UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File Number 0-22572
OM GROUP, INC.
(exact name of registrant as specified in its charter)
| Delaware (state or other jurisdiction of incorporation or organization) |
52-1736882 (I.R.S., Employer Identification Number) |
Tower City
50 Public Square
Suite 3500
Cleveland, Ohio 44113-2204
(Address of principal executive offices)
(zip code)
(216) 781-0083
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and 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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)
Yes X No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of June 30, 2003: Common Stock, $.01 Par Value — 28,354,804 shares.
INDEX
OM GROUP, INC.
| Part I. Financial Information | ||||
| Item 1. | Financial Statements (Unaudited) | |||
| Condensed consolidated balance sheets — June 30, 2003 and December 31, 2002 | ||||
| Condensed statements of consolidated operations — Three months ended June 30, 2003 and 2002; Six months ended June 30, 2003 and 2002 | ||||
| Condensed statements of consolidated cash flows -Six months ended June 30, 2003 and 2002 | ||||
| Notes to condensed consolidated financial statements — June 30, 2003 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |||
| Item 4. | Controls and Procedures | |||
| Part II. Other Information | ||||
| Item 1. | Legal Proceedings — Not applicable | |||
| Item 2. | Changes in Securities and Use of Proceeds — Not applicable | |||
| Item 3. | Defaults upon Senior Securities — Not applicable | |||
| Item 4. | Submission of Matters to a Vote of Security Holders | |||
| Item 5. | Other information — Not applicable | |||
| Item 6. | Exhibits and Reports on Form 8-K | |||
| (a) Exhibits | ||||
| (12) | Computation of Ratio of Earnings to Fixed Charges | |||
| (31.1) | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer | |||
| (31.2) | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer | |||
| (32.1) | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer | |||
| (32.2) | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer | |||
| (b) Reports on Form 8-K | ||||
| 1. | The Company furnished to the SEC a Current Report on Form 8-K under Item 12, filed under Item 9 pursuant to the SEC’s interim guidance, dated April 29, 2003, regarding the Company’s financial results for the quarter ended March 31, 2003. | |||
| 2. | The Company furnished to the SEC a Current Report on Form 8-K under Item 9, dated June 3, 2003, regarding a definitive agreement to sell its Precious Metals business, and a letter of intent to sell its PVC Heat Stabilizer product line. | |||
| 3. | The Company furnished to the SEC a Current Report on Form 8-K under Item 12, filed under Item 9 pursuant to the SEC’s interim guidance, dated June 3, 2003, regarding Second Quarter 2003 financial expectations. | |||
| Signature | ||||
OM GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share data)
(Unaudited)
| June 30, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
ASSETS |
|||||||||||
CURRENT ASSETS |
|||||||||||
Cash and cash equivalents |
$ | 19,518 | $ | 11,757 | |||||||
Accounts receivable |
110,120 | 95,829 | |||||||||
Inventories |
306,965 | 295,951 | |||||||||
Other current assets |
69,450 | 90,377 | |||||||||
Total
Current Assets |
506,053 | 493,914 | |||||||||
PROPERTY, PLANT AND EQUIPMENT |
|||||||||||
Land |
5,117 | 4,970 | |||||||||
Buildings and improvements |
175,797 | 176,110 | |||||||||
Machinery and equipment |
510,344 | 499,226 | |||||||||
Furniture and fixtures |
15,558 | 15,392 | |||||||||
| 706,816 | 695,698 | ||||||||||
Less accumulated depreciation |
223,375 | 196,920 | |||||||||
| 483,441 | 498,778 | ||||||||||
OTHER ASSETS |
|||||||||||
Goodwill and other intangible assets |
190,073 | 188,597 | |||||||||
Other assets |
93,882 | 91,080 | |||||||||
Assets of discontinued operations |
1,089,860 | 1,066,767 | |||||||||
TOTAL ASSETS |
$ | 2,363,309 | $ | 2,339,136 | |||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|||||||||||
CURRENT LIABILITIES |
|||||||||||
Current portion of long-term debt |
$ | 7,000 | $ | 6,750 | |||||||
Accounts payable |
63,317 | 94,186 | |||||||||
Other accrued expenses |
57,225 | 55,203 | |||||||||
Total
Current Liabilities |
127,542 | 156,139 | |||||||||
LONG -TERM LIABILITIES |
|||||||||||
Long-term debt |
1,145,776 | 1,187,650 | |||||||||
Deferred income taxes |
58,024 | 64,136 | |||||||||
Minority interests and other long-term liabilities |
65,879 | 64,483 | |||||||||
Liabilities of discontinued operations |
444,832 | 396,843 | |||||||||
STOCKHOLDERS’ EQUITY |
|||||||||||
Preferred stock, $0.01 par value: |
|||||||||||
Authorized 2,000,000 shares; no shares issued or
outstanding |
|||||||||||
Common stock,
$0.01 par value: |
|||||||||||
Authorized 60,000,000 shares; issued 28,402,163 shares
in 2003 and 2002 |
284 | 284 | |||||||||
Capital in excess of par value |
490,741 | 490,741 | |||||||||
Retained deficit |
(21,329 | ) | (17,943 | ) | |||||||
Treasury stock (47,359 shares in 2003 and 2002, at cost) |
(2,255 | ) | (2,255 | ) | |||||||
Accumulated other comprehensive income |
56,305 | 2,008 | |||||||||
Unearned compensation |
(2,490 | ) | (2,950 | ) | |||||||
Total
Stockholders’ Equity |
521,256 | 469,885 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 2,363,309 | $ | 2,339,136 | |||||||
See notes to condensed Consolidated Financial Statements
OM GROUP, INC.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Thousands of dollars, except per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net sales |
$ | 196,719 | $ | 182,487 | $ | 406,059 | $ | 349,041 | |||||||||
Cost of products sold |
161,775 | 130,836 | 335,635 | 250,150 | |||||||||||||
| 34,944 | 51,651 | 70,424 | 98,891 | ||||||||||||||
Selling, general and administrative expenses |
20,597 | 18,288 | 40,338 | 38,083 | |||||||||||||
Restructuring charges |
3,799 | ||||||||||||||||
INCOME FROM OPERATIONS |
14,347 | 33,363 | 26,287 | 60,808 | |||||||||||||
OTHER INCOME (EXPENSE) |
|||||||||||||||||
Interest expense |
(10,679 | ) | (5,800 | ) | (20,890 | ) | (12,487 | ) | |||||||||
Foreign exchange gain |
3,196 | 6,894 | 734 | 6,595 | |||||||||||||
Investment income and other, net |
492 | 2,783 | 963 | 2,812 | |||||||||||||
| (6,991 | ) | 3,877 | (19,193 | ) | (3,080 | ) | |||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTERESTS |
