quarter of 2008, the Company borrowed on its Revolver. The outstanding Revolver
balance was $47.0 million at March 31, 2008. The Revolver provides for interest-only payments
during its term, with principal due at maturity, December 20, 2010.
29
Since December 31, 2007, there have been no other 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 Form 10-K for the year ended December 31, 2007.
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, giving due consideration to materiality. The
application of 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 and assumptions, which may impact the
comparability of the Companys results of operations to their 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, 2007 other than the adoption of SFAS No. 157, SFAS No. 159 and EITF No.
06-10, as discussed in Note 2 to the Unaudited Condensed Consolidated Financial Statements in this
Form 10-Q.
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 2007 Annual Report on Form 10-K. There
have been no material changes from December 31, 2007 to March 31, 2008.
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, 2008. 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,
2008 solely because of the material weakness identified as of December 31, 2007 relating to
accounting for income taxes, as summarized in the Form 10-K for the year ended December 31, 2007.
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, 2008,
and the results of its operations, cash flows and changes in stockholders equity for the three
months ended March 31, 2008.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of December 31, 2007, 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, by
deciding to hire an additional internal tax resource and by the increased use of a third-party
service provider to review the Companys tax provision. However, the improvements in controls have
not all been operating effectively for a period of time sufficient for the Company to fully
evaluate their design and operating effectiveness and the additional internal tax resource has not yet
been identified and hired. Additionally, certain internal controls over the accounting for income
taxes are annual controls associated with the preparation of the Companys year-end financial
statements and, therefore, cannot be evaluated as fully remediated until that time.
30
The Company completed the implementation of a new ERP system at multiple U.S. locations and its
Canadian site during the first quarter of 2008, 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. As currently planned, the Company will continue to implement the ERP
system in a phased approach. The Company is taking steps to monitor and maintain appropriate
internal controls during the implementation. The Company performed additional procedures,
including performing additional verifications and testing data integrity, to ensure the Unaudited
Condensed Consolidated Financial Statements included in this report present fairly, in all material
respects, the Companys financial position as of March 31, 2008, and the results of its operations,
cash flows and changes in stockholders equity for the three months ended March 31, 2008.
There were no other changes in the Companys internal control over financial reporting in
connection with the Companys first quarter 2008 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, 2007.
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) |
31
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 8, 2008 |
By: |
/s/ Kenneth Haber |
|
|
|
Kenneth Haber |
|
|
|
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer) |
|
32