UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OM GROUP, INC.

Delaware (State or other jurisdiction of incorporation or organization)		52-1736882 (I.R.S. Employer Identification No.)
127 Public Square, 1500 Key Tower, Cleveland, Ohio (Address of principal executive offices)		44114-1221 (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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Act). Yes o No þ

As of July 31, 2006 there were 29,325,617 shares of Common Stock, par value $.01 per share, outstanding.

 

 

OM Group, Inc.
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1.		Unaudited Financial Statements	2
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.		Controls and Procedures	30
PART II — OTHER INFORMATION
Item 1A.		Risk Factors	32
Item 4.		Submission of Matters to a Vote of Security Holders	32
Item 6.		Exhibits	32
		Signatures	33

Part I — FINANCIAL INFORMATION
Item I. Unaudited Financial Statements

OM Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

		June 30,				December 31,
(In thousands, except share data)		2006				2005
ASSETS
Current assets
Cash and cash equivalents		$	168,477			$	114,618
Accounts receivable, less allowances			150,738				128,278
Inventories			307,869				304,557
Advances to suppliers			17,047				5,503
Other current assets			63,830				52,152
Total current assets			707,961				605,108
Property, plant and equipment, net			364,140				369,129
Goodwill			182,688				179,123
Notes receivable from non-consolidated joint ventures			5,516				354
Notes receivable from joint venture partner, less allowances			24,179				25,179
Other non-current assets			41,651				41,380
Total assets		$	1,326,135			$	1,220,273
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	—			$	5,750
Accounts payable			136,748				103,397
Accrued employee costs			23,751				21,100
Retained liabilities of businesses sold			7,118				6,020
Other current liabilities			41,720				31,772
Total current liabilities			209,337				168,039
Long-term debt			403,256				416,096
Deferred income taxes			20,296				21,461
Minority interest			37,630				36,994
Other non-current liabilities			44,261				41,150
Stockholders’ equity:
Preferred stock, $.01 par value:
Authorized 2,000,000 shares, no shares issued or outstanding			—				—
Common stock, $.01 par value:
Authorized 60,000,000 shares; issued 29,386,852 in 2006 and 29,368,519 shares in 2005			293				293
Capital in excess of par value			519,416				516,510
Retained earnings			76,525				6,811
Treasury stock (61,235 shares in 2006 and 2005, at cost)			(2,226	)			(2,226	)
Accumulated other comprehensive income			17,347				15,145
Total stockholders’ equity			611,355				536,533
Total liabilities and stockholders’ equity		$	1,326,135			$	1,220,273

See accompanying notes to unaudited condensed consolidated financial statements.

OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Income

		Three Months Ended June 30,								Six Months Ended June 30,
(In thousands, except per share data)		2006				2005				2006				2005
Net sales		$	330,164			$	314,709			$	624,773			$	666,641
Cost of products sold			240,131				274,136				479,646				570,217
Gross profit			90,033				40,573				145,127				96,424
Selling, general and administrative expenses			31,616				20,169				57,441				55,739
Income from operations			58,417				20,404				87,686				40,685
Other income (expense):
Interest expense			(9,936	)			(10,259	)			(19,732	)			(20,252	)
Foreign exchange gain (loss)			1,066				(1,482	)			1,577				(2,812	)
Gain on sale of investments in equity securities			12,223				2,359				12,223				2,359
Other income, net			494				1,501				4,044				3,494
			3,847				(7,881	)			(1,888	)			(17,211	)
Income from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle			62,264				12,523				85,798				23,474
Income tax expense			(7,511	)			(3,090	)			(13,488	)			(5,791	)
Minority interest share of (income) loss			(1,239	)			1,041				(636	)			4,571
Income from continuing operations before cumulative effect of change in accounting principle			53,514				10,474				71,674				22,254
Discontinued operations:
Income (loss) from discontinued operations, net of tax			(399	)			841				(673	)			1,625
Income before cumulative effect of change in accounting principle			53,115				11,315				71,001				23,879
Cumulative effect of change in accounting principle			—				—				287				—
Net income		$	53,115			$	11,315			$	71,288			$	23,879
Net income (loss) per common share — basic:
Continuing operations		$	1.82			$	0.37			$	2.44			$	0.78
Discontinued operations			(0.01	)			0.03				(0.02	)			0.06
Cumulative effect of change in accounting principle			—				—				0.01				—
Net income		$	1.81			$	0.40			$	2.43			$	0.84
Net income (loss) per common share — assuming dilution:
Continuing operations		$	1.81			$	0.37			$	2.43			$	0.78
Discontinued operations			(0.01	)			0.03				(0.02	)			0.06
Cumulative effect of change in accounting principle			—				—				0.01				—
Net income		$	1.80			$	0.40			$	2.42			$	0.84
Weighted average shares outstanding
Basic			29,319				28,473				29,316				28,463
Assuming dilution			29,489				28,519				29,412				28,545