7,356 | 37,240 | 7,094 | 57,728 | |||||||||||||
Income taxes |
1,542 | 8,328 | 1,542 | 16,834 | |||||||||||||
Minority interests |
(1,429 | ) | 25 | (1,367 | ) | (21 | ) | ||||||||||
INCOME FROM CONTINUING OPERATIONS |
7,243 | 28,887 | 6,919 | 40,915 | |||||||||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAXES |
(2,868 | ) | (3,386 | ) | (10,308 | ) | 7,954 | ||||||||||
NET INCOME (LOSS) |
$ | 4,375 | $ | 25,501 | $ | (3,389 | ) | $ | 48,869 | ||||||||
Net income (loss) per common share — basic |
|||||||||||||||||
Continuing operations |
$ | 0.26 | $ | 1.02 | $ | 0.24 | $ | 1.48 | |||||||||
Discontinued operations |
(0.11 | ) | (0.12 | ) | (0.36 | ) | 0.28 | ||||||||||
Net income (loss) |
$ | 0.15 | $ | 0.90 | $ | (0.12 | ) | $ | 1.76 | ||||||||
Net income (loss) per common share — assuming dilution |
|||||||||||||||||
Continuing operations |
$ | 0.26 | $ | 1.01 | $ | 0.24 | $ | 1.45 | |||||||||
Discontinued operations |
(0.11 | ) | (0.12 | ) | (0.36 | ) | 0.29 | ||||||||||
Net income (loss) |
$ | 0.15 | $ | 0.89 | $ | (0.12 | ) | $ | 1.74 | ||||||||
Weighted average shares outstanding (000) |
|||||||||||||||||
Basic |
28,306 | 28,253 | 28,304 | 27,696 | |||||||||||||
Assuming dilution |
28,308 | 28,706 | 28,305 | 28,151 | |||||||||||||
Dividends paid per common share |
$ | — | $ | 0.14 | $ | — | $ | 0.28 | |||||||||
See notes to condensed Consolidated Financial Statements
OM GROUP, INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Thousands of dollars)
(Unaudited)
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
OPERATING ACTIVITIES |
||||||||||||
Income from continuing operations |
$ | 6,919 | $ | 40,915 | ||||||||
Items not affecting cash: |
||||||||||||
Depreciation and amortization |
30,393 | 25,754 | ||||||||||
Foreign exchange gain |
(734 | ) | (6,595 | ) | ||||||||
Minority interests |
(1,367 | ) | (21 | ) | ||||||||
Changes in operating assets and liabilities |
(32,491 | ) | (66,712 | ) | ||||||||
NET
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES |
2,720 | (6,659 | ) | |||||||||
INVESTING ACTIVITIES |
||||||||||||
Expenditures for property, plant and equipment, net |
(2,182 | ) | (41,054 | ) | ||||||||
Investments in unconsolidated joint venture |
(994 | ) | ||||||||||
NET CASH USED IN INVESTING ACTIVITIES |
(2,182 | ) | (42,048 | ) | ||||||||
FINANCING ACTIVITIES |
||||||||||||
Payments of long-term debt |
(41,624 | ) | (245,851 | ) | ||||||||
Dividend payments |
— | (7,915 | ) | |||||||||
Long-term borrowings |
9,994 | |||||||||||
Proceeds from exercise of stock options |
2,716 | |||||||||||
Proceeds from sale of common shares |
— | 225,805 | ||||||||||
NET CASH USED IN FINANCING ACTIVITIES |
(41,624 | ) | (15,251 | ) | ||||||||
Cash used in continuing operations |
(41,086 | ) | (63,958 | ) | ||||||||
Cash
provided by discontinued operations (See Note B) |
48,296 | 61,045 | ||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
551 | 977 | ||||||||||
Increase (decrease) in cash and cash equivalents |
7,761 | (1,936 | ) | |||||||||
Cash and cash equivalents at beginning of period |
11,757 | 18,852 | ||||||||||
Cash and cash equivalents at end of period |
19,518 | 16,916 | ||||||||||
See notes to condensed Consolidated Financial Statements
OM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2003
(Thousands of dollars, except as noted and per share amounts)
| Note A | Basis of Presentation | |
| The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair financial presentation have been included. Past operating results are not necessarily indicative of the results which may occur in future periods, and the interim period results are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. | ||
| Note B | Divestitures of Precious Metals (Subsequent Event) and SCM Metals, Inc. | |
| On June 3, 2003, the Company announced that it had entered into a definitive agreement with Umicore to sell its Precious Metals business (“PMG business”). This business is comprised of the Precious Metal Chemistry and Metal Management reportable segments, which were acquired by the Company from Degussa in August 2001. The sale to Umicore was completed on July 31, 2003, on which date the Company received gross proceeds of €697 million, or $814 million, before transaction costs, taxes and expenses. The PMG business has been classified as a discontinued operation, and the consolidated financial statements of prior periods have been restated, where applicable, to reflect this business as a discontinued operation. The transaction and related gain on sale will be recorded in the third quarter of 2003. | ||
| The gross proceeds were used to repay the Company’s outstanding indebtedness under its Senior credit facilities. The net proceeds from the sale are expected to be approximately $730 million, after transaction costs and expenses and taxes. During June 2003, the Company received a commitment for a new $150 million revolving credit facility. The new facility, which closed on August 7, 2003, bears interest at an interest rate of LIBOR plus 2.00% to 3.00% or PRIME plus 0.25% to 1.25%, matures in August 2006 and includes covenants that are less stringent than those in the previous Senior facility. | ||
| On April 1, 2003, the Company completed its previously announced sale of its copper powders business — SCM Metal Products, Inc. — for proceeds of $65 million before transaction costs and expenses. The net proceeds, which are included in Cash provided by discontinued operations in the Condensed Statements of Consolidated Cash Flows, were used to repay a portion of the Company’s outstanding indebtedness under its credit facilities. There was no gain or loss recorded on that date, as the business was written-down to fair value in the fourth quarter of 2002. This business has been presented as a discontinued operation for all periods presented. | ||
| Operating results of discontinued operations are summarized as follows (in millions): |
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net sales |
$ | 941.9 | $ | 1,079.1 | $ | 2,081.6 | $ | 2,101.3 | ||||||||
Operating income |
22.4 | 21.6 | 37.7 | 46.1 | ||||||||||||
Interest expense — allocated |
14.0 | 12.5 | 29.1 | 23.4 | ||||||||||||
Income taxes |
2.9 | 2.0 | 6.8 | 2.0 | ||||||||||||
