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Registrant’s telephone number,
including area code
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes x No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No x
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 x No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation
S-T during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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 x
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 x
The aggregate market value of Common Stock, par value $.01 per
share, held by nonaffiliates (based upon the closing sale price
on the NYSE) on June 30, 2010 was approximately
$723.7 million.
As of January 31, 2011 there were 30,878,171 shares of
Common Stock, par value $.01 per share, outstanding.
OM Group, Inc. (the “Company”) is a global solutions
provider of specialty chemicals, advanced materials,
electrochemical energy storage, and technologies crucial to
enabling its customers to meet increasingly stringent market and
application requirements. The Company believes it is the
world’s largest refiner of cobalt and producer of
cobalt-based specialty products.
The Company is executing a 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 Company’s 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
Company’s ability to continue to build long-term
shareholder value.
Segments
The Company is organized into three operating segments: Advanced
Materials, Specialty Chemicals and Battery Technologies.
Financial information and further discussion of these segments
and geographic areas, including external sales and long-lived
assets, are contained in Note 19 to the accompanying
consolidated financial statements of this Annual Report on
Form 10-K.
Advanced
Materials segment
The Advanced Materials segment consists of inorganics, a joint
venture that operates a smelter in the Democratic Republic of
Congo (the “DRC”) and metal resale. The Advanced
Materials segment manufactures inorganic products using
unrefined cobalt and other metals and serves the battery
materials, powder metallurgy, ceramics and chemical end markets
by providing products with functional characteristics critical
to the success of our customers. These products improve the
electrical conduction of rechargeable batteries used in portable
electronic devices such as cellular phones, video cameras,
portable computers and power tools as well as various types of
electric vehicles. In other applications, these products
strengthen and add durability to diamond and machine cutting
tools and drilling equipment used in manufacturing,
construction, oil and gas drilling, and quarrying. The smelter
joint venture, Groupement pour le Traitement du Terril de
Lubumbashi Limited (“GTL”), is owned by the Company
(55%); Groupe George Forrest (25%); and
La Générale des Carrières et des Mines
(“Gécamines”) (20%). The GTL smelter is a primary
source of the Company’s cobalt raw material feed. GTL is
consolidated in the Company’s financial statements because
the Company has a controlling interest in the joint venture.
Specialty
Chemicals segment
The Specialty Chemicals segment is comprised of Electronic
Chemicals, Advanced Organics, Ultra Pure Chemicals
(“UPC”) and Photomasks.
Electronic Chemicals: Electronic
Chemicals develops and manufactures products for the printed
circuit board, memory disk, general metal finishing, and
photovoltaic markets. Chemicals developed and manufactured for
the printed circuit board market include oxide treatments,
electroplating additives, etching technology and electroless
copper processes used in the manufacturing of printed circuit
boards widely used in computers, communications,
military/aerospace, automotive, industrial and consumer
electronics applications. Chemicals developed and manufactured
for the memory disk market include electroless nickel solutions
and preplate chemistries for the manufacture of hard drive
memory disks used in memory and data storage applications.
Memory disk applications include computer hard drives, digital
video recorders, MP3 players, digital cameras and business and
enterprise servers. Chemicals developed and manufactured for the
photovoltaic industry focus on proprietary chemistries and
processes used to manufacture solar cells.
Advanced Organics: Advanced Organics
offers products for the coating and inks, chemical and tire
markets. Products for the coatings and inks market promote
drying and other performance characteristics. Within the
chemical markets, the products accelerate the curing of
polyester resins found in reinforced fiberglass. In the tire
market, the products promote the adhesion of metal to rubber.
During 2009, the Company commenced a restructuring plan to
better align the cost structure and asset base of its European
carboxylate business to industry conditions resulting from weak
customer demand, commoditization of products and overcapacity in
that market. The restructuring plan included exiting the
Manchester, England manufacturing facility and workforce
reductions at the Belleville, Ontario, Canada; Kokkola, Finland;
Franklin, Pennsylvania and Westlake, Ohio locations. The
majority of position eliminations were completed by mid-2010.
The restructuring plan does not involve the discontinuation of
any material product lines or other functions.
Ultra Pure Chemicals: UPC develops,
manufactures and distributes 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 manufacturing 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 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.
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,
microelectronics and micro electro mechanical systems 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.
Battery
Technologies segment
The Battery Technologies segment, which consists of the
EaglePicher Technologies business acquired on January 29,2010, provides advanced batteries, battery materials, battery
management systems, battery-related research and energetic
devices for the defense, aerospace and medical markets. In the
defense market, Battery Technologies develops battery products
for missile launch vehicles, missiles, guided bombs and other
weapons systems. It also provides primary (non-rechargeable) and
secondary (rechargeable) batteries, battery management systems,
battery chargers, and energetic devices for diverse defense
applications such as unmanned vehicles,
sub-munitions,
mines, sonabuoys, and fuzes. In the aerospace market, Battery
Technologies designs, manufactures and qualifies primary and
secondary batteries for satellites, aircraft, packaging of cells
and other special applications. In the medical market, Battery
Technologies designs, manufactures and qualifies miniature
batteries to power implantable medical devices. Battery
Technologies has a 45% interest in Diehl & EaglePicher
GmbH (“D&EP”)which manufactures thermal batteries
for military applications and customized battery packs for the
defense, electronics and communication industries. The
investment in D&EP is accounted for under the equity method.
Products
The Company is a diversified global developer, producer and
marketer of value-added specialty chemicals, advanced materials,
and electrochemical energy storage. The Company believes it is
the world’s largest producer of cobalt-based specialty
products. The Company’s businesses produce a variety of
value-added specialty chemicals, advanced materials and
electrochemical energy storage devices. The Company’s
products leverage the Company’s production capabilities and
bring value to its customers through superior
product performance. Typically, these products represent a small
portion of the customer’s total cost of manufacturing or
processing, but are critical to the customer’s product
performance. The products frequently are essential components in
chemical and industrial processes where they facilitate a
chemical or physical reaction
and/or
enhance the physical properties of end-products. The
Company’s products are sold in various forms such as
solutions, crystals, cathodes, powders, quartz or glass plates,
and battery systems.
Advanced
Materials segment
The Advanced Materials segment consists of inorganics, a joint
venture that operates a smelter in the DRC and metal resale. The
powders and specialty chemicals that this business produces are
used in a variety of industries, including rechargeable battery,
construction equipment and cutting tools, catalyst, and ceramics
and pigments. Products in this segment, grouped by end market,
are:
The Specialty Chemicals segment is comprised of Electronic
Chemicals, Advanced Organics, UPC and Photomasks.
•
Electronic Chemicals: This unit
works with electroless nickel, precious metals and related
products used in the production of printed circuit board
assemblies, memory disks, general metal finishing and
photovoltaics. Products/processes in Electronic Chemicals,
grouped by end market, are:
Printed Circuit Board Chemistry —
Graphite-based
SHADOW®
Direct Metalization, Electroless Copper,
E-PREP
Desmear Chemistries, CO-BRA
BOND®
Innerlayer Bonding chemistries, Lead — free solderable
finishes including Organic Solderability Preservatives (OSP),
Electroless Nickel-Immersion Gold (ENIG), Immersion Silver,
specialty cleaners and etchants for copper, acid copper and acid
tin electroplating additives, SolStrip for solar cells, Base
Metal Processes, Electronic Grade Base Metal Concentrates,
Electronic Grade Methane Sulfonate Concentrates, Lead Free
Plating Processes, Pre-Plate and Post-Plate Processes, Tin-Lead
Alloy Plating Processes
Memory Disk — Electroless Nickel
Products, Pre-treatment Products
General Metal Finishing — Auxiliary
Chemicals, Electroless Nickel Processes, Nickel/Gold Strippers
and Other Products, Polishing Chemicals, Zincate and Post
Treatment Chemistries
Photovoltaics — Cleaners, Plating
Processes, Metal Etchants
Advanced Organics: Metal-based
specialty chemicals from this business are used to meet the
critical needs of a range of industries, including coatings and
inks, tire, catalyst, and lubricant and fuel additives. Advanced
Organics products, grouped by end market, include:
Coatings & Inks — Additives
for Paints, Driers for Paints and Printing Inks
Tire — Rubber Adhesion Promoters
Chemicals — Composite and other Catalysts
Additives — Fuel Oil Additives,
Lubricant and Grease Additives
•
Ultra Pure Chemicals: The UPC
business develops, manufactures and distributes 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. UPC products and services,
grouped by application, include:
Services — Analytical Services,
Chemicals Management, Logistics Services, Total Chemical
Management.
•
Photomasks:The Photomasks
business 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 component of the
semiconductor and integrated circuit value chains and perform a
function similar to that of a negative in conventional
photography.
Battery
Technologies segment
The Battery Technologies segment is comprised of Defense,
Aerospace and Medical.
•
Defense:The defense business
develops battery products for missile launch vehicles, missiles,
guided bombs and other weapons systems. It also provides primary
(non-rechargeable) and secondary (rechargeable) batteries,
battery management systems, battery chargers, and energetic
devices for diverse defense applications such as unmanned
vehicles,
sub-munitions,
mines, sonabuoys, and fuzes. Defense products, grouped by
application, include:
Missiles: Primary batteries for launch,
guidance systems, detonation, flight termination for missiles,
bombs and torpedoes
Launchers: Primary batteries for launch
and guidance systems for launchers and launch vehicles
Portable Power: Primary and secondary
batteries for soldiers
Pyrotechnic Devices: Igniters, fuses,
actuators for switches and relays, arming devices, quick acting
valves, gas generators, safety devices
Battery Packaging: Assembly of cells,
development of battery management systems to meet energy
requirements, physical size requirements and environmental
parameters
Other: Primary and secondary batteries
for unmanned underwater vehicles and unmanned ground vehicles
•
Aerospace: The aerospace
business designs, manufactures and qualifies primary and
secondary batteries for satellites, aircraft, packaging of cells
and other special applications. Aerospace products, grouped by
application, include:
Satellites: Batteries for satellite and
other space applications.
Aircraft: Batteries and Battery
Management Systems for military and commercial aircraft
Electronics: Battery chargers, battery
analyzers, battery management systems
Battery Packaging: Assembly of cells,
development of battery management systems to meet energy
requirements, physical size requirements and environmental
parameters
Other: Reserve batteries for unique
missile applications, such as exoatmospheric defense systems,
single-use lithium electrochemistries, primarily for special
operations missions
•
Medical: The medical business
designs, manufactures and qualifies miniature batteries to power
implantable medical devices. The medical product line includes
primary and secondary battery solutions for cardiac rhythm
management (pacing, ICD), monitoring, and neuromodulation.
Raw
Materials
The Company uses a variety of raw materials purchased from a
broad supplier base. Multiple suppliers are generally available
for each of these materials; however, some raw materials are
sourced from a single supplier. Temporary shortages of raw
materials may occasionally occur and cause temporary price
increases. Historically, these shortages have not resulted in
unavailability of raw materials. The Company attempts to
mitigate increases in raw material prices by passing through
such increases to its customers in the prices of its products
and, when possible, by entering into sales contracts that
contain variable pricing that adjusts based on changes in the
price of certain raw materials. The Company also uses certain
raw materials that must be qualified before being used in
production. For these raw materials, changes in suppliers may
result in disruption of production, forward purchasing of
contract requirements or re-qualification expenses.
Advanced
Materials segment
The primary raw material used by the Advanced Materials segment
is unrefined cobalt. Unrefined cobalt is obtained from three
basic sources: primary cobalt mining, as a by-product of another
metal (typically copper or nickel), and from recycled material.
Cobalt raw materials include ore, concentrate, slag, scrap and
metallic feed. The availability of unrefined cobalt is dependent
on global market conditions, cobalt prices and the prices of
copper and nickel. Also, political and civil instability in
supplier countries, variability in supply and worldwide demand,
including demand in developing countries such as China, have
affected and will likely continue to affect the supply and
market price of raw materials. 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 GTL smelter in the DRC is a primary
source for the Company’s cobalt raw material feed. After
smelting in the DRC, cobalt/copper white alloy is sent to the
Company’s refinery in Kokkola, Finland.
The cost of the Company’s raw materials fluctuates due to
changes in the cobalt reference price, actual or perceived
changes in supply and demand of raw materials, and changes in
availability from suppliers. The Company attempts to mitigate
increases in raw material prices by passing through such
increases to its customers in the prices of its products and by
entering into sales contracts that 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.
Fluctuations in the price of cobalt have historically been
significant and the Company believes that cobalt price
fluctuations are likely to continue in the future. Declines in
the selling prices of the Company’s finished goods, which
can result from decreases in the reference price of cobalt or
other factors, can result in the Company’s inventory
carrying value being written down to a lower market value.
In 2007, the Company entered into five-year supply agreements
with Norilsk Nickel for up to 2,500 metric tons per year of
cobalt metal, up to 2,500 metric tons per year of crude in the
form of cobalt hydroxide concentrate, up to 1,500 metric tons
per year of cobalt in the form of crude cobalt sulfate and up to
5,000 metric tons per year of copper in the form of copper cake.
The Norilsk agreements strengthen the Company’s supply
chain and secure a consistent source of raw materials, providing
the Company with a stable supply of cobalt metal.
Complementary geography and operations shorten the supply chain
and allow the Company to leverage its cobalt-based refining and
chemicals expertise with Norilsk’s cobalt mining and
processing capabilities. The Company’s supply of cobalt is
principally sourced from the DRC (primarily GTL), Russia and
Finland.
A graph of the end of the month reference price of low grade
cobalt (as published in Metal Bulletin magazine) per
pound for 2005 through 2010 is as follows:
Specialty
Chemicals segment
The Specialty Chemicals segment uses a variety of raw materials
purchased from a broad supplier base. The principal raw
materials utilized by the Specialty Chemicals segment include
cobalt, nickel sulphate crystals, sodium hypophosphite,
ethylhexoic and neodecanoic acids and various other acids.
Certain nickel-based raw materials used in the Company’s
Electronic Chemicals business are obtained from Norilsk Nickel
under the five-year supply agreements discussed above.
Battery
Technologies segment
The Battery Technologies segment uses a variety of raw materials
purchased from a broad supplier base. The principal raw
materials utilized by the Battery Technologies segment include
custom machined parts, glass to metal seals, electronic
components, precious metals including silver and platinum,
specialty chemicals and powders.
Competition
The Company encounters a variety of competitors in each of its
product lines, but believes no single company competes with the
Company across all of its existing product lines. Competition in
the markets in which the Company participates is based primarily
on product quality, supply reliability, price, service and
technical support capabilities. These markets have historically
been competitive and this environment is expected to continue.
The Company’s principal competitors by business are as
follows:
•
Advanced Materials: Sherritt
International Corporation; Umicore S.A.; Eurotungstene Poudres
S.A.S.; and The Shepherd Chemical Company
•
Specialty Chemicals
•
Advanced Organics: Byk-Chemie;
Ciba Inc. (a subsidiary of BASF Group); Dainippon Ink and
Chemicals, Incorporated; Dura Chemicals Inc.; Elementis plc;
Shepherd Chemical Company; Taekwang Industrial Co., Ltd; and
Troy Corporation
Electronic Chemicals: Atotech (a
subsidiary of Total S.A.); Cookson Group plc; MacDermid
Incorporated; Rohm & Haas Company (a subsidiary of Dow
Chemical Company.); and Uyemura International, Inc.
•
UPC: BASF Group; Honeywell
International Inc.; Kanto Chemical Co., Inc.; KMG Chemicals,
Inc.; Mitsubishi Chemical Corp.; and Sumitomo Corporation
•
Photomasks: Dai Nippon Printing
(DNP); Photronics, Inc.; Toppan Photomasks, Inc. (a wholly-owned
subsidiary of Toppan Printing Co., Ltd.)
•
Battery Technologies: Biotronic;
Bren-Tronics, Inc.; Ener1, Inc.; Enersys, Inc.; The Enser Corp.;
Greatbatch; Litronic, GmbH; Quallion LLC; Saft Groupe S.A.;
Sorin; Ultralife Corp.; and Yardney Technical Products, Inc.;
Customers
The Company’s business serves over 3,700 customers. During
2010, approximately 43% of the Company’s net sales were to
customers in Asia, 31% to customers in Europe and 26% to
customers in the Americas. In the Advanced Materials segment,
sales to Nichia Chemical Corporation represented approximately
14%, 16% and 22% of consolidated net sales in 2010, 2009 and
2008, respectively. The loss of this customer could have a
material adverse effect on the Company’s business, results
of operations or financial position. Sales to the top three
customers in the Battery Technologies segment represented
approximately 50% of Battery Technologies’ net sales in
2010. The loss of one or more of these customers could have a
material adverse effect on Battery Technologies’ business,
results of operations or financial position.
While customer demand for the Company’s products is
generally non-seasonal, supply/demand and price perception
dynamics of key raw materials do periodically cause customers to
either accelerate or delay purchases of the Company’s
products, generating short-term results that may not be
indicative of longer-term trends. Historically, Advanced
Materials revenues during July and August have been lower than
other months due to the summer holiday season in Europe.
Furthermore, the Company historically has used the summer season
to perform its annual maintenance shut-down at its refinery in
Finland.
The Company generally has written sales agreements with its
customers. In some cases, these arrangements are in the form of
a written contract containing provisions applicable to the
sales, including the terms of the sales arrangement. In other
cases, sales are made pursuant to a written purchase order that
is issued in connection with a sale and contains terms and
conditions applicable to the sale.
The Company, through its Battery Technologies segment, acts as a
prime contractor or subcontractor for numerous
U.S. Government programs. The primary Battery Technologies
customers include aerospace and defense prime contractors and
Tier I and Tier II suppliers, such as Boeing, Lockheed
Martin and Raytheon. U.S. Government customers include the
U.S. Department of Defense; National Aeronautic and Space
Administration (“NASA”), the National Oceanic
Atmospheric Administration (“NOAA”), the Jet
Propulsion Laboratories (“JPL”) and the Department of
Energy (“DOE”).
The Company’s contracts with the U.S. Government or
its contractors have standard termination provisions. In
addition, the U.S. Government retains the right to
terminate contracts at its convenience; however, if contracts
are terminated in this manner, the Company is entitled to
reimbursement for allowable costs and profits on authorized work
performed through the date of termination. U.S. Government
contracts are also subject to reduction or modification in the
event of changes in government requirements or budgetary
constraints.
U.S. Government programs generally are implemented by the
award of individual contracts and subcontracts. For certain
programs, the U.S. Congress (“Congress”)
appropriates funds on a fiscal year basis even though a program
may extend over several fiscal years. Consequently, programs are
often only partially funded initially and additional funds are
committed only as Congress makes further appropriations. If
sufficient appropriations for such programs are not available,
contracts and subcontracts under a program may be subject to
termination for convenience or adjustment.
U.S. Government contracts generally are subject to the
Federal Acquisition Regulation, which sets forth policies,
procedures and requirements for the acquisition of goods and
services by the U.S. Government. These regulations impose a
broad range of requirements, many of which are unique to
government contracting, including various procurement, import
and export, security, contract pricing and cost, contract
termination and adjustment, and audit requirements. Failure to
comply with these regulations and requirements could result in
reductions to the value of contracts, contract modifications or
termination, and the assessment of penalties and fines, which
may lead to suspension or debarment, for cause, from government
contracting or subcontracting for a period of time. In addition,
government contractors are also subject to routine audits and
investigations by U.S. Government agencies such as the
Defense Contract Audit Agency (“DCAA”). DCAA reviews a
contractor’s performance under its contracts, cost
structure and compliance with applicable laws, regulations and
standards. The DCAA also reviews the adequacy of, and a
contractor’s compliance with, its internal control systems
and policies, including the contractor’s purchasing,
property, estimating, compensation and management information
systems. For a discussion of certain risks associated with
noncompliance with U.S. Government contract regulations and
requirements, see Item 1A “Risk Factors” of this
Form 10-K.
Backlog
The Battery Technologies segment tracks backlog in order to
assess its current business development effectiveness and to
assist in forecasting future business needs and financial
performance. Backlog is equal to the value of unfulfilled orders
for which funding is contractually obligated by the customer and
for which revenue has not been recognized. Backlog is converted
into sales as work is performed or deliveries are made. At
December 31, 2010, backlog of $35.1 million (or 26%)
is not expected to be converted into sales during the next
twelve months.
The following table sets forth backlog in the Battery
Technologies segment as of:
Orders in the Advanced Materials and Specialty Chemicals
segments are generally filled on a current basis, and order
backlog is not material to those segments.
Foreign
Currency
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
Company’s raw material purchases and product sales are
based on the U.S. dollar, sales at certain locations,
prices of certain raw materials,
non-U.S. operating
expenses and income taxes are denominated in local currencies.
As such, the Company’s results of operations are subject to
the variability that arises from exchange rate movements. 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
Company’s operating results. The primary currencies for
which the Company has foreign currency rate exposure are the
European Union Euro, Taiwanese Dollar, Malaysian Ringgit,
Singapore Dollar, British Pound Sterling, Japanese Yen,
Congolese Franc, Chinese Renminbi and the Canadian Dollar.
Research and
Development
The Company’s research and new product development program
is an integral part of its business. Research and development
focuses on adapting proprietary technologies to develop new
products and working with customers to meet their specific
requirements including joint development arrangements with
customers that
involve innovative products. New products include new chemical
formulations and electro-chemistry cells, metal-containing
compounds, core technologies for battery development and
concentrations of various components and product forms. Research
and development expenses were approximately $11.8 million
in 2010, $9.2 million in 2009 and $10.8 million in
2008.
The Company’s research staff conducts research and
development in laboratories located in:
Americas
Europe
Asia-Pacific
Joplin, Missouri
Riddings, England
Kuching, Malaysia
South Plainfield, New Jersey
Kokkola, Finland
Singapore
Maple Plain, Minnesota
Saint Fromond, France
Chung-Li, Taiwan
Westlake, Ohio
Lagenfeld, Germany
Plano, Texas
Vancouver, British Columbia
Patents and Other
Intellectual Property
The Company holds patents registered in the United States and
foreign countries relating to the manufacturing, processing and
use of metal-organic and metal-based compounds, battery
electrochemistry, battery applications and power system
electrical/electronics. In addition, the Company holds patents
relating to the design and manufacture of certain batteries and
energetic devices. Certain of these patents cover proprietary
technology for base metal refining, metal and metal oxide
powders, catalysts, metal-organic compounds and inorganic salts.
In addition to patents, the Company also possesses other
intellectual property, including trademarks, tradenames,
know-how, developed technology and trade secrets. Although the
Company believes these intellectual property rights are
important in the operations of its specific businesses, it does
not consider any single patent, trademark, tradename, know-how,
developed technology, trade secret or any group of patents,
trademarks, tradenames, know-how, developed technology or trade
secrets to be material to its business as a whole.
Environmental
Matters
The Company is subject to a wide variety of environmental laws
and regulations in the United States and in foreign countries as
a result of its operations and use of certain substances that
are, or have been, used, produced or discharged by its plants.
In addition, soil
and/or
groundwater contamination presently exists and may in the future
be discovered at levels that require remediation under
environmental laws at properties now or previously owned,
operated or used by the Company. At December 31, 2010 and
2009, the Company had environmental reserves of
$1.5 million and $2.8 million, respectively, related
to remediation and decommissioning at the Company’s closed
manufacturing sites in Newark, New Jersey and Vasset, France. In
addition, at December 31, 2010, the Company has recorded a
$1.3 million environmental liability associated with a site
located in Joplin, Missouri. The $1.3 million liability
related to the Joplin, Missouri site was a liability acquired
with the EaglePicher Technologies acquisition. The Company
continually evaluates the adequacy of its reserves and adjusts
the reserves when determined to be appropriate.
Ongoing environmental compliance costs, which are expensed as
incurred, were approximately $11.1 million in 2010 and
$10.9 million in 2009 and included costs relating to
product stewardship; waste water analysis, treatment, and
disposal; hazardous and non-hazardous solid waste analysis and
disposal; air emissions control; sustainability programs and
related staff costs. The Company anticipates that it will
continue to incur compliance costs at moderately increasing
levels for the foreseeable future as environmental laws and
regulations are becoming increasingly stringent. This includes
the European Union’s Registration, Evaluation and
Authorization of Chemicals (“REACH”) legislation,
which has established a requirement to register and evaluate
chemicals manufactured in, or imported to, the European Union.
REACH-related activities and studies require additional testing,
documentation and risk assessments for the chemical industry and
affect a broad range of substances manufactured and sold by the
Company.
The Company also incurred capital expenditures of approximately
$1.2 million and $0.5 million in 2010 and 2009,
respectively, in connection with ongoing environmental
compliance. The Company anticipates that capital expenditure
levels for these purposes will be approximately
$1.9 million in 2011, as it continues to modify certain
processes to ensure they continue to comply with environmental
regulation and undertakes new pollution prevention and waste
reduction projects.
Due to the ongoing development of facts and remedial options and
due to the possibility of unanticipated regulatory developments,
the amount and timing of future environmental expenditures could
vary significantly. Although it is difficult to quantify the
potential impact of compliance with or liability under
environmental protection laws, based on presently available
information, the Company believes that its ultimate aggregate
cost of environmental remediation as well as liability under
environmental protection laws will not materially adversely
effect its financial condition or results of operations.
Employees
At December 31, 2010, the Company had 2,806 full-time
employees, with 1,157 located in North America, 691 located
in Europe, 563 located in Asia-Pacific and 395 located in
Africa. The employees located in Africa are employed by GTL, the
smelter joint venture. Employees at the Company’s facility
in Kokkola, Finland are members of several national
workers’ unions under various union agreements. Employees
in the DRC are members of various trade unions. The union
agreements have a term of three years expiring in May 2011. The
Company expects to enter into new agreements covering those
employees upon expiration of the current agreements. Other
European employees are represented by either a labor union or a
statutory works council arrangement. The Company believes that
relations with its employees are good.
Approximately 200 Battery Technologies employees are represented
by the United Steelworkers union. Following the expiration of
the collective bargaining agreement in May 2008, Battery
Technologies unilaterally implemented its “last, best, and
final offer”, and the Company and the union are currently
operating under the implemented terms and conditions of that
offer.
SEC
Reports
The Company makes available free of charge through its website
(www.omgi.com) its reports on
Forms 10-K,
10-Q and
8-K as soon
as reasonably practicable after the reports are electronically
filed with the Securities and Exchange Commission. A copy of any
of these documents is available in print free of charge to any
stockholder who requests a copy, by writing to OM Group, Inc.,
127 Public Square, 1500 Key Tower, Cleveland,
Ohio 44114-1221
USA, Attention: Troy Dewar, Director of Investor Relations.
Item 1A.
Risk
Factors
Our business faces significant risks. These risks include those
described below and may include additional risks and
uncertainties not presently known to us or that we currently
deem immaterial. Our business, financial condition and results
of operations could be materially adversely affected by any of
these risks. These risks should be read in conjunction with the
other information in this Annual Report on
Form 10-K.
EXTENDED BUSINESS
INTERRUPTION AT OUR FACILITIES COULD HAVE AN ADVERSE IMPACT ON
OPERATING RESULTS.
Our results of operations are dependent in large part upon our
ability to produce and deliver products promptly upon receipt of
orders and to provide prompt and efficient service to our
customers. Any disruption of our
day-to-day
operations could have a material adverse effect on our business,
customer relations and profitability. Our Kokkola, Finland
facility is the primary refining and production facility for our
Advanced Materials products. The GTL smelter in the DRC is a
primary source for our cobalt raw material feed. These
facilities are critical to our business, and a fire, flood,
earthquake or other disaster or condition that damaged or
destroyed any of these facilities could disable them. Any such
damage to, or other condition significantly interfering with the
operation of these facilities, such as an interruption of our
supply lines, would have a material adverse effect on our
business, financial condition and results of operations. Our
insurance coverage
may not be adequate to fully cover these potential risks. In
addition, our insurance coverage may become more restrictive
and/or
increasingly costly, and there can be no assurance that we will
be able to maintain insurance coverage in the future at an
acceptable cost or at all.
WE ARE AT RISK AS
A RESULT OF CURRENT CIRCUMSTANCES AND DEVELOPMENTS REGARDING THE
DRC.
A substantial amount of our supply of cobalt is sourced from the
DRC, a nation that has historically experienced outbreaks of
political instability, changes in national and local leadership
and financial crisis. The global economic and financial market
crisis along with the recent decline in metal prices has
impacted the financial condition of the DRC. These factors
heighten the risk of changes in the national and local policy
towards investors, which, in turn, could result in modification
of concessions or contracts, imposition of new
and/or
retroactive taxes and assessment of penalties, denial of permits
or permit renewals or expropriation of assets. GTL has
experienced an increase in claims by DRC national and local
government agencies for additional taxes and customs duties and
we cannot predict whether GTL will receive additional claims in
the future. Furthermore, if additional claims are received, we
cannot predict whether such additional claims will be
successful, or, if successful, whether such claims would have a
material adverse effect on our business, financial condition or
results of operations.
Private equity groups or hedge funds have purchased distressed
debt of the DRC and have taken legal actions to attempt to
collect this debt from the DRC or state-owned entities such as
Gécamines, which is one of our joint venture partners in
GTL. If successful, these efforts and any similar efforts in the
future could further damage the financial condition and
undermine the stability of the DRC or its state-owned entities
and potentially threaten our supply of unrefined cobalt. If that
were to occur, such actions could have a material adverse effect
on our business, financial condition or results of operations.
WE ARE AT RISK
FROM UNCERTAINTIES IN THE SUPPLY OF UNREFINED COBALT, WHICH IS
OUR PRIMARY RAW MATERIAL.
There are a limited number of supply sources for unrefined
cobalt. Production problems or political or civil instability in
supplier countries, primarily the DRC, Finland and Russia, have
from time to time affected and may in the future affect the
market price and supply of unrefined cobalt.
In particular, political and civil instability and unexpected
adverse changes in laws or regulatory requirements, including
with respect to export duties and quotas, may affect the
availability of raw materials from the DRC. If a substantial
interruption should occur in the supply of unrefined cobalt from
the DRC or elsewhere, we may not be able to obtain as much
unrefined cobalt from other sources as would be necessary to
satisfy our requirements at prices comparable to our current
arrangements and our results of operations could be adversely
impacted.
WE ARE AT RISK
FROM FLUCTUATIONS IN THE PRICE OF COBALT AND OTHER RAW
MATERIALS.
Unrefined cobalt is the principal raw material we use in
manufacturing Advanced Materials products, and the cost of
cobalt fluctuates due to changes in the reference price caused
by actual or perceived changes in supply and demand, and changes
in availability from suppliers. Fluctuations in the price of
cobalt have been significant in the past and we believe price
fluctuations are likely to occur in the future. Our ability to
pass increases in raw material costs through to our customers by
increasing the selling prices of our products is an important
factor in our business. We cannot guarantee that we will be able
to maintain an appropriate differential at all times.