See accompanying notes to unaudited condensed consolidated financial statements.

OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Cash Flows

		Six Months Ended June 30,
						2005 Revised -
(In thousands)		2006				See Note 1
Operating activities
Net income		$	71,288			$	23,879
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations			673				(1,625	)
Income from cumulative effect of change in accounting principle			(287	)			—
Depreciation and amortization			24,427				24,640
Foreign exchange (gain) loss			(1,577	)			2,812
Gain on sale of investments in equity securities			(12,223	)			(2,359	)
Provision for receivables from joint venture partner			1,000				—
Minority interest share of income (loss)			636				(4,571	)
Equity income from investment			(630	)			(2,841	)
Other non-cash items			(902	)			(495	)
Changes in operating assets and liabilities
Accounts receivable			(18,315	)			22,143
Inventories			(1,500	)			53,331
Advances to suppliers			(11,544	)			16,191
Accounts payable			30,615				(26,552	)
Shareholder litigation accrual			—				(74,000	)
Other, net			(2,069	)			(6,610	)
Net cash provided by operating activities			79,592				23,943
Investing activities
Expenditures for property, plant and equipment			(11,698	)			(8,735	)
Proceeds from sale of investments in equity securities			12,223				4,534
Loans to non-consolidated joint ventures			(4,953	)			—
Acquisition of business, net of cash acquired			(5,394	)			—
Net cash used for investing activities			(9,822	)			(4,201	)
Financing activities
Payments of long-term debt			(17,250	)			(2,875	)
Payments of revolving line of credit			—				(49,872	)
Proceeds from revolving line of credit			—				49,872
Proceeds from exercise of stock options			345				117
Net cash used for financing activities			(16,905	)			(2,758	)
Effect of exchange rate changes on cash			2,742				(1,605	)
Cash and cash equivalents
Increase from continuing operations			55,607				15,379
Discontinued operations — net cash used for operating activities			(1,748	)			(4,722	)
Balance at the beginning of the period			114,618				26,779
Balance at the end of the period		$	168,477			$	37,436

See accompanying notes to unaudited condensed consolidated financial statements

OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Stockholders’ Equity

		Six Months Ended June 30,
(In thousands)		2006				2005
Common Stock — Shares
Beginning balance			29,307				28,480
Shares issued under share-based compensation plans			18				40
			29,325				28,520
Common Stock — Dollars
Beginning balance		$	293			$	285
Shares issued under share-based compensation plans			—				—
			293				285
Capital in Excess of Par Value
Beginning balance			516,510				498,250
Shares issued under share-based compensation plans			345				845
Share-based compensation			2,561				1,123
			519,416				500,218
Retained Earnings (Deficit)
Beginning balance, as originally reported			6,811				(32,080	)
Adoption of EITF No. 04-6			(1,574	)			—
Beginning balance, as adjusted for the adoption of EITF 04-6			5,237				(32,080	)
Net income			71,288				23,879
			76,525				(8,201	)
Treasury Stock
Beginning balance			(2,226	)			(710	)
Reacquired shares			—				(1,516	)
			(2,226	)			(2,226	)
Accumulated Other Comprehensive Income
Beginning balance			15,145				21,287
Foreign currency translation			2,948				(1,770	)
Reclassification of hedging activities into earnings			(954	)			(3,475	)
Unrealized gain on cash flow hedges, net of tax expense of $1,741 in 2006 and $198 in 2005			4,953				563
Reclassification of realized gain on available-for-sale securities into earnings			(4,745	)			(930	)
			17,347				15,675
Total Stockholders’ Equity		$	611,355			$	505,751