| The operating results summarized above include an allocation of consolidated interest expense, based upon the estimated net proceeds from the sales of the respective discontinued businesses that are required to be used to re-pay amounts under the Company’s credit facilities. | ||
| The assets and liabilities of these businesses, which have been classified as Assets of Discontinued Operations and Liabilities of Discontinued Operations in the Consolidated Balance Sheet, consist of the following (in millions): |
| June 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
Current assets |
$ | 880.9 | $ | 829.3 | ||||
Property, plant and equipment |
187.1 | 194.2 | ||||||
Other long-term assets |
21.9 | 43.3 | ||||||
Total assets of discontinued operations |
$ | 1,089.9 | $ | 1,066.8 | ||||
Current liabilities, including accounts payable and other accrued
expenses |
$ | 256.7 | $ | 272.0 | ||||
Long-term liabilities |
188.1 | 124.8 | ||||||
Total liabilities of discontinued operations |
$ | 444.8 | $ | 396.8 | ||||
| Current assets include primarily accounts receivable and inventories. | ||
| Note C | Restructuring Charges | |
| During the first quarter of 2003, the Company recorded restructuring charges related to continuing operations of $3.8 million. These charges, which represent the continuation of the Company’s restructuring plan that commenced in the fourth quarter of 2002, are recorded in a separate line in the Condensed Statement of Consolidated Operations. | ||
| Restructuring liabilities for continuing operations at December 31, 2002, charges taken in the first quarter of 2003, and amounts utilized in 2003 to date are summarized as follows (in millions): |
| Number of | Workforce | Inventory and other | Facility Exit | |||||||||||||||||
| Employees | Reductions | asset write-downs | and Other | Total | ||||||||||||||||
Balance at 12/31/02 |
68 | $ | 5.2 | $ | 0 | $ | 2.0 | $ | 7.2 | |||||||||||
Charges in 2003 |
11 | 0.7 | 1.5 | 1.6 | 3.8 | |||||||||||||||
Utilized in 2003 |
(74 | ) | (2.6 | ) | (1.5 | ) | (1.4 | ) | (5.5 | ) | ||||||||||
Balance at 6/30/03 |
5 | $ | 3.3 | $ | 0 | $ | 2.2 | $ | 5.5 | |||||||||||
| In connection with the first quarter 2003 restructuring activities, the Company also recorded charges of |
| $6.3 million related to discontinued operations, which are included in Income (Loss) from Discontinued Operations. | ||
| Note D | Inventories | |
| Inventories consist of the following: |
| June 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
Raw materials and supplies |
$ | 144,303 | $ | 133,015 | ||||
Finished goods |
126,123 | 119,975 | ||||||
| 270,426 | 252,990 | |||||||
LIFO reserve |
36,539 | 42,961 | ||||||
Total inventories |
$ | 306,965 | $ | 295,951 | ||||
| Note E | Contingent Matters | |
| The Company is a party to various legal proceedings incidental to its business and is subject to a variety of environmental and pollution control laws and regulations in the jurisdictions in which it operates. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings involving environmental matters. Although it is very difficult to quantify the potential impact of compliance with or liability under environmental protection laws, management believes that the ultimate aggregate cost to the Company of environmental remediation, as well as other legal proceedings arising out of operations in the normal course of business, will not result in a material adverse effect upon its financial condition or results of operations. | ||
| Note F | Computation of Net Income (Loss) Per Common Share | |
| The following table sets forth the computation of net income (loss) per common share and net income (loss) per common share — assuming dilution (shares in thousands): |
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income (loss) |
$ | 4,375 | $ | 25,501 | $ | (3,389 | ) | $ | 48,869 | ||||||||
Weighted average number of shares outstanding |
28,306 | 28,253 | 28,304 | 27,696 | |||||||||||||
Dilutive
effect of stock-based compensation |
2 | 453 | 1 | 455 | |||||||||||||
Weighted
average number of shares outstanding – assuming dilution |
28,308 | 28,706 | 28,305 | 28,151 | |||||||||||||
Net income (loss) per common share |
$ | 0.15 | $ | 0.90 | $ | (0.12 | ) | $ | 1.76 | ||||||||
Net income (loss) per common share – assuming dilution |
$ | 0.15 | $ | 0.89 | $ | (0.12 | ) | $ | 1.74 | ||||||||
| Note G | Comprehensive Income |
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income (loss) |
$ | 4,375 | $ | 25,501 | $ | (3,389 | ) | $ | 48,869 | |||||||
Unrealized loss on available-for-sale securities |
(2,869 | ) | (901 | ) | ||||||||||||
Foreign currency translation |
43,374 | 4,363 | 52,875 | 9,121 | ||||||||||||
Unrealized gain on cash flow hedges |
578 | 1,233 | 332 | 4,346 | ||||||||||||
Additional
minimum pension liability |
1,090 | 1,090 | ||||||||||||||
Total comprehensive income |
$ | 49,417 | $ | 28,228 | $ | 50,908 | $ | 61,435 | ||||||||
| Note H | Stock Compensation — Adoption of SFAS No. 148 | |
| In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, was issued. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition when a company voluntarily changes to the fair value-based method of recognizing expense in results of operations for stock-based employee compensation, including stock options granted to employees. Prior to 2003, the Company accounted for stock-based employee compensation under APB No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Under APB 25, compensation expense has been recorded for restricted stock granted to certain executive officers, but no expense was recorded for stock options granted to employees, as all options had an intrinsic value of zero on the date of grant. During the second quarter of 2003, the Company voluntarily adopted, effective January 1, 2003, the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under the prospective method of adoption selected by the Company under the provisions of SFAS No. 148, the recognition provisions will be applied to all employee awards granted, modified or settled after January 1, 2003. As such, net income for 2003 will include expense for stock options granted to employees in 2003; there have been no such grants during the six months ended June 30, 2003. | ||
| If the Company had previously elected to adopt the fair value provisions of SFAS No. 123 and thereby recorded compensation expense related to employee stock options, pro forma results of operations would have been as follows: |