We may be required under U.S. GAAP accounting rules to
write down the carrying value of our inventory when cobalt and
other raw material prices decrease. Declines in the selling
prices of our finished products, which can result from decreases
in the reference price of cobalt or other factors, can result in
the Company’s inventory carrying value being written down
to a lower market value, resulting in a charge against inventory
that could have a material adverse effect on our business,
financial condition or results of operations.
WE INTEND TO
CONTINUE TO SEEK ADDITIONAL ACQUISITIONS, BUT WE MAY NOT BE ABLE
TO IDENTIFY OR COMPLETE TRANSACTIONS, WHICH COULD ADVERSELY
AFFECT OUR STRATEGY.
Our strategy anticipates growth through future acquisitions.
However, our ability to identify and consummate any future
acquisitions on terms that are favorable to us may be limited by
the number of attractive acquisition targets, internal demands
on our resources and our ability to obtain financing. Our
success in integrating newly acquired businesses will depend
upon our ability to retain key personnel, avoid diversion of
management’s attention from operational matters, and
integrate general and administrative services and key
information processing systems. In addition, future acquisitions
could result in the incurrence of additional debt, costs and
contingent liabilities. Integration of acquired operations may
take longer, or be more costly or disruptive to our business,
than originally anticipated, and it is also possible that
expected synergies from future acquisitions may not materialize.
We also may incur costs and divert management attention with
regard to potential acquisitions that are never consummated.
There may be liabilities of the acquired companies that we fail
to or are unable to discover during the due diligence
investigation and for which we, as a successor owner, may be
responsible. Indemnities and warranties obtained from the seller
may not fully cover the liabilities due to limitations in scope,
amount or duration, financial limitations of the indemnitor or
warrantor or other reasons.
WE ARE SUBJECT TO
RISKS ARISING FROM UNCERTAINTY IN WORLDWIDE ECONOMIC
CONDITIONS.
The recent global economic downturn caused, among other things,
a general tightening in the credit markets, lower levels of
liquidity, increases in the rates of default and bankruptcy, and
lower business spending, all of which had a negative effect on
our business, results of operations, financial condition and
liquidity during 2009. Many of our customers, distributors and
suppliers were negatively affected by the current economic
downturn, which in turn negatively impacted us. There currently
is uncertainty regarding global economic conditions and the
existence and rate of any economic recovery. This uncertainty
may have an adverse effect on the general level of economic
activity in industries and markets in which we and our customers
operate, which may in turn have a negative effect on us. While
we saw signs of an economic recovery in a number of markets in
2010, certain markets such as parts of Europe continue to
experience weakened or uncertain economic conditions. Some of
our customers, distributors and suppliers may be negatively
impacted by these conditions which could lead to reduced demand
for our products, reduced gross margins, and increased payment
delays or defaults. The strength or duration of recovery in the
remaining markets remains uncertain. If this uncertainty
continues or if economic conditions deteriorate, our business,
results of operations, financial condition and liquidity could
be materially adversely affected. We are limited in our ability
to reduce costs to offset the results of a prolonged or severe
economic downturn in light of certain fixed costs associated
with our operations.
DETERIORATION OF
THE GLOBAL ECONOMY COULD RESULT IN FUTURE GOODWILL OR INTANGIBLE
ASSET IMPAIRMENTS.
Deterioration in the global economy also may impact the
valuation of certain long-lived or intangible assets that are
subject to impairment testing, potentially resulting in
impairment charges that may be material to our financial
condition or results of operations. As of December 31,2010, we have $306.9 million of goodwill and
$153.4 million of intangible assets recorded on our balance
sheet. We perform impairment tests of our goodwill and
indefinite-lived intangible assets annually and more often if
indicators of impairment exist.
We use a number of estimates and assumptions in calculating the
estimated fair values of assets in our impairment testing,
including future operating cash flow assumptions, future growth
rates, future cobalt price assumptions and the weighted average
cost of capital.
Factors that could trigger an impairment test outside of the
required annual review include the following:
•
significant underperformance relative to projected operating
results;
•
significant changes in estimates of future cash flows from
operations;
significant changes in discount rates used in our impairment
testing;
•
market capitalization deterioration; or
•
significant negative industry or economic trends.
Changes in our assumptions and estimates, or weakness or
deterioration in the economy, could materially affect the
goodwill and intangible asset impairment tests. If any of these
factors deteriorate, we may be required to recognize goodwill
and/or
intangible asset impairment charges that may be material to our
financial condition or results of operations.
THE LEVEL OF
RETURNS ON PENSION PLAN ASSETS AND CHANGES IN THE ACTUARIAL
ASSUMPTIONS USED COULD AFFECT OUR OPERATING RESULTS AND CASH
FLOWS IN FUTURE PERIODS.
Our operating results may be positively or negatively impacted
by the amount of expense we record for our defined benefit
pension plans. U.S. GAAP requires that we calculate pension
expense using actuarial valuations, which are dependent upon our
various assumptions; including estimates of expected long-term
rate of return on plan assets, discount rates for future payment
obligations, and the expected rate of increase in future
compensation levels. Our pension expense and funding
requirements also may be affected by our actual return on plan
assets, and by legislation and other government regulatory
actions. Changes in returns on pension plan assets and actuarial
assumptions could lead to variability in operating results and
could have a material adverse effect on our financial condition,
liquidity or results of operations.
WE DO BUSINESS
WITH THE UNITED STATES GOVERNMENT AND AS A RESULT ARE SUBJECT TO
CERTAIN GOVERNMENT REGULATIONS.
U.S. Government contracts are subject to specific
regulations. For example, we must comply with the Federal
Acquisition Regulation (“FAR”), the Truth in
Negotiations Act, the Cost Accounting Standards
(“CAS”), the Service Contract Act and Department of
Defense security regulations. We must also comply with various
other government regulations and requirements as well as various
statutes related to employment practices, environmental
protection, recordkeeping and accounting. These laws impact how
we transact business with our governmental clients and, in some
instances, impose significant costs on our business operations.
If we fail to comply with any of these regulations, requirements
or statutes, our existing government contracts could be
terminated, and we could be temporarily suspended or even
debarred from government contracting or subcontracting.
We also run the risk of the impact of government audits,
investigations and proceedings. For example, government agencies
such as the U.S. Defense Contract Audit Agency (the
“DCAA”) routinely review and audit government
contractors. The U.S. Government, including the DCAA,
audits and reviews our performance on contracts, pricing
practices, cost structure and compliance with applicable laws,
regulations and standards. The DCAA reviews a contractor’s
internal control systems and policies, including the
contractor’s purchasing, property, estimating, compensation
and management information systems, and the contractor’s
compliance with such policies. Any costs found to be improperly
allocated to a specific contract will not be reimbursed, while
such costs already reimbursed must be refunded. Despite the fact
that we take precautions to prevent and deter fraud, misconduct
or other non-compliance, we face the risk that our employees,
partners or subcontractors may engage in such activities. If any
of these agencies determine that a rule or regulation has been
violated, a variety of penalties can be imposed, including
criminal and civil penalties, all of which would harm our
reputation with the government or even debar us from future
government activities. The DCAA has the authority to review how
we have accounted for cost under the FAR and CAS, and if they
believe that we have engaged in inappropriate accounting or
other activities, payments to us may be disallowed.
If one or more of our government contracts are terminated for
any reason including for convenience, if we are suspended or
debarred from government contract work, or if payment of our
cost is disallowed, we could suffer
a significant reduction in expected revenue and could have a
material adverse effect on our financial condition or results of
operations.
CONTRACTS WITH
THE U.S. GOVERNMENT ARE SUBJECT TO UNCERTAIN LEVELS OF FUNDING,
MODIFICATION DUE TO CHANGES IN CUSTOMER PRIORITIES AND POTENTIAL
TERMINATION.
The funding of U.S. Government programs is subject to
congressional budget authorization and appropriation processes.
For certain programs, Congress appropriates funds on a fiscal
year basis even though a program may extend over several fiscal
years. Consequently, programs are often only partially funded
initially and additional funds are committed only as Congress
makes further appropriations. We cannot predict the extent to
which total funding
and/or
funding for individual programs will be included, increased or
reduced as part of the 2011 and subsequent budgets ultimately
approved by Congress or included in the scope of separate
supplemental appropriations. In addition to changes in funding
priorities, other factors such as U.S. economic
circumstances, economic plans adopted by the
U.S. Government, and pressures on the federal budget could
also adversely affect the total funding
and/or
funding for individual programs. In the event that
appropriations for one or more of our or our customers’
programs becomes unavailable, or is reduced or delayed, our
contract or subcontract under such program may be terminated or
adjusted by the U.S. Government, which could have a
material adverse effect on our future sales under such program.
We also cannot predict the impact of potential changes in
priorities due to military transformation and planning
and/or the
nature of war-related activity on existing, follow-on or
replacement programs. A shift of government priorities to
programs in which we do not participate
and/or
reductions in funding for or the termination of programs in
which we do participate, unless offset by other programs and
opportunities, could have a material adverse effect on our
results or bid prospects from this portion of our Battery
Technologies business.
In addition, the U.S. Government generally has the ability
to terminate contracts, in whole or in part, without prior
notice, for convenience or for default based on performance. In
the event of termination for the government’s convenience,
contractors are entitled to reimbursement for allowable costs
and profits on authorized work performed through the date of
termination. Termination resulting from our default can expose
us to liability and have a material adverse effect on our
ability to compete for contracts.
CHANGES IN
EFFECTIVE TAX RATES OR ADVERSE OUTCOMES RESULTING FROM
EXAMINATION OF OUR INCOME TAX RETURNS COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION OR OPERATING RESULTS.
We are subject to income taxes in the United States and numerous
foreign jurisdictions. Significant judgment is required in
evaluating our worldwide provision for income taxes. During the
ordinary course of business, there are many transactions for
which the ultimate tax determination is uncertain. For example,
our effective tax rates could be adversely affected by:
•
earnings being lower than anticipated in countries where we have
lower statutory rates and higher than anticipated in countries
where we have higher statutory rates;
•
changes in the valuation of our deferred tax assets and
liabilities;
•
the timing and amount of earnings of foreign subsidiaries that
we repatriate to the United States; or
•
changes in the relevant tax, accounting and other laws,
regulations, principles and interpretations.
We are subject to tax audits in various jurisdictions, and such
jurisdictions may assess additional income tax against us. The
final determination of tax audits and any related litigation
could be materially different from our historical income tax
provisions and accruals. The results of an audit or litigation
could have a material adverse effect on our financial condition
or results of operations in the period or periods for which that
determination is made.
THE MAJORITY OF
OUR OPERATIONS ARE OUTSIDE THE UNITED STATES, WHICH SUBJECTS US
TO RISKS THAT MAY ADVERSELY AFFECT OUR OPERATING
RESULTS.
Our business is subject to risks related to the differing legal
and regulatory requirements and the social, political and
economic conditions of many jurisdictions. In addition to risks
associated with fluctuations in foreign exchange rates, risks
inherent in international operations include the following:
•
potential supply disruptions as a result of political
instability, civil unrest or labor difficulties in countries in
which we have operations, especially the DRC and surrounding
countries;
•
agreements may be difficult to enforce, may be subject to
government renegotiation, and receivables difficult to collect
through a foreign country’s legal system;
•
customers in certain regions may have longer payment cycles;
•
foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs or adopt other
restrictions on foreign trade, investment or repatriation of
monies, including currency exchange controls;
•
unexpected adverse changes in foreign laws or regulatory
requirements may occur, including with respect to labor,
taxation, royalties, divestment, imports, exports, trade
regulations, currency and environmental matters; and
•
having to submit to the jurisdiction of a foreign court or
arbitration panel or having to enforce the judgment of a foreign
court or arbitration panel against a sovereign nation within its
own territory.
Our overall success as a global business depends, in part, upon
our ability to succeed in differing legal, regulatory, economic,
social and political conditions. We cannot assure you that we
will implement policies and strategies that will be effective in
each location where we do business. Furthermore, we cannot be
sure that one or more of the foregoing factors will not have a
material adverse effect on our business, financial condition or
results of operations.
We engage in business in certain countries where the risk of
public sector corruption and bribery is high. We have
implemented policies and procedures and conducted employee
training to assure that our operations are in compliance with
anti-bribery laws. If our compliance actions fail, a violation
of anti-bribery laws could result in serious penalties,
including criminal and civil sanctions. Such sanctions could
have a material adverse effect on our business as a whole.
THE MAJORITY OF
OUR CASH IS GENERATED AND HELD OUTSIDE THE UNITED STATES. THE
FAILURE TO MAINTAIN A LEVEL OF CASH SUFFICIENT TO ADDRESS OUR
CASH REQUIREMENTS IN THE UNITED STATES COULD AFFECT OUR
FINANCIAL CONDITION AND CASH FLOWS IN FUTURE PERIODS.
As of December 31, 2010, 87% of our cash and cash
equivalents were held outside the United States. If a
substantial amount of cash were required in the United States
for debt repayment, capital expenditures or other special
initiatives including future acquisitions, we may be required to
repatriate funds to the United States or otherwise finance
the desired activity. If funds are repatriated to the United
States, they could be subject to additional taxation, which
could have a material adverse effect on our financial condition
and liquidity.
WE MAINTAIN CASH
BALANCES IN U.S. AND FOREIGN FINANCIAL INSTITUTIONS WHICH COULD
ADVERSELY AFFECT OUR LIQUIDITY.
While we monitor the financial institutions with which we
maintain accounts, we may not be able to recover our funds in
the event that a financial institution fails. As a result, this
could adversely affect our ability to fund normal operations or
capital expenditures.
WE ARE EXPOSED TO
FLUCTUATIONS IN FOREIGN EXCHANGE RATES, WHICH MAY ADVERSELY
AFFECT OUR OPERATING RESULTS.
In addition to the United States, we have manufacturing and
other facilities in Africa, Canada, Europe and Asia-Pacific.
Although a significant portion of our raw material purchases and
product sales are transacted in U.S. dollars, liabilities
for
non-U.S. operating
expenses and income taxes are denominated in local currencies.
Many of our foreign operating subsidiaries use the local
currency as their functional currency. These include, among
others, the European Union Euro, Taiwanese Dollar, Singapore
Dollar, Malaysian Ringgit, British Pound Sterling, Japanese Yen,
Chinese Renminbi and the Canadian Dollar. In these
circumstances, the financial condition and results of operations
of our foreign operating subsidiaries are reported in the
relevant functional currency and then translated to
U.S. dollars at the applicable currency exchange rate for
inclusion in our consolidated financial statements. Changes in
exchange rates between these foreign currencies and the
U.S. dollar may adversely affect the recorded levels of our
assets and liabilities because foreign assets and liabilities,
as well as results of operations, that are translated into
U.S. dollars for presentation in our financial statements
could result in exchange losses. In addition to currency
translation risks, we incur currency transaction risk whenever
we enter into either a purchase or sales transaction using a
currency other than the functional currency of the transacting
entity.
WE ARE SUBJECT TO
STRINGENT ENVIRONMENTAL REGULATION AND MAY INCUR UNANTICIPATED
COSTS OR LIABILITIES ARISING OUT OF ENVIRONMENTAL
MATTERS.
We are subject to stringent laws and regulations relating to the
storage, handling, disposal, emission and discharge of materials
into the environment, and we have expended, and may be required
to expend in the future, substantial funds for compliance with
such laws and regulations. In addition, we may from time to time
be subjected to claims for personal injury, property damages or
natural resource damages made by third parties or regulators.
Our annual environmental compliance costs were
$11.1 million in 2010. In addition, we made capital
expenditures of approximately $1.2 million in 2010 in
connection with environmental compliance.
As of December 31, 2010, we had reserves of
$2.8 million for environmental liabilities. However, given
the many uncertainties involved in assessing liability for
environmental claims, our current reserves may prove to be
insufficient. In addition, our current reserves are based only
on known sites and the known contamination on those sites. It is
possible that additional remediation sites will be identified in
the future or that unknown contamination at previously
identified sites will be discovered. This could require us to
make additional expenditures for environmental remediation or
could result in exposure to claims in the future.
CHANGES IN
ENVIRONMENTAL, HEALTH AND SAFETY REGULATORY REQUIREMENTS COULD
AFFECT SALES OF OUR PRODUCTS.
New or revised governmental regulations relating to health,
safety and the environment may affect demand for our products.
For example, the European Union’s REACH legislation, which
has established a new system to register and evaluate chemicals
manufactured in, or imported to, the European Union and requires
additional testing, documentation and risk assessments for the
chemical industry, could affect our ability to sell certain
products. Such new or revised regulations may result in
heightened concerns about the chemicals involved and in
additional requirements being placed on the production,
handling, or labeling of the chemicals and may increase the cost
of producing them
and/or limit
the use of such chemicals or products containing such chemicals,
which could lead to a decrease in demand. As a result of these
regulations, customers may avoid purchasing some products in
favor of perceived “greener,” less hazardous or less
costly alternatives which could adversely affect sales of our
products. Additional new regulations may require us to incur
significant additional compliance costs.
WE MAY NOT BE
ABLE TO RESPOND EFFECTIVELY TO TECHNOLOGICAL CHANGES IN OUR
INDUSTRY OR IN OUR CUSTOMERS’ PRODUCTS.
Our future business success will depend in part upon our ability
to maintain and enhance our technological capabilities, develop
and market products and applications that meet changing customer
needs and
successfully anticipate or respond to technological changes on a
cost-effective and timely basis. Our inability to anticipate,
respond to or utilize changing technologies could have a
material adverse effect on our business, financial condition or
results of operations. Moreover, technological and other changes
in our customers’ products or processes may render some of
our products unnecessary, which would reduce the demand for
those products. In addition, technical advances by competitors
may lead to production of less expensive or more effective
products, which could have a material adverse effect on our
business, financial condition or results of operations.
WE MAY NOT BE
ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL
CONDITION OR OPERATING RESULTS.
We rely on U.S. and foreign patents and trade secrets to
protect our intellectual property. We attempt to protect and
restrict access to our trade secrets and proprietary
information, but it may be possible for a third party to obtain
our information and develop similar technologies.
If a competitor infringes upon our patent or other intellectual
property rights, enforcing those rights could be difficult,
expensive and time-consuming, making the outcome uncertain. Even
if we are successful, litigation to enforce our intellectual
property rights or to defend our patents against challenge could
be costly and could divert management’s attention.
BECAUSE WE DEPEND
ON SEVERAL LARGE CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR
REVENUES, OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY
ANY DISRUPTION OF OUR RELATIONSHIP WITH THESE CUSTOMERS OR ANY
MATERIAL ADVERSE CHANGE IN THEIR BUSINESSES.
We depend on several large customers for a significant portion
of our business. Sales to Nichia Chemical Corporation
represented approximately 14% of consolidated net sales in 2010.
Sales to the top three customers in the Battery Technologies
segment represented approximately 50% of Battery
Technologies’ net sales in 2010. Any disruption in our
relationships with our major customers, including any adverse
modification of our agreements with them or their unwillingness
or inability to perform their obligations under the agreements,
could materially affect our business, financial condition or
results of operations. In addition, any material adverse change
in the financial condition of any of our major customers could
have similar adverse effects.
WE OPERATE IN
VERY COMPETITIVE INDUSTRIES, WHICH COULD ADVERSELY AFFECT OUR
PROFITABILITY.
We have many competitors. Some of our principal competitors have
greater financial and other resources and greater brand
recognition than we have. Accordingly, these competitors may be
better able to withstand changes in conditions within the
industries in which we operate and may have significantly
greater operating and financial flexibility than we do. As a
result of the competitive environment in the markets in which we
operate, we currently face and will continue to face pressure on
the sales prices of our products from competitors and large
customers. With these pricing pressures, we may experience
future reductions in the profit margins on our sales, or may be
unable to pass on future raw material price or operating cost
increases to our customers, which also would reduce profit
margins. As we have few long-term commitments from our
customers, this competitive environment could give rise to a
sudden loss of business.
INDUSTRY
CONSOLIDATION BY COMPETITORS MAY LEAD TO INCREASED COMPETITION
AND MAY HARM OUR OPERATING RESULTS.
There has been a trend toward consolidation in our industries.
We believe that industry consolidation among our peers may
result in stronger competitors with greater financial and other
resources that are better able to compete for customers. This
could lead to more variability in operating results and could
have a material adverse effect on our business, financial
condition or results of operations.
FAILURE TO RETAIN
AND RECRUIT KEY PERSONNEL WOULD HARM OUR ABILITY TO MEET KEY
OBJECTIVES.
Our key personnel are critical to the management and direction
of our businesses. Our future success depends, in large part, on
our ability to retain key personnel and other capable management
personnel. It is particularly important that we maintain our
senior management group that is responsible for implementing our
strategic transformation. If we were not able to attract and
retain talented personnel and replace key personnel should the
need arise, the inability could make it difficult to meet key
objectives and disrupt the operations of our businesses.
OUR STOCK PRICE
MAY CONTINUE TO BE VOLATILE.
Historically, our common stock has experienced substantial price
volatility, particularly as a result of changes in metal prices,
primarily unrefined cobalt, which is our primary raw material in
the Advanced Materials segment. In addition, the stock market
has experienced and continues to experience significant price
and volume volatility that has often been unrelated to our
operating performance. These broad market fluctuations may
adversely affect the market price of our common stock.
THE INSURANCE
THAT WE MAINTAIN MAY NOT FULLY COVER ALL POTENTIAL
EXPOSURES.
We maintain property, business interruption and casualty
insurance but such insurance may not cover all risks associated
with the hazards of our business and is subject to limitations,
including deductibles and maximum liabilities covered. We may
incur losses beyond the limits, or outside the coverage, of our
insurance policies, including liabilities for environmental
remediation. We are potentially at risk if one or more of our
insurance carriers fail. Additionally, severe disruptions in the
domestic and global financial markets could adversely impact the
ratings and survival of some insurers. Future downgrades in the
ratings of enough insurers could adversely impact both the
availability of appropriate insurance coverage and its cost. In
the future, we may not be able to obtain coverage at current
levels, and our premiums may increase significantly on coverage
that we maintain.
Item 1B.
Unresolved
Staff Comments
The Company has received no written comments regarding its
periodic or current reports from the staff of the Securities and
Exchange Commission that were issued 180 days or more
preceding the end of its 2010 fiscal year and that remain
unresolved.
Item 2.
Properties
The Company believes that its plants and facilities, which are
of varying ages and of different construction types, have been
satisfactorily maintained, are suitable for the Company’s
operations and generally provide sufficient capacity to meet the
Company’s production requirements. The depreciation lives
of fixed assets associated with leases do not exceed the lives
of the leases.
The Company’s Kokkola, Finland production facility is
situated on property owned by Boliden Kokkola Oy. The Company
and Boliden Kokkola Oy share certain physical facilities,
services and utilities under agreements with varying expiration
dates.
M — Manufacturing/refining; A —
Administrative; R — Research and Development;
W — Warehouse
Item 3.
Legal
Proceedings
The Company is a party to various legal and administrative
proceedings incidental to its business. The Company believes
that disposition of all suits and claims related to its ordinary
course of business should not in the aggregate have a material
adverse effect on the Company’s financial position or
results of operations.
Item 4.
Submission
of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of the Company’s 2010 fiscal year.
There is set forth below the name, age, positions and offices
held by each of the Company’s executive officers, as well
as their business experience during the past five years. Dates
indicate when the individual was named to or held the indicated
position.
Joseph Scaminace — 57
•
Chairman and Chief Executive Officer (August 2005)
Kenneth Haber — 60
•
Chief Financial Officer (March 2006)
•
Interim Chief Financial Officer (November 2005 — March
2006)
Valerie Gentile Sachs — 55
•
Vice President, General Counsel and Secretary (September 2005)
Stephen D. Dunmead — 47
•
Vice President and General Manager, Specialties (January 2006)
•
Vice President and General Manager, Cobalt Group (August
2003 — January 2006)
Gregory J. Griffith — 55
•
Vice President, Strategic Planning, Development and Investor
Relations (February 2007)
•
Vice President, Corporate Affairs and Investor Relations
(October 2005 — February 2007)
Michael V. Johnson — 59
•
Vice President, Human Resources (November 2010)
•
Senior Vice President, Human Resources, FXI Foamex Innovations
(January 2008 — October 2010)
•
Human Resources Consultant (September 2006 — January
2008)
•
Vice President, Human Resources, Sanofi-Aventis (February
2004 — March 2006)
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the New York Stock
Exchange under the symbol “OMG”. As of
December 31, 2010, the number of record holders of the
Company’s common stock was 1,068.
The high and low market prices for the Company’s common
stock for each quarter during the past two years are presented
in the table below:
2010
2009
Sales Price
Cash
Sales Price
Cash
High
Low
Dividend
High
Low
Dividend
First quarter
$
36.50
$
29.83
$
—
$
24.38
$
13.90
$
—
Second quarter
$
39.06
$
23.72
$
—
$
30.10
$
18.94
$
—
Third quarter
$
30.91
$
21.97
$
—
$
35.97
$
25.24
$
—
Fourth quarter
$
39.92
$
29.50
$
—
$
34.44
$
26.41
$
—
The Company intends to continue to retain earnings for use in
the operation and expansion of the business and therefore does
not anticipate paying cash dividends in 2011.
Amounts attributable to OM Group, Inc. common
stockholders:
Income (loss) from continuing operations before cumulative
effect of change in accounting principle, net of tax
$
82.6
$
(19.4
)
$
134.9
$
111.5
$
23.6
Income from discontinued operations, net of tax
0.8
1.5
0.1
135.4
192.2
Cumulative effect of change in accounting principle, net of tax
—
—
—
—
0.3
Net income (loss)
$
83.4
$
(17.9
)
$
135.0
$
246.9
$
216.1
Net income (loss) per common share attribuable to OM Group,
Inc. common stockholders — basic:
Continuing operations
$
2.72
$
(0.64
)
$
4.48
$
3.73
$
0.80
Discontinued operations
0.02
0.05
—
4.52
6.55
Cumulative effect of change in accounting principle
—
—
—
—
0.01
Net income (loss)
$
2.74
$
(0.59
)
$
4.48
$
8.25
$
7.36
Net income (loss) per common share attribuable to
OM Group, Inc. common shareholders — assuming
dilution:
Continuing operations
$
2.70
$
(0.64
)
$
4.45
$
3.68
$
0.80
Discontinued operations
0.03
0.05
—
4.47
6.50
Cumulative effect of a change in accounting principle
—
—
—
—
0.01
Net income (loss)
$
2.73
$
(0.59
)
$
4.45
$
8.15
$
7.31
Dividends declared and paid per common share
$
—
$
—
$
—
$
—
$
—
Balance Sheet Data:
Total assets
$
1,772.7
$
1,444.1
$
1,434.4
$
1,469.2
$
1,618.2
Long-term debt, excluding current portion(a)
$
90.0
$
—
$
26.1
$
1.1
$
1.2
(a)
Amount in 2006 excludes the $400.0 million of outstanding
Notes. On February 2, 2007, the Company notified its
noteholders that it had called for redemption all
$400.0 million of its outstanding Notes. The Notes were
classified as a current liability at December 31, 2006.
Results for 2010 include a $2.1 million pre-tax
restructuring charge.
Results for 2009 include a $37.5 million pre-tax goodwill
impairment charge, a $12.7 million pre-tax restructuring
charge and a $4.7 million pre-tax gain on termination of
the retiree medical plan.
Results for 2008 include a $27.7 million pre-tax adjustment
to reduce the carrying value of certain inventory to market
value, an $8.8 million pre-tax goodwill impairment charge
and a $46.6 million tax benefit related to an election to
take foreign tax credits on prior year U.S. tax returns.
Results for 2007 include a pretax and after-tax gain on the sale
of the Nickel business of $77.0 million and
$72.3 million, respectively. In addition, 2007 results also
include a $21.7 million pre-tax charge related to the
redemption of the Notes and income tax expense of
$45.7 million related to repatriation of cash from overseas
primarily as a result of the redemption of the Notes in March
2007.
Results for 2006 include a $12.2 million pre-tax gain
related to the sale of common shares of Weda Bay Minerals, Inc.
Results for 2006 also include a $3.2 million pre-tax charge
for the settlement of litigation related to the former chief
executive officer’s termination. Income tax expense for
2006 includes $14.1 million to provide additional
U.S. income taxes on $384.1 million of undistributed
earnings of consolidated foreign subsidiaries in connection with
the Company’s planned redemption of the Notes in March 2007.
Item 7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Management’s discussion and analysis of financial condition
and results of operations should be read in conjunction with the
consolidated financial statements and the notes thereto
appearing elsewhere in this Annual Report.
General
The Company is a global solutions provider of specialty
chemicals, advanced materials, electrochemical energy storage,
and technologies crucial to enabling its customers to meet
increasingly stringent market and application requirements. The
Company believes it is the world’s largest refiner of
cobalt and producer of cobalt-based specialty products.
The Company is executing a 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 Company’s 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
Company’s ability to continue to build long-term
shareholder value.
On January 29, 2010, the Company completed the acquisition
of EaglePicher Technologies, LLC from EaglePicher Corporation
for approximately $172 million in cash. Based in Joplin,
Missouri, EaglePicher Technologies is a leader in portable power
solutions and energy storage technologies serving aerospace,
defense and medical markets, and is developing technologies in
advanced power storage to serve alternative energy storage
markets. EaglePicher Technologies product offerings can be
grouped into two broad categories: (i) proprietary battery
products and (ii) complementary battery support products
that consist of energetic devices, chargers, battery management
systems and distributed products. In fiscal year 2009,
EaglePicher Technologies recorded revenues of approximately
$125 million, of which 60 percent came from its
defense business, 33 percent from its aerospace business
and the remainder from its medical business. EaglePicher
Technologies is operated and reported within a new segment
called Battery Technologies. The results of operations of
EaglePicher Technologies have been included in the results of
the Company from the date of acquisition.
Segments
As a result of the EaglePicher Technologies acquisition, the
Company is now organized into three operating segments: Advanced
Materials, Specialty Chemicals and Battery Technologies. The
Advanced Materials segment consists of Inorganics, a joint
venture that operates a smelter in the Democratic Republic of
Congo (“DRC”) and metal resale. The Specialty
Chemicals segment is comprised of Electronic Chemicals, Advanced
Organics, Ultra Pure Chemicals (“UPC”) and Photomasks.
The Battery Technologies segment is comprised of the EaglePicher
Technologies business.