See accompanying notes to unaudited condensed consolidated financial statements

Notes to Condensed Consolidated Financial Statements
OM Group, Inc. and Subsidiaries

(In thousands, except as noted and per share amounts)

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of OM Group, Inc. and its subsidiaries (the “Company”). These financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair financial presentation of the financial position of the Company at June 30, 2006 and the results of its operations for the three and six months ended June 30, 2006 and 2005 and its cash flows and changes in stockholders’ equity for the six months ended June 30, 2006 and 2005 have been included. The balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date but does not include all of the information or notes required by U.S. generally accepted accounting principles for complete financial statements. Past operating results are not necessarily indicative of the results which may occur in future periods, and the interim period results are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Unless otherwise indicated, all disclosures and amounts in the Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. Cash flows associated with liabilities of business sold for the first six months of 2005, which had previously been included in the operating section of the cash flow statement, have been reclassified and are now included with cash flows attributable to discontinued operations.

Note 2 — Recently Issued Accounting Standards

Accounting Standards adopted in 2006:

SFAS No. 123R: In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised), “Share-Based Payments” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that the cost of transactions involving share-based payments be recognized in the financial statements based on a fair-value-based measurement. The Company adopted SFAS No. 123R on January 1, 2006 using the modified prospective method. The Company has selected the Black-Scholes option-pricing model and will recognize compensation expense on a straight-line method over the awards’ vesting period. Previously, the Company expensed share-based payments under the provisions of SFAS No. 123.

SFAS No. 123R requires the Company to estimate forfeitures in calculating the expense relating to share-based compensation while SFAS No. 123 had permitted the Company to recognize forfeitures as an expense reduction upon occurrence. The adjustment to apply estimated forfeitures to previously recognized share-based compensation was accounted for as a cumulative effect of a change in accounting principle and increased net income by $0.3 million, or $.01 per basic and diluted share, for the six months ended June 30, 2006. The income tax expense related to the cumulative effect was offset by a corresponding change in our deferred tax assets and valuation allowance; thus, there was no net tax impact upon adoption of SFAS 123R.

The Company’s 2002 Stock Incentive Plan authorizes the grant of options and restricted stock to employees and outside directors of up to 1,400,000 shares, with a limit of 200,000 shares to a single individual in any year. The Plan also limits the total number of shares subject to the Plan that may be granted in the form of restricted stock. The Company’s 1998 Long-Term Incentive Compensation Plan authorizes the annual grant of options to employees and outside directors of up to one and one-half percent of the number of outstanding shares of common stock of the Company on the prior December 31, plus unused shares and shares relating to terminated awards from prior years, subject to an overall annual maximum of 2% of common stock outstanding. This plan also limits awards to a single individual to 200,000 shares in any year. All options granted under both plans have 10-year terms and generally have an exercise price equal to the market price at the date of grant.

The unaudited condensed statements of consolidated income include share-based compensation expense of $1.6 million and $0.5 million for the three months ended June 30, 2006 and 2005, respectively, and $2.9 million and $1.1 million for the six months ended June 30, 2006 and 2005, respectively. At June 30, 2006, there was $14.0 million of total unrecognized compensation expense related to nonvested share-based awards. That cost is expected to be recognized as follows: $4.2 million in the remainder of 2006, $6.5 million in 2007, $3.0 million in 2008 and $0.3 million in 2009. Unearned compensation expense is recognized over the vesting period for the particular grant as a component of Selling, general and administrative expenses within the unaudited condensed statements of consolidated Income. The Company currently provides a full valuation allowance for net U.S. deferred tax assets, and accordingly, a valuation allowance is also provided for any tax effects of share-based compensation expense pursuant to SFAS 123R.

In connection with the exercise of stock options granted, the Company received cash payments of $0.1 million and $0.3 million for the three and six months ended June 30, 2006, respectively. No options were exercised in the first six months of 2005. The Company issues new shares to satisfy stock option exercises and restricted stock awards. The Company does not settle share-based payment obligations for cash.