| Three Months | Six Months | ||||||||||||||||
| Ended | Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income (loss) |
|||||||||||||||||
As reported |
$ | 4,375 | $ | 25,501 | $ | (3,389 | ) | $ | 48,869 | ||||||||
Pro forma |
$ | 4,329 | $ | 24,636 | $ | (3,507 | ) | $ | 47,280 | ||||||||
Basic net income (loss) per share |
|||||||||||||||||
As reported |
$ | 0.15 | $ | 0.90 | $ | (0.12 | ) | $ | 1.76 | ||||||||
Pro forma |
$ | 0.15 | $ | 0.87 | $ | (0.12 | ) | $ | 1.71 | ||||||||
Diluted net income (loss) per share |
|||||||||||||||||
As reported |
$ | 0.15 | $ | 0.89 | $ | (0.12 | ) | $ | 1.74 | ||||||||
Pro forma |
$ | 0.15 | $ | 0.86 | $ | (0.12 | ) | $ | 1.68 | ||||||||
| Note I | Income Taxes | |
| Income taxes as a percentage of income from continuing operations before income taxes and minority interests for the six months ended June 30, 2003 were 21.7% compared to 29.2% in the same period in 2002. These effective rates are lower than the statutory rate in the United States due primarily to significant income earned each period in Malaysia, where the Company has a tax holiday, and the allocation of a portion of interest expense in the United States to discontinued operations, which effectively shifted a portion of the U.S. net operating loss without a corresponding tax benefit to discontinued operations. The lower rate in 2003 compared to 2002 is due primarily to higher earnings in the tax holiday country of Malaysia. | ||
| Note J | Guarantor and Non-Guarantor Subsidiary Information | |
| In December 2001, the Company issued $400 million in aggregate principal amount of 9.25% Senior Subordinated Notes due 2011 (the “Notes”). These Notes are guaranteed by the Company’s wholly-owned domestic subsidiaries. The guarantees are full, unconditional and joint and several. | ||
| The Company’s foreign subsidiaries are not guarantors of these Notes. The Company, as presented below, represents OM Group, Inc. exclusive of its guarantor subsidiaries and its non-guarantor subsidiaries. Condensed consolidating financial information for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries is as follows: |
| June 30, 2003 | ||||||||||||||||||||||
| Combined | Combined | |||||||||||||||||||||
| The | Guarantor | Non-Guarantor | ||||||||||||||||||||
| Balance Sheet Data | Company | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Assets |
||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||
Cash |
$ | 2,003 | $ | 2,621 | $ | 14,894 | $ | 19,518 | ||||||||||||||
Accounts receivable |
731,220 | 77,553 | 431,005 | $ | (1,129,658 | ) | 110,120 | |||||||||||||||
Inventories |
30,070 | 276,895 | 306,965 | |||||||||||||||||||
Other current assets |
18,572 | 3,834 | 47,044 | 69,450 | ||||||||||||||||||
Total current assets |
751,795 | 114,078 | 769,838 | (1,129,658 | ) | 506,053 | ||||||||||||||||
Property, plant and equipment, net |
41,652 | 441,789 | 483,441 | |||||||||||||||||||
Goodwill and other intangible assets |
75,830 | 59,016 | 55,227 | 190,073 | ||||||||||||||||||
Intercompany receivables |
188,604 | 23,400 | 1,154,525 | (1,366,529 | ) | |||||||||||||||||
Investment in subsidiaries |
714,780 | 360,631 | 1,441,346 | (2,516,757 | ) | |||||||||||||||||
Other assets |
25,584 | 7,738 | 60,560 | 93,882 | ||||||||||||||||||
Assets of discontinued operations |
110,893 | 978,967 | 1,089,860 | |||||||||||||||||||
Total assets |
$ | 1,756,593 | $ | 717,408 | $ | 4,902,252 | $ | (5,012,944 | ) | $ | 2,363,309 | |||||||||||
Liabilities and stockholders’ equity |
||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||
Current portion of long-term debt |
$ | 7,000 | $ | 7,000 | ||||||||||||||||||
Accounts payable |
40,881 | $ | 350,415 | $ | 403,516 | $ | (731,495 | ) | 63,317 | |||||||||||||
Other accrued expenses |
(3,782 | ) | 13,517 | 47,490 | 57,225 | |||||||||||||||||
Total current liabilities |
44,099 | 363,932 | 451,006 | (731,495 | ) | 127,542 | ||||||||||||||||
Long-term debt |
1,145,776 | 1,145,776 | ||||||||||||||||||||
Deferred income taxes |
35,297 | 22,727 | 58,024 | |||||||||||||||||||
Other long-term liabilities |
137 | 65,742 | 65,879 | |||||||||||||||||||
Intercompany payables |
407,729 | 1,341,600 | (1,749,329 | ) | ||||||||||||||||||
Liabilities of discontinued operations |
52,503 | 392,329 | 444,832 | |||||||||||||||||||
Stockholders’ equity |
531,284 | (106,756 | ) | 2,628,848 | (2,532,120 | ) | 521,256 | |||||||||||||||
Total liabilities and stockholders’ equity |
$ | 1,756,593 | $ | 717,408 | $ | 4,902,252 | $ | (5,012,944 | ) | $ | 2,363,309 | |||||||||||
| December 31, 2002 | |||||||||||||||||||||
| Combined | Combined | ||||||||||||||||||||
| Balance Sheet Data | The | Guarantor | Non-guarantor | ||||||||||||||||||
| Company | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Assets |
|||||||||||||||||||||
Current assets: |
|||||||||||||||||||||
Cash and cash equivalents |
$ | 667 | $ | 1,887 | $ | 9,203 | $ | 11,757 | |||||||||||||
Accounts receivable |
752,800 | 85,378 | 404,084 | $ | (1,146,433 | ) | 95,829 | ||||||||||||||
Inventories |
29,686 | 266,265 | 295,951 | ||||||||||||||||||
Other current assets |
26,553 | 4,902 | 58,922 | 90,377 | |||||||||||||||||
Total current assets |
780,020 | 121,853 | 738,474 | (1,146,433 | ) | 493,914 | |||||||||||||||
Property, plant and equipment, net |
42,260 | 456,518 | 498,778 | ||||||||||||||||||
Goodwill and other intangible assets |
134,922 | 53,675 | 188,597 | ||||||||||||||||||
Intercompany receivables |
300,768 | 1,146,191 | (1,446,959 | ) | |||||||||||||||||
Investment in subsidiaries |
655,822 | 522,939 | 1,268,535 | (2,447,296 | ) | ||||||||||||||||
Other assets |
21,231 | 10,146 | 59,703 | 91,080 | |||||||||||||||||
Assets of discontinued operations |
208,051 | 858,716 | 1,066,767 | ||||||||||||||||||
Total assets |
$ | 1,757,841 | $ | 1,040,171 | $ | 4,581,812 | $ | (5,040,688 | ) | $ | 2,339,136 | ||||||||||
Liabilities and stockholders’ equity |
|||||||||||||||||||||
Current liabilities: |
|||||||||||||||||||||
Current portion of long-term debt |
$ | 6,750 | $ | 6,750 | |||||||||||||||||
Accounts payable |
65,917 | $ | 382,699 | $ | 373,228 | $ | (727,658 | ) | 94,186 | ||||||||||||
Other accrued expenses |
(7,681 | ) | 5,742 | 57,142 | 55,203 | ||||||||||||||||