The Advanced Materials segment manufactures inorganic products
using unrefined cobalt and other metals and serves the battery
materials, powder metallurgy, ceramics and chemical end markets
by providing products with functional characteristics critical
to the success of the Company’s customers. These products
improve the electrical conduction of rechargeable batteries used
in portable electronic devices such as cellular phones, video
cameras, portable computers and power tools as well as various
types of electric vehicles. The smelter joint venture
(Groupement pour le Traitement du Terril de Lubumbashi Limited
(“GTL”)) is
consolidated in the Company’s financial statements because
the Company has a controlling interest in the joint venture. The
GTL smelter is a primary source of the Company’s cobalt raw
material feed.
The Specialty Chemicals segment consists of the following:
Electronic Chemicals: Electronic
Chemicals develops and manufactures products for the printed
circuit board, memory disk, general metal finishing, electronic
packaging and finishing, and photovoltaic markets.
Advanced Organics: Advanced Organics
offers products for the coating and inks, chemical and tire
markets. Products for the coatings and inks market promote
drying and other performance characteristics.
Ultra Pure Chemicals: UPC develops,
manufactures and distributes 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: Photomasks manufactures
photo-imaging masks (high-purity quartz or glass plates
containing precision, microscopic images of integrated circuits)
and reticles for the semiconductor, optoelectronics,
microelectronics and micro electro mechanical systems industries
under the Compugraphics brand name.
The Battery Technologies segment, which consists of the
EaglePicher Technologies business acquired on January 29,2010, provides advanced batteries, battery materials, battery
management systems, battery-related research and energetic
devices for the defense, aerospace and medical markets.
The Company’s business is critically connected to both the
availability and price of raw materials. The primary raw
material used by the Advanced Materials segment is unrefined
cobalt. Unrefined cobalt is obtained from three basic sources:
primary cobalt mining, as a by-product of another metal
(typically copper or nickel), and from recycled material. Cobalt
raw materials include ore, concentrate, slag, scrap and metallic
feed. The availability of unrefined cobalt is dependent on
global market conditions, cobalt prices and the prices of copper
and nickel. Also, political and civil instability in supplier
countries, variability in supply and worldwide demand, including
demand in developing countries such as China, have affected and
will likely continue to affect the supply and market price of
raw materials. 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 GTL smelter in the DRC is a primary source for
the Company’s cobalt raw material feed. After smelting in
the DRC, cobalt/copper white alloy is sent to the Company’s
refinery in Kokkola, Finland.
The cost of the Company’s raw materials fluctuates due to
changes in the cobalt reference price, actual or perceived
changes in supply and demand of raw materials, and changes in
availability from suppliers. The Company attempts to mitigate
increases in raw material prices by passing through such
increases to its customers in the prices of its products and by
entering into sales contracts that 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.
Fluctuations in the price of cobalt have historically been
significant and the Company believes that cobalt price
fluctuations are likely to continue in the future. Fluctuations
in the price of copper can also impact the short-term
profitability and cash flow from operations of the Company both
positively and negatively. Declines in the selling prices of the
Company’s finished goods, which can result from decreases
in the reference price of cobalt or other factors, can result in
the Company’s inventory carrying value being written down
to a lower market value.
Executive
Overview
The Company’s Advanced Materials and Specialty Chemicals
segments both achieved significantly improved
year-over-year
results. An increase in end — market demand resulted
in increased sales and product volumes, which together with
higher metal prices led to improved operating results during
2010 compared to 2009. The
Company completed the acquisition of EaglePicher Technologies on
January 29, 2010. Battery Technologies contributed
$113.9 million and $5.1 million to the Company’s
net sales and operating profit, respectively, during 2010.
The Advanced Materials segment benefitted from an increase in
the average cobalt reference price and favorable product mix in
2010 compared to 2009. Demand for fine powders in powder
metallurgy applications strengthened significantly from 2009,
partially due to customer restocking within the supply chain.
These favorable items were partially offset by decreased sales
of battery materials, primarily in China.
The Specialty Chemicals segment experienced an increase in
operating profit in 2010 compared with 2009, even after
excluding the 2009 goodwill impairment and restructuring
charges, largely as the result of increased volume due to
stronger end-market demand and favorable product mix. During
2009, the Company determined that a portion of Specialty
Chemicals goodwill was impaired, resulting in net impairment
charges of $37.5 million. Restructuring charges related to
the Advanced Organics business were $2.1 million and
$12.7 million in 2010 and 2009, respectively.
Battery Technologies operating profit was $3.1 million in
both the third and fourth quarter of 2010 compared to
$0.4 million in the second quarter of 2010. This increase
in operating profit was primarily due to timing of deliveries in
Defense and Aerospace and $1.6 million of charges in the
second quarter of 2010 related to purchase price accounting for
acquired inventories and deferred revenue that did not recur in
the third or fourth quarters of 2010.
The following table identifies, by segment, the components of
change in net sales in 2010 compared with 2009:
(In millions)
2009 Net Sales
$
871.7
Increase in 2010 from:
Advanced Materials
148.2
Specialty Chemicals
60.9
Battery Technologies
113.9
Intersegment items
1.9
2010 Net Sales
$
1,196.6
Net sales increased $324.9 million, or 37.3%, primarily due
to increased volume, the increase in the cobalt reference price
and the EaglePicher Technologies acquisition. Increased
end-market demand drove higher volume in Specialty Chemicals
($50.2 million). Advanced Materials achieved increased
cobalt volume ($30.7 million). The improvement in demand
was partially due to customer re-stocking within the supply
chain in certain end markets. The average cobalt reference price
increased from $15.90 in 2009 to $18.74 in 2010, which together
with favorable product mix, resulted in higher product selling
prices ($68.7 million) in Advanced Materials. Advanced
Materials also benefited from an increase in cobalt metal resale
($35.5 million) primarily due to the increase in the
average cobalt reference price and increased volume. Advanced
Materials copper by-product sales also were higher
($13.3 million) due to the higher average copper price in
2010 compared with 2009, partially offset by lower volume.
Favorable selling prices and mix positively affected Specialty
Chemicals in 2010 compared to 2009 ($12.3 million). Battery
Technologies net sales were $113.9 million in 2010.
Excluding Battery Technologies, net sales increased
$211.0 million, or 24.2%, in 2010 compared with 2009.
During 2009, the Company commenced a restructuring plan of the
Company’s Advanced Organics business within the Specialty
Chemicals segment to better align the cost structure and asset
base of its European carboxylate business to industry conditions
resulting from weak customer demand, commoditization of products
and overcapacity in that market. The restructuring included
exiting the Manchester, England manufacturing facility and
disposing of the fixed assets located in the Manchester
facility, as well as smaller workforce reductions at other
facilities. The majority of position eliminations were completed
by mid-2010. The restructuring plan does not involve the
discontinuation of any material product lines or other functions
for the Advanced Organics business as a whole. Decommissioning
and demolition of the Manchester, England facility began during
the third quarter of 2010 and is expected to be completed during
the first half of 2011. The Company recorded restructuring
charges of $2.1 million and $12.7 million in 2010 and
2009, respectively.
Gross profit increased to $284.7 million in 2010, compared
with $165.8 million in 2009. The largest factor affecting
the $118.9 million increase in gross profit was the
increase in the average cobalt reference price that resulted in
higher Advanced Materials selling prices, which together with
favorable product mix increased gross profit by
$48.7 million in 2010 compared with 2009. Also impacting
the Advanced Materials segment gross profit was increased cobalt
volume ($19.3 million) in 2010 compared to 2009. These
improvements to gross profit in the Advanced Materials segment
were partially offset by a $22.1 million increase in
manufacturing and distribution expenses due to the increase in
cobalt volume and costs associated with the maintenance shutdown
of the GTL smelter. In the Specialty Chemicals segment, gross
profit was affected by increased volume ($27.9 million) and
favorable pricing/mix ($11.4 million) and a
$3.4 million decrease in manufacturing and distribution
expenses. Decreased manufacturing and distribution expenses in
the Advanced Organics business due to the restructuring were
partially offset by increased manufacturing and distribution
expenses in the other Specialty Chemicals businesses due to
increased volume. Battery Technologies contributed
$18.1 million of gross profit in 2010, after a
$3.2 million charge related to purchase accounting
adjustments that will not recur, as discussed below. The
increase in gross profit as a percentage of
net sales (23.8% in 2010 versus 19.0% in 2009) was
primarily due to the positive factors discussed above and the
decrease in restructuring charges in 2010 compared to 2009.
Inventory acquired as part of the EaglePicher Technologies
acquisition was initially recorded at fair value, which involves
stepping up the value of acquired finished goods and
work-in-process
from historical cost of the acquired company to its expected
sales value less costs to complete and sell the inventory. As
this inventory was sold in the ordinary course of business, the
inventory
step-up was
charged to cost of products sold, which reduced gross profit by
$2.4 million in 2010. During 2010, the Company also
recorded a $0.8 million reduction in revenue related to
amortization of the adjustment to fair value deferred revenue on
the acquired balance sheet. The
step-up to
fair value of inventory acquired and the adjustment to fair
value deferred revenue have been fully amortized as of
December 31, 2010 and will not recur in the future.
Selling, general and administrative expenses
(“SG&A”) increased to $161.8 million in 2010
compared with $133.3 million in 2009. The increase was
primarily due to $13.1 million of Battery Technologies
SG&A expenses, increased employee incentive compensation
expense related to the anticipated payouts under the 2010 annual
bonus program, a $2.0 million charge in 2010 due to an
other-than-temporary
decline in the fair value of a cost method investment and
$0.9 million in transaction costs associated with the
EaglePicher Technologies acquisition. The decrease in SG&A
as a percentage of net sales (13.5% in 2010 versus 15.3% in
2009) was due to SG&A expenses being spread over
higher net sales.
In 2009, the Company recorded a non-cash charge totaling
$37.5 million in the Specialty Chemicals segment for the
impairment of goodwill related to the Advanced Organics, UPC and
Photomasks businesses.
The Company recognized a $4.7 million gain in 2009 on the
termination of its retiree medical plan. As a result of the
termination, the accumulated postretirement benefit obligation
has been eliminated. The gain is included as a reduction of
Corporate expenses.
The following table identifies, by segment, the components of
change in operating profit (loss) for 2010 compared with 2009:
(In millions)
2009 Operating Loss
$
(1.0
)
Increase (decrease) in 2010 from:
Advanced Materials
42.3
Specialty Chemicals
86.5
Battery Technologies
5.1
Corporate
(10.3
)
Intersegment items
—
2010 Operating Profit
$
122.6
The change in operating profit (loss) for 2010 as compared to
2009 was due to the factors discussed above and Battery
Technologies operating profit, which includes purchase
accounting adjustments of $3.2 million discussed above and
$3.2 million of amortization of acquired intangibles.
The following table summarizes the components of Other expense,
net:
The increase in interest expense is due to the increase in the
average amount outstanding under the Revolver during 2010
compared with 2009. The increase in foreign exchange loss is
primarily related to the revaluation of non-functional currency
cash balances at foreign sites due to changes in exchange rates
(primarily the Euro, Malaysian Ringgit and Taiwanese Dollar).
The change in income (loss) from continuing operations before
income tax expense for 2010 compared with 2009 was due to the
factors discussed above, primarily the affect of the increase in
the cobalt reference price, favorable product mix and increased
sales volume.
The Company recorded income tax expense of $29.7 million on
income from continuing operations before income tax expense of
$107.3 million for 2010, resulting in an effective income
tax rate of 27.6%. The Company recorded net discrete tax items
netting to expense of $5.4 million. This amount included
$10.1 million of discrete tax expense related to the GTL
joint venture, of which the Company’s share is 55%, or
$5.6 million. The GTL items are primarily comprised of an
$11.5 million charge to reserve a portion of GTL’s
prepaid income tax balance, and a benefit of $2.6 million
primarily related to a return to provision adjustment. Without
discrete items, the effective income tax rate for 2010 would
have been 22.6%. This rate is lower than the U.S. statutory
tax rate primarily due to income earned in tax jurisdictions
with lower statutory rates than the U.S. (primarily
Finland) and a tax holiday in Malaysia. This was partially
offset by losses in certain jurisdictions with no corresponding
tax benefit (including the U.S.). During 2009, the Company
recorded discrete tax expense items totaling $10.2 million,
which included $9.2 million related to GTL of which the
Company’s 55% share was $5.1 million. Also in 2009,
the Company recorded goodwill and intangible asset impairment
charges totaling $39.1 million, which are not deductible
for tax purposes. Adjusting the pretax loss for the impairment
charges and excluding discrete items, the Company’s
effective income tax rate would have been 28.2% for 2009. This
effective tax rate is 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)
and a tax holiday in Malaysia, offset by income earned in
foreign tax jurisdictions with higher statutory rates than the
US, principally the DRC.
Income from discontinued operations in 2010 of $0.7 million
was primarily due to a $1.6 million tax benefit related to
a prior period error, partially offset by a $1.2 million
increase in a tax contingency accrual. Income from discontinued
operations of $1.5 million in 2009 was primarily due to the
reversal of a $2.0 million tax contingency accrual. Both
periods were also impacted by translation adjustments of
retained liabilities of businesses sold denominated in a foreign
currency.
Net (income) loss attributable to the noncontrolling interest
relates to GTL. Since the joint venture is consolidated, the
noncontrolling interest is part of total income from continuing
operations. Net (income) loss attributable to the noncontrolling
interest removes the income (loss) not attributable to OM Group,
Inc. Net loss attributable to the noncontrolling interest was
$5.0 million in 2010 compared with $2.6 million in
2009. The change was primarily due to the discrete tax items at
GTL discussed above and costs associated with the maintenance
shutdown of the GTL smelter ($5.7 million), partially
offset by the favorable impact of increased deliveries in 2010
compared with 2009 due to timing of arrivals of cobalt raw
material to the Kokkola refinery from the DRC smelter.
Income (loss) from continuing operations attributable to OM
Group, Inc. was income of $82.6 million, or $2.70 per
diluted share, in 2010 compared with a loss of
$19.4 million, or $0.64 per diluted share in 2009, due
primarily to the aforementioned factors.
Net income (loss) attributable to OM Group, Inc. was income of
$83.4 million, $2.73 per diluted share, in 2010, compared
with a loss of $17.9 million, or $0.59 per diluted share,
in 2009, due primarily to the aforementioned factors.
The following table identifies, by segment, the components of
change in net sales in 2009 compared with 2008:
(In millions)
2008 Net Sales
$
1,736.8
Decrease in 2009 from:
Advanced Materials
(720.0
)
Specialty Chemicals
(144.9
)
Intersegment items
(0.2
)
2009 Net Sales
$
871.7
Net sales decreased $865.1 million, or 50%, primarily due
to a $398.7 million decrease from lower product selling
prices in the Advanced Materials segment, which resulted from a
decrease in the average cobalt reference price in 2009 compared
with 2008, and a $169.0 million decrease from the resale of
cobalt metal. The weak economy drove decreases in volume in both
Advanced Materials ($122.0 million) and Specialty Chemicals
($107.8 million) as a result of weak end-market demand and
customer de-stocking. Advanced Materials copper by-product sales
also were lower ($28.6 million) due to the lower average
copper price and decreased volume in 2009 compared with 2008.
Unfavorable selling prices and sales mix ($24.1 million)
and currency impact ($14.3 million) also negatively
impacted net sales in Specialty Chemicals.
During 2009, the Company announced and began to implement a
restructuring plan of the carboxylate portion of its Advanced
Organics business to better align the cost structure to industry
conditions resulting from weak customer demand and overcapacity.
The Company recorded charges totaling $12.7 million in 2009
in connection with the restructuring during that period.
Gross profit decreased to $165.8 million in 2009, compared
with $352.5 million in 2008. The largest factor affecting
the $186.7 million decrease in gross profit was the change
in the average cobalt reference price during 2008 and 2009. The
average cobalt reference price rose from $40.00 at the beginning
of 2008 to near $50.00 by the end of the first quarter and
averaged $45.93 and $32.54 per pound in the second and third
quarters of 2008, respectively, before dropping to an average of
$20.81 per pound in the fourth quarter of 2008. The average
reference price of cobalt was $13.37, $14.44, $17.30 and $18.35
in the first, second, third and fourth quarters of 2009,
respectively. As a result, 2008 benefited from higher product
selling prices due to the high average reference price for
cobalt during the first half of 2008 and the favorable effect of
a rising cobalt price environment during that period, which
resulted in the sale at higher selling prices of products
manufactured using lower cost cobalt raw materials. This set of
circumstances did not exist during 2009, which included a lower
and more stable price environment. The impact of the changing
reference price reduced gross profit by $156.9 million in
2009 compared with 2008. As a result of the rapid and
significant decline in the cobalt reference price during the
second half of 2008, and in particular in the fourth quarter,
2008 results include a $27.7 million charge ($20.7 in
Advanced Materials and $7.0 million in Specialty Chemicals)
to reduce the carrying value of certain inventories to market
value. Also impacting the Advanced Materials segment gross
profit was decreased volume ($51.9 million) and a decrease
in profit associated with copper by-product sales
($7.2 million). Advanced Materials was favorably impacted
by a $23.7 million reduction in manufacturing and
distribution expenses due primarily to reduced volume and the
Company’s profit enhancement initiatives that included
reductions in discretionary spending, headcount reductions, and
decreased employee incentive compensation; and lower
process-based material costs ($15.2 million). In the
Specialty Chemicals segment, decreased volume and restructuring
charges reduced gross profit by $36.8 million and
$12.0 million, respectively. Specialty Chemicals was
favorably impacted by a $12.6 million reduction in
manufacturing and distribution expenses due primarily to the
reduced volume and the Company’s profit enhancement
initiatives described above. The decrease in gross profit as a
percentage of net sales (19.0% in 2009 versus 20.3% in
2008) was primarily due to the favorable effect of higher
cobalt selling prices in 2008 partially offset by the
$27.7 million inventory adjustment, as compared with the
conditions that existed
during 2009, which included the $12.0 million restructuring
charge and fixed expenses spread over lower sales revenues.
SG&A decreased to $133.3 million in 2009 compared with
$166.1 million in 2008. The decline in SG&A was
primarily attributable to overall reduced spending due to
reduced volume and the Company’s profit enhancement
initiatives, including headcount reductions and decreased
employee incentive compensation. The increase in SG&A as a
percentage of net sales (15.3% in 2009 versus 9.6% in
2008) was due to SG&A expenses being spread over lower
net sales.
In 2009, the Company recorded a non-cash charge totaling
$37.5 million in the Specialty Chemicals segment for the
impairment of goodwill related to the Advanced Organics, UPC and
Photomasks businesses.
The Company recognized a $4.7 million gain in 2009 on the
termination of its retiree medical plan. As a result of the
termination, the accumulated postretirement benefit obligation
has been eliminated. The gain is included as a reduction of
Corporate expenses.
The change in operating profit (loss) for 2009 compared with
2008 was due to the factors discussed above, primarily changes
in cobalt price, reduced volumes and goodwill impairment
charges, partially offset by cost reductions. The following
table identifies, by segment, the components of change in
operating profit (loss) for 2009 compared with 2008:
(In millions)
2008 Operating Profit
$
177.6
Increase (decrease) in 2009 from:
Advanced Materials
(150.2
)
Specialty Chemicals
(38.2
)
Corporate
10.2
Intersegment items
(0.4
)
2009 Operating Loss
$
(1.0
)
Other income (expense), net for 2009 was expense of
$0.1 million compared with expense of $5.3 million in
2008. The following table summarizes the components of Other
income (expense), net:
The change in income (loss) from continuing operations before
income tax expense for 2009 compared with 2008 was due to the
factors discussed above, primarily the impact of the decline in
the cobalt reference price, the negative impact on demand caused
by the deterioration of the global economy, the goodwill and
intangible asset impairment charges and the restructuring charge.
Income tax expense in 2009 was $20.9 million on pre-tax
loss of $1.1 million, resulting in a negative tax rate,
compared to income tax expense in 2008 of $16.1 million on
pre-tax income of $172.3 million, or 9.3%. During 2009, the
Company recorded discrete tax expense items totaling
$10.2 million, which included $9.2 million related to
GTL in the DRC, (of which the Company’s share is 55%). Also
in 2009, the Company recorded goodwill and intangible asset
impairment charges totaling $39.1 million, which are not
deductible for tax purposes. Adjusting the pretax loss for the
impairment charges and excluding the discrete items, the
Company’s effective income tax rate would have been 28.2%
for 2009. This effective tax rate is 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) and a tax holiday in Malaysia,
offset by income earned in foreign tax jurisdictions with higher
statutory rates than the US, principally the DRC. During 2008,
the Company completed an analysis of foreign tax credit
positions and recorded a $46.6 million tax benefit related
to an election to take foreign tax credits on prior year
U.S. tax returns. Excluding the tax benefit related to the
foreign tax credits, the Company’s effective income tax
rate would have been 36.4% for 2008. In 2008, the effective tax
rate, excluding the foreign tax credit noted above, was higher
than the U.S. statutory rate due to several factors: the
non-deductible goodwill impairment charge, the cost of
repatriating foreign earnings and the ability to recognize tax
benefits for only a portion of U.S. losses.
Income from discontinued operations in 2009 of $1.5 million
was primarily due to the reversal of a $2.0 million tax
contingency accrual partially offset by translation adjustments
of retained liabilities of businesses sold denominated in a
foreign currency.
Net (income) loss attributable to noncontrolling interest
relates to the Company’s 55%-owned smelter joint venture in
the DRC. Since the joint venture is consolidated, the
noncontrolling interest is included in income from continuing
operations. Net loss attributable to noncontrolling interest of
$2.6 million in 2009 compared with net income attributable
to noncontrolling interest of $21.3 million in 2008. The
change was due to the unfavorable impact of lower cobalt prices,
decreased deliveries and increased tax expense in 2009 compared
with 2008.
Income (loss) from continuing operations attributable to OM
Group, Inc. was a loss of $19.4 million, or $0.64 per
diluted share in 2009, compared with income of
$134.9 million, or $4.45 per diluted share in 2008, due
primarily to the aforementioned factors.
Net income (loss) attributable to OM Group, Inc. was a loss of
$17.9 million, or $0.59 per diluted share, in 2009,
compared with income of $135.0 million, or $4.45 per
diluted share, in 2008. The decrease was due primarily to the
aforementioned factors.
The following table summarizes the average quarterly reference
price per pound of low grade cobalt (as published in Metal
Bulletin magazine):
2010
2009
2008
First Quarter
$
20.11
$
13.37
$
46.19
Second Quarter
$
19.36
$
14.44
$
45.93
Third Quarter
$
18.10
$
17.30
$
32.54
Fourth Quarter
$
17.41
$
18.35
$
20.81
Full Year
$
18.74
$
15.90
$
36.58
The following table summarizes the average quarterly London
Metal Exchange (“LME”) price per pound of copper:
2010
2009
2008
First Quarter
$
3.29
$
1.56
$
3.52
Second Quarter
$
3.18
$
2.12
$
3.83
Third Quarter
$
3.28
$
2.65
$
3.49
Fourth Quarter
$
3.91
$
3.01
$
1.80
Full Year
$
3.42
$
2.34
$
3.16
2010 Compared
with 2009
Net
Sales
The following table identifies the components of change in net
sales:
(In millions)
2009 Net Sales
$
472.4
Increase (decrease) in 2010 from:
Selling price/mix
68.7
Cobalt volume
30.7
Cobalt metal resale
35.5
Copper by-product (price and volume)
13.3
2010 Net Sales
$
620.6
The increase in net sales in 2010 was due primarily to increased
product selling prices which resulted from an increase in the
average cobalt reference price from 2009 to 2010, favorable
product mix and increased volume.
Favorable product mix was primarily the result of increased
demand, primarily in the powder metallurgy market. Increased
demand for fine powders in powder metallurgy applications due in
part to customer restocking within the supply chain was
partially offset by decreased sales of battery materials,
primarily in China. The shift in product mix and increased
cobalt volume resulted in higher net sales dollars and operating
profit as discussed below. Cobalt metal resale was also
positively affected by the increase in the cobalt price and
increased volume. The increase in copper by-product sales in
2010 was due to the higher average copper price in 2010 compared
with 2009, partially offset by decreased volume. The decrease in
copper volume in 2010 compared to 2009 was primarily due to
changes in the mix of feed.
Operating
Profit
The following table identifies the components of change in
operating profit:
The increase in operating profit in 2010 compared with 2009
periods was primarily due to favorable cobalt price basis as
2010 benefited from higher product selling prices due to the
higher average reference price for cobalt during 2010 and higher
cobalt volume. These items were partially offset by increased
manufacturing and distribution expenses. The increase in
manufacturing and distribution expenses in 2010 was due to
$5.7 million of expense associated with the maintenance
shut-down of the GTL smelter and the increase in cobalt volume.
The decrease in operating profit associated with copper
by-product sales was due to decreased volume primarily due to
changes in the mix of feed partially offset by favorable copper
price. SG&A expenses include a $2.0 million charge in
2010 due to an
other-than-temporary
decline in the fair value of a cost method investment.
2009 Compared
with 2008
Net
Sales
The following table identifies the components of change in net
sales:
(In millions)
2008 Net Sales
$
1,192.4
Decrease in 2009 from:
Selling price
(398.7
)
Cobalt metal resale
(169.0
)
Volume
(122.0
)
Copper (price and volume)
(28.6
)
Other
(1.7
)
2009 Net Sales
$
472.4
The net sales decrease in 2009 was due primarily to decreased
product selling prices that resulted from a decrease in the
average cobalt reference price. Cobalt metal resale was also
negatively impacted by the
decrease in the cobalt price. Weak worldwide economic conditions
drove decreases in volume, which impacted all end markets
including cobalt metal resale. Copper by-product sales were
lower due to the lower average copper price and decreased volume
in 2009 compared with 2008.
Operating
Profit
The following table identifies the components of change in
operating profit:
Reductions in manufacturing and distribution expenses
23.7
Reductions in SG&A expenses
8.0
Other
(4.1
)
2009 Operating Profit
$
53.3
The decrease in operating profit in 2009 compared to 2008 was
primarily due to unfavorable cobalt pricing as 2008 benefited
from higher product selling prices due to the high average
reference price for cobalt during 2008 and the favorable effect
of a rising cobalt price environment during the first half of
2008, which resulted in the sale at higher selling prices of
products manufactured using lower cost cobalt raw materials.
This set of circumstances did not exist during 2009, which
included a lower and more stable price environment. Operating
profit was also impacted by decreased volume as the
deterioration of the global economy resulted in weak demand in
all end markets. However, on a sequential basis, operating
profit increased from $11.4 million in the first half of
2009 to $41.9 million in the second half of 2009, due to
increased demand across all end markets and the favorable effect
of a rising cobalt price environment. The decrease in profit
associated with copper by-product sales in 2009 compared to 2008
was due to both lower price and decreased volume associated with
differences in raw material mix. These items were partially
offset by decreased manufacturing and distribution and SG&A
expenses, lower process-based material costs and a favorable
currency impact. Manufacturing and distribution and SG&A
expenses decreased primarily due to overall reduced spending in
response to the weak global economic conditions including
reductions in discretionary spending, headcount reductions, and
decreased employee incentive compensation. The favorable
currency impact was primarily the result of the stronger
U.S. Dollar against the Euro in 2009 compared to 2008.
Ultra Pure Chemicals sales volume — gallons (thousands)
5,973
4,564
5,152
Photomasks — number of masks
30,632
27,065
27,834
2010 Compared
with 2009
Net
Sales
The following table identifies the components of change in net
sales:
(In millions)
2009 Net Sales
$
401.8
Increase (decrease) in 2010 from:
Volume
50.2
Selling price/mix
12.3
Foreign currency
(2.8
)
Other
1.2
2010 Net Sales
$
462.7
The $60.9 million increase in net sales in 2010 compared to
2009 was primarily due to increased volume and favorable selling
price/mix. 2009 was unfavorably impacted by decreased volumes
across all end markets due to customers’ inventory
de-stocking, primarily during the first half of 2009, and weak
customer demand as a result of the global economic conditions.
The following table identifies the components of change in
operating profit (loss):
(In millions)
2009 Operating Loss
$
(27.0
)
2009 Goodwill impairment, net
37.5
2009 Intangible asset impairment, net
1.6
2009 Restructuring charge
12.7
Increase (decrease) in 2010 from:
Volume
27.9
Price/Mix
11.4
Manufacturing and distribution expenses
3.4
Selling, general and administrative expenses
(6.2
)
2010 Restructuring charge
(2.1
)
Foreign currency
(0.8
)
Other
1.2
2010 Operating Profit
$
59.6
The operating profit increase in 2010 compared to 2009 was
primarily due to the 2009 charges for the impairment of
goodwill, the 2009 restructuring charge, increased sales volume
and favorable product pricing/mix in 2010 and favorable
manufacturing and distribution expenses. Favorable manufacturing
and distribution expenses in the Advanced Organics business due
to the restructuring were partially offset by increased
manufacturing and distribution expenses in the other Specialty
Chemicals businesses due to increased volume. These favorable
items were partially offset by increased SG&A expenses and
the 2010 restructuring charge. The increase in SG&A was
primarily attributable to overall increased spending due to
increased volume and increased employee incentive compensation
in 2010.
2009 Compared
with 2008
Net
Sales
The following table identifies the components of change in net
sales:
(In millions)
2008 Net Sales
$
546.7
Increase (decrease) in 2009 from:
Volume
(107.8
)
Selling price/mix
(24.1
)
Foreign currency
(14.3
)
Other
1.3
2009 Net Sales
$
401.8
The $144.9 million decrease in net sales in 2009 compared
to 2008 was primarily due to decreased volume. Volumes were down
across all end markets due to customers’ inventory
de-stocking, primarily during the first half of 2009, and weak
demand as a result of the global economic conditions.
Unfavorable selling prices, sales mix and the stronger
U.S. dollar also negatively impacted net sales.
The following table identifies the components of change in
operating profit (loss):
(In millions)
2008 Operating Profit
$
11.2
2008 Goodwill impairment
8.8
2008 Intangible asset impairment charge
0.2
2008 Lower of cost or market inventory charge
7.0
Increase (decrease) in 2009 from:
Volume
(36.8
)
Price/Mix
0.7
Reductions in manufacturing and distribution expenses
12.6
Reductions in selling, general and administrative expenses
17.6
Foreign currency
4.4
Other
(0.9
)
2009 Goodwill impairment, net
(37.5
)
2009 Intangible asset impairment charges
(1.6
)
2009 Restructuring charges
(12.7
)
2009 Operating Loss
$
(27.0
)
The $38.2 million decrease in operating profit (loss) in
2009 compared to 2008 included non-cash charges for the
impairment of goodwill related to the UPC, Photomasks and
Advanced Organics businesses and non-cash intangible asset
impairment charges ($1.6 million in 2009 compared to
$0.2 million in 2008). See Note 6 to the Consolidated
Financial Statements in this
Form 10-K
for further discussion of the goodwill and intangible asset
impairment charges. In addition, the Company recorded
restructuring charges totaling $12.7 million in 2009. See
Note 7 to the Consolidated Financial Statements in this
Form 10-K
for further discussion of the restructuring charge. The decrease
in sales volume that drove the decrease in net sales discussed
above also impacted operating loss in 2009. These unfavorable
items were significantly offset by decreased manufacturing and
distribution and SG&A expenses as a result of a reduction
in discretionary spending, headcount reductions, and decreased
employee incentive compensation.