Stock Options

Options granted prior to 2003 generally vested and became fully exercisable at the end of the next fiscal year following the year of grant. Options granted subsequent to January 1, 2003 generally vest equally over three years. The Company accounts for options that vest over more than one year as one award and recognizes expense related to those awards on a straight-line basis over the vesting period. During the first six months of 2006, the Company granted 105,450 stock options.

In June 2005, as an inducement to join the Company, the Chief Executive Officer (the “CEO”) was granted options to purchase 254,996 shares of common stock, of which options for 80,001 shares vested on May 31, 2006, options for 85,050 shares vest on May 31, 2007 and options for 89,945 shares vest on May 31, 2008, subject to the CEO remaining employed by the Company on those dates. The options that vested in 2006 have an exercise price equal to the market price of the Company’s common stock on the date of grant ($24.89). The options that vest on May 31, 2007 and 2008 have exercise prices set above the grant date market price of the Company’s common stock ($28.67 and $33.67, respectively).

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:

		Six Months Ended
		June 30,
		2006				2005
Risk-free interest rate			4.9	%			3.9	%
Dividend yield			—				—
Volatility factor of Company common stock			0.47				0.44
Weighted-average expected option life (years)			6.1				5.0
Weighted-average grant-date fair value		$	14.12			$	9.64

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 operation of the business and does not anticipate paying dividends in 2006. Expected volatilities are based on historical volatility of the Company’s common stock. The expected term of options granted is determined using the shortcut method allowed by SAB No. 107. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.

A summary of the Company’s stock option activity for the six months ended June 30, 2006 is as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggegate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term				Value
Outstanding at January 1, 2006			1,252,817			$	30.71
Granted			105,450				27.15
Exercised			(18,333	)			18.82
Expired unexercised			(35,000	)			31.29
Forfeited			(2,500	)			27.00
Outstanding at June 30, 2006			1,302,434			$	30.59				7.36			$	5,487,969
Vested or expected to vest at June 30, 2006			1,271,503			$	30.67				7.33			$	5,368,587
Exercisable at June 30, 2006			646,745			$	34.33				5.89			$	2,548,018

The total intrinsic value of options exercised during the six months ended June 30, 2006 was $0.1 million. No options were exercised during the six months ended June 30, 2005.

Restricted Stock — Performance-Based Awards

In May 2006, the Company granted 96,680 shares of performance-based restricted stock which vest subject to the Company’s financial performance. The total 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. The satisfaction of the performance criteria will be finally determined based on the three-year performance period ending December 31, 2008. The market value of the performance-based restricted stock award was valued based upon the market price ($28.80) 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 service period based upon the number of shares which are anticipated to vest. The number of shares anticipated to vest will be evaluated quarterly and compensation cost will be adjusted accordingly.

A summary of the Company’s performance-based restricted stock awards for the six months ended June 30, 2006 is as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Outstanding at January 1, 2006			—			$	—
Granted			96,680				28.80
Outstanding at June 30, 2006			96,680			$	28.80
Expected to vest at June 30, 2006			43,290

Restricted Stock — Time-Based Awards

In May 2006, the Company granted 22,150 shares of restricted stock that vest on May 1, 2009 subject to the respective employee remaining employed by the Company on that date. The market value of the restricted stock award was based upon the market price ($28.76) of an unrestricted share of the Company’s common stock at the date of grant. The expense is being recognized ratably over the vesting period.

In June 2005, the Company granted 166,194 shares of restricted stock to its CEO in connection with his hiring. The restricted shares vest on May 31, 2008 subject to the CEO remaining employed by the Company on that date. The market value of the restricted stock award based upon the market price ($24.89) of an unrestricted share of the Company’s common stock at the date of grant was $4.1 million and the expense is being recognized ratably over the vesting period.