Total Current liabilities |
64,986 | 388,441 | 430,370 | (727,658 | ) | 156,139 | |||||||||||||||
Long-term debt |
1,187,650 | 1,187,650 | |||||||||||||||||||
Deferred income taxes |
35,320 | (131 | ) | 28,947 | 64,136 | ||||||||||||||||
Other long-term liabilities |
1,824 | 62,659 | 64,483 | ||||||||||||||||||
Intercompany payables |
557,894 | 1,230,175 | (1,788,069 | ) | |||||||||||||||||
Liabilities
of discontinued operations |
73,242 | 323,601 | 396,843 | ||||||||||||||||||
Shareholder’s equity |
469,885 | 18,901 | 2,506,060 | (2,524,961 | ) | 469,885 | |||||||||||||||
Total liabilities and stockholders’ equity |
$ | 1,757,841 | $ | 1,040,171 | $ | 4,581,812 | $ | (5,040,688 | ) | $ | 2,339,136 | ||||||||||
| Three Months Ended June 30, 2003 | |||||||||||||||||||||
| Combined | Combined | ||||||||||||||||||||
| Income Statement Data | The | Guarantor | Non-Guarantor | ||||||||||||||||||
| Company | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Net sales |
$ | 36,756 | $ | 219,684 | $ | (59,721 | ) | $ | 196,719 | ||||||||||||
Cost of products sold |
26,550 | 194,946 | (59,721 | ) | 161,775 | ||||||||||||||||
| 10,206 | 24,738 | 34,944 | |||||||||||||||||||
Selling, general and administrative expenses |
5,450 | 15,147 | 20,597 | ||||||||||||||||||
Income from operations |
4,756 | 9,591 | 14,347 | ||||||||||||||||||
Interest expense |
$ | (8,655 | ) | (1,684 | ) | (18,916 | ) | 18,576 | (10,679 | ) | |||||||||||
Foreign exchange gain (loss) |
451 | (28 | ) | 2,773 | 3,196 | ||||||||||||||||
Investment income and other, net |
4,866 | 509 | 13,693 | (18,576 | ) | 492 | |||||||||||||||
Income
(loss) from continuing operations before income
taxes and minority interests |
(3,338 | ) | 3,553 | 7,141 | 7,356 | ||||||||||||||||
Income taxes |
1,542 | 1,542 | |||||||||||||||||||
Minority interests |
(1,429 | ) | (1,429 | ) | |||||||||||||||||
Income (loss) from continuing operations |
(3,338 | ) | 3,553 | 7,028 | 7,243 | ||||||||||||||||
Loss from discontinued operations |
(14,000 | ) | (2,721 | ) | (13,853 | ) | (2,868 | ) | |||||||||||||
Net income (loss) |
$ | (17,338 | ) | $ | 832 | $ | 20,881 | $ | 4,375 | ||||||||||||
| Three Months Ended June 30, 2002 | |||||||||||||||||||||
| Combined | Combined | ||||||||||||||||||||
| Income Statement Data | The | Guarantor | Non-Guarantor | ||||||||||||||||||
| Company | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Net sales |
$ | 36,806 | $ | 207,417 | $ | (61,736 | ) | $ | 182,487 | ||||||||||||
Cost of products sold |
25,288 | 167,284 | (61,736 | ) | 130,836 | ||||||||||||||||
| 11,518 | 40,133 | 51,651 | |||||||||||||||||||
Selling, general and administrative expenses |
8,966 | 9,322 | 18,288 | ||||||||||||||||||
Income (loss) from operations |
2,552 | 30,811 | 33,363 | ||||||||||||||||||
Interest expense |
$ | (5,928 | ) | (3,466 | ) | (11,771 | ) | 15,365 | (5,800 | ) | |||||||||||
Foreign exchange gain (loss) |
717 | (543 | ) | 6,720 | 6,894 | ||||||||||||||||
Investment income and other, net |
3,547 | (94 | ) | 14,695 | (15,365 | ) | 2,783 | ||||||||||||||
Income
(loss) from continuing operations before income |
|||||||||||||||||||||
taxes and minority interests |
(1,664 | ) | (1,551 | ) | 40,455 | 37,240 | |||||||||||||||
Income taxes |
(2,419 | ) | (1,156 | ) | 11,903 | 8,328 | |||||||||||||||
Minority interests |
25 | 25 | |||||||||||||||||||
Income (loss) from continuing operations |
755 | (395 | ) | 28,527 | 28,887 | ||||||||||||||||
Loss from discontinued operations |
(11,700 | ) | (2,304 | ) | 10,618 | (3,386 | ) | ||||||||||||||
Net income (loss) |
$ | (10,945 | ) | $ | (2,699 | ) | $ | 39,145 | $ | 25,501 | |||||||||||
| Six Months Ended June 30, 2003 | |||||||||||||||||||||||
| Combined | Combined | ||||||||||||||||||||||
| Income Statement Data | The | Guarantor | Non-Guarantor | ||||||||||||||||||||
| Company | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||||
Net sales |
$ | 77,982 | $ | 442,681 | $ | (114,604 | ) | $ | 406,059 | ||||||||||||||
Cost of products sold |
55,927 | 394,312 | (114,604 | ) | 335,635 | ||||||||||||||||||
| 22,055 | 48,369 | 70,424 | |||||||||||||||||||||
Selling, general and administrative expenses |
24,788 | 15,550 | 40,338 | ||||||||||||||||||||
Restructuring charges |
2,694 | 1,105 | 3,799 | ||||||||||||||||||||
Income (loss) from operations |
(5,427 | ) | 31,714 | 26,287 | |||||||||||||||||||
Interest expense |
$ | (18,149 | ) | (5,386 | ) | (37,041 | ) | 39,686 | (20,890 | ) | |||||||||||||
Foreign exchange gain (loss) |
524 | (13 | ) | 223 | 734 | ||||||||||||||||||
Investment income and other, net |
10,293 | 311 | 30,045 | (39,686 | ) | 963 | |||||||||||||||||
Income (loss) from continuing operations before income |
|||||||||||||||||||||||
taxes and minority interests |
(7,332 | ) | (10,515 | ) | 24,941 | 7,094 | |||||||||||||||||
Income taxes |
7 | 1,535 | 1,542 | ||||||||||||||||||||
Minority interests |
(1,367 | ) | (1,367 | ) | |||||||||||||||||||
Income (loss) from continuing operations |
(7,332 | ) | (10,522 | ) | 24,773 | 6,919 | |||||||||||||||||
Loss from discontinued operations |
(28,100 | ) | (5,774 | ) | 23,566 | (10,308 | ) | ||||||||||||||||
Net income (loss) |
$ | (35,432 | ) | $ | (16,296 | ) | $ | 48,339 | $ | (3,389 | ) | ||||||||||||
| Six Months Ended June 30, 2002 | |||||||||||||||||||||||
| Combined | Combined | ||||||||||||||||||||||
| Income Statement Data | The | Guarantor | Non-Guarantor | ||||||||||||||||||||
| Company | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||||
Net sales |
$ | 71,321 | $ | 385,439 | $ | (107,719 | ) | $ | 349,041 | ||||||||||||||
Cost of products sold |
46,522 | 311,347 | (107,719 | ) | 250,150 | ||||||||||||||||||
| 24,799 | 74,092 | 98,891 | |||||||||||||||||||||
Selling, general and administrative expenses |
19,704 | 18,379 | 38,083 | ||||||||||||||||||||
Income (loss) from operations |
5,095 | 55,713 | 60,808 | ||||||||||||||||||||
Interest expense |
$ | (12,058 | ) | (7,162 | ) | (26,632 | ) | 33,365 | (12,487 | ) | |||||||||||||
Foreign exchange gain (loss) |
513 | (764 | ) | 6,846 | 6,595 | ||||||||||||||||||
Investment income and other, net |
8,164 | 204 | 27,809 | (33,365 | ) | 2,812 | |||||||||||||||||
Income (loss) from continuing operations before income |
|||||||||||||||||||||||
taxes and minority interests |
(3,381 | ) | (2,627 | ) | 63,736 | 57,728 | |||||||||||||||||