Includes activity since the acquisition of EaglePicher
Technologies on January 29, 2010.
(b)
Includes purchase accounting adjustments which reduced operating
profit by $1.5 million, $1.6 million and
$0.1 million in the first second and third quarters of
2010, respectively, for acquired inventories and deferred
revenue. These charges will not recur in the future.
The Battery Technologies segment tracks backlog in order to
assess its current business development effectiveness and to
assist in forecasting future business needs and financial
performance. Backlog is equal to the value of unfulfilled orders
for which funding is contractually obligated by the customer and
for which revenue has not been recognized. Backlog is converted
into sales as work is performed or deliveries are made. At
December 31, 2010, backlog of $35.1 million (or 26%)
is not expected to be converted into sales during the next
twelve months.
Net backlog increased at December 31, 2010 compared to
September 30, 2010 primarily due to orders in excess of
deliveries in Defense, partially offset by deliveries in excess
of orders in Aerospace and Medical. The decrease in Aerospace
backlog is partially due to the delay of certain government
programs.
The following table summarizes the percentage of sales dollars
by end market for the Battery Technologies segment:
Battery Technologies net sales of $113.9 million for 2010
represents the net sales results of the EaglePicher Technologies
business following the acquisition that was completed on
January 29, 2010. On a sequential basis, Battery Technology
net sales decreased $4.5 million, or 12.6%, in the fourth
quarter of 2010 compared to the third quarter of 2010, primarily
due to timing of deliveries in Aerospace.
Operating
Profit
Battery Technologies operating profit for 2010 represents the
results of the EaglePicher Technologies business following the
acquisition on January 29, 2010. Included in the
$5.1 million operating profit is a $2.4 million charge
related to the
step-up to
fair value of inventory acquired as of January 29, 2010 and
sold in the ordinary course of business, a $0.8 million
reduction in revenue related to the amortization of the
adjustment to fair value deferred revenue and $3.2 million
of amortization of acquired intangibles. The
step-up to
fair value of inventory acquired and the adjustment to fair
value deferred revenue have been fully amortized as of
December 31, 2010 and will not recur in the future.
Corporate
Expenses
Corporate expenses consist of corporate overhead supporting the
Advanced Materials, Specialty Chemicals and Battery Technologies
segments but not specifically allocated to an operating segment,
including certain legal, finance, human resources and strategic
development activities, as well as all share-based compensation.
2010 Compared
with 2009
Corporate expenses were $37.6 million in 2010 compared with
$27.3 million in 2009. Corporate expenses in 2010 include
increased employee incentive compensation expense primarily due
to anticipated payouts under the 2010 annual incentive plan.
There were no payouts under the 2009 annual incentive plan.
Also, 2009 includes a $4.7 million gain on the termination
of the Company’s retiree medical plan.
2009 Compared
with 2008
Corporate expenses were $27.3 million in 2009 compared with
$37.5 million in 2008. Corporate expense in 2009 is net of
a $4.7 million gain for the termination of the
Company’s retiree medical plan. Also contributing to the
$10.2 million decrease in corporate expenses from 2008 is a
decrease in employee incentive and share-
based compensation expense in 2009 compared with 2008. This
decrease was primarily due to a significant reduction in
anticipated annual incentive compensation (including no payout
under the 2009 annual incentive plan), a reduction in the number
of time-based restricted shares outstanding, and a reduction in
expense related to performance-based incentive compensation as
the probability of achievement/vesting decreased. These items
were partially offset by $1.3 million in transaction costs
related to the acquisition of EaglePicher Technologies that were
expensed in 2009.
Liquidity and
Capital Resources
Cash Flow
Summary
The Company’s cash flows from operating, investing and
financing activities for 2010, 2009 and 2008, as reflected in
the Statements of Consolidated Cash Flows, are summarized and
discussed in the following tables (in millions) and related
narrative:
2010
2009
change
Net cash provided by (used for):
Operating activities
$
126.6
$
165.5
$
(38.9
)
Investing activities
(199.8
)
(30.5
)
(169.3
)
Financing activities
120.3
(26.7
)
147.0
Discontinued
operations-net
cash used for operating activities
(0.1
)
(0.4
)
0.3
Effect of exchange rate changes on cash
(1.8
)
2.7
(4.5
)
Net change in cash and cash equivalents
$
45.2
$
110.6
$
(65.4
)
Net cash provided by operating activities was
$126.6 million in 2010 compared with net cash provided by
operations of $165.5 million in 2009. The 2010 amount was
primarily due to $77.7 million of income from continuing
operations plus the following factors:
•
depreciation and amortization expense of $54.1 million;
•
an $11.5 million non-cash charge to establish an allowance
against GTL’s prepaid tax asset; and
•
a $10.7 million non-cash foreign exchange loss.
These items were partially offset by a $40.3 million
reduction in net working capital (defined as inventory plus
accounts receivable less accounts payable) reflecting a decrease
in inventories and accounts payable and an increase in accounts
receivable. In 2009, net cash provided by operations of
$165.5 million was primarily due to the $22.0 million
loss from continuing operations in 2009, the change in net
working capital (defined as inventory plus accounts receivable
less accounts payable) which contributed positive cash flows of
$73.6 million in 2009, depreciation and amortization
expense of $53.8 million, and the $37.5 million
non-cash goodwill impairment charge.
Net cash used for investing activities was $199.8 million
in 2010 compared with net cash used for investing activities of
$30.5 million in 2009. The amount in 2010 includes
$172.0 million for the EaglePicher Technologies acquisition.
Net cash provided by financing activities was
$120.3 million in 2010 compared with net cash used for
financing activities of $26.7 million in 2009. 2010
includes net borrowings under the Company’s Revolver of
$120.0 million to fund the EaglePicher Technologies
acquisition. 2009 includes repayment of debt of
$26.1 million.
2009
2008
change
Net cash provided by (used for):
Operating activities
$
165.5
$
172.1
$
(6.6
)
Investing activities
(30.5
)
(17.9
)
(12.6
)
Financing activities
(26.7
)
(6.7
)
(20.0
)
Discontinued
operations-net
cash used for operating activities
(0.4
)
—
(0.4
)
Effect of exchange rate changes on cash
2.7
(2.9
)
5.6
Net change in cash and cash equivalents
$
110.6
$
144.6
$
(34.0
)
The decrease in net cash flows from operating activities was
primarily due to the $22.0 million loss from continuing
operations in 2009 compared to $156.2 million of income
from continuing operations in 2008, partially offset by the
following factors:
•
the change in net working capital (defined as inventory plus
accounts receivable less accounts payable) which contributed
positive cash flows of $73.6 million in 2009 compared to
$0.9 million in 2008;
•
the impact of the $56.8 million change in refundable,
prepaid and accrued income taxes. The 2008 refundable, prepaid
and accrued income taxes included the impact of the tax benefit
related to the recording of the tax benefit related to an
election to take foreign tax credits on prior year U.S. tax
returns of $46.6 million, which is expected to be received
in 2010; and
•
a $33.6 million change in cash flows associated with
advances to suppliers.
Net cash used for investing activities is due primarily to
capital expenditures of $25.7 million and
$30.7 million in the 2009 and 2008 period, respectively.
Net cash used for investing activities in the 2008 period also
includes proceeds from settlement of cobalt forward purchase
contracts ($10.7 million); proceeds from loans to
consolidated joint venture partners ($10.3 million); and
cash payments made in 2008 for professional fees incurred in
connection with the REM and Borchers acquisitions.
Cash used for financing activities in 2009 is primarily
repayment of all of the Company’s outstanding debt of
$26.1 million. Cash used for financing activities in 2008
included $24.5 million net borrowings under the revolving
credit agreement, partially offset by a $26.2 million
distribution to the DRC smelter joint venture partners.
Financial
Condition
Cash and cash equivalents were $400.6 million at
December 31, 2010, compared to $355.4 million at
December 31, 2009. The increase in cash of
$45.2 million was the net impact of $126.6 million
provided by operating activities, $199.8 million used for
investing activities, and $120.3 million provided by
financing activities, offset by a $1.8 million decrease in
cash due to unfavorable changes in exchange rates. Expected uses
of cash include working capital needs, planned capital
expenditures and future acquisitions.
Cash balances are held in numerous locations throughout the
world. As of December 31, 2010, 87% of the Company’s
cash and cash equivalents were held outside the United States.
Most of the amounts held outside the U.S. could be
repatriated to the U.S. but, under current law, would be
subject to U.S. income taxes, less applicable foreign tax
credits. The Company’s intent is to retain such cash
balances outside of the U.S. and to meet
U.S. liquidity needs through cash generated from operations
in the U.S., external borrowings, or both.
On March 8, 2010, the Company entered into a new
$250.0 million secured revolving credit facility (the
“Revolver”). The Revolver replaced the Company’s
prior revolving credit facility that was scheduled to expire in
December 2010. The Revolver includes an “accordion”
feature under which the Company may increase the Revolver’s
availability by $75.0 million to a maximum of
$325.0 million, subject to certain customary conditions and
the agreement of current or new lenders to accept a portion of
the increased commitment. To date, the Company has not sought to
borrow under the accordion feature. Obligations under the
Revolver are guaranteed by the Company’s present and future
subsidiaries (other than immaterial subsidiaries, joint ventures
and certain foreign subsidiaries) and are secured by a lien on
substantially all of the personal property assets of the Company
and subsidiary guarantors, except that the lien on the shares of
first-tier foreign subsidiaries is limited to 65% of such shares.
The Revolver requires the Company to maintain a minimum
consolidated interest coverage ratio of no less than 3.50 to
1.00 and a maximum consolidated leverage ratio of not more than
2.50 to 1.00. At December 31, 2010, the Company’s
interest coverage ratio was 24.36 to 1.00 and its leverage ratio
was .71 to 1.00. Both of the financial covenants are tested
quarterly for each trailing four-consecutive-quarter period.
Other covenants in the Revolver limit consolidated capital
expenditures to $50.0 million per year and also limit the
Company’s ability to incur additional indebtedness, make
investments, merge with another corporation, dispose of assets
and pay dividends. As of December 31, 2010, the Company was
in compliance with all of the covenants under the Revolver.
The Company has the option to specify that interest be
calculated based either on a London interbank offered rate
(“LIBOR”) or on a variable base rate, plus, in each
case, a calculated applicable margin. The applicable margins
range from 1.25% to 2.00% for base rate loans and 2.25% to 3.00%
for LIBOR loans. The Revolver also requires the payment of a fee
of 0.375% to 0.5% per annum on the unused commitment and a fee
on the undrawn amount of letters of credit at a rate equal to
the applicable margin for LIBOR loans. The applicable margins
and unused commitment fees are subject to adjustment quarterly
based upon the leverage ratio. The Revolver provides for
interest-only payments during its term, with all unpaid
principal due at maturity on March 8, 2013. Outstanding
borrowing under the Revolver totaled $120.0 million at
December 31, 2010. There were no amounts outstanding under
the prior credit facility at December 31, 2009.
During 2008, the Company’s Finnish subsidiary, OMG Kokkola
Chemicals Oy (“OMG Kokkola”), entered into a €
25 million credit facility agreement (the “Credit
Facility”). Under the Credit Facility, subject to the
lender’s discretion, OMG Kokkola can draw short-term loans,
ranging from one to nine months in duration, in
U.S. dollars at LIBOR plus a margin of 0.55%. The Credit
Facility has an indefinite term, and either party can
immediately terminate the Credit Facility after providing notice
to the other party. The Company agreed to unconditionally
guarantee all of the obligations of OMG Kokkola under the Credit
Facility. There were no borrowings outstanding under the Credit
Facility at December 31, 2010 or 2009.
The Company believes that cash flow from operations, together
with its strong cash position and the availability of funds to
the Company under the Revolver and to OMG Kokkola under the
Credit Facility, will be sufficient to meet working capital
needs and planned capital expenditures during the next twelve
months.
Capital
Expenditures
Capital expenditures in 2010 were $26.4 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 $40 million to $50 million in 2011
primarily for projects to expand capacity; to maintain and
improve throughput; for compliance with environmental, health
and safety regulations; and for other fixed asset additions at
existing facilities. The Company expects to fund 2011
capital expenditures through cash generated from operations and
cash on hand at December 31, 2010.
As a result of the EaglePicher Technologies acquisition, the
Company assumed the EaglePicher Technologies defined benefit
pension obligations, made up of two frozen defined benefit
pension plans and two active partially-funded defined benefit
pension plans. The Company also has a funded, non-contributory,
defined benefit pension plan for certain retired employees in
the United States related to the Company’s divested SCM
Metal Products, Inc. business and an unfunded obligation to its
former chief executive officer in settlement of an unfunded
supplemental executive retirement plan (“SERP”).
Certain
non-U.S. employees
are covered under other defined benefit plans.
The Statements of Consolidated Operations include defined
benefit pension expense of $3.1 million, $1.3 million
and $0.9 million in 2010, 2009 and 2008, respectively. At
December 31, 2010, the Company’s projected benefit
obligation exceeded the fair value of plan assets by
$63.4 million. The Company expects to contribute
$7.6 million and $0.1 million to its U.S. and
non-U.S. pension
plans, respectively, in 2011. Expected contributions are
dependent on many variables, including the variability of the
market value of the assets as compared to the benefit obligation
and other market or regulatory conditions. Accordingly, actual
funding may differ significantly from current estimates.
Calculations of the amount of defined benefit pension expense
and obligations depend on the assumptions used in the actuarial
valuations. See Critical Accounting Policies below for further
discussion of the Company’s assumptions related to its
pension plans.
Contractual
Obligations
The Company has entered into contracts with various third
parties in the normal course of business that will require
future payments. The following table summarizes the
Company’s contractual cash obligations and their expected
maturities at December 31, 2010 (in thousands).
Payments due by period
2011
2012
2013
2014
2015
Thereafter
Total
Purchase and other obligations(1)
$
294,788
$
45,961
$
1,414
$
1,167
$
908
$
887
$
345,125
Revolving credit facility
30,000
—
90,000
—
—
—
120,000
Interest payments on revolving
credit facility
3,800
3,455
612
—
—
—
7,867
Capital lease obligations (principal
and interest)
757
620
510
394
378
1,932
4,591
Operating lease obligations
6,219
4,708
2,283
1,844
1,815
9,534
26,403
Total
$
335,564
$
54,744
$
94,819
$
3,405
$
3,101
$
12,353
$
503,986
(1)
For 2011 through 2015, purchase obligations include raw material
contractual obligations reflecting estimated future payments
based on committed tons of material per the applicable contract
multiplied by the reference price of each metal. The price used
in the computation is the average daily price for the last week
of December 2010 for each respective metal. Commitments made
under these contracts represent future purchases in line with
expected usage.
Interest payments are calculated based upon the Company’s
anticipated payment schedule using December 31, 2010
interest rates adjusted for the related interest rate swap
agreements.
Pension funding can vary significantly each year due to changes
in the market value of plan assets, legislation and the
Company’s funding decisions to contribute any excess above
the minimum legislative funding requirements. As a result,
pension funding has not been included in the table above. The
Company expects to contribute $7.6 million and
$0.1 million related to its U.S. and
non-U.S. pension
plans, respectively, in 2011. Pension benefit payments are made
from assets of the pension plan. The Company also has an
unfunded obligation to its former chief executive officer in
settlement of an unfunded supplemental executive retirement
plan, for which the Company expects to make annual benefit
payments of approximately $0.7 million.
At December 31, 2010, the liability for uncertain tax
positions includes $4.7 million for which it is reasonably
possible that the uncertainty will be resolved within the next
twelve months. However, the decrease would not result in any
cash payments as the Company would be able to utilize available
foreign tax credits. The Company is not able to reasonably
estimate the period in which cash outflows related to the
remaining $16.6 million of uncertain tax positions could
occur. See Note 12 to the Consolidated Financial Statements
for further discussion of the Company’s uncertain tax
positions.
Off Balance Sheet
Arrangements
The Company has not entered into any off balance sheet financing
arrangements, other than operating leases, which are disclosed
in the contractual obligations table above and in Note 18
to the Consolidated Financial Statements included in Item 8
of this
Form 10-K.
Critical
Accounting Policies
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires the
Company’s management to make estimates and assumptions in
certain circumstances that affect amounts reported in the
accompanying consolidated financial statements. In preparing
these financial statements, management has made their best
estimates and judgments of certain amounts included in the
financial statements related to the critical accounting policies
described below. The application of these critical accounting
policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual
results could differ from these estimates. In addition, other
companies may utilize different estimates, which may impact the
comparability of the Company’s results of operations to
similar businesses.
Revenue Recognition — Revenues are recognized
when the revenue is realized or realizable, and has been earned,
in accordance with the U.S. Securities and Exchange
Commission’s Staff Accounting Bulletin No. 104,
“Revenue Recognition in Financial Statements.” The
majority of the Company’s sales are related to sales of
product. Revenue for product sales is recognized when persuasive
evidence of an arrangement exists, unaffiliated customers take
title and assume risk of loss, the sales price is fixed or
determinable and collection of the related receivable is
reasonably assured. Revenue recognition generally occurs upon
shipment of product or usage of consignment inventory. Freight
costs and any directly related associated costs of transporting
finished product to customers are recorded as Cost of products
sold.
The Battery Technologies segment uses the percentage of
completion method to recognize the majority of its revenue. The
majority of defense contracts use
units-of-delivery
while the majority of aerospace contracts use the
cost-to-cost
method as the basis to measure progress toward completing the
contract. Under the
cost-to-cost
method, revenue is recognized based on the ratio of cost
incurred compared to managements’ estimate of total costs
expected to be incurred under the contract. The percentage of
completion method requires the use of estimates of costs to
complete long-term contracts. The estimation of these costs
requires substantial judgment on the part of management due to
the duration of the contracts as well as the technical nature of
the products involved. Contract revenues and cost estimates are
reviewed periodically and adjustments are reflected in the
accounting period such amounts are determined. Contract revenues
and cost estimates are recognized based upon estimates of
progress towards completion on a
contract-by-contract
basis. Changes in cost estimates are recognized in the period of
change and reflect the cumulative change from inception of the
contract. For example, an increase in the estimated profit
booking rate will result in an increase in revenue and operating
profit and reflect the
inception-to-date
effect of the change. Significant contracts are reviewed at
least quarterly. Billings in excess of amounts earned are
deferred. Anticipated losses on contracts are recorded in full
in the period in which the loss becomes evident.
Inventories — The Company’s inventories
are stated at the lower of cost or market and valued using the
first-in,
first-out (“FIFO”) method. Inventory accounted for
under the
percentage-of-completion
method is included in work-in-process inventory and represents
accumulated contract costs less the portion of such costs
allocated to delivered units. The costs attributed to units
delivered are based on the estimated average cost of
all units expected to be produced on a
contract-by-contract
basis. The Company evaluates the need for an LCM adjustment to
inventories based on the
end-of-the-reporting
period selling prices of its finished products. In periods of
declines in the selling prices of the Company’s finished
products, which can result from decreases in the reference price
of cobalt or other factors, inventory carrying values may exceed
the amount the Company could realize on sale, resulting in a
lower of cost or market charge.
For cobalt metal re-sale inventory and inventory for which sales
prices are highly correlated to cobalt prices (primarily in the
Advanced Materials segment), volatile cobalt prices can have a
significant impact on the LCM calculation. Fluctuations in the
price of cobalt have been significant in the past and may be
significant in the future. When evaluating whether such
cobalt-based inventory is stated at the lower of cost or market,
the Company generally considers cobalt reference prices at the
end of the period. However, to the extent cobalt prices increase
subsequent to the balance sheet date but before issuance of the
financial statements, the Company considers these price
movements in its LCM evaluation and determination of net
realizable value (“NRV”). To the extent such price
increases have an impact on the NRV of the Company’s
inventory as of the balance sheet date, the Company will use the
higher prices in its calculation so as not to recognize a loss
when an actual loss will not be realized.
Notes Receivable from Joint Venture Partner —
The Company has a 55% interest in GTL. The remaining 45%
interest is owned by two partners at 25% and 20%, respectively.
The GTL smelter is a primary source of the Company’s cobalt
raw material feed. GTL is consolidated in the Company’s
financial statements because the Company has a controlling
interest in the joint venture.
In years prior to 2008, the Company refinanced the capital
contribution for the 25% minority shareholder. At
December 31, 2010 and 2009, the notes receivable (the
“Notes”) from this partner were $13.9 million,
net of a $5.2 million valuation allowance. The interest
rate on the Notes is based on LIBOR (0.99% at December 31,2010) and resets annually in January. The repayment date
for the Notes is December 31, 2011, which may be extended
at the Company’s option. Under the terms of the Notes, a
portion (80%) of the partner’s share of any dividends from
the joint venture and any other cash flow distributions
(“secondary considerations”) paid by the joint
venture, if any, first serve to reduce the balance of the Notes
before any amounts are remitted to the joint venture partner.
The Notes are secured by 80% of the partner’s interest in
the joint venture. The Company currently anticipates that
repayment of the Notes, net of the reserve, will be made from
the partner’s share of dividends and returns of capital
from the joint venture. Due to the uncertainty of collection of
the Notes, the Company continues to record a full allowance
against unpaid interest receivable under the Notes.
To evaluate the collectability of the Notes, the Company
estimates the future cash flows of the joint venture, as
repayment of the Notes is dependent on future dividends and
return of capital from the joint venture. These estimates are
based on management’s judgment and are consistent with the
Company’s current budget and long-range plans, including
cobalt price assumptions, anticipated changes in market
conditions and planned capital expenditures, among other
considerations. Although the Company believes the assumptions,
judgments and estimates used in the evaluation of the
collectability of the Notes are reasonable and appropriate,
different assumptions, judgments and estimates could materially
affect the evaluation of the collectability of the Notes and the
Company’s results of operations and financial position.
GTL Prepaid Taxes — The Company has a 55%
interest in GTL. The remaining 45% interest is owned by two
partners at 25% and 20%. The GTL smelter is a primary source of
the Company’s cobalt raw material feed. GTL is consolidated
in the Company’s financial statements because the Company
has a controlling interest in the joint venture.
At December 31, 2010 and 2009, GTL has a net prepaid tax
asset of $2.0 million and $10.3 million, respectively.
The balance at December 31, 2010 is net of a valuation
allowance of $11.9 million. During 2010, certain companies
doing business in the DRC, including GTL, received notification
from the DRC tax authorities that requests to utilize tax
overpayments to offset more than 20% of current taxes payable
would not be granted. Based on past precedent set by the DRC tax
authorities, GTL had previously estimated it would be able to
utilize its prepaid tax asset to offset more than 20% of its
future tax obligations. A key factor in the Company’s
analysis for realization of the prepaid tax asset includes the
contractual term of the current smelter feed supply agreement.
Additional feed options exist that could potentially extend the
recoverability period of the prepaid tax asset. The Company will
re-evaluate the allowance in the future for changes in
estimates, including changes in feed supply arrangements, which
would indicate a change in the realizability of the prepaid tax
asset. Although the Company believes the assumptions, judgments
and estimates used in the evaluation of the recoverability of
the GTL prepaid tax asset are reasonable and appropriate,
different assumptions, judgments and estimates could materially
affect the evaluation of the collectability of the
recoverability of the GTL prepaid tax asset and the
Company’s results of operations and financial position.
Goodwill — The Company had goodwill of
$306.9 million and $234.2 million at December 31,2010 and 2009, respectively. The Company is required to test
goodwill for impairment annually and more often if indicators of
impairment exist. The goodwill impairment test is a two-step
process. During the first step, the Company estimates the fair
value of the reporting unit and compares that amount to the
carrying value of that reporting unit. The Company’s
reporting units are Advanced Materials, Electronic Chemicals,
Advanced Organics, UPC, Photomasks, Defense, Aerospace and
Medical.
The Company conducts its annual goodwill impairment test as of
October 1. The results of the testing as of October 1,2010 confirmed the fair value of each of the reporting units
exceeded its carrying value and therefore no impairment loss was
required to be recognized. The Company recorded non-cash charges
of $37.5 million and $8.8 million in 2009 and 2008,
respectively, in the Specialty Chemicals segment for the
impairment of goodwill related to the Advanced Organics (2008),
and UPC and Photomasks (2009).
To test goodwill for impairment, the Company is required to
estimate the fair value of each of its reporting units. Since
quoted market prices in an active market are not available for
the Company’s reporting units, the Company has developed a
model to estimate the fair value of the reporting units
utilizing a discounted cash flow valuation technique (“DCF
model”). The Company selected the DCF model as it believes
it is comparable to what would be used by market participants to
estimate its fair value. The impairment test incorporates the
Company’s estimates of future cash flows, future growth
rates, terminal value amounts, allocations of certain assets,
liabilities and cash flows among reporting units, and the
applicable weighted-average cost of capital (the
“WACC”) used to discount those estimated cash flows.
These estimates are based on management’s judgment.
The estimates and projections used in the estimate of fair value
are consistent with the Company’s current budget and
long-range plans, including anticipated changes in market
conditions, industry trends, growth rates, and planned capital
expenditures, among other considerations. The terminal value
estimates the value of the ongoing cash flows after the discrete
forecast period using a nominal long-term growth rate of
3.5 percent based on long-term inflation projections. The
WACC is derived using a Capital Asset Pricing Model
(“CAPM”). The risk-free rate in the CAPM is based on
20-year
U.S. Treasury Bonds, the beta is determined based on an
analysis of comparable public companies, the market risk premium
is derived from historical risk premiums and the size premium is
based on the size of the Company. The risk-free rate was
adjusted for the risks associated with the operations of the
reporting units. As a proxy for the cost of debt, the Company
uses the Baa borrowing rate, an estimated effective tax rate,
and applies an estimated debt to total invested capital ratio
using market participant assumptions to arrive at an after-tax
cost of debt. The estimates and judgments that most
significantly affect the fair value calculation are future
operating cash flow assumptions and the WACC used in the DCF
model. The WACC’s used in the goodwill testing at
October 1, 2010 ranged from 10.25% to 13.56%, with an
average of 11.84%. The Company believes the assumptions used in
its impairment testing were consistent with the risk inherent in
the business models of the reporting units at the time the
impairment tests were performed. Although the Company believes
the assumptions, judgments and estimates used are reasonable and
appropriate, different assumptions, judgments and estimates
could materially affect the goodwill test and, potentially, the
Company’s results of operations and financial position.
In order to evaluate the sensitivity of the fair value
calculations on the goodwill impairment testing, the Company
applied a hypothetical 5% decrease to the estimated fair value
and determined the estimated fair
value exceeded the carrying value for the Advanced Materials,
Electronic Chemicals, UPC, Photomasks, Defense and Medical
reporting units. For the Aerospace reporting unit, the Company
applied a hypothetical 5% decrease to the estimated fair value
and determined that the carrying value exceeded its estimated
fair value by $0.6 million. The Company separately applied
a hypothetical increase of 100 basis points to the WACC and
determined the estimated fair value exceeded the carrying value
for the Advanced Materials, Electronic Chemicals, UPC and
Photomasks reporting units. For the Defense, Aerospace and
Medical reporting units, the Company applied a hypothetical
increase of 100 basis points to the WACC and determined the
carrying values exceeded estimated fair values by
$8.8 million, $5.4 million and $0.8 million,
respectively. If step-one goodwill impairment tests performed in
future periods indicate the carrying value of any reporting unit
exceeds its estimated fair value, the Company would need to
complete a step-two analysis to determine the amount, if any, of
the goodwill impairment, based on the implied fair values
determined in the step-two analysis.
Other Intangible Assets — Intangible assets
consist of (i) definite-lived assets subject to
amortization and (ii) indefinite-lived intangible assets
not subject to amortization. At December 31, 2010, the
Company had definite-lived intangible assets of
$124.8 million and indefinite-lived intangible assets of
$28.6 million. Definite-lived intangible assets consist
principally of customer relationships, know-how, developed
technology and capitalized software and are being amortized
using the straight-line method. Indefinite-lived intangible
assets consist of trade names. The Company evaluates the
carrying value of definite-lived intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. The
definite-lived intangible asset would be considered impaired if
the future net undiscounted cash flows generated by the asset
are less than its carrying value. The Company evaluates the
carrying value of indefinite-lived intangible assets for
impairment annually as of October 1 and between annual
evaluations if changes in circumstances or the occurrence of
certain events indicate potential impairment. If the carrying
value of an indefinite-lived intangible asset exceeds its
estimated fair value, an impairment loss is recognized.
The results of the testing of the indefinite-lived trade names
as of October 1, 2010 confirmed the fair value of each
intangible asset exceeded its carrying value and therefore no
impairment loss was required to be recognized. The Company
recorded non-cash charges of $1.6 million in 2009 in the
Specialty Chemicals segment for the impairment of
indefinite-lived trade names due to downward revisions in
estimates of future revenue and cash flows. The Company utilizes
a “relief from royalty” methodology in estimating fair
values for indefinite-lived trade names. The methodology
estimates the fair value of each trade name by determining the
present value of the royalty payments that are avoided as a
result of owning the trade name and includes judgmental
assumptions about sales growth that are consistent with the
assumptions used to determine the fair value of reporting units
in the Company’s goodwill testing. Although the Company
believes the assumptions, judgments and estimates used are
reasonable and appropriate, different assumptions, judgments and
estimates could materially affect the intangible asset
impairment test and, potentially, the Company’s results of
operations and financial position if additional impairment
charges were required to be recorded.
Long-Lived Assets — Long-lived assets are
assessed for impairment whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. The Company generally invests in long-lived assets
to produce new products, or increase production capacity or
capability. Because market conditions may change, future cash
flows may be difficult to forecast. Furthermore, the assets and
related businesses may be in different stages of development. If
the Company determined that the future undiscounted cash flows
from these investments were not expected to exceed the carrying
value of the investments, the Company would record an impairment
charge. However, determining future cash flows is subject to
estimates and different estimates could yield different results.
Additionally, other changes in the estimates and assumptions,
including the discount rate and expected long-term growth rate,
which drive the valuation techniques employed to estimate the
future cash flows of the these investments, could change and,
therefore, impact the analysis of impairment in the future.