Income taxes |
(6,794 | ) | (1,896 | ) | 25,524 | 16,834 | |||||||||||||||||
Minority interests |
— | (21 | ) | (21 | ) | ||||||||||||||||||
Income (loss) from continuing operations |
3,413 | ) | (731 | ) | 38,233 | 40,915 | |||||||||||||||||
Loss from discontinued operations |
(21,900 | ) | (3,695 | ) | 33,549 | 7,954 | |||||||||||||||||
Net income (loss) |
$ | (18,487 | ) | $ | (4,426 | ) | $ | 71,782 | $ | 48,869 | |||||||||||||
| Six Months Ended June 30, 2003 | |||||||||||||||||||||
| Combined | Combined | ||||||||||||||||||||
| Cash Flow Data | The | Guarantor | Non-Guarantor | ||||||||||||||||||
| Company | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 42,960 | $ | 1,964 | $ | (42,204 | ) | $ | $ | 2,720 | |||||||||||
Investing activities: |
|||||||||||||||||||||
Expenditures for property, plant and equipment, net |
(507 | ) | (1,675 | ) | (2,182 | ) | |||||||||||||||
Net cash used in investing activities |
(507 | ) | (1,675 | ) | (2,182 | ) | |||||||||||||||
Financing activities: |
|||||||||||||||||||||
Payments of long-term debt |
(41,624 | ) | (41,624 | ) | |||||||||||||||||
Net cash used in financing activities |
(41,624 | ) | (41,624 | ) | |||||||||||||||||
Cash provided by (used in) continuing operations |
1,336 | 1,457 | (43,879 | ) | (41,086 | ) | |||||||||||||||
Cash
(used in) provided by discontinued operations |
(723 | ) | 49,019 | 48,296 | |||||||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
551 | 551 | |||||||||||||||||||
Increase
in cash and cash equivalents |
1,336 | 734 | 5,691 | 7,761 | |||||||||||||||||
Cash and cash equivalents at beginning of the period |
667 | 1,887 | 9,203 | 11,757 | |||||||||||||||||
Cash and cash equivalents at end of the period |
$ | 2,003 | $ | 2,621 | $ | 14,894 | $ | 19,518 | |||||||||||||
| Six Months Ended June 30, 2002 | |||||||||||||||||||||
| Combined | Combined | ||||||||||||||||||||
| Cash Flow Data | The | Guarantor | Non-Guarantor | ||||||||||||||||||
| Company | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 15,694 | $ | 1,542 | $ | (23,895 | ) | $ | (6,659 | ) | |||||||||||
Investing activities: |
|||||||||||||||||||||
Expenditures for property, plant and equipment, net |
(663 | ) | (40,391 | ) | (41,054 | ) | |||||||||||||||
Investments in unconsolidated joint venture |
(994 | ) | (994 | ) | |||||||||||||||||
Net cash used in investing activities |
(663 | ) | (41,385 | ) | (42,048 | ) | |||||||||||||||
Financing activities: |
|||||||||||||||||||||
Payments of long-term debt |
(245,839 | ) | (12 | ) | (245,851 | ) | |||||||||||||||
Dividend payments |
(7,915 | ) | (7,915 | ) | |||||||||||||||||
Long-term borrowings |
9,994 | 9,994 | |||||||||||||||||||
Proceeds from exercise of stock options |
2,716 | 2,716 | |||||||||||||||||||
Issuance of common stock |
225,805 | 225,805 | |||||||||||||||||||
Net cash provided by (used in) financing activities |
(15,239 | ) | (12 | ) | (15,251 | ) | |||||||||||||||
Cash provided by (used in) continuing operations |
455 | 867 | (65,280 | ) | (63,958 | ) | |||||||||||||||
Cash (used in) provided by discontinued operations |
(838 | ) | 61,883 | 61,045 | |||||||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
977 | 977 | |||||||||||||||||||
Increase (decrease) in cash and cash equivalents |
455 | 29 | (2,420 | ) | (1,936 | ) | |||||||||||||||
Cash and cash equivalents at beginning of the period |
638 | 1,647 | 16,567 | 18,852 | |||||||||||||||||
Cash and cash equivalents at end of the period |
$ | 1,093 | $ | 1,676 | $ | 14,147 | $ | 16,916 | |||||||||||||
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| On June 3, 2003, the Company announced that it had entered into a definitive agreement to sell its Precious Metals business (PMG) to Umicore. This business is comprised of the Company’s Precious Metal Chemistry and Metal Management reportable segments, which were acquired by the Company from Degussa in August 2001. The sale to Umicore was completed on July 31, 2003. The PMG business has been classified as a discontinued operation, and prior periods have been restated to reflect this business as a discontinued operation. The continuing operations of the Company represent the historical base metals business for all periods presented. | ||
| Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 | ||
| Net sales for the three months ended June 30, 2003 were $196.7 million, an increase of 7.8% compared to the same period in 2002. The increase was the result of higher metal market prices for cobalt and nickel, resulting in higher selling prices for the Company’s products. This increase was partially offset by lower metal-contained sales volumes, due primarily to lower nickel volumes for the quarter. | ||
| The following information summarizes market prices of the primary raw materials used by the Company: |
| Market Price Ranges per Pound | ||||||||
| Three Months Ended June 30, | ||||||||
| 2003 | 2002 | |||||||
Cobalt - 99.3% Grade |
$8.68 to $9.45 | $6.55 to $8.45 | ||||||
Nickel |
$3.56 to $4.25 | $2.97 to $3.33 | ||||||
| The following information summarizes the physical volumes of metals sold: |
| Three Months Ended June 30, | ||||||||||||
| Percentage | ||||||||||||
| (in millions of pounds) | 2003 | 2002 | Change | |||||||||
Cobalt |
4.9 | 4.6 | 6.5 | % | ||||||||
Nickel |
26.1 | 29.1 | -10.3 | % | ||||||||
| Gross profit decreased to $34.9 million, or 17.8% of net sales, for the three month period |
| ended June 30, 2003, a 32.3% decrease compared to $51.7 million, or 28.3% of net sales, for the same period in 2002. The decrease in gross profit was primarily due to the negative impact of the strengthened euro against the dollar on the Company’s manufacturing expenses in Finland; increased raw material costs; LIFO charges in 2003 compared to benefits in 2002; and lower nickel production volumes at the Company’s facility in Harjavalta, Finland due to a planned maintenance shut-down. The effects were partially offset by the positive impact of higher cobalt and nickel prices. | ||
| Selling, general and administrative expenses in 2003 increased as a percentage of sales, to 10.5% in 2003 compared to 10.0% in the 2002 period. This increase is primarily the result of the impact of the strengthened euro against the dollar in 2003 compared to 2002, partially offset by cost reductions from restructuring activities initiated in the fourth quarter of 2002. When the euro strengthens against the dollar, selling, general and administrative expenses at the Company’s facilities in Europe are translated into dollars at a higher rate, resulting in higher dollar expenses. | ||
| Other expense — net was $7.0 million for the three-month period ended June 30, 2003, compared to income of $3.9 million for the same period in 2002, due primarily to higher interest expense in 2003 compared to 2002 as a result of higher interest rates under the Company’s December 2002 credit agreement and higher average outstanding borrowings, and smaller foreign exchange gains in 2003 ($3.2 million) compared to 2002 ($6.9 million). | ||
| Income taxes as a percentage of income from continuing operations before income taxes and minority interests were 21.0% compared to 22.4% in the same period in 2002. These effective rates are lower than the statutory rate in the United States due primarily to significant income earned each period in Malaysia, where the Company has a tax holiday, and the allocation of a portion of interest expense in the United States to discontinued operations, which effectively shifted a portion of the U.S. net operating loss without a corresponding tax benefit to discontinued operations. | ||
| Loss from discontinued operations was $2.9 million in 2003 compared to $3.4 million in 2002. The improvement is due primarily to the sale of certain unprofitable operations on or before April 1, 2003, which therefore impacted 2002 but not 2003, partially offset by higher interest expense as a result of higher interest rates in the current year period. | ||
| Net income for the three-month period ended June 30, 2003 was $4.4 million, compared to net income of $25.5 million for the corresponding period in 2002, due primarily to the aforementioned factors. | ||
| Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002 | ||
| Net sales for the six months ended June 30, 2003 were $406.1 million, an increase of 16.3% compared to the same period in 2002. The increase was the result of higher metal market prices for cobalt and nickel, resulting in higher selling prices for the Company’s products. This increase was partially offset by lower metal-contained sales volumes, due primarily to lower nickel volumes for the period. | ||
| The following information summarizes market prices of the primary raw materials used by the Company: |
| Market Price Ranges per Pound | ||||||||
| Six Months Ended June 30, | ||||||||
| 2003 | 2002 | |||||||
Cobalt - 99.3% Grade |
$6.45 to $9.45 | $6.40 to $8.45 | ||||||
Nickel |
$3.28 to $4.25 | $2.63 to $3.33 | ||||||
| The following information summarizes the physical volumes of metals sold: |
| Six Months Ended June 30, | ||||||||||||
| Percentage | ||||||||||||
| (in millions of pounds) | 2003 | 2002 | Change | |||||||||
Cobalt |
10.0 | 9.0 | 11.1 | % | ||||||||
Nickel |
57.0 | 59.5 | -4.2 | % | ||||||||
| Gross profit decreased to $70.4 million, or 17.3% of net sales, for the six-month period ended June 30, 2003, a 28.8% decrease compared to $98.9 million, or 28.3% of net sales, for the same period in 2002. The decrease in gross profit was primarily due to the negative impact of the strengthened euro against the dollar on the Company’s manufacturing expenses in Finland; LIFO charges in 2003 compared to benefits in 2002; and lower nickel production volumes at the Company’s facility in Harjavalta, Finland due to a planned maintenance shut-down. The effects were partially offset by the positive impact of higher cobalt and nickel prices and healthy demand in certain key end-markets. | ||
| Selling, general and administrative expenses in 2003 remained flat at 10.9% of sales compared to the 2002 period. These amounts were impacted positively in 2003 by cost reductions from restructuring activities initiated in the fourth quarter of 2002, which were offset by the impact of the strengthened euro against the dollar in 2003 compared to 2002, and additional restructuring charges of $3.8 million recorded in the first quarter of 2003. | ||
| Other expense — net was $19.2 million for the six-month period ended June 30, 2003, compared to $3.1 million for the same period in 2002, due primarily to higher interest expense in 2003 compared to 2002 as a result of higher interest rates under the Company’s December 2002 credit agreement and higher average outstanding borrowings, and smaller foreign exchange gains in 2003 ($0.7 million) compared to 2002 ($6.6 million). | ||
| Income taxes as a percentage of income from continuing operations before income taxes and minority interests were 21.7% compared to 29.2% in the same period in 2002. These effective rates are lower than the statutory rate in the United States due primarily to significant income earned each period in Malaysia, where the Company has a tax holiday, and the allocation of a portion of interest expense in the United States to discontinued operations, which effectively shifted a portion of the U.S. net operating loss without a corresponding tax benefit to discontinued operations. The lower rate in 2003 compared to 2002 is due primarily to higher earnings in the tax holiday country of Malaysia. | ||
| Loss from discontinued operations, net of income taxes was $10.3 million in 2003 compared to income of $8.0 million in 2002, due primarily to restructuring changes taken in 2003, higher interest expense as a result of higher interest rates, and higher tax expense. | ||
| Net loss for the six-month period ended June 30, 2003 was $3.4 million, compared to net income of $48.9 million for the corresponding period in 2002, due primarily to the aforementioned factors. | ||
| Liquidity and Capital Resources | ||
| During the six-month period ended June 30, 2003, the Company’s net working capital increased by approximately $40.7 million. This increase was primarily the result of a decrease in accounts payable of $30.9 million due to prepayments made by the Company for certain raw materials during the quarter, and an increase in accounts receivable of $14.3 million due to higher sales in the second quarter of 2003 compared to the fourth quarter of 2002. Capital expenditures in 2003 were $2.2 million and primarily related to ongoing projects to maintain current operating levels. | ||