Pension Plans — As a result of the EaglePicher
Technologies acquisition, the Company assumed the EaglePicher
Technologies defined benefit pension obligations, made up of two
frozen defined benefit pension plans and two active defined
benefit pension plans. The Company also has a funded,
non-contributory, defined benefit pension plan for certain
retired employees in the United States related to the
Company’s divested SCM Metal Products, Inc. business.
Pension benefits are paid to plan participants directly from
pension plan assets. In addition, the Company has an unfunded
obligation to its former chief executive officer in settlement
of an unfunded supplemental executive retirement plan
(“SERP”). Certain
non-U.S. employees
are covered under other defined benefit plans. These
non-U.S. plans
are not material to the Company.
Calculations of the amount of defined benefit pension expense
and obligations depend on the assumptions used in the actuarial
valuations. The primary assumptions are as follows:
Discount Rate — The discount rate
is used in calculating the present value of benefits, which is
based on projections of benefit payments to be made in the
future. The basis for the selection of the discount rate for
each plan is determined by matching the timing of the payment of
the expected obligations under the defined benefit plans against
the corresponding yield of high-quality corporate bonds of
equivalent maturities.
Expected Return on Plan Assets —
The expected long-term rate of return on defined benefit plan
assets reflects management’s expectations of long-term
rates of return on funds invested to provide for benefits
included in the projected benefit obligations. The Company has
established the expected long-term rate of return assumption for
plan assets by considering historical rates of return over a
period of time that is consistent with the long-term nature of
the underlying obligations of these plans. The historical rates
of return for each of the asset classes used by the Company to
determine its estimated rate of return assumption were based
upon the rates of return earned by investments in the equivalent
benchmark market indices for each of the asset classes. The
Company estimates the future return on plan assets based on
prior performance and future expectations for the types of
investments held by the plans as well as the expected long-term
allocation of plan assets for these investments. These projected
returns reduce the net defined benefit pension expense.
Rate of Compensation Increase —
For the active plans, the Company projects annual employee pay
increases, which are used to project pension benefits at
retirement.
Changes in key economic indicators can result in changes in the
assumptions used by the Company. While the Company believes that
the assumptions used in calculating its defined benefit pension
expense and obligations are appropriate, differences in actual
experience or changes in the assumptions may affect the
Company’s results of operations or financial position.
The Company used a weighted average discount rate of 5.29% and
5.12% for the two active and two frozen EaglePicher Technologies
plans, respectively, in computing the amount of the defined
benefit pension obligations to be recorded at December 31,2010, which represents a decrease of 38 and 52 basis points
in the discount rates for the two active and two frozen plans,
respectively, from the rate used to calculate the net defined
benefit pension obligation assumed as of the EaglePicher
Technologies acquisition date. A further 25 basis point
reduction in the discount rate used for the plans would have
increased the net obligation related to the four EaglePicher
Technologies plans by $5.3 million from the amount recorded
in the financial statements at December 31, 2010.
The defined benefit pension plan assets consist primarily of
publicly traded stocks and government and corporate bonds. There
is no guarantee the actual return on the plans’ assets will
equal the expected long-term rate of return on plan assets or
that the plans will not incur investment losses. For 2010, the
expected long-term rate of return assumptions applicable to
assets held in the four EaglePicher Technologies plans were
estimated at 8.25% and 6.00% for the two active and two frozen
plans, respectively, which is 0.00 and 0.75, respectively, lower
than the rates used to determine the net defined benefit pension
obligation assumed as of the EaglePicher Technologies
acquisition. These expected rates of return reflect the asset
allocation of the plans and the expected long-term returns on
equity and debt investments included in plan assets. If the
expected
long-term rates of return on plan assets in the four EaglePicher
Technologies plans were reduced by 0.5%, pension expense for
2010 would have increased $0.6 million.
Income Taxes — Tax law requires certain items
to be included in the tax return at different times than the
items are reflected in the financial statements. Some of these
differences are permanent, such as expenses that are not
deductible for tax purposes, and some differences are temporary,
reversing over time, such as depreciation expense. These
temporary differences create deferred tax assets and
liabilities. The objective of accounting for income taxes is to
recognize the amount of taxes payable or refundable for the
current year, and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in
the financial statements or tax returns. Deferred income taxes
are not provided for undistributed earnings of foreign
consolidated subsidiaries, to the extent such earnings are
determined to be reinvested for an indefinite period of time.
Deferred income taxes are provided on income from foreign
subsidiaries which have not been reinvested abroad permanently,
as upon remittance to the United States, such earnings are
taxable.
The Company has significant operations outside the United
States, where most of its pre-tax earnings are derived, and in
jurisdictions where the statutory tax rate is different than in
the United States statutory tax rate. The Company’s tax
assets, liabilities, and tax expense are supported by historical
earnings and losses and the Company’s best estimates and
assumptions of its global cash requirements, planned dividend
repatriations, and expectations of future earnings. When the
Company determines, based on all available evidence, that it is
more likely than not that deferred tax assets will not be
realized, a valuation allowance is established.
The Company is subject to income taxes in both the United States
and numerous foreign jurisdictions and is subject to audits
within these jurisdictions. As a result, in the ordinary course
of business there is inherent uncertainty in quantifying income
tax positions. The Company assesses its income tax positions and
records accruals for all years subject to examination based upon
management’s evaluation of the facts, circumstances and
information available at the reporting date. For those tax
positions where it is more likely than not that a tax benefit
will be sustained, the Company has recorded the largest amount
of tax benefit with a greater than 50% likelihood of being
realized upon ultimate settlement with a taxing authority that
has full knowledge of all relevant information. These accruals
are adjusted, if necessary, upon the completion of tax audits or
changes in tax law or administrative practice.
Since significant judgment is required to assess the future tax
consequences of events that have been recognized in the
Company’s financial statements or tax returns, the ultimate
resolution of these events could result in adjustments to the
Company’s financial statements and such adjustments could
be material. The Company believes the current assumptions,
judgments and other considerations used to estimate the current
year accrued and deferred tax positions are appropriate.
However, if the actual outcome of future tax consequences
differs from these estimates and assumptions due to changes or
future events, the resulting change to the provision for income
taxes could have a material impact on the Company’s results
of operations and financial position.
Share-Based Compensation — The computation of
the expense associated with share-based compensation requires
the use of a valuation model. The Company currently uses a
Black-Scholes option pricing model to calculate the fair value
of its stock options. The Black-Scholes model requires the use
of subjective assumptions, including estimating the length of
time employees will retain their vested stock options before
exercising (the “expected term”) and the volatility of
the Company’s common stock price over the expected term.
Expected stock price volatility is based on historical
volatility of the Company’s stock price. Changes in these
assumptions may result in a material change to the fair value
calculation of share-based awards.
The fair value of time-based and performance-based restricted
stock grants is calculated based upon the market value of an
unrestricted share of the Company’s common stock at the
date of grant. The performance-based restricted stock vests
solely upon the Company’s achievement of specific
measurable criteria over a three-year performance period. A
recipient of performance-based restricted stock may earn a total
award ranging from 0% to 100% of the initial grant. No payout
will occur unless the Company equals or exceeds certain
threshold performance objectives. The amount of compensation
expense recognized is based upon current performance projections
for the three-year period and the percentage of the requisite
service that has been rendered.
The Company estimates forfeitures for its stock options,
restricted stock awards and restricted stock unit awards based
on historical forfeiture experience. The fair value of
share-based compensation awards less estimated forfeitures is
amortized over the vesting period.
Valuation of EaglePicher Technologies
Acquisition — The acquisition of EaglePicher
Technologies requires the allocation of the purchase price to
the tangible assets and liabilities and identifiable intangible
assets acquired. Any residual purchase price is recorded as
goodwill. The allocation of the purchase price requires
management to make significant estimates in determining the fair
values of assets acquired and liabilities assumed, especially
with respect to intangible assets. These estimates are based on
historical experience and information obtained from management
of the acquired company. These estimates can include, but are
not limited to, the cash flows that an asset is expected to
generate in the future and the appropriate weighted-average cost
of capital. These estimates are inherently uncertain and
unpredictable, and if different estimates were used, the
purchase price for the acquisition may have been allocated to
the acquired assets differently from the current allocation.
Although the Company believes the assumptions, judgments and
estimates used are reasonable and appropriate, different
assumptions, judgments and estimates could materially affect the
value ascribed to an acquired asset and, potentially, the
Company’s results of operations and financial position if
impairment charges were required to be recorded.
Recently Issued
Accounting Standards
Accounting
Guidance adopted in 2010:
In January 2010, the Financial Accounting Standards Board
(“FASB”) issued guidance related to fair value
measurements and disclosures, which were effective for interim
and annual fiscal periods beginning after December 15,2009, except for disclosures about certain Level 3 activity
which will not become effective until interim and annual periods
beginning after December 15, 2010. This guidance requires
companies to disclose transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons
for the transfers as well as activity in Level 3 fair value
measurements. The new standard also requires a more detailed
level of disaggregation of the assets and liabilities being
measured as well as increased disclosures regarding inputs and
valuation techniques of the fair value measurements. See
Note 11 to the Consolidated Financial Statements in this
Form 10-K
for the required disclosure.
In June 2009, the FASB issued guidance on “Consolidation of
Variable Interest Entities” to require an analysis to
determine whether a variable interest gives the entity a
controlling financial interest in a variable interest entity.
This guidance requires an ongoing reassessment and eliminates
the quantitative approach previously required for determining
whether an entity is the primary beneficiary. The Company
adopted this guidance on January 1, 2010 and such adoption
did not have any effect on the Company’s results of
operations or financial position.
Accounting
Guidance Not Yet Adopted
In July 2010, the FASB issued guidance regarding disclosures
about the credit quality of financing receivables and the
allowance for credit losses. The guidance will require
disaggregated information about the credit quality of financing
receivables and the allowance for credit losses based on
portfolio segment and class, as well as disclosure of credit
quality indicators, past due information, and modifications of
financing receivables. The disclosures as of the end of a
reporting period were effective for interim and annual reporting
periods ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning
on or after December 15, 2010. When effective, the Company
will comply with the disclosure provisions of this guidance.
In March 2010, the FASB issued guidance that recognizes the
milestone method as an acceptable revenue recognition method for
substantive milestones in research or development arrangements.
This guidance sets forth requirements for an entity to recognize
consideration that is contingent upon achievement of a
substantive milestone as revenue in the period in which the
milestone is achieved. In addition, this guidance requires
disclosure of certain information with respect to arrangements
that contain milestones. This guidance is effective for fiscal
years, and interim periods within those years, beginning on or
after June 15, 2010. The
Company has not determined the effect, if any, the adoption of
this guidance will have on its results of operations or
financial position.
In October 2009, the FASB issued guidance on
multiple-deliverable revenue arrangements that addresses the
unit of accounting for arrangements involving multiple
deliverables. This guidance is effective for annual periods
beginning after June 15, 2010. The guidance also addresses
how arrangement consideration should be allocated to separate
units of accounting, when applicable, and expands the disclosure
requirements for multiple-deliverable arrangements. The Company
has not determined the effect, if any, the adoption of this
guidance will have on its results of operations or financial
position.
Effects of
Foreign Currency
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
Company’s raw material purchases and product sales are
based on the U.S. dollar, sales at certain locations,
prices of certain raw materials,
non-U.S. operating
expenses and income taxes are denominated in local currencies.
As such, the Company’s results of operations are subject to
the variability that arises from exchange rate movements. 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
Company’s operating results. The primary currencies for
which the Company has foreign currency rate exposure are the
European Union Euro, Taiwanese Dollar, Malaysian Ringgit,
Singapore Dollar, British Pound Sterling, Japanese Yen,
Congolese Franc, Chinese Renminbi and the Canadian Dollar.
From time to time, the Company has entered into foreign currency
forward contracts to mitigate the variability in cash flows due
to changes in the Euro/U.S. dollar exchange rate.
Environmental
Matters
The Company is subject to a wide variety of environmental laws
and regulations in the United States and in foreign countries as
a result of its operations and use of certain substances that
are, or have been, used, produced or discharged by its plants.
In addition, soil
and/or
groundwater contamination presently exists and may in the future
be discovered at levels that require remediation under
environmental laws at properties now or previously owned,
operated or used by the Company.
The European Union’s REACH legislation established
requirement to register and evaluate chemicals manufactured in,
or imported to, the European Union and requires additional
testing, documentation and risk assessments for the chemical
industry. Due to the ongoing development and understanding of
facts and remedial options and due to the possibility of
unanticipated regulatory developments, the amount and timing of
future environmental expenditures could vary significantly.
Although it is difficult to quantify the potential impact of
compliance with or liability under environmental protection
laws, based on presently available information, the Company
believes that its ultimate aggregate cost of environmental
remediation as well as liability under environmental protection
laws will not result in a material adverse effect upon its
financial condition or results of operations.
See Item I of this Annual Report on
Form 10-K
for further discussion of these matters.
Cautionary
Statement for “Safe Harbor” Purposes under the Private
Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements made by or on behalf
of the Company. This report contains statements that the Company
believes may be “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements are not historical
facts and generally can be identified by use of statements that
include words such as “believe,”“expect,”“anticipate,”“intend,”“plan,”“foresee” or other words or phrases of similar import.
Similarly, statements that describe the Company’s
objectives, plans or goals also are
forward-looking statements. These forward-looking statements are
subject to risks and uncertainties that are difficult to
predict, may be beyond the Company’s control and could
cause actual results to differ materially from those currently
anticipated. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Significant
factors affecting these expectations are set forth under
Item 1A — Risk Factors in this Annual Report on
Form 10-K.
Item 7A.
Quantitative
and Qualitative Disclosures about Market Risk
Quantitative and
Qualitative Disclosures about Market Risk
The Company, as a result of its global operating and financing
activities, is exposed to changes in commodity prices, interest
rates and foreign currency exchange rates which may adversely
affect its results of operations and financial position. In
seeking to minimize the risks
and/or costs
associated with such activities, the Company manages exposures
to changes in commodity prices, interest rates and foreign
currency exchange rates through its regular operating and
financing activities, which include the use of derivative
instruments.
Commodity
Price Risk
The primary raw material used by the Advanced Materials segment
is unrefined cobalt. Unrefined cobalt is obtained from three
basic sources: primary cobalt mining, as a by-product of another
metal (typically copper or nickel), and from recycled material.
Cobalt raw materials include ore, concentrate, slag, scrap and
metallic feed. The availability of unrefined cobalt is dependent
on global market conditions, cobalt prices and the prices of
copper and nickel. Also, political and civil instability in
supplier countries, variability in supply and worldwide demand,
including demand in developing countries such as China, have
affected and will likely continue to affect the supply and
market price of raw materials. 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 Company’s raw materials fluctuates due to
changes in the cobalt reference price, actual or perceived
changes in supply and demand of raw materials, and changes in
availability from suppliers. The Company attempts to mitigate
increases in raw material prices by passing through such
increases to its customers in the prices of its products and by
entering into sales contracts that 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.
Fluctuations in the price of cobalt have historically been
significant and the Company believes that cobalt price
fluctuations are likely to continue in the future. Declines in
the selling prices of the Company’s finished goods, which
can result from decreases in the reference price of cobalt or
other factors, can result in the Company’s inventory
carrying value being written down to a lower market value.
The Company enters into derivative instruments and hedging
activities to manage commodity price risk. The Company, from
time to time, employs derivative instruments in connection with
certain purchases and sales of inventory in order to establish a
fixed margin and mitigate the risk of price volatility. Some
customers request fixed pricing and the Company may use a
derivative to mitigate price risk. The Company makes or receives
payments based on the difference between a fixed price (as
specified in each individual contract) and the market price of
the commodity being hedged. These payments will offset the
change in prices of the underlying sales or purchases and
effectively fix the price of the hedged commodity at the
contracted rate for the contracted volume. While this hedging
may limit the Company’s ability to participate in gains
from favorable commodity price fluctuations, it eliminates the
risk of loss from adverse commodity price fluctuations.
Interest Rate
Risk
The Company is exposed to interest rate risk primarily through
its borrowing activities. If needed, the Company predominantly
utilizes U.S. dollar-denominated borrowings to fund its
working capital, acquisition and investment needs. There is an
inherent rollover risk for borrowings as they mature and are
renewed at current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future
interest rates and business financing requirements (see
Note 9 to the consolidated financial statements contained
in Item 8 of this Annual Report).
From time to time, the Company enters into derivative
instruments and hedging activities to manage, where possible and
economically efficient, interest rate risk related to
borrowings. The Company uses interest rate swap agreements to
partially reduce risks related to floating rate financing
agreements that are subject to changes in the market rate of
interest. Terms of the interest rate swap agreements require the
Company to receive a variable interest rate and pay a fixed
interest rate. The Company’s interest rate swap agreements
and its variable rate financings are predominately based upon
the three-month LIBOR. The Company had interest rate swaps with
notional values that totaled $60.0 million at
December 31, 2010. The outstanding contracts as of
December 31, 2010 had maturities ranging up to
17 months. The Company had no outstanding interest rate
derivatives at December 31, 2009.
Credit
Risk
By using derivative instruments to hedge exposures to changes in
commodity prices and interest rates, the Company exposes itself
to credit risk. Credit risk is the failure of the counterparty
to perform under the terms of the derivative contract. When the
fair value of a derivative contract is positive, the
counterparty owes the Company, which creates credit risk for the
Company. When the fair value of a derivative contract is
negative, the Company owes the counterparty and the Company does
not possess credit risk. To mitigate credit risk, it is the
Company’s policy to execute such instruments with
creditworthy banks and not enter into derivative instruments for
speculative purposes. There were no counterparty defaults during
the years ended December 31, 2010, 2009 and 2008.
Market
Risk
By using derivative instruments to hedge exposures to changes in
commodity prices and interest rates, the Company exposes itself
to market risk. Market risk is the change in value of a
derivative instrument that results from a change in commodity
prices or interest rates. The market risk associated with
commodity prices and interests is managed by establishing and
monitoring parameters that limit the types and degree of market
risk that may be undertaken.
Foreign
Currency Exchange Rate Risk
In addition to the United States, the Company has manufacturing
and other facilities in Africa, Canada, Europe and Asia-Pacific,
and markets its products worldwide. Although a significant
portion of the Company’s raw material purchases and product
sales are based on the U.S. dollar, prices of certain raw
materials,
non-U.S. operating
expenses and income taxes are denominated in local currencies.
As such, the results of operations are subject to the
variability that arises from exchange rate movements
(particularly the Euro). In addition, fluctuations in exchange
rates may affect product demand and profitability in
U.S. dollars of products provided by the Company in foreign
markets in cases where payments for its products are made in
local currency. Accordingly, fluctuations in currency prices
affect the Company’s operating results. The primary
currencies for which the Company has foreign currency rate
exposure are the European Union Euro, Taiwanese Dollar,
Malaysian Ringgit, Singapore Dollar, British Pound Sterling,
Japanese Yen, Congolese Franc, Chinese Renminbi and the Canadian
Dollar.
The functional currency for the Company’s Finnish operating
subsidiary is the U.S. dollar since a majority of its
purchases and sales are denominated in U.S. dollars.
Accordingly, foreign currency exchange gains and losses related
to transactions of this subsidiary denominated in other
currencies (principally the Euro) are included in the Statements
of Consolidated Operations. While a majority of the
subsidiary’s raw material purchases are in
U.S. dollars, it also has some Euro-denominated expenses.
Beginning in 2009, the Company entered into foreign currency
forward contracts to mitigate a portion of the earnings
volatility in those Euro-denominated cash flows due to changes
in the Euro/U.S. dollar exchange rate. The Company had Euro
forward contracts with notional values that totaled
1.5 million Euros at December 31, 2009. The Company
had no Euro forward contracts at December 31, 2010. The
Company designated these derivatives as cash flow hedges of its
forecasted foreign currency denominated expense.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of OM Group, Inc.
We have audited the accompanying consolidated balance sheets of
OM Group, Inc. and Subsidiaries as of December 31, 2010 and
2009, and the related statements of consolidated operations,
comprehensive income (loss), total equity, and cash flows for
each of the three years in the period ended December 31,2010. Our audits also included the financial statement schedule
listed in the index at Item 15. These financial statements
and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of OM Group, Inc. and Subsidiaries at
December 31, 2010 and 2009, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), OM
Group Inc.’s internal control over financial reporting as
of December 31, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated February 24, 2011 expressed an unqualified
opinion thereon.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of OM Group, Inc.
We have audited OM Group Inc. and Subsidiaries’ internal
control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). OM
Group, Inc. and Subsidiaries’ management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial
Reporting appearing on page 107. Our responsibility is to
express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, OM Group, Inc. and Subsidiaries maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2010, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of OM Group, Inc. and Subsidiaries
as of December 31, 2010 and 2009, and the related
statements of consolidated operations, comprehensive income
(loss), total equity, and cash flows for each of the three years
in the period ended December 31, 2010 and our report dated
February 24, 2011 expressed an unqualified opinion thereon.
Notes to
Consolidated Financial Statements
OM Group, Inc. and Subsidiaries
(In thousands, except as noted and share and per share
amounts)
Note 1 —
Significant Accounting Policies
Principles of Consolidation — The consolidated
financial statements include the accounts of OM Group, Inc. (the
“Company”) and its consolidated subsidiaries.
Intercompany accounts and transactions have been eliminated in
consolidation. The Company has a 55% interest in a joint venture
(“GTL”) 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. Noncontrolling interest is recorded for the
remaining 45% interest.
The equity method of accounting is applied to non-consolidated
entities in which the Company can exercise significant influence
over the entity with respect to its operations and major
decisions. At December 31, 2010, the Company held a 45%
interest in Diehl & EaglePicher GmbH
(“D&EP”), which manufactures thermal batteries
for military applications and customized battery packs for the
defense, electronics and communication industries. D&EP is
accounted for under the equity method. The carrying amount of
the investment ($5.0 million at December 31,2010) is included in Other non-current assets in the
Consolidated Balance Sheets and the Company’s share of
D&EP earnings are included in Other, net in the
Consolidated Statements of Operations.
On January 29, 2010, the Company completed the acquisition
of EaglePicher Technologies, LLC. The financial position,
results of operations and cash flows of EaglePicher Technologies
are included in the Consolidated Financial Statements from the
date of acquisition.
Unless otherwise indicated, all disclosures and amounts in the
Notes to Consolidated Financial Statements relate to the
Company’s continuing operations.
Use of Estimates — The preparation of financial
statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and
assumptions in certain circumstances that affect the amounts
reported in the accompanying consolidated financial statements
and notes. Actual results could differ from these estimates.
Cash Equivalents — All highly liquid
investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Restricted Cash on Deposit — In 2009, GTL was
served in Jersey, Channel Islands, with an injunction for
$108.3 million. In November 2010, the Royal Court of Jersey
(the “Court”) released its Final Judgment in favor of
the plaintiff. One of the terms of the injunction prohibits GTL
from making payments to La Générale des Carrières
et des Mines (“Gécamines”) (a partner in GTL),
including amounts payable for raw material purchases under the
Long Term Slag Sales Agreement. In December 2010, GTL appealed
the decision of the Court. As a result of the legal appeal filed
by GTL, the Company was required to deposit amounts payable to
one of its joint venture partners’ with the Court. As of
December 31, 2010, $68.1 million has been deposited
with the Court and is recorded on the Consolidated Balance Sheet
as Restricted cash on deposit. See Note 17 for further
disclosure related to the injunction and legal appeal.
Revenue Recognition — For revenue not
recognized under the percentage of completion method of
accounting, the Company recognizes revenue when persuasive
evidence of an arrangement exists, unaffiliated customers take
title and assume risk of loss, the sales price is fixed or
determinable and collection of the related receivable is
reasonably assured. Revenue recognition generally occurs upon
shipment of product or usage of inventory consigned to customers.
The Battery Technologies segment uses the percentage of
completion method to recognize the majority of its revenue. The
majority of defense contracts use
units-of-delivery
while the majority of aerospace contracts use the
cost-to-cost
method as the basis to measure progress toward completing the
contract. Under the units-of delivery method, revenues are
recognized based on the contract price of units delivered. Under
the
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
cost-to-cost
method, revenue is recognized based on the ratio of cost
incurred compared to managements’ estimate of total costs
expected to be incurred under the contract. The percentage of
completion method requires the use of estimates of costs to
complete long-term contracts. The estimation of these costs
requires substantial judgment on the part of management due to
the duration of the contracts as well as the technical nature of
the products involved. Contract revenues and cost estimates are
reviewed periodically and adjustments are reflected in the
accounting period such amounts are determined. Contract revenues
and cost estimates are recognized based upon estimates of
progress towards completion on a
contract-by-contract
basis. Changes in cost estimates are recognized in the period of
change and reflect the cumulative change from inception of the
contract. These adjustments have historically not been material.
For example, an increase in the estimated profit booking rate
will result in an increase in revenue and operating profit and
reflect the
inception-to-date
effect of the change. Significant contracts are reviewed at
least quarterly. Billings in excess of amounts earned are
deferred. Anticipated losses on contracts are recorded in full
in the period in which the loss becomes evident.
The Company collects and remits taxes assessed by different
governmental authorities that are both imposed on and concurrent
with revenue producing transactions between the Company and its
customers. These taxes may include sales, use and value-added
taxes. The Company reports the collection of these taxes on a
net basis (excluded from revenues).
All amounts in a sales transaction billed to a customer related
to shipping and handling are reported as revenues.
Cost of Products Sold — Cost of products sold
is comprised of raw material costs, direct production,
maintenance and utility costs, depreciation, other overhead
costs and shipping and handling costs.
Restructuring — The Company accounts for
contractual terminations in accordance with the
“Compensation — Nonretirement Postemployment
Benefits” topic of the Accounting Standards Codification
(“ASC”), which requires recording an accrual when it
is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. The Company accounts for
one-time termination benefits, contract terminations, asset
write-offs,
and/or costs
to terminate lease obligations in accordance with the “Exit
or Disposal Cost Obligations” topic of the ASC, which
addresses financial accounting and reporting for costs
associated with restructuring activities. The Company
establishes a liability for a cost associated with an exit or
disposal activity, including one-time termination benefits,
lease termination obligations and other related costs, when the
liability is incurred rather than at the date the Company
commits to an exit plan. Lease termination costs include
remaining payments due under existing lease agreements after the
cease-use date and any lease cancellation fees. The Company
reassesses the expected cost to complete the exit or disposal
activities at the end of each reporting period and adjusts the
remaining estimated liabilities, if necessary.
Allowance for Doubtful Accounts — The Company
has recorded an allowance for doubtful accounts to reduce
accounts receivable to their estimated net realizable value. The
allowance is based upon an analysis of historical bad debts, a
review of the aging of accounts receivable and the current
creditworthiness of customers. Accounts are written off against
the allowance when it becomes evident that collections will not
occur. Bad debt expense is included in selling, general and
administrative expenses and amounted to income of
$0.5 million in 2010 due to recoveries of previously
reserved amounts and expense of $0.3 million and
$4.3 million in 2009 and 2008, respectively. Trade credit
is generally extended on a short-term basis; thus accounts
receivable do not bear interest.
Inventories — Inventories are stated at the
lower of cost or market and valued using the
first-in,
first-out (“FIFO”) method. Inventory costs include raw
materials, labor and manufacturing overhead. Inventory accounted
for under the
percentage-of-completion
method is included in work-in-process inventory and represents
accumulated contract costs less the portion of such costs
allocated to delivered units. The costs
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
attributed to units delivered are based on the estimated average
cost of all units expected to be produced on a
contract-by-contract
basis.
The cost of the Company’s raw materials fluctuates due to
actual or perceived changes in supply and demand of raw
materials, changes in cobalt market prices and changes in
availability from suppliers. Changes in the cobalt price can
have a significant impact on inventory valuation. The Company
evaluates the need for a lower of cost or market
(“LCM”) adjustment to inventories based on the
end-of-the-reporting
period selling prices of its finished products. Declines in the
selling prices of the Company’s finished goods, which can
result from decreases in the reference price of cobalt or other
factors, can result in the Company’s inventory carrying
value being written down to a lower market value.
Receivables from Joint Venture Partners and Noncontrolling
Interests — The Company has a 55% interest in a
joint venture that has a smelter in the DRC. The remaining 45%
interest is owned by two partners at 25% and 20%, respectively.
In years prior to 2008, the Company refinanced the capital
contribution for the 25% minority shareholder in its joint
venture in the DRC. At December 31, 2010 and 2009, the
notes receivable from this partner were $13.9 million, net
of a $5.2 million valuation allowance. The interest rate is
based on LIBOR (0.99% at December 31, 2010) and resets
annually in January. The repayment date for the notes receivable
is December 31, 2011, which may be extended at the
Company’s option. Due to the uncertainty of collection, the
Company continues to record a full allowance against unpaid
interest receivable under the notes receivable.
Under the terms of the note receivable, a portion (80%) of the
partner’s share of any dividends from the joint venture and
any other cash flow distributions (“secondary
considerations”) paid by the joint venture, if any, first
serve to reduce the Company’s receivables before any
amounts are remitted to the joint venture partner. The note
receivable is secured by 80% of the partner’s interest in
the joint venture.
The Company currently anticipates that repayment of the
receivables, net of the reserve, will be made from the
partner’s share of dividends and returns of capital from
the joint venture.
Property, Plant and Equipment — Property, plant
and equipment is recorded at historical cost less accumulated
depreciation. Depreciation of plant and equipment, including
assets recorded under capital leases, is provided by the
straight-line method over the useful lives of 5 to 25 years
for land improvements, 5 to 40 years for buildings and
improvements, 5 to 15 years for machinery and equipment
(with the majority in the range of 5 to 10 years), 5 to
10 years for furniture and fixtures and 3 to 5 years
for vehicles and computers and related equipment. Leasehold
improvements are depreciated over the shorter of the estimated
useful life or the term of the lease.
The Company records the fair value of a liability for an asset
retirement obligation in the period in which it is incurred, if
a reasonable estimate of fair value can be made. The related
asset retirement costs are capitalized as a part of the carrying
amount of the long-lived asset and amortized over the
asset’s useful life.
Internal Use Software — The Company capitalizes
costs associated with the development and installation of
internal use software in accordance with Financial Accounting
Standards Board (“FASB”) ASC Subtopic
350-40,
“Intangibles — Goodwill and Other: Internal Use
Software.” Accordingly, internal use software costs are
expensed or capitalized depending on whether they are incurred
in the preliminary project stage, application development stage
or post-implementation stage. Amounts capitalized are amortized
over the estimated useful lives of the software.