| During the six months ended June 30, 2003, the Company’s total debt balances decreased to $1.153 billion from $1.194 billion. This decrease represents primarily cash repayments using the net proceeds from the sale of SCM Metal Products, Inc. on April 1, 2003 (See Note B). Subsequent to June 30, the Company completed the sale of its Precious Metals business to Umicore for cash proceeds of $814 million, before transaction costs, taxes and expenses (See Note B). The gross proceeds were used to repay the Company’s outstanding indebtedness under its Senior Credit facilities. The Company’s $400 million Senior Subordinated Notes remain outstanding. The net proceeds from the sale are expected to be approximately $730 million, after transaction costs and expenses and taxes. | ||
| During June 2003, the Company received a commitment for a new $150 million revolving credit facility. The new facility, which closed on August 7, 2003, bears interest at an interest rate of LIBOR plus 2.00% to 3.00% or PRIME plus 0.25% to 1.25%, matures in August 2006 and includes covenants that are less restrictive than those in the previous Senior facility. |
| Critical Accounting Policies | ||
| The consolidated financial statements include accounts of the company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. There has been no change in the company’s critical accounting policies as disclosed in Form 10-K filed for the year ended December 31, 2002, except that policies associated with the divested Precious Metals business are no longer applicable. In addition, no new critical accounting policies have been adopted in the first six months of 2003, except for the adoption of SFAS No. 123, as amended by SFAS No. 148, effective January 1, 2003, related to stock-based employee compensation (See Note H). | ||
| Forward Looking Statements | ||
| The Company is making this statement in order to satisfy the “safe harbor” provisions contained in the Private Securities Litigation Reform Act of 1995. 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 phrases 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. Factors that could materially affect these forward-looking statements can be found in this report. | ||
| Important facts that may affect the Company’s expectations, estimates or projections include: |
| • | the price and supply of raw materials, particularly cobalt and nickel; | |
| • | the demand for metal-based specialty chemicals and products in the Company’s markets; | |
| • | the effect of fluctuations in currency exchange rates on the Company’s international operations; | |
| • | the effect of non-currency risks of investing in and conducting operations in foreign countries, including political, social, economic and regulatory factors; | |
| • | the impact of the Company’s restructuring program on its continuing operations; | |
| • | the potential impact of the Company being named in a 2002 United Nations panel report focusing on companies and individuals operating in the Democratic Republic of Congo; | |
| • | the potential impact of an adverse result of the shareholder class action lawsuits filed against the Company and the named executives; | |
| • | the general level of global economic activity and demand for the Company’s products. |
| The Company does not assume any obligation to update these forward-looking statements. |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | |
| A discussion of market risk exposures is included in Part II, Item 7a, “Qualitative and Quantitative Disclosure About Market Risk”, of the Company’s 2002 Annual Report on Form 10-K. There have been no material changes during the six months ended June 30, 2003, except that risks associated with the divested Precious Metals business are no longer applicable. | ||
| Item 4 | Controls and Procedures | |
| (a) Evaluation of Disclosure Controls and Procedures | ||
| The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2003. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information relating to the Company is made known to them by others within the Company. | ||
| (b) Changes in Internal Controls | ||
| There were no significant changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting. | ||
| Part II | Other Information | |
| Item 4 | Submission of Matters to a Vote of Security Holders | |
| The annual meeting of stockholders of OM Group, Inc. was held on May 6, 2003. An election of Directors was held at which John E. Mooney and Markku Toivanen were nominated and elected for terms which expire in the year 2006. The following votes were cast with respect to each nominee: |
| Director | For | Withheld Authority | ||||||
John E. Mooney |
24,999,380 | 382,596 | ||||||
Markku Toivanen |
25,089,246 | 292,730 | ||||||
| Ernst & Young LLP was re-elected as independent auditors: For - 24,887,181; against — 421,837; abstain — 72,958. | ||
| Item 6 | Exhibits and Reports on Form 8-K | |
| EXHIBITS | ||
| (12) Computation of Ratio of Earnings to Fixed Charges |
| (31.1) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer | ||
| (31.2) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer | ||
| (32.1) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer | ||
| (32.2) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer | ||
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REPORTS ON FORM 8-K The Company furnished to the SEC a Current Report on Form 8-K under Item 12, filed under Item 9 pursuant to the SEC’s interim guidance, dated April 29, 2003, regarding the Company’s financial results for the quarter ended March 31, 2003. |
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| The Company furnished to the SEC a Current Report on Form 8-K under Item 9, dated June 3, 2003, regarding the Company’s definitive agreement to sell its Precious Metals business to Umicore, and a letter of intent to sell its PVC Heat Stabilizer product line. | ||
| The Company furnished to the SEC a Current Report on Form 8-K under Item 12, filed under Item 9 pursuant to the SEC’s interim guidance, dated June 3, 2003, regarding the Company’s Second Quarter 2003 financial expectations. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| August 11, 2003 | OM GROUP, INC. | |
|
/s/ Thomas R. Miklich Thomas R. Miklich Chief Financial Officer (Duly authorized signatory of OM Group, Inc.) |