Long-lived Assets other than Goodwill —
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount
may not be recoverable. Events or circumstances that would
result in an impairment review primarily include operating
losses, a significant change in the use of an asset, or the
planned disposal or sale of the asset. The asset would be
considered impaired when the future net
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
undiscounted cash flows generated by the asset are less than its
carrying value. An impairment loss would be recognized based on
the amount by which the carrying value of the asset exceeds its
estimated fair value.
Goodwill and Intangible Assets — In accordance
with the “Intangibles — Goodwill and Other”
topic of the ASC, the Company evaluates the carrying value of
goodwill and indefinite-lived intangible assets for impairment
annually as of October 1 and between annual evaluations if
changes in circumstances or the occurrence of certain events
indicate potential impairment. If the carrying value of goodwill
or an indefinite-lived intangible asset exceeds its fair value,
an impairment loss is recognized.
Intangible assets consist of (i) definite-lived assets
subject to amortization and (ii) indefinite-lived
intangible assets not subject to amortization. Definite-lived
intangible assets consist principally of customer relationships,
developed technology, know-how, capitalized software and license
agreements and are being amortized using the straight-line
method. Indefinite-lived intangible assets consist of trade
names.
Retained Liabilities of Businesses Sold —
Retained liabilities of businesses sold include obligations
of the Company related to its former Precious Metals Group
(“PMG”), which was sold in 2003. Under terms of the
sale agreement, the Company will reimburse the buyer of this
business for certain items that become due and payable by the
buyer subsequent to the sale date. Such items are principally
comprised of taxes payable related to periods during which the
Company owned PMG. As of December 31, 2010, the net
liability was $7.5 million, of which $2.9 million was
included in Other current liabilities and $8.1 million was
included in Other non-current liabilities and corresponding
receivables of $3.5 million, related to indemnifications of
the liabilities, were recorded in Other non-current assets. The
liability at December 31, 2009 was $6.8 million, of
which $2.9 million was included in Other current
liabilities and $5.4 million was included in Other
non-current liabilities and corresponding receivables of
$1.5 million, related to indemnifications of the
liabilities, were recorded in Other non-current assets.
Research and Development — Research and
development costs are charged to expense when incurred, are
included in selling, general and administrative expenses and
amounted to $11.8 million, $9.2 million and
$10.8 million in 2010, 2009 and 2008, respectively.
Repairs and Maintenance — The Company expenses
repairs and maintenance costs, including periodic maintenance
shutdowns at its manufacturing facilities, when incurred.
Accounting for Leases — Lease expense is
recorded on a straight-line basis. The noncancellable lease term
used to calculate the amount of the straight-line expense is
generally determined to be the initial lease term, including any
optional renewal terms that are reasonably assured. Certain
leases include step rent provisions and escalation clauses,
which are recognized on a straight-line basis over the lease
term. Lease payments that depend on an existing index or rate
are included in our minimum lease payments. They are taken into
account in computing our minimum lease payments and the minimum
lease payments are recognized on a straight-line basis over the
minimum lease term.
Income Taxes — Deferred income taxes are
provided to recognize the effect of temporary differences
between financial and tax reporting. Deferred income taxes are
not provided for undistributed earnings of foreign consolidated
subsidiaries, to the extent such earnings are determined to be
reinvested for an indefinite period of time.
Foreign Currency Translation — The functional
currency for the Company’s Finnish subsidiary and related
DRC operations is the U.S. dollar since a majority of their
purchases and sales are denominated in U.S. dollars.
Accordingly, foreign currency exchange gains and losses related
to assets, liabilities and transactions denominated in other
currencies (principally the Euro) are included in the Statements
of Consolidated Operations.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The functional currency for the Company’s other operating
subsidiaries outside of the United States is the applicable
local currency. For those operations, financial statements are
translated into U.S. dollars at year-end exchange rates as
to assets and liabilities and weighted average exchange rates as
to revenues and expenses. The resulting translation adjustments
are recorded as a component of Accumulated other comprehensive
income (loss) in stockholders’ equity.
Derivative Instruments — The Company enters
into derivative instruments and hedging activities to manage,
where possible and economically efficient, commodity price risk,
foreign currency exchange rate risk and interest rate risk
related to borrowings. It is the Company’s policy to
execute such instruments with creditworthy banks and not enter
into derivative instruments for speculative purposes. All
derivatives are reflected at their fair value and recorded in
other current assets and other current liabilities as of
December 31, 2010 and 2009. The accounting for the fair
value of a derivative depends upon whether it has been
designated as a hedge and on the type of hedging relationship.
To qualify for designation in a hedging relationship, specific
criteria must be met and appropriate documentation prepared.
Changes in the fair values of derivatives not designated in a
hedging relationship are recognized in earnings.
The Company, from time to time, employs derivative instruments
in connection with purchases and sales of inventory in order to
establish a fixed margin and mitigate the risk of price
volatility. Some customers request fixed pricing and the Company
may use a derivative to mitigate price risk. While this hedging
may limit the Company’s ability to participate in gains
from favorable commodity price fluctuations, it eliminates the
risk of loss from adverse commodity price fluctuations.
Periodically, the Company enters into certain derivative
instruments designated as cash flow hedges. For these hedges,
the effective portion of the gain or loss from the financial
instrument is initially reported as a component of Accumulated
other comprehensive income (loss) in stockholders’ equity
and subsequently reclassified into earnings in the same line as
the hedged item in the same period or periods during which the
hedged item affects earnings.
Note 2 —
Recently Issued Accounting Guidance
Accounting
Guidance adopted in 2010:
In July 2010, the FASB issued guidance regarding disclosures
about the credit quality of financing receivables and the
allowance for credit losses. The guidance required disaggregated
information about the credit quality of financing receivables
and the allowance for credit losses based on portfolio segment
and class, as well as disclosure of credit quality indicators,
past due information, and modifications of financing
receivables. The Company adopted the guidance for disclosures as
of the end of a reporting period for the fourth quarter of 2010.
The disclosures about activity that occurs during a reporting
period are effective for interim and annual reporting periods
beginning on or after December 15, 2010. When effective,
the Company will comply with the disclosure provisions of this
guidance about activity that occurs during a reporting period.
In January 2010, the FASB issued guidance related to fair value
measurements and disclosures, which are effective for interim
and annual fiscal periods beginning after December 15,2009, except for disclosures about certain Level 3 activity
which will not become effective until interim and annual periods
beginning after December 15, 2010. This guidance requires
companies to disclose transfers in and out of Level 1 and
Level 2 fair value measurements, the reasons for the
transfers, and activity in Level 3 fair value measurements.
The new standard also requires a more detailed level of
disaggregation of the assets and liabilities being measured as
well as increased disclosures regarding inputs and valuation
techniques of the fair value measurements. See Note 11 for
disclosures related to the new guidance.
In June 2009, the FASB issued guidance on “Consolidation of
Variable Interest Entities” to require an analysis to
determine whether a variable interest gives the entity a
controlling financial interest in a variable interest entity.
This guidance requires an ongoing reassessment and eliminates
the quantitative approach previously required
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
for determining whether an entity is the primary beneficiary.
The Company adopted this guidance on January 1, 2010 and
such adoption did not have any effect on the Company’s
results of operations or financial position.
Accounting
Guidance Not Yet Adopted
In March 2010, the FASB issued guidance that recognizes the
milestone method as an acceptable revenue recognition method for
substantive milestones in research or development arrangements.
This guidance sets forth requirements for an entity to recognize
consideration that is contingent upon achievement of a
substantive milestone as revenue in the period in which the
milestone is achieved. In addition, this guidance requires
disclosure of certain information with respect to arrangements
that contain milestones. This guidance is effective for fiscal
years, and interim periods within those years, beginning on or
after June 15, 2010. The Company has not determined the
effect, if any, the adoption of this guidance will have on its
results of operations or financial position.
In October 2009, the FASB issued guidance on
multiple-deliverable revenue arrangements that addresses the
unit of accounting for arrangements involving multiple
deliverables. This guidance is effective for annual periods
beginning after June 15, 2010. The guidance also addresses
how arrangement consideration should be allocated to separate
units of accounting, when applicable, and expands the disclosure
requirements for multiple-deliverable arrangements. The Company
has not determined the effect, if any, the adoption of this
guidance will have on its results of operations or financial
position.
Note 3 —
Inventories
Inventories consist of the following as of December 31,
Total depreciation expense on property, plant and equipment was
$40.8 million in 2010, $43.2 million in 2009 and
$45.6 million in 2008.
Note 5 — Acquisition
On January 29, 2010, the Company completed the acquisition
of EaglePicher Technologies LLC from EaglePicher Corporation for
approximately $172 million in cash. Based in Joplin,
Missouri, EaglePicher Technologies is a leader in portable power
solutions and energy storage technologies serving aerospace,
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
defense and medical markets, and is developing technologies in
advanced power storage to serve alternative energy storage
markets. EaglePicher Technologies product offerings can be
grouped into two broad categories: (i) proprietary battery
products and (ii) complementary battery support products
that consist of energetic devices, chargers, battery management
systems and distributed products. In fiscal year 2009,
EaglePicher Technologies recorded revenues of approximately
$125 million, of which approximately 60 percent came
from its defense business, approximately 33 percent from
its aerospace business, and the remainder from its medical
business. The acquisition of EaglePicher Technologies furthers
the Company’s growth strategy and expands its presence in
the battery market. The financial position, results of
operations and cash flows of EaglePicher Technologies are
included in the Consolidated Financial Statements from the date
of acquisition. EaglePicher Technologies is operated and
reported within a new segment called Battery Technologies. Net
sales and operating profit for Battery Technologies were
$113.9 million and $5.1 million, respectively, for
2010.
The purchase price has been allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at
the date of acquisition. The purchase price exceeded the fair
value of the net assets acquired, resulting in
$65.1 million of goodwill, of which $18.6 million is
deductible for tax purposes. The excess purchase price over net
assets acquired primarily reflects the Company’s view that
this acquisition will add broad technical expertise in battery
applications, which will be critical to the Company’s
growth in battery materials and technologies.
The following represents the final allocation of the purchase
price:
Accounts Receivable
$
12,144
Inventories
27,459
Other current assets
1,936
Property, plant and equipment
44,460
Other assets
5,276
Customer relationships
40,700
Know-how
18,600
Developed technology
3,100
Tradename
20,700
Goodwill
65,112
Total assets acquired
239,487
Net pension obligations
42,902
Other liabilities, primarily accounts payable and other accrued
liabilities
Customer relationships represent the estimated fair value of
relationships with customers acquired in connection with the
acquisition. Know-how and developed technology represent a
combination of processes, patents and trade secrets developed
through years of experience in development and manufacturing of
EaglePicher Technologies products. Acquired know-how primarily
includes its proprietary processes, technical knowledge and
manufacturing capabilities/processes in the Defense and
Aerospace business units, which the Company considers trade
secrets that allow it to achieve a competitive advantage in the
marketplace. EaglePicher has a reputation of successfully
converting technology into products, and the Company utilizes
EaglePicher’s
concept-to-market
capabilities to produce its products, including products not
otherwise covered by patents but rather resulting from the
application of its trade secrets. Tradename represents the
EaglePicher name that the Company will continue to use. In
total, the weighted-average amortization period
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
for acquired intangible assets is 18 years. The
weighted-average amortization periods for customer
relationships, know-how and developed technology acquired are
18 years, 20 years and 15 years, respectively.
The tradename is an indefinite-lived asset that will be tested
for impairment at least annually.
Included in other liabilities is a $1.3 million
environmental liability associated with a site located in
Joplin, Missouri. See Note 17 for further disclosure
related to environmental liabilities.
In connection with the EaglePicher Technologies acquisition, the
Company incurred a total of $3.5 million in
acquisition-related costs, of which $2.2 million was
recognized in 2010 and $1.3 million was recognized in 2009.
Acquisition-related costs are included in Selling, general and
administrative expenses in the Statement of Consolidated
Operations. A significant portion of these expenses were related
to investment banking and due diligence fees.
Note 6 —
Goodwill and Other Intangible Assets
Goodwill is tested for impairment on an annual basis and more
often if indicators of impairment exist. The goodwill impairment
test is a two-step process. During the first step, the Company
estimates the fair value of the reporting unit (including
goodwill) and compares that amount to the carrying value of that
reporting unit. If the estimated fair value of the reporting
unit is less than its carrying value, the
“Intangibles — Goodwill and Other” topic of
the ASC requires a second step to determine the implied fair
value of goodwill of the reporting unit, and a comparison of
that amount to the carrying value of the goodwill of the
reporting unit. This second step includes valuing all of the
tangible and intangible assets and liabilities of the reporting
unit as if they had been acquired in a business combination on
the testing date.
The Company’s reporting units are Advanced Materials,
Electronic Chemicals, Advanced Organics, Ultra Pure Chemicals
(“UPC”), Photomasks, Defense, Aerospace and Medical.
The Company is organized into three segments: Advanced
Materials, Specialty Chemicals and Battery Technologies. The
Specialty Chemicals segment is comprised of Electronic
Chemicals, Advanced Organics, UPC and Photomasks. The Battery
Technologies segment is comprised of Defense, Aerospace and
Medical. The EaglePicher Technologies acquisition purchase price
has been allocated to the assets acquired and liabilities
assumed for each Battery Technologies reporting unit based upon
their estimated fair values at the date of acquisition. Goodwill
is the excess of the purchase price over the fair value of the
net assets acquired.
To test goodwill for impairment, the Company is required to
estimate the fair value of each of its reporting units. Since
quoted market prices in an active market are not available for
the Company’s reporting units, the Company uses other
valuation techniques. The Company has developed a model to
estimate the fair value of the reporting units utilizing a
discounted cash flow valuation technique (“DCF
model”). The Company selected the DCF model as it believes
it is comparable to what would be used by market participants to
estimate its fair value. The DCF model incorporates the
Company’s estimates of future cash flows; future growth
rates; terminal value amounts; allocations of certain assets,
liabilities and cash flows among reporting units; and the
applicable weighted-average cost of capital (the
“WACC”) used to discount those estimated cash flows.
These estimates are based on management’s judgment. The
estimates and projections used in the estimate of fair value are
consistent with the Company’s forecast and long-range plans.
The Company conducts its annual goodwill impairment test as of
October 1. The results of testing as of October 1,2010 confirmed that the estimated fair value of each of the
reporting units exceeded its carrying value and therefore no
impairment loss was required to be recognized. In 2009 and 2008,
the Company recorded non-cash charges of $37.5 million and
$8.8 million, respectively, in the Specialty Chemicals
segment for the impairment of goodwill related to the Advanced
Organics, UPC and Photomasks reporting units.
Intangible assets consist of (i) definite-lived assets
subject to amortization and (ii) indefinite-lived
intangible assets not subject to amortization. All intangible
assets subject to amortization are amortized on a straight-line
basis over the estimated useful lives.
The weighted average amortization period is as follows (in
years):
Customer relationships
14
Developed Technology
16
Know-how
20
Capitalized software
3
License agreements
5
Indefinite-lived intangible assets are tested annually for
impairment and between annual evaluations if changes in
circumstances or the occurrence of certain events indicate
potential impairment. The results of the testing of the
indefinite-lived trade names as of October 1, 2010
confirmed the fair value of each intangible asset exceeded its
carrying value and therefore no impairment loss was required to
be recognized. During 2009, the Company determined that a
license agreement in the UPC reporting unit and certain
indefinite-lived trade names in its Photomasks and UPC reporting
units were impaired due to downward revisions in estimates of
future revenue and cash flows. As a result, selling, general and
administrative expenses for 2009 includes an impairment charge
of $0.9 million for the license agreement and
$0.7 million related to the indefinite-lived trade names.
In performing its annual intangible asset impairment testing as
of October 1, 2008, the Company determined that certain
indefinite-lived trade names in its Photomasks reporting unit
were impaired due to
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
downward revisions in estimates of future revenue. As a result,
selling, general and administrative expenses for 2008 include an
impairment charge of $0.2 million related to the
indefinite-lived trade names.
Amortization expense related to intangible assets, including
capitalized software, for the years ended December 31,2010, 2009 and 2008 was $13.3 million, $10.5 million
and $10.5 million, respectively. The increase in
amortization expense in 2010 was due to the amortization of
intangible assets associated with the acquisition of EaglePicher
Technologies in 2010.
Internal use software costs are expensed or capitalized
depending on whether they are incurred in the preliminary
project stage, application development stage or the
post-implementation stage. Amounts capitalized are amortized
over the estimated useful lives of the software beginning with
the project’s completion. Amortization of capitalized
software was $2.8 million, $3.4 million and
$3.0 million for the years ended December 31, 2010,
2009 and 2008, respectively.
Estimated annual pretax amortization expense for intangible
assets is as follows (in millions):
2011
$
11.7
2012
$
11.3
2013
$
11.0
2014
$
10.2
2015
$
10.1
Note 7 — Restructuring
During 2009, the Company commenced a restructuring plan for its
Advanced Organics business within the Specialty Chemicals
segment to better align the cost structure and asset base of its
European carboxylate business to industry conditions resulting
from weak customer demand, commoditization of products and
overcapacity in that market. The restructuring plan included
exiting the Manchester, England manufacturing facility and
workforce reductions at the Company’s Belleville, Ontario,
Canada; Kokkola, Finland; Franklin, Pennsylvania and Westlake,
Ohio locations. The restructuring plan included the elimination
of 100 employee positions, including two in Westlake, five
in Belleville, six in Franklin, 15 in Kokkola and 72 in
Manchester. The majority of position eliminations were completed
by mid-2010. The restructuring plan does not involve the
discontinuation of any material product lines or other functions.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
During 2010 and 2009, the Company recorded restructuring charges
of $2.1 million and $12.7 million, respectively, in
the Statement of Consolidated Operations. The Company has
incurred and expects to incur the following restructuring
charges:
Decommissioning, demolition and lease termination charges
1,446
25
1,213
208
7,742
4,992
2,471
279
Non-cash charges
Fixed asset impairment
5,536
5,536
—
—
Inventory impairment/other charges (reversals)
1,809
2,180
(371
)
—
7,345
7,716
(371
)
—
Total charges
$
15,087
$
12,708
$
2,100
$
279
Decommissioning and demolition of the Manchester, England
facility began during the third quarter of 2010 and is expected
to be completed during the first half of 2011. Cash charges were
for severance, decommissioning and demolition costs, lease
termination costs and other exit costs. The Company expects to
continue to incur costs for severance, decommissioning and
demolition, lease termination and other exit costs through
June 30, 2011. Such costs will be expensed as incurred.
The following table presents the activity and accrued liability
balance related to the restructuring program:
The restructuring accrual represents future cash payments and is
recorded on the Consolidated Balance Sheet and is included in
Other current liabilities.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
Note 8 —
Discontinued Operations
Income from discontinued operations is related to the
Company’s former copper powders business, SCM Metal
Products, Inc. (“SCM”), and PMG, which were both sold
in 2003. Income from discontinued operations consisted of the
following for the years ended December 31:
2010
2009
2008
Income (loss) from discontinued operations before income taxes
$
(909
)
$
1,981
$
92
Income tax (benefit) expense
(1,635
)
485
—
Income from discontinued operations, net of tax
$
726
$
1,496
$
92
Income from discontinued operations in 2010 includes a
$1.6 million tax benefit related to a prior period error,
partially offset by a $1.2 million increase in a
contingency accrual. Income from discontinued operations in 2009
includes the reversal of a $2.0 million tax contingency
accrual related to PMG. 2010, 2009 and 2008 were also impacted
by translation adjustments of retained liabilities of businesses
sold denominated in a foreign currency.
Note 9 —
Debt
On March 8, 2010, the Company entered into a new
$250.0 million secured revolving credit facility (the
“Revolver”). The Revolver replaced the Company’s
prior revolving credit facility that was scheduled to expire in
December 2010. The Revolver includes an “accordion”
feature under which the Company may increase the Revolver’s
availability by $75.0 million to a maximum of
$325.0 million, subject to certain customary conditions and
the agreement of current or new lenders to accept a portion of
the increased commitment. To date, the Company has not sought to
borrow under the accordion feature. Obligations under the
Revolver are guaranteed by the Company’s present and future
subsidiaries (other than immaterial subsidiaries, joint ventures
and certain foreign subsidiaries) and are secured by a lien on
substantially all of the personal property assets of the Company
and subsidiary guarantors, except that the lien on the shares of
first-tier foreign subsidiaries is limited to 65% of such shares.
The Revolver requires the Company to maintain a minimum
consolidated interest coverage ratio of no less than 3.50 to
1.00 and a maximum consolidated leverage ratio of not more than
2.50 to 1.00. At December 31, 2010, the Company’s
interest coverage ratio was 24.36 to 1.00 and its leverage ratio
was .71 to 1.00. Both of the financial covenants are tested
quarterly for each trailing four-consecutive-quarter period.
Other covenants in the Revolver limit consolidated capital
expenditures to $50.0 million per year and also limit the
Company’s ability to incur additional indebtedness, make
investments, merge with another corporation, dispose of assets
and pay dividends. As of December 31, 2010, the Company was
in compliance with all of the covenants under the Revolver.
The Company has the option to specify that interest be
calculated based either on a London interbank offered rate
(“LIBOR”) or on a variable base rate, plus, in each
case, a calculated applicable margin. The applicable margins
range from 1.25% to 2.00% for base rate loans and 2.25% to 3.00%
for LIBOR loans. The Revolver also requires the payment of a fee
of 0.375% to 0.5% per annum on the unused commitment and a fee
on the undrawn amount of letters of credit at a rate equal to
the applicable margin for LIBOR loans. The applicable margins
and unused commitment fees are subject to adjustment quarterly
based upon the leverage ratio. The Revolver provides for
interest-only payments during its term, with all unpaid
principal due at maturity on March 8, 2013. Outstanding
borrowings under the Revolver totaled $120.0 million at
December 31, 2010. There were no amounts outstanding under
the prior credit facility at December 31, 2009. At
December 31, 2010, the weighted average interest rate for
the outstanding borrowings under the Revolver was 2.78%, and the
weighted average interest rate for the outstanding borrowings
under the Revolver together with the related interest rate swap
agreements was 3.17%.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The Company incurred fees and expenses of $2.6 million
related to the Revolver. These fees and expenses were deferred
and are being amortized to interest expense over the three-year
term of the Revolver.
During 2008, the Company’s Finnish subsidiary, OMG Kokkola
Chemicals Oy (“OMG Kokkola”), entered into a
€25 million credit facility agreement (the
“Credit Facility”). Under the Credit Facility, subject
to the lender’s discretion, OMG Kokkola can draw short-term
loans, ranging from one to nine months in duration, in
U.S. dollars at LIBOR plus a margin of 0.55%. The Credit
Facility has an indefinite term, and either party can
immediately terminate the Credit Facility after providing notice
to the other party. The Company agreed to unconditionally
guarantee all of the obligations of OMG Kokkola under the Credit
Facility. There were no borrowings outstanding under the Credit
Facility at December 31, 2010 or 2009.
Interest paid on long-term debt was $2.9 million,
$0.4 million and $1.0 million for 2010, 2009 and 2008,
respectively. Interest expense has not been allocated to
discontinued operations. No interest was capitalized in 2010,
2009 or 2008.
Note 10 —
Derivative Instruments
The Company enters into derivative instruments and hedging
activities to manage, where possible and economically efficient,
commodity price risk, foreign currency exchange rate risk and
interest rate risk related to borrowings. It is the
Company’s policy to execute such instruments with
creditworthy counterparties and not enter into derivative
instruments for speculative purposes. All derivatives are
reflected on the balance sheet at fair value and recorded in
other current assets and other current liabilities in the
Consolidated Balance Sheets. The accounting for the fair value
of a derivative depends upon whether it has been designated as a
hedge and on the type of hedging relationship. Changes in the
fair value of derivative instruments are recognized immediately
in earnings, unless the derivative is designated as a hedge and
qualifies for hedge accounting. Under hedge accounting,
recognition of derivative gains and losses can be matched in the
same period with that of the hedged exposure and thereby
minimize earnings volatility. To qualify for designation in a
hedging relationship, specific criteria must be met and
appropriate documentation prepared.
For a fair value hedge, the change in fair value of the hedging
instrument and the change in fair value of the hedged item
attributable to the risk being hedged are both recognized
currently in earnings. For a cash flow hedge, the effective
portion of the change in fair value of a hedging instrument is
initially recognized in Accumulated other comprehensive income
(loss) (“AOCI(L)”) in stockholders’ equity and
subsequently reclassified to earnings when the hedged item
affects income. The ineffective portion of the change in fair
value of a cash flow hedge is recognized immediately in earnings.
Commodity
Price Risk
The Company enters into derivative instruments and hedging
activities to manage commodity price risk. The Company, from
time to time, employs derivative instruments in connection with
certain purchases and sales of inventory in order to establish a
fixed margin and mitigate the risk of price volatility. Some
customers request fixed pricing and the Company may use a
derivative to mitigate price risk. The Company makes or receives
payments based on the difference between a fixed price (as
specified in each individual contract) and the market price of
the commodity being hedged. These payments will offset the
change in prices of the underlying sales or purchases and
effectively fix the price of the hedged commodity at the
contracted rate for the contracted volume. While this hedging
may limit the Company’s ability to participate in gains
from favorable commodity price fluctuations, it eliminates the
risk of loss from adverse commodity price fluctuations.
Derivative instruments employed by the Company to manage
commodity price risk include cash flow and fair value hedges as
well as some contracts that are not designated as accounting
hedges.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
Cash Flow
Hedges
From time to time, the Company enters into copper forward sales
contracts that are designated as cash flow hedges. At
December 31, 2009, the notional quantity of open copper
forward sales contracts designated as cash flow hedges in
accordance with the “Derivatives and Hedging” topic of
the ASC was 1.3 million pounds. The Company had no copper
forward sales contracts designated as cash flow hedges at
December 31, 2010. No hedge ineffectiveness was recorded in
income in the years ended December 31, 2010, 2009 or 2008
for these hedges.
Fair Value
Hedges
From time to time, the Company enters into certain cobalt
forward purchase contracts designated as fair value hedges. The
Company had no cobalt forward purchase contracts designated as
fair value hedges at December 31, 2010 or 2009.
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 sales during the second quarter
of 2008 of cobalt-containing finished products that were priced
based on a formula that included a fixed cobalt price component.
These forward purchase contracts were not designated as hedging
instruments under the “Derivatives and Hedging” topic
of the ASC. Accordingly, these contracts were adjusted to fair
value as of the end of each reporting period, with the gain or
loss recorded in Cost of products sold. The Company had no
forward contracts at December 31, 2010 or 2009.
Foreign
Currency Exchange Rate Risk
The functional currency for the Company’s Finnish operating
subsidiary is the U.S. dollar since a majority of its
purchases and sales are denominated in U.S. dollars.
Accordingly, foreign currency exchange gains and losses related
to transactions of this subsidiary denominated in other
currencies (principally the Euro) are included in earnings.
While a majority of the subsidiary’s raw material purchases
are in U.S. dollars, it also has some Euro-denominated
expenses. Beginning in 2009, the Company entered into foreign
currency forward contracts to mitigate a portion of the earnings
volatility in those Euro-denominated cash flows due to changes
in the Euro/U.S. dollar exchange rate. The Company had Euro
forward contracts with notional values that totaled
1.5 million Euros at December 31, 2009. The Company
had no Euro forward contracts at December 31, 2010. The
Company designated these derivatives as cash flow hedges of its
forecasted Euro-denominated expenses. No hedge ineffectiveness
was recorded in income in the years ended December 31,2010, 2009 or 2008 for these hedges.
Interest Rate
Risk
The Company is exposed to interest rate risk primarily through
its borrowing activities. If needed, the Company predominantly
utilizes U.S. dollar-denominated borrowings to fund its
working capital, acquisition and investment needs. There is an
inherent rollover risk for borrowings as they mature and are
renewed at current market rates. From time to time, the Company
enters into derivative instruments and hedging activities to
manage, where possible and economically efficient, interest rate
risk related to borrowings. The Company uses interest rate swap
agreements to partially reduce risks related to floating rate
financing agreements that are subject to changes in the market
rate of interest. Terms of the interest rate swap agreements
require the Company to receive a variable interest rate and pay
a fixed interest rate. The Company’s interest rate swap
agreements and its variable rate financings are predominately
based upon the three-month LIBOR. The Company had interest rate
swaps with notional values that totaled $60.0 million at
December 31, 2010. The outstanding contracts as of
December 31, 2010 had maturities ranging up to
17 months. As of December 31, 2010, AOCI(L) included a
cumulative loss of $0.4 million related to these contracts,
of which $0.3 million is
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
expected to be reclassified to earnings within the next twelve
months. The Company had no outstanding interest rate derivatives
at December 31, 2009. No hedge ineffectiveness was recorded
in income in 2010, 2009 or 2008 for these hedges.
The following table summarizes the fair value of derivative
instruments recorded in the Consolidated Balance Sheets:
See Note 13 for fair value disclosure related to pension
assets.
The Company uses significant other observable inputs to value
commodity contracts and interest rate swap agreements;
therefore, they are classified within Level 2 of the
valuation hierarchy. The fair value for these contracts is
determined based on copper prices and interest rates,
respectively. There were no transfers into or out of
Levels 1, 2 or 3 in 2010.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
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 inputs:
In September 2009, the Company announced a restructuring plan
related to its Advanced Organics business. See Note 7. As a
result, the Company reviewed its long-lived assets associated
with the Manchester, England facility for impairment and
recorded a $5.7 million impairment charge. The fair value
measurements were calculated using significant unobservable
inputs (combination of the cost and market approach).
In accordance with the provisions of the
“Intangibles — Goodwill and Other” topic of
the ASC, goodwill of the UPC reporting unit was written down to
its implied fair value of $28.3 million after completing
step two in 2009. The resulting $4.1 million adjustment to
the estimated goodwill impairment charge of $8.8 million
recorded in 2008 was included in earnings of 2009. During 2009,
the Company recorded an additional $15.8 million goodwill
impairment charge related to the UPC reporting unit to write
down goodwill with a carrying value of $28.5 million to its
implied fair value of $12.7 million. In addition, the
Company recorded an impairment charge of $19.1 million
related to the Photomasks reporting unit to write down goodwill
with a carrying value of $22.3 million to its implied fair
value of $3.2 million. Goodwill related to the Advanced
Organics reporting unit with a carrying amount of
$6.8 million was written down to its implied fair value of
$0, resulting in an impairment charge of $6.8 million in
2009. The Company utilizes a discounted cash flow analysis to
estimate the fair value of the reporting units utilizing
unobservable inputs. The fair value measurement of the reporting
unit under the step-one analysis and the step-two analysis in
their entirety are classified as Level 3 inputs.
During 2009 the Company also wrote down to fair value
indefinite-lived trade name intangible assets in its Photomasks
and Electronic Chemicals reporting units and a license agreement
in its UPC reporting unit due to downward revisions in estimates
of future revenue and cash flows. The impaired indefinite-lived
trade name intangible assets were determined to have an
estimated fair value of $4.0 million resulting in a charge
of $0.7 million, and the license agreement was determined
to have no value resulting in a charge of $0.9 million.
Both charges were included in earnings for 2009. The Company
utilizes a “relief from royalty” methodology in
estimating fair values for indefinite-lived trade names. The
methodology estimates the fair value of each trade name by
determining the present value of the royalty payments that are
avoided as a result of owning the trade name and includes
judgmental assumptions about sales growth that are consistent
with the assumptions used to determine the fair value of
reporting units in the Company’s goodwill testing. The fair
value measurements were calculated using unobservable inputs,
classified as Level 3, requiring significant management
judgment due to the absence of quoted market prices or
observable inputs for assets of a similar nature.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The Company also holds financial instruments consisting of cash,
accounts receivable, and accounts payable. The carrying amounts
of cash, accounts receivable and accounts payable approximate
fair value due to the short-term maturities of these
instruments. The carrying value of the Company’s Revolver
approximates fair value due to the variable interest rate terms.
Derivative instruments are recorded at fair value as indicated
in Note 10.
Cost method investments are evaluated for impairment quarterly.
During 2010, the Company recorded a charge of $2.0 million
in Selling, general and administrative expenses due to an
other-than-temporary
decline in the fair value of a cost method investment. This
impairment charge was recognized in the Advanced Materials
segment. As of December 31, 2009, the estimated fair value
of this investment approximated the Company’s carrying
value in the investment ($2.0 million). The decline in
value was determined to be other
other-than-temporary
due to the Company’s reassessment of the fair value of the
investment due, in part, to the investee’s inability to
obtain permanent financing, which required the investee to delay
and scale back its development plans. The Company determined
that the fair value of the investment was zero based on
Level 3 inputs. Level 3 inputs were used to determine
the fair value of the investment as the investment was in a
privately held entity without quoted market prices. To determine
the fair value of the investments, the Company used earnings and
cash flow forecasts of the entity.
Accounts receivable potentially subjects the Company to a
concentration of credit risk. The Company maintains significant
accounts receivable balances with several large customers. At
December 31, 2010 the accounts receivable balance from our
largest customer represented 6% of the Company’s net
accounts receivable. Generally, the Company does not obtain
security from its customers in support of accounts receivable.
Sales to Nichia Chemical Corporation represented approximately
14%, 16% and 22% of net sales in 2010, 2009 and 2008,
respectively. No other customer individually represented more
than 10% of net sales for any period presented. The loss of this
customer could have a material adverse effect on the
Company’s business, results of operations or financial
position. Sales to the top three customers in the Battery
Technologies segment represented approximately 50% of Battery
Technologies’ net sales in 2010. The loss of one or more of
these customers could have a material adverse effect on Battery
Technologies’ business, results of operations or financial
position.
Note 12 —
Income Taxes
Income (loss) from continuing operations before income tax
expense consists of the following:
A reconciliation of income taxes computed using the United
States statutory rate to income taxes computed using the
Company’s effective income tax rate is as follows:
Year Ended December 31
2010
2009
2008
Income (loss) from continuing operations before income tax
expense
$
107,315
$
(1,058
)
$
172,288
Income taxes at the United States statutory rate (35)%
37,560
(370
)
60,301
Increase (decrease) in taxes resulting from:
Effective tax rate differential on income outside of the United
States
(25,447
)
5,260
(17,673
)
Repatriation of foreign earnings
5,564
2,537
10,284
Goodwill impairment
—
11,853
2,200
Malaysian tax holiday
(4,545
)
(3,946
)
(4,962
)
Valuation allowance (reversal)
(1,967
)
1,025
6,419
Liability for uncertain tax positions
1,936
8,160
2,317
Foreign tax credits on amended prior year tax returns
—
(5,985
)
(46,636
)
Allowance on GTL prepaid tax asset
11,465
—
—
Other, net
5,090
2,365
3,826
Income tax expense
$
29,656
$
20,899
$
16,076
Effective income tax rate
27.6
%
(a
)
9.3
%
(a)
not meaningful
During 2010, the Company recorded discrete tax items related to
continuing operations netting to expense of $5.4 million.
Included in this amount is $10.1 million of discrete tax
expense related to the GTL joint venture, of which the
Company’s share is 55%, or $5.6 million. The GTL items
are primarily comprised of an $11.5 million charge to
reserve a portion of GTL’s prepaid income tax balance, and
a benefit of $2.6 million primarily related to a return to
provision adjustment. In 2010, certain companies doing business
in the DRC, including GTL, received notification from the DRC
tax authorities that requests to utilize tax overpayments to
offset more than 20% of 2010 taxes payable would not be granted.
Based on past precedent set by the DRC tax authorities, GTL had
previously estimated it would be able to utilize its prepaid tax
asset to offset more than 20% of its future tax
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
obligations. Given these changes, the Company updated its
estimation of the realizability of GTL’s prepaid tax asset
in the DRC and recorded an allowance of $11.5 million
against the prepaid tax asset in 2010. Excluding the discrete
items, the effective income tax rate for 2010 would have been
22.6%. This rate is lower than the U.S. statutory tax rate
primarily due to income earned in tax jurisdictions with lower
statutory rates than the U.S. (primarily Finland) and a tax
holiday in Malaysia. This was partially offset by losses in
certain jurisdictions with no corresponding tax benefit
(including the U.S.). During 2009, the Company recorded discrete
tax expense items totaling $10.2 million, which included
$9.2 million related to GTL, of which the Company’s
share is 55%, or $5.1 million. Also in 2009, the Company
recorded goodwill and intangible asset impairment charges
totaling $39.1 million, which are not deductible for tax
purposes. Adjusting the pretax loss for the impairment charges
and excluding the special tax items, the Company’s
effective income tax rate would have been 28.2% for 2009. This
effective tax rate is 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)
and a tax holiday in Malaysia, offset by income earned in
foreign tax jurisdictions with higher statutory rates than the
US, principally the DRC.
During 2009, the Company updated its analysis of foreign tax
credit positions and recorded a $5.8 million tax benefit
related to an election to take foreign tax credits on prior year
U.S. tax returns. As originally filed, such returns claimed
these amounts as deductions rather than foreign tax credits
because the Company was in a net operating loss carryforward
position in the U.S. during those years. However, due to
income taxes paid in the U.S. in connection with the 2009
repatriation of foreign earnings, the Company is able to utilize
these foreign tax credits previously taken as deductions. The
benefit related to the foreign tax credits was $0.19 per diluted
share in 2009. During 2008, the Company completed an analysis of
foreign tax credit positions and recorded a $46.6 million
tax benefit related to an election to take foreign tax credits
on prior year U.S. tax returns. As originally filed, such
returns claimed these amounts as deductions rather than foreign
tax credits because the Company was in a net operating loss
carryforward position in the U.S. during those years.
However, due to income taxes paid in the U.S. in connection
with the 2007 repatriation of foreign earnings, the Company is
able to utilize these foreign tax credits previously taken as
deductions. The benefit related to the foreign tax credits was
$1.54 per diluted share in 2008. The $46.6 million tax
benefit is net of a valuation allowance of $1.5 million on
deferred tax assets because it is more likely than not that
those deferred tax assets will not be realized as a result of
the Company’s election to claim the foreign tax credits.
Excluding the tax benefit related to the foreign tax credits,
the Company’s effective income tax rate would have been
36.4% for 2008.
As discussed above, during 2008 and 2009, the Company recorded
tax benefits related to its election to take foreign tax credits
on prior year U.S. tax returns. As of December 31,2010, the Company has a receivable of $37.9 million
(included in Refundable and prepaid income taxes on the
Consolidated Balance Sheets) related to amending its
U.S. tax returns. The Company expects to receive this
refund in 2011.
The Company intends to repatriate only future earnings and
therefore has not provided additional United States income
taxes on approximately $204.8 million of undistributed
earnings of consolidated foreign subsidiaries. Such earnings
could become taxable upon the sale or liquidation of these
foreign subsidiaries or upon dividend repatriation. The
Company’s intent is for such earnings to be permanently
reinvested by the foreign subsidiaries. It is not practicable to
estimate the amount of unrecognized withholding taxes and tax
liability on such earnings.
In connection with an investment incentive arrangement, the
Company has a “tax holiday” from income taxes in
Malaysia. This arrangement, which expires on December 31,2011, reduced income tax expense by $4.5 million,
$3.9 million and $5.0 million for 2010, 2009 and 2008,
respectively. The benefit of the tax holiday on net income per
diluted share was approximately $0.15, $0.13, and $0.16 in 2010,
2009 and 2008, respectively.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The Company has a subsidiary in the Netherlands which is a
closed CV and under Dutch law is not subject to tax in the
Netherlands. The Company’s tax ruling confirming its
favorable tax status expired on December 31, 2010. The
Company has requested, and expects to receive, a renewal of the
ruling confirming its tax status under Dutch law.
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 2003. The
Internal Revenue Service is currently examining the
Company’s 2007 U.S. federal income tax return. This
examination is expected to be completed in 2011.
Income tax payments were $26.5 million, $23.9 million
and $77.4 million in 2010, 2009 and 2008, respectively.
Significant components of the Company’s deferred income
taxes are as follows:
December 31
2010
2009
Employee benefit accruals
$
24,246
$
10,339
Foreign operating loss carryforwards
12,413
2,823
Foreign tax credit carryforwards
10,567
8,257
State operating loss carryforwards
6,702
7,711
Operating accruals
17,796
15,411
Investment credit carryforwards
2,195
—
Valuation allowance
(50,329
)
(24,141
)
Deferred tax assets
23,590
20,400
Depreciation and amortization
(33,853
)
(31,732
)
Earnings repatriation
(969
)
(1,578
)
Other
(951
)
(625
)
Deferred tax liabilities
(35,773
)
(33,935
)
Net deferred tax liabilities
$
(12,183
)
$
(13,535
)
Deferred income taxes are recorded in the Consolidated Balance
Sheets in the following accounts:
December 31
2010
2009
Other current assets
$
8,208
$
6,519
Other non-current assets
4,000
8,077
Other current liabilities
(892
)
(678
)
Deferred income taxes — non-current liabilities
(23,499
)
(27,453
)
$
(12,183
)
$
(13,535
)
The Company has a U.S. net deferred tax asset of
$0.4 million which is expected to be recovered based on
temporary differences that will reverse in
2011-2012.
At December 31, 2010 and 2009, the Company has
U.S state net operating loss carryforwards representing a
potential future tax benefit of $6.7 million and
$7.7 million. These carryforwards expire at various dates
from 2011 through 2030. The Company has recorded a full
valuation allowance against the U.S state net operating loss
carryforwards. The Company has foreign net operating loss
carryforwards of $38.4 million, representing a potential
future tax benefit of $12.4 million in various
jurisdictions, some of which expire in 2012 through 2030, and
some of which have no expiration. The Company has established a
$7.4 million valuation allowance against the foreign net
operating loss
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
carryforwards as the Company believes that the majority of these
assets will not be realized. The remaining $5.0 million
foreign operating loss carryforward, which relates to GTL, is
expected to be realized based on current projections of future
taxable income. The Company has foreign investment tax credit
carryforwards of $2.2 million which expire in 2028. The
Company has recorded a valuation allowance against the foreign
investment tax credit carryforwards as the Company believes that
these assets will not be realized. For the year ended
December 31, 2010, the Company’s valuation allowance
increased primarily due to establishing valuation allowances
against the net deferred tax assets associated with the
EaglePicher Technologies acquisition.
A reconciliation of the beginning and ending amount of uncertain
tax positions is as follows:
If recognized, all uncertain tax positions would affect the
effective tax rate. However, $8.5 million of the uncertain
tax positions relate to foreign tax credit carryforwards, which
if recognized would be offset by an adjustment to the valuation
allowance. At December 31, 2010, there are no uncertain tax
positions for which the ultimate deductibility is highly certain
but for which there is uncertainty about the timing of such
deductibility. The increase in uncertain tax positions in 2010
results primarily from intercompany transactions including
transfer pricing matters and a tax refund on an intercompany
dividend. The decrease in uncertain tax positions in 2010
results primarily from audit activities and a change in
recognition related to an intercompany loan. The increase in
uncertain tax positions in 2009 results primarily from transfer
pricing matters. At December 31, 2010, the liability for
uncertain tax positions includes $4.7 million for which it
is reasonably possible that the uncertain tax position will
decrease within the next twelve months. These uncertain tax
positions primarily relate to transfer pricing and may decrease
upon completion of examination by taxing authorities.
The Company recognizes interest accrued related to uncertain tax
positions and penalties as a component of income tax expense.
During 2010, 2009 and 2008, the Company recognized a
$0.1 million benefit, $0.5 million expense and
$0.1 million expense related to interest and penalties,
respectively. At December 31, 2010 and 2009, the Company
had $0.8 million and $0.9 million accrued for interest
and penalties.
Note 13 —
Pension and Other Post-Retirement Benefit Plans
The Company has defined contribution plans covering
substantially all eligible U.S. employees. Contributions
are directed by the employee into various investment options.
These defined contribution plans do not have any direct
ownership of the Company’s common stock. Under these plans,
the Company matches participants’ contributions based on
plan provisions. Certain plans provide for a discretionary
Company contribution based on employee compensation. From July
2009 through December 2009, the Company suspended the
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
discretionary employer contributions to its defined contribution
retirement plans. The Company maintains additional defined
contribution plans in certain locations outside the United
States. Aggregate defined contribution plan expenses were
$5.7 million, $4.4 million and $3.8 million in
2010, 2009 and 2008, respectively.
As a result of the EaglePicher Technologies acquisition, the
Company assumed certain pension obligations and an unfunded life
insurance plan. The EaglePicher Technologies pension plans
consist of four non-contributory defined benefit pension plans.
The Technologies Salaried Plan is a defined benefit, cash
balance plan that covers EaglePicher Technologies salaried
employees hired prior to January 1, 2007. The Technologies
Hourly Plan is a defined benefit plan that covers EaglePicher
Technologies non-union hourly employees hired prior to
January 1, 2007 and union hourly employees hired prior to
May 3, 2008. The Company also assumed the liabilities of
two frozen defined benefit pension plans. Pension benefits are
paid to plan participants directly from pension plan assets. The
liability associated with the life insurance plan was
$0.6 million at December 31, 2010 and is included in
Other non-current liabilities in the Consolidated Balance Sheet.
In addition to the pension liabilities assumed as a result of
the EaglePicher Technologies acquisition, the Company has a
non-contributory, defined benefit pension plan for certain
retired employees in the United States related to the
Company’s divested SCM business. Pension benefits are paid
to plan participants directly from pension plan assets. Certain
non-U.S. employees
are covered under other defined benefit plans. These
non-U.S. plans
are not material to the Company.
The Company also has an obligation to its former chief executive
officer in settlement of an unfunded supplemental executive
retirement plan (“SERP”). Payments under the SERP are
made directly from the Company.
During 2008, to comply with the requirements of U.S. GAAP
to measure plan assets and benefit obligations as of the date of
its statement of financial position, the Company changed the
measurement date of its pension and postretirement benefit plans
from October 31 to December 31. As a result, an adjustment
to beginning retained earnings of $0.2 million was recorded
in 2008 and is reflected in the Statement of Consolidated
Stockholders’ Equity.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The following table sets forth the changes in the benefit
obligation and the plan assets during the year and reconciles
the funded status of the defined benefit plans with the amounts
recognized in the Consolidated Balance Sheets at December 31:
Pension Benefits
U.S. Plans
Non-U.S. Plans
2010
2009
2010
2009
Change in benefit obligation
Projected benefit obligation at beginning of year
$
(24,061
)
$
(23,670
)
$
(2,813
)
$
(2,086
)
EaglePicher Technologies acquisition
(182,670
)
—
—
—
Service cost
(913
)
—
(228
)
(173
)
Interest cost
(11,078
)
(1,307
)
(129
)
(122
)
Actuarial gain
(8,976
)
(893
)
(405
)
(365
)
Benefits paid
11,832
1,137
57
71
Plan amendments
—
—
—
(89
)
Transfers out of the plan
—
—
—
32
Foreign currency exchange rate changes
—
—
185
(81
)
SERP payments related to former CEO
672
672
—
—
Projected benefit obligation at end of year
(215,194
)
(24,061
)
(3,333
)
(2,813
)
Change in plan assets
Fair value of plan assets at beginning of year
10,013
8,845
309
293
EaglePicher Technologies acquisition
139,768
—
—
—
Actual return on plan assets
15,865
2,076
3
7
Employer contributions
5,633
229
57
71
Foreign currency exchange rate changes
—
—
(20
)
9
Benefits paid
(11,832
)
(1,137
)
(57
)
(71
)
Fair value of plan assets at end of year
159,447
10,013
292
309
Funded status — plan assets less than benefit
obligations
(55,747
)
(14,048
)
(3,041
)
(2,504
)
Recognized in accumulated other comprehensive income:
Net actuarial (gain) loss
13,895
11,528
571
177
Amounts not yet recognized as a component of net
postretirement benefit cost
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
Set forth below is a detail of the net periodic pension and
other post-retirement benefit expense for the defined benefit
plans for the years ended December 31:
Pension Benefits
U.S. Plans
2010
2009
2008
Service cost
$
913
$
—
$
—
Interest cost
11,078
1,307
1,295
Amortization of unrecognized net loss
364
390
273
Expected return on plan assets
(9,621
)
(711
)
(857
)
Net periodic benefit cost
2,734
986
711
Net (gain) loss arising during the year
2,731
(473
)
3,966
Net (gain) loss recognized during the year
(363
)
(390
)
(273
)
Change in measurement date
—
—
(46
)
Total recognized in other comprehensive income
2,368
(863
)
3,647
Total recognized in net periodic benefit cost and other
comprehensive income
$
5,102
$
123
$
4,358
Pension Benefits
Non-U.S. Plans
2010
2009
2008
Service cost
$
228
$
173
$
130
Interest cost
129
122
120
Amortization of unrecognized net loss
3
(7
)
—
Amortization of prior service credit
5
—
—
Expected return on plan assets
(9
)
(10
)
(17
)
Net periodic benefit cost
356
278
233
Net (gain) loss arising during the year
411
375
(325
)
Net (gain) loss recognized during the year
(3
)
7
—
Amortization of prior service credit
(5
)
89
—
Exchange rate gain (loss)
(9
)
6
17
Total recognized in other comprehensive income
394
477
(308
)
Total recognized in net periodic benefit cost and other
comprehensive income
$
750
$
755
$
(75
)
Future pension benefit payments expected to be paid are as
follows:
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The Company expects to contribute $7.6 million and
$0.1 million related to its U.S. and
non-U.S. pension
plans, respectively, in 2011. Expected contributions are
dependent on many variables, including the variability of the
market value of the assets as compared to the obligation and
other market or regulatory conditions. Accordingly, actual
funding may differ significantly from current estimates.
The amounts in Accumulated other comprehensive income (loss)
that are expected to be recognized as components of net periodic
benefit cost during 2011 are as follows:
U.S. Plans
Non-U.S. Plans
Total
Net actuarial loss
$
386
$
10
$
396
Prior service cost
—
5
5
Total
$
386
$
15
$
401
The following weighted-average assumptions were used to
determine the Company’s pension benefit obligations for the
year ended December 31:
2010
2009
U.S. Plans
Discount rate — EPT Active Plans
5.29%
n/a
Discount rate — EPT Inactive Plans
5.12%
n/a
Discount rate — SCM Plans
5.12%
5.50%
Expected return on pension plan assets — EPT Active
Plans
8.25%
n/a
Expected return on pension plan assets — EPT Inactive
Plans
6.00%
n/a
Expected return on pension plan assets — SCM Plans
6.75%
7.50%
Rate of increases in compensation
3.50%
n/a
Non U.S. Plans
Discount rate
4.33%
5.07%
Rate of increases in compensation
2.75% – 3.00%
2.00% – 3.00%
The following weighted-average assumptions were used to
determine the Company’s net periodic pension benefit costs
for the year ended December 31:
2010
2009
U.S. Plans
Discount rate — EPT Active Plans
5.67%
n/a
Discount rate — EPT Inactive Plans
5.64%
n/a
Discount rate — SCM Plans
5.50%
5.50%
Expected return on pension plan assets — EPT Active
Plans
8.25%
n/a
Expected return on pension plan assets — EPT Inactive
Plans
6.75%
n/a
Expected return on pension plan assets — SCM Plans
7.50%
7.00%
Non U.S. Plans
Discount rate
5.10%
5.25% – 6.25%
Expected return on pension plan assets
5.78%
5.0% – 6.0%
The Company’s investment objective for defined benefit plan
assets is to meet the plan’s benefit obligations, without
undue exposure to risk. The investment strategy focuses on asset
class diversification, liquidity to meet benefit payments and an
appropriate balance of long-term investment return and risk. The
Investment Committee oversees the investment allocation process,
which includes the selection and evaluation of the investment
manager, the determination of investment objectives and risk
guidelines, and the monitoring of actual investment performance.
In determining the expected long-term rate of return on defined
benefit
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
pension plan assets, management considers the historical rates
of return over a period of time that is consistent with the
long-term nature of the underlying obligations of these plans,
the nature of investments and an expectation of future
investment strategies.
The Company utilizes the services of independent third-party
investment managers to oversee the management of
U.S. pension plan assets. The investment managers are
allowed to exercise investment discretion, subject to
limitations established by the Company.
EaglePicher Technologies defined benefit pension obligations
consist of four pension plans, comprised of two frozen plans and
two active plans. The EaglePicher Technologies plan assets are
managed as two “pools” in recognition of the
differences in the obligations of the active and frozen plans.
Below are the Company’s actual and established target
allocations for the EaglePicher Technologies Pension Plans,
representing 92% of U.S. pension plan assets:
Active Plans
Frozen Plans
Actual
Target
Actual
Target
Allocation
Allocation
Allocation
Allocation
U.S. equity securities
36
%
35
%
12
%
12
%
International equity securities
30
%
30
%
8
%
8
%
Fixed income
22
%
25
%
69
%
70
%
High yield
0
%
0
%
2
%
2
%
TIPS
5
%
5
%
5
%
6
%
Global REITS
5
%
5
%
3
%
3
%
Cash
2
%
0
%
1
%
0
%
Total assets
100
%
100
%
100
%
100
%
Active Plans: Domestic equity securities are
invested broadly in U.S. companies in various industries
using the Wilshire 5000 Index as the asset class benchmark.
International equity securities are invested broadly in
non-U.S. companies
in various industries using the MSCI ACWI ex-U.S. Index as
the asset class benchmark. Long-term Core Fixed Income
(“Fixed income”) consists of broad investment grade
fixed income bonds using the Barclays Capital Long
Government/Credit Index as the asset class benchmark.
U.S. Treasury Inflation Protected Fixed Income
(“TIPS”) invests in the U.S. Treasury inflation
protected securities market using the Barclays U.S. TIPS
Index as the asset class benchmark. Real estate investments are
invested in the broad global real estate securities market with
the FTSE EPRA/NAREIT Developed RE Index (or other comparable
index) as the asset class benchmark.
Frozen Plans: Domestic equity securities are
invested broadly in U.S. companies in various industries
using the Wilshire 5000 Index as the asset class benchmark.
International equity securities are invested broadly in
non-U.S. companies
in various industries using the MSCI ACWI ex-U.S. Index as
the asset class benchmark. Fixed income consists of long-credit
fixed income bonds using the Barclays Capital Long Credit Index
as the asset class benchmark. High Yield Fixed Income
(“High yield”) invests in broad
U.S. non-investment grade fixed income bonds using the
Merrill Lynch U.S. High Yield Master II Index as the
asset class benchmark. TIPS invests in the U.S. Treasury
inflation protected securities market using the Barclays
U.S. TIPS Index as the asset class benchmark. Real estate
investments are invested in the broad global real estate
securities market with the FTSE EPRA/NAREIT Developed RE Index
(or other comparable index) as the asset class benchmark.
Equity securities are invested broadly in U.S. companies in
various industries. Foreign assets consist of equity securities
of
non-U.S. companies
in various industries as well as foreign mutual funds.
The fair value measurements of defined benefit pension plan
assets by category at December 31, 2010 are as follows:
The defined benefit pension plans do not have any direct
ownership of the Company’s common stock.
In June 2009, the Company announced a plan to terminate its
unfunded postretirement medical and life insurance plan. As a
result of such action, benefits available to eligible employees
and retirees ceased on August 31, 2009. The Company
recognized a $4.7 million gain on the termination in 2009.
The $4.7 million gain, which is included in Corporate for
segment reporting, is net of reversal of unrecognized actuarial
gain of $0.1 million.
The following table sets forth the computation of basic and
dilutive income (loss) per common share from continuing
operations attributable to OM Group, Inc. common stockholders
for the years ended December 31:
2010
2009
2008
(in thousands, except per share amounts)
Income (loss) from continuing operations attributable to
OM Group, Inc. common stockholders
$
82,648
$
(19,353
)
$
134,911
Weighted average shares outstanding — basic
30,433
30,244
30,124
Dilutive effect of stock options and restricted stock
132
—
234
Weighted average shares outstanding — assuming dilution
30,565
30,244
30,358
Earnings per common share:
Income (loss) from continuing operations attributable to
OM Group, Inc. common stockholders — basic
$
2.72
$
(0.64
)
$
4.48
Income (loss) from continuing operations attributable to
OM Group, Inc. common stockholders — assuming dilution
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The following table sets forth the computation of basic and
diluted net income (loss) per common share attributable to OM
Group, Inc. common stockholders for the years ended December 31:
2010
2009
2008
(in thousands, except per share amounts)
Net income (loss) attributable to OM Group, Inc. common
stockholders
$
83,374
$
(17,857
)
$
135,003
Weighted average shares outstanding — basic
30,433
30,244
30,124
Dilutive effect of stock options and restricted stock
132
—
234
Weighted average shares outstanding — assuming dilution
30,565
30,244
30,358
Earnings per common share:
Net income (loss) attributable to OM Group, Inc. common
stockholders — basic
$
2.74
$
(0.59
)
$
4.48
Net income (loss) attributable to OM Group, Inc. common
stockholders — assuming dilution
$
2.73
$
(0.59
)
$
4.45
The Company uses the treasury stock method to calculate the
effect of outstanding share-based compensation awards, which
requires the Company to compute total employee proceeds as the
sum of (a) the amount the employee must pay upon exercise
of the award, (b) the amount of unearned share-based
compensation costs attributed to future services and
(c) the amount of tax benefits, if any, that would be
credited to additional paid-in capital assuming exercise of the
award. Shares under share-based compensation awards for which
the total employee proceeds exceed the average market price over
the applicable period have an antidilutive effect on earnings
per share, and accordingly, are excluded from the calculation of
diluted earnings per share.
In the year ended December 31, 2010, stock options to
purchase 0.2 million shares of common stock were excluded
from the calculation of dilutive earnings per share because the
options’ exercise prices were greater than the average
market price of the common shares and, therefore, the effect
would have been anti dilutive. As the Company had a loss from
continuing operations for the year ended December 31, 2009,
the effect of including dilutive securities in the earnings per
share calculation would have been antidilutive. Accordingly, all
shares under share-based compensation awards were excluded from
the calculation of loss from continuing operations attributable
to OM Group, Inc. common stockholders assuming dilution and net
loss attributable to OM Group, Inc. common stockholders assuming
dilution for the year ended December 31, 2009. For the year
ended December 31, 2008, share-based compensation awards
for 0.3 million shares were excluded from the diluted
earnings per share calculation because they were antidilutive.
Note 16 —
Share-Based Compensation
On May 8, 2007, the stockholders of the Company approved
the 2007 Incentive Compensation Plan (the “2007
Plan”). The 2007 Plan superseded and replaced 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 did 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 ten-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
Company’s common stock on the NYSE, on the date of grant.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
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 Company satisfies stock option
exercises and restricted stock awards through the issuance of
authorized but unissued shares or treasury shares.
The Statements of Consolidated Operations include share-based
compensation expense for option grants, restricted stock and
restricted stock unit awards granted to employees as a component
of Selling, general and administrative expenses of
$5.4 million, $5.8 million and $7.3 million in
2010, 2009 and 2008, respectively. No tax benefit was realized
during 2010, 2009 or 2008 as a result of the valuation allowance
against the deferred tax assets.
At December 31, 2010, there was $5.9 million of
unrecognized compensation expense related to nonvested
share-based awards. That cost is expected to be recognized as
follows: $3.4 million in 2011, $2.3 million in 2012
and $0.2 million in 2013 as a component of Selling, general
and administrative expenses. 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 and fluctuations in
the fair value of restricted stock unit awards.
Beginning in 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 Company’s common stock on the NYSE on the last
trading date of the quarter. Pursuant to this plan, the Company
issued 8,458 shares in 2010, 11,256 shares in 2009 and
7,316 shares in 2008 to non-employee directors.
Stock
Options
Options granted generally vest in equal increments over a
three-year period from the grant date. Upon any change in
control of the Company, as defined in the applicable plan, or
upon death, disability or retirement, the stock options become
100% vested and exercisable. The Company accounts for options
that vest over more than one year as one award and recognizes
expense related to those awards on a straight-line basis over
the vesting period. During 2010, 2009 and 2008 the Company
granted stock options to purchase 243,050, 188,003 and
168,175 shares of common stock, respectively. Included in
the 2009 grants are stock options to purchase 7,703 shares
of common stock with a vesting period of one year, which were
granted to the Company’s Chief Executive Officer
(“CEO”) in connection with payment of his 2008
high-performance bonus.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The fair value of options was estimated at the date of grant
using a Black-Scholes options pricing model with the following
weighted-average assumptions:
2010
2009
2008
Risk-free interest rate
2.7
%
2.1
%
2.6
%
Dividend yield
—
—
—
Volatility factor of Company common stock
0.58
0.59
0.47
Weighted-average expected option term (years)
6.0
6.0
6.0
Weighted-average grant-date fair value
$
17.24
$
11.23
$
27.72
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 Company’s 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 of option shares and
weighted-average grant-date fair value:
The fair value of options that vested during 2010, 2009 and 2008
was $3.6 million, $3.3 million and $3.3 million,
respectively. The intrinsic value of options exercised during
2010, 2009 and 2008 was $2.2 million, $0 million
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
and $0.4 million, respectively. The intrinsic value of an
option represents the amount by which the market value of the
stock exceeds the exercise price of the option.
In connection with the exercise of stock options previously
granted, the Company received cash payments of
$4.1 million, $0 million and $0.9 million in
2010, 2009 and 2008, respectively. The Company does not settle
stock options for cash.
Restricted
Stock — Performance-Based Awards
During 2010, 2009 and 2008, the Company awarded 121,700, 87,250
and 60,200 shares, respectively, of performance-based
restricted stock that vest subject to the Company’s
financial performance. The number of shares of restricted stock
that ultimately vest is based upon the Company’s
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, with target
being 50% of the initial grant. The shares awarded during 2010
and 2009 will vest upon the satisfaction of established
performance criteria based on average consolidated EBITDA Margin
(defined as operating profit plus depreciation and amortization
expense divided by revenue) measured against a predetermined
peer group, and average return on net assets, calculated over
respective three-year performance periods ending
December 31, 2012 and December 31, 2011, respectively.
The performance period for the shares awarded during 2008 ended
on December 31, 2010. Such shares vest based upon the level
of satisfaction of established performance criteria based on the
Company’s consolidated operating profit and average return
on net assets, in each case over the three-year performance
period ended December 31, 2010. The shares will vest upon
the determination by the Compensation Committee that the
performance objectives relating to the shares were satisfied and
that the shares were earned. Based upon the level of
satisfaction of the performance objectives, approximately 1,700
of the performance-based shares awarded in 2008 are expected to
vest and be issued in the first quarter of 2011.
The performance period for 86,854 shares awarded during
2007 ended on December 31, 2009. A total of 80,600 of the
shares awarded during 2007 were subject to vesting based upon
the level of satisfaction of established performance criteria,
based on the Company’s consolidated operating profit and
average return on net assets, in each case over the three-year
performance period ended December 31, 2009. Based upon the
level of satisfaction of the performance objectives, as
determined by the Compensation Committee in March 2010, 74,676
performance-based shares vested and were issued in the first
quarter of 2010. Upon vesting, employees surrendered
26,651 shares of common stock to the Company to pay
required minimum withholding taxes applicable to the vesting of
restricted stock. The surrendered shares are held by the Company
as treasury stock. The remaining 6,254 shares issued in
2007 did not vest as the Company did not meet an established
earnings target during any one of the years in the three-year
performance period ended December 31, 2009.
The performance period for the shares of restricted stock
awarded during 2006 ended on December 31, 2008. During
2009, a total of 86,610 shares vested upon the
determination by the Compensation Committee that the performance
objectives relating to the shares were satisfied, and the shares
were earned at the maximum (100%) level. Upon vesting, employees
surrendered 24,654 shares of common stock to the Company to
pay required minimum withholding taxes applicable to the vesting
of restricted stock. The surrendered shares are held by the
Company as treasury stock.
The value of the performance-based restricted stock awards was
based upon the market price of an unrestricted share of the
Company’s common stock at the date of grant. The Company
recognizes expense related to performance-based restricted stock
ratably over the requisite performance 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
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
the plan, or upon retirement, the shares become 100% vested at
the target level. 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 Company’s performance-based restricted
stock awards for 2010 is as follows:
During 2010 and 2009, the Company awarded 19,850 and 22,480
performance-based restricted stock units, respectively, to
employees outside the U.S. that vest subject to the
Company’s financial performance for three-year performance
periods ending on December 31, 2012 and December 31,2011, respectively. These awards will be settled in cash based
on the value of the Company’s common stock at the vesting
date. Since the awards will be settled in cash, they are
recorded as a liability award in accordance with the “Stock
Compensation” topic of the ASC. Accordingly, the Company
records these awards as a component of Other non-current
liabilities on the Consolidated Balance Sheets. The fair value
of the awards, which determines the measurement of the liability
on the balance sheet, is remeasured at each reporting period
until the award is settled. Fluctuations in the fair value of
the liability awards are recorded as increases or decreases to
compensation expense. Over the life of these awards, the
cumulative amount of compensation expense recognized will match
the actual cash paid. The number of restricted stock units that
ultimately vest is based upon the Company’s achievement of
the same performance criteria as the 2010 and 2009
performance-based restricted stock awards described above.
The Company recognizes expense related to performance-based
restricted stock units ratably over the requisite performance
period based upon the number of units that are anticipated to
vest. The number of units 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, or upon retirement, the units become 100%
vested at the target level. In the event of death or disability,
a pro rata number of units remain eligible for vesting at the
end of the performance period.
A summary of the Company’s performance-based restricted
stock unit awards for 2010 is as follows:
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
Restricted
Stock — Time-Based Awards
During 2010, 2009 and 2008, the Company awarded 63,100, 24,850
and 17,675 shares, respectively, of time-based restricted
stock that vest three years from the date of grant, subject to
the recipient remaining employed by the Company on that date. In
addition, during 2009, the Company awarded 4,127 shares of
time-based restricted stock with a vesting period of one year to
its CEO in connection with payment of his 2008
high-performance
bonus. The value of the restricted stock awarded in 2010, 2009
and 2008, based upon the market price of an unrestricted share
of the Company’s common stock at the date of grant, was
$1.9 million, $0.6 million and $1.0 million,
respectively. Compensation expense is being recognized ratably
over the vesting period. Upon any change in control of the
Company, as defined in the plan, or upon retirement, 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 Company’s time-based restricted stock
awards for 2010 is as follows:
A total of 22,760 shares of time-based restricted stock
awarded during 2007 vested during 2010. Upon vesting, employees
surrendered 7,923 shares of common stock to the Company to
pay required minimum withholding taxes applicable to the vesting
of restricted stock. The surrendered shares are held by the
Company as treasury stock. The 4,127 shares granted during
2009 to the Company’s chief executive officer, as discussed
above, vested during 2010. Upon vesting, the Company’s
chief executive officer surrendered 1,310 shares of common
stock to the Company to pay required minimum withholding taxes
applicable to the vesting of restricted stock.
A total of 19,750 shares of time-based restricted stock
awarded during 2006 vested during 2009. During 2009, employees
surrendered 5,690 shares of common stock to the Company
upon vesting to pay required minimum withholding taxes
applicable to the vesting of the restricted stock. The
surrendered shares are held by the Company as treasury stock.
Restricted Stock
Units — Time-Based Awards
During 2010 and 2009, the Company awarded 10,550 and 4,400
time-based restricted stock units, respectively, to employees
outside the U.S. These awards will be settled in cash based
on the value of the Company’s common stock at the vesting
date. Since the awards will be settled in cash, they are
recorded as a liability award in accordance with the “Stock
Compensation” topic of the ASC. Accordingly, the Company
records these awards as a component of Other non-current
liabilities on the Consolidated Balance Sheets. The fair value
of the awards, which determines the measurement of the liability
on the balance sheet, is remeasured at each reporting period
until the award is settled. Fluctuations in the fair value of
the liability awards are recorded as increases or decreases to
compensation expense. Over the life of these awards, the
cumulative amount of compensation expense recognized will match
the actual cash paid. The restricted share units vest three
years from the date of grant, subject to the recipient remaining
employed by the Company on that date. Upon any change in control
of the Company, as defined in the applicable plan, or upon
retirement, the units
In October 2010, GTL was served in Jersey, Channel Islands, with
an injunction obtained by Marange Investments (Proprietary)
Limited (“Marange”), which restrains Gécamines (a
partner in GTL) from removing any of its assets from the island
of Jersey up to the amount of 14.5 million British Pounds,
pending the resolution of proceedings brought by Marange against
Gécamines in the Supreme Court of South Africa. In January
2011, Marange obtained a new order amending the injunction to
include an additional claim for 5.0 million British Pounds.
As a result, GTL has been enjoined from making payments to
Gécamines under the Long Term Slag Sales Agreement between
GTL and Gécamines up to the value of 19.5 million
British Pounds.
In March 2009, GTL was served in Jersey, Channel Islands, with
an injunction obtained by FG Hemisphere Associates LLC (“FG
Hemisphere”), which was seeking to enforce two arbitration
awards made in 2003 by an arbitral tribunal operating under the
auspices of the International Court of Arbitration against the
DRC and Société Nationale D’Electricité for
$108.3 million (the “Arbitration Awards”). One of
the terms of the injunction prohibits GTL from making payments
to Gécamines, including amounts payable for raw material
purchases under the Long Term Slag Sales Agreement. In November
2010, the Royal Court of Jersey (the “Court”) released
its Final Judgment in favor of FG Hemisphere for the full amount
of the Arbitration Awards. The Court rejected
Gécamines’ argument that it was not an organ of the
DRC and rejected GTL’s various arguments, including that
the Court did not have jurisdiction to seize monies to be paid
to Gécamines under the Long Term Slag Sales Agreement
between GTL and Gécamines on the basis that such monies are
not held in Jersey. In December 2010, GTL appealed the decision
of the Court; as a condition of not paying FG Hemisphere such
monies prior to appeal, the Court requires that all amounts owed
by GTL to Gécamines (up to the amount of the Arbitration
Awards), including monies payable under the Long Term Slag Sales
Agreement, be deposited into the Court. As a result, as of
December 31, 2010, $68.1 million has been deposited
with the Court. Until the appeal is resolved, additional amounts
due from GTL to Gécamines, up to the amount of the
Arbitration Awards, will be deposited with the Court as they
become due. While there can be no assurances with respect to the
final outcome of either matter, the Company believes that, based
on the information currently available to it, this matter will
not have a material adverse effect upon its financial condition
or results of operations.
The Company has potential contingent liabilities with respect to
environmental matters related to its former PMG operations in
Brazil. The Company has been informed by the purchaser of the
PMG operations of environmental issues at three of the operating
locations in Brazil. Environmental-cost sharing arrangements are
in place between the original owner and operator of those PMG
operations, the Company and the subsequent purchaser of the PMG
operations. The Company has reviewed the limited information
made available to it on the environmental conditions and is
awaiting more detailed information from the purchaser of PMG.
The Company cannot currently evaluate whether or not, or to what
extent, it will be responsible for any remediation costs until
more detailed information is received.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The Company is subject to a variety of environmental and
pollution control laws and regulations in the jurisdictions in
which it operates. As is the case with other companies in
similar industries, the Company faces exposure from actual or
potential claims and legal proceedings involving environmental
matters. A number of factors affect the cost of environmental
remediation, including the determination of the extent of
contamination, the length of time the remediation may require,
the complexity of environmental regulations and the continuing
improvements in remediation techniques. Taking these factors
into consideration, the Company estimates the undiscounted costs
of remediation, which will be incurred over several years, and
accrues an amount consistent with the estimates of these costs
when it is probable that a liability has been incurred. At
December 31, 2010 and December 31, 2009, the Company
has recorded environmental liabilities of $1.5 million and
$2.8 million, respectively, related to remediation and
decommissioning at the Company’s closed manufacturing sites
in Newark, New Jersey and Vasset, France. In addition, at
December 31, 2010, the Company has recorded a
$1.3 million environmental liability associated with a site
located in Joplin, Missouri. The $1.3 million liability
related to the Joplin, Missouri site was a liability acquired
with the EaglePicher Technologies acquisition. 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 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.
From time to time, the Company is subject to various legal and
regulatory proceedings, claims and assessments that arise in the
normal course of business. The ultimate resolution of such
proceedings, claims and assessments is inherently unpredictable
and, as a result, the Company’s estimates of liability, if
any, are subject to change and actual results may materially
differ from the Company’s estimates. The Company’s
estimate of any costs to be incurred as a result of these
proceedings, claims and assessments are accrued when the
liability is considered probable and the amount can be
reasonably estimated. The Company believes the amount of any
potential liability with respect to legal and regulatory
proceedings, claims and assessments will not have a material
adverse effect upon its financial condition, results of
operations, or cash flows.
Note 18 —
Lease Obligations
The Company rents office space, equipment, land and an airplane
under long-term operating leases. The Company’s operating
lease expense was $8.8 million in 2010, $7.4 million
in 2009 and $7.8 million in 2008.
Future minimum payments under noncancellable operating leases at
December 31, 2010 are as follows for the year ending
December 31:
2011
$
6,219
2012
4,708
2013
2,283
2014
1,844
2015
1,815
2016 and thereafter
9,534
Total minimum lease payments
$
26,403
Note 19 —
Reportable Segments and Geographic Information
As a result of the EaglePicher Technologies acquisition, the
Company is now organized into three operating segments: Advanced
Materials, Specialty Chemicals and Battery Technologies.
Intersegment transactions are generally recognized based on
current market prices and are eliminated in consolidation.
Corporate is comprised of general and administrative expenses
not allocated to the operating segments.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
The Advanced Materials segment consists of Inorganics, the DRC
smelter joint venture and metal resale. The Advanced Materials
segment manufactures inorganic products using unrefined cobalt
and other metals and serves the battery materials, powder
metallurgy, ceramic and chemical end markets.
The Specialty Chemicals segment is comprised of Electronic
Chemicals, Advanced Organics, UPC and Photomasks. Electronic
Chemicals develops and manufactures products for the printed
circuit board, memory disk, general metal finishing and
photovoltaic markets. Advanced Organics offers products for the
coating and inks, chemical and tire markets. UPC develops,
manufactures and distributes 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, microelectronics and micro
electro mechanical systems industries under the Compugraphics
brand name.
The Battery Technologies segment, which consists of the
EaglePicher Technologies business acquired on January 29,2010, provides advanced batteries, battery materials, battery
management systems, battery-related research and energetic
devices for the defense, aerospace and medical markets. In the
defense market, Battery Technologies develops battery products
for missile launch vehicles, missiles, guided bombs and other
weapons systems. It also provides primary (non-rechargeable) and
secondary (non-rechargeable) batteries, battery management
systems, battery chargers, and energetic devices for diverse
defense applications such as unmanned vehicles,
sub-munitions,
mines, sonabuoys, and fuzes. In the aerospace market, Battery
Technologies designs, manufactures and qualifies primary and
secondary batteries for satellites, aircraft, packaging of cells
and other special applications. In the medical market, Battery
Technologies designs, builds and qualifies miniature batteries
to power implantable medical devices.
The Company has manufacturing and other facilities in North
America, Europe, Africa and Asia-Pacific, and the Company
markets its products worldwide. Further, approximately 18% of
the Company’s investment in property, plant and equipment
is located in the DRC, where the Company operates a smelter
through a 55%-owned joint venture.
There are a limited number of supply sources for cobalt.
Production problems or political or civil instability in
supplier countries, primarily the DRC, Finland and Russia, as
well as increased demand in developing countries may affect the
supply and market price of cobalt. In particular, political and
civil instability in the DRC may affect the availability of raw
materials from that country. Any raw material supply disruption
from the DRC could have a material adverse effect on our
business, financial condition or results of operations.
Sales to one customer in the Advanced Materials segment
represented approximately 14%, 16% and 22% of consolidated net
sales in 2010, 2009 and 2008, respectively. Sales to the top
three customers in the Battery Technologies segment represented
approximately 50% of Battery Technologies’ net sales in
2010.
The following table reflects the 2010, 2009 and 2008 sales
within Specialty Chemicals:
Specialty Chemicals includes a $2.1 million restructuring
charge in 2010 and a $37.5 million non-cash goodwill
impairment charge and a $12.7 million restructuring charge
in 2009.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
(b)
Corporate includes $2.2 million of fees related to the
EaglePicher Technologies acqusition in 2010 and a
$4.7 million gain on the termination of the Company’s
retiree medical plan and $1.3 million of fees related to
the EaglePicher Technologies acquisition in 2009.
(c)
Includes activity since the acquisition of EaglePicher
Technologies on January 29, 2010.
(d)
Includes a $5.0 million investment related to Battery
Technologies 45% interest in Diehl & EaglePicher
GmbH which is accounted for under the equity method.
(e)
Includes a $68.1 million deposit related to the Jersey
Court injunction. See Note 17 for further discussion.
Long-Lived
Net Sales(a)
Assets(b)
Geographic Region Information
2010
Finland
$
354,889
$
86,019
United States
312,368
79,980
Japan
223,441
221
Other
305,948
44,529
Democratic Republic of Congo
—
45,349
$
1,196,646
$
256,098
2009
Finland
$
260,361
$
89,610
United States
153,539
36,388
Japan
190,122
91
Other
267,647
48,774
Democratic Republic of Congo
—
52,252
$
871,669
$
227,115
2008
Finland
$
581,260
United States
280,275
Japan
536,620
Other
338,694
Democratic Republic of Congo
—
$
1,736,849
(a)
Net sales attributed to the geographic area are based on the
location of the manufacturing facility, except for Japan, which
is a sales office.
(b)
Long-lived assets consists of property, plant and equipment, net.
Income (loss) from discontinued operations, net of tax
137
(518
)
1,003
104
$
726
Net income
$
22,600
$
12,789
$
24,201
$
23,784
$
83,374
Net income (loss) per common share — basic
Continuing operations
$
0.74
$
0.44
$
0.76
$
0.78
$
2.72
Discontinued operations
0.01
(0.02
)
0.03
—
0.02
Net income
$
0.75
$
0.42
$
0.79
$
0.78
$
2.74
Net income (loss) per common share — assuming dilution
Continuing operations
$
0.74
$
0.43
$
0.76
$
0.77
$
2.70
Discontinued operations
—
(0.01
)
0.03
0.01
0.03
Net income
$
0.74
$
0.42
$
0.79
$
0.78
$
2.73
The first, second and third quarters of 2010 include
restructuring charges related to the Company’s Advanced
Organics business of $0.6 million, 0.4 million and
$1.1 million, respectively.
The fourth quarter of 2010 includes a charge of
$2.0 million due to an
other-than-temporary
decline in the fair value of a cost method investment.
The Company’s income tax expense for 2010 was
$29.7 million, resulting in an effective tax rate of 27.6%.
Through September 30, 2010, the Company’s
year-to-date
income tax expense was $31.8 million and the effective tax
rate was 37.1%. The decrease in the full-year effective tax rate
in the fourth quarter resulted in an income tax benefit of
$2.1 million for the fourth quarter of 2010.
The Company’s share of discrete tax items (excluding
noncontrolling interests) in 2010 totaled income (expense) of
$2.8 million in the first quarter of 2010,
($5.2 million) in the second quarter of 2010,
$0.3 million in the third quarter of 2010 and
$1.5 million in the fourth quarter of 2010.
Notes to
Consolidated Financial Statements
OM Group, Inc. and
Subsidiaries —
Continued
2009
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Full Year
Net sales
$
191,706
$
203,352
$
235,239
$
241,372
$
871,669
Gross profit
$
26,615
$
34,434
$
42,679
$
62,055
$
165,783
Amounts attributable to OM Group, Inc. common stockholders:
Income (loss) from continuing operations, net of tax
$
(8,541
)
$
(35,006
)
$
9,579
$
14,615
$
(19,353
)
Income (loss) from discontinued operations, net of tax
264
(325
)
1,846
(289
)
$
1,496
Net income (loss)
$
(8,277
)
$
(35,331
)
$
11,425
$
14,326
$
(17,857
)
Net income (loss) per common share — basic
Continuing operations
$
(0.28
)
$
(1.16
)
$
0.32
$
0.48
$
(0.64
)
Discontinued operations
0.01
(0.01
)
0.06
(0.01
)
0.05
Net income (loss)
$
(0.27
)
$
(1.17
)
$
0.38
$
0.47
$
(0.59
)
Net income (loss) per common share — assuming dilution
Continuing operations
$
(0.28
)
$
(1.16
)
$
0.32
$
0.48
$
(0.64
)
Discontinued operations
0.01
(0.01
)
0.06
(0.01
)
0.05
Net income (loss)
$
(0.27
)
$
(1.17
)
$
0.38
$
0.47
$
(0.59
)
The first quarter of 2009 includes a $6.6 million
adjustment to reduce the carrying value of certain inventory to
market value and a non-cash net charge of $2.6 million for
the impairment of goodwill.
The second quarter of 2009 includes a non-cash charge of
$35.0 million for the impairment of goodwill, a non-cash
charge of $1.2 million for the impairment of intangible
assets and a $4.7 million gain on termination of the
retiree medical plan.
The third quarter of 2009 includes an $11.9 million
restructuring charge related to the Company’s Advanced
Organics business.
The fourth quarter of 2009 includes an $0.8 million
restructuring charge related to the Company’s Advanced
Organics business.
The Company’s share of discrete tax items in 2009 totaled
income (expense) of ($2.0 million) in the first quarter of
2009, ($1.3 million) in the second quarter of 2009,
$1.7 million in the third quarter of 2009 and
($4.4 million) in the fourth quarter of 2009.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
There are no such changes or disagreements.
Item 9A.
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 Company’s
disclosure controls and procedures as of December 31, 2010.
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 Company’s Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. The Company’s disclosure
controls and procedures include components of the Company’s
internal control over financial reporting.
Based upon this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company’s
disclosure controls and procedures were effective as of
December 31, 2010.
Management’s
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision of the Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2010 based on the
framework set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in “Internal
Control-Integrated Framework.” Based on that evaluation,
management has concluded that the Company’s internal
control over financial reporting was effective as of
December 31, 2010.
The Company’s independent registered public accounting
firm, Ernst & Young LLP, audited the Company’s
internal control over financial reporting and, based on that
audit, issued an attestation report regarding the Company’s
internal control over financial reporting, which is included in
this Annual Report.
Changes in
Internal Controls
There were no changes in the Company’s internal control
over financial reporting, identified in connection with
management’s evaluation of internal control over financial
reporting, that occurred during the fourth quarter of 2010 that
have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
Directors,
Executive Officers of the Registrant and Corporate
Governance
Information with respect to directors of the Company will be set
forth under the heading “Proposal 1. Election of
Directors” in the Company’s proxy statement to be
filed pursuant to Regulation 14A under the Exchange Act in
connection with the 2011 Annual Meeting of Stockholders of the
Company (the “2011 Proxy Statement”) and is
incorporated herein by reference. For information with respect
to the executive officers of the Company, see “Executive
Officers of the Registrant” in Part I of this
Form 10-K.
Information with respect to the Company’s audit committee,
nominating and governance committee, compensation committee and
the audit committee financial experts will be set forth in the
2011 Proxy Statement under the heading “Corporate
Governance and Board Matters” and is incorporated herein by
reference.
Information with respect to compliance with Section 16(a)
of the Exchange Act will be set forth in the 2011 Proxy
Statement under the heading “Section 16(a) Beneficial
Ownership Reporting Compliance” and is incorporated herein
by reference.
The Company has adopted a Code of Conduct and Ethics that
applies to all of its employees, including the principal
executive officer, the principal financial officer and the
principal accounting officer. The Code of Conduct and Ethics,
the Company’s corporate governance principles and all
committee charters are posted on the “Corporate
Governance” portion of the Company’s website
(www.omgi.com). A copy of any of these documents is
available in print free of charge to any stockholder who
requests a copy, by writing to OM Group, Inc., 127 Public
Square, 1500 Key Tower, Cleveland, Ohio44114-1221
USA, Attention: Troy Dewar, Director of Investor Relations.
On May 26, 2010, the Company filed the annual certification
by its CEO that, as of the date of the certification, he was
unaware of any violation by the Company of the corporate
governance listing standards of the New York Stock Exchange.
Item 11.
Executive
Compensation
Information with respect to executive and director compensation
and compensation committee interlocks and insider participation,
together with the report of the compensation committee regarding
the compensation discussion and analysis will be set forth in
the 2011 Proxy Statement under the headings “Executive
Compensation,”“Corporate Governance and Board
Matters — Compensation Committee Interlocks and
Insider Participation” and “Compensation Committee
Report” and is incorporated herein by reference.
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information with respect to security ownership of certain
beneficial owners and management will be set forth in the 2011
Proxy Statement under the heading “Security Ownership of
Directors, Executive Officers and Certain Beneficial
Owners — Beneficial Ownership” and is
incorporated herein by reference.
The following table sets forth information concerning common
stock issuable pursuant to the Company’s equity
compensation plans as of December 31, 2010.
Number of securities
remaining available for
future issuance under
Number of securities
equity compensation plans
to be issued upon
Weighted-average
(excluding securities
exercise of
exercise price of
issuable under
outstanding options
outstanding options
outstanding options)
Equity Compensation Plans Approved by the Stockholders
982,520
$
36.50
1,991,421
Equity Compensation Plans Not Approved by the Stockholders(a)
88,934
$
33.67
—
(a)
As an inducement to join the Company, on June 13, 2005, the
Chief Executive Officer was granted options to purchase
88,934 shares of common stock that are not covered by the
equity compensation plans approved by the Company’s
stockholders. These options have an exercise price of $33.67 per
share (the market price of Company stock on the grant date was
$24.89) and became exercisable on May 31, 2008. The options
have an expiration date of June 13, 2015.
Item 13.
Certain
Relationships and Related Transactions, Director
Independence
Information with respect to certain relationships and related
transactions, as well as director independence, will be set
forth in the 2011 Proxy Statement under the heading
“Corporate Governance and Board Matters” and is
incorporated herein by reference.
Item 14.
Principal
Accountant Fees and Services
Information with respect to principal accounting fees and
services will be set forth in the 2011 Proxy Statement under the
heading “Description of Principal Accountant Fees and
Services” and is incorporated herein by reference.
Statements of Consolidated Stockholders’ Equity for the
years ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
(2)
Schedule II — Valuation and Qualifying Accounts
for the years ended December 31, 2010, 2009 and 2008
All other schedules are omitted because they are not applicable
or because the information required is included in the
consolidated financial statements or the notes thereto.
(3)
Exhibits
The following exhibits are included in this Annual Report on
Form 10-K:
Technology Agreement among Outokumpu Oy, Outokumpu Engineering
Contractors Oy, Outokumpu Research Oy, Outokumpu Harjavalta
Metals Oy and Kokkola Chemicals Oy dated March 24, 1993.
‡
OM Group, Inc. Bonus Program for Key Executives and Middle
Management. ‡
+10.7
Joint Venture Agreement among OMG B.V., Groupe George Forrest
S.A., La Generale Des Carrieres Et Des Mines and OM Group,
Inc. to partially or totally process the slag located in the
site of Lubumbashi, Democratic Republic of Congo.
10.8
Sale and purchase agreement dated as of December 23, 2009
by and among EaglePicher Corporation, as guarantor of the
Seller, EaglePicher Technologies Holdings, LLC, as the Seller,
EaglePicher Technologies, LLC, as the Company, OM Group, Inc.,
as limited guarantor of the Buyer, and OMG Energy Holdings,
Inc., as the Buyer (incorporated by reference to
Exhibit 10.8 to the Company’s Annual Report on
Form 10-K
filed on February 25, 2010).
Long Term Slag Sales Agreement between La Generale Des
Carriers Et Des Mines and J.V. Groupement Pour Le Traitement Du
Terril De Lubumbashi (filed as an Annex to Exhibit 10.7).
+10.10
Long Term Cobalt Alloy Sales Agreement between J.V. Groupement
Pour Le Traitement Du Terril De Lubumbashi and OMG Kokkola
Chemicals Oy (filed as an Annex to Exhibit 10.7).
+10.11
Tolling Agreement between Groupement Pour Le Traitement Du
Terril De Lubumbashi and Societe De Traitement Due Terril De
Lubumbashi (filed as an Annex to Exhibit 10.7).
Form of Indemnification Agreement between OM Group, Inc. and its
directors and certain officers (incorporated by reference to
Exhibit 10 to the Company’s Current Report on
Form 8-K
filed on January 25, 2011).
Form of Restricted Stock Agreement (2010 time-based) under the
2007 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q
filed on November 4, 2010).
Form of Amended and Restated Change in Control Agreement between
OM Group, Inc. and certain executive officers (incorporated by
reference to Exhibit 99.2 to the Company’s Current
Report on
Form 8-K
filed on November 14, 2006).
10.28
Form of Restricted Stock Agreement (2010 performance-based)
under the 2007 Incentive Compensation Plan (incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly
Report on
Form 10-Q
filed on November 4, 2010).
*10.29
Amended and Restated Change in Control Agreement dated as of
November 13, 2006 between OM Group, Inc. and Joseph M.
Scaminace (incorporated by reference to Exhibit 99.4 to the
Company’s Current Report on
Form 8-K
filed on November 14, 2006).
OM Group, Inc. 2007 Incentive Compensation Plan, as amended
(incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on
Form 10-Q
filed on November 4, 2010).
Stock Purchase Agreement Among OMG Kokkola Chemicals Holding
(Two) BV, OMG Harjavalta Chemicals Holding BV, OMG Finland Oy,
OM Group, Inc., Norilsk Nickel (Cyprus) Limited And OJSC MMC
Norilsk Nickel (incorporated by reference to Exhibit 2 to
the Company’s Current Report on
Form 8-K
filed on March 7, 2007).
Form of Restricted Stock Agreement (time-based) under the 2007
Incentive Compensation Plan (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q
filed on November 2, 2007).
*10.36
Form of Restricted Stock Agreement (performance-based) under the
2007 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q
filed on November 2, 2007).
*10.37
OM Group, Inc. Deferred Compensation Plan (incorporated by
reference to Exhibit 10 to the Company’s Current
Report on
Form 8-K
filed May 21, 2008).
*10.38
Form of Amendment to Severance Agreement between OM Group, Inc.
and certain executive officers (incorporated by reference to the
Company’s Current Report on
Form 8-K
filed on December 19, 2008).
10.39
Amended and Restated Credit Agreement, dated as of March 8,2010 among OM Group, as “Borrower;” certain of its
subsidiaries, as “Guarantors;” PNC Bank, National
Association, as “Administrative Agent;”; the
“Lenders” party thereto; PNC Capital Markets LLC, Banc
of America Securities LLC and Wells Fargo Bank, N.A., as
“Joint Lead Arrangers;” and PNC Capital Markets LLC,
as “Sole Bookrunner.” (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on
Form 8-K
filed on March 11 2010).
Certification of Principal Financial Officer Pursuant to
Rule 13a-14(a)
32
Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. 1350
101.1
Instance Document
101.2
Schema Document
101.3
Calculation Linkbase Document
101.4
Labels Linkbase Document
101.5
Presentation Linkbase Document
101.6
Definition Linkbase Document
*
Indicates a management contract, executive compensation plan or
arrangement.
+
Portions of Exhibit have been omitted and filed separately with
the Securities and Exchange Commission in reliance on
Rule 24b-2
and an Order from the Commission granting the Company’s
request for confidential treatment dated June 26, 1998.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized, on February 24, 2011.
OM GROUP, INC.
By:
/s/ Kenneth
Haber
Kenneth Haber
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form 10-K
has been signed below on February 24, 2011 by the following
persons on behalf of the registrant and in the capacities
indicated.
Signature
Title
/s/ Joseph
Scaminace
Joseph
Scaminace
Chairman and Chief Executive Officer
(Principal Executive Officer)