A summary of the Company’s time-based restricted stock awards for the six months ended June 30, 2006 is as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Outstanding at January 1, 2006			166,194			$	24.89
Granted			22,150				28.76
Outstanding at June 30, 2006			188,344			$	25.35
Vested or expected to vest at June 30, 2006			187,444

EITF No. 04-6: In June 2005, the FASB ratified modifications to EITF No. 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry.” EITF No. 04-6, which was required to be adopted in the first reporting period beginning after December 15, 2005, clarifies that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred. The Company adopted EITF No. 04-6 on January 1, 2006. In accordance with EITF 04-6, stripping costs incurred during the production phase of a mine will be included in the cost of inventory produced. Previously, the Company capitalized and deferred stripping costs when developing a new pit or expanding an existing pit until that pit reached full production. Upon adoption of EITF No. 04-6, the Company wrote off the amount of deferred stripping costs that were incurred after production commenced at each pit. The transition provisions require that adoption be accounted for in a manner similar to a cumulative effect adjustment with any adjustment recognized in the opening balance of retained earnings in the year of adoption. The effect of adoption was a $1.6 million reduction to Other non-current assets and beginning retained earnings, including the additional valuation allowance to offset the resulting tax benefit.

SFAS No. 154: In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. In addition, SFAS No. 154 redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006 and will apply SFAS No. 154 in future periods, when applicable. The adoption did not impact the Company’s results of operations and financial position.

SFAS No. 151: In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — An amendment of ARB No. 43.” SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Companies must apply the standard prospectively. The adoption of SFAS No. 151 did not and is not expected to impact the Company’s results of operations or financial position.

Accounting Standards Not Yet Adopted

SFAS No. 155: In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments,” which is an amendment of SFAS No. 133 and 140 and allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Companies must apply the standard prospectively. The adoption of SFAS No. 155 is not expected to have a material impact on the Company’s results of operations or financial position.

SFAS No. 156: In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS No. 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning

of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS No. 156 is not expected to have a material impact on the Company’s results of operations or financial position.

FIN No. 48: In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently analyzing the effects of FIN No. 48.

Note 3 — Inventories

Inventories consist of the following:

		June 30,				December 31,
		2006				2005
Raw materials and supplies		$	187,877			$	192,739
Work-in-process			31,000				21,781
Finished goods			88,992				90,037
		$	307,869			$	304,557

Note 4 — Acquisition and Investments

On March 21, 2006, the Company completed the acquisition of Plaschem Specialty Products Pte Ltd. and its subsidiaries (“Plaschem”). Plaschem develops and produces specialty chemicals for printed circuit board chemistries, semiconductor chemistries and general metal finishing with a manufacturing facility in Singapore and an integrated manufacturing, research and technical support facility in the Shanghai area of China. Plaschem had sales of approximately $11.0 million in 2005. In connection with the acquisition, the Company paid $5.2 million in cash, net of cash acquired and issued a $0.5 million note that is payable in March 2007. The Company incurred fees of approximately $0.2 million associated with this transaction. Additional contingent consideration, up to a maximum of $2.0 million, is due to the seller if certain specified financial performance targets of the acquired business are met over the three-year period following the acquisition. Plaschem is included in the Specialties segment results of operations since the date of acquisition.

The Company has an approximately 5% equity interest ($1.3 million at June 30, 2006) in Talvivaara Mining Company, Ltd. (“Talvivaara”). During the fourth quarter of 2005, the Company entered into a convertible loan agreement with Talvivaara pursuant to which it has loaned a total of 2.0 million Euros ($2.5 million at June 30, 2006), of which 0.3 million Euros was advanced in 2005 and 1.7 million Euros was advanced in the first six months of 2006. The loan is convertible into Talvivaara shares at the Company’s option.

During the second quarter of 2006, the Company sold the outstanding common shares it held in Weda Bay Minerals, Inc. (“Weda Bay”) and received cash proceeds of $12.2 million. The Company recognized a $12.0 million gain, net of $0.2 million tax expense, upon completion of the sale as the net book value of the investment was zero due to a permanent impairment charge recorded in prior years. The gain is included in Gain on sale of investments in the unaudited condensed statements of consolidated income.

The Company has a 20% interest in MPI Nickel, an Australian nickel company, that is accounted for by the equity method. The investment is included in other non-current assets in the unaudited condensed consolidated balance sheets, and equity income (loss) is included in Other income, net in the unaudited condensed statements of consolidated income. During the first quarter of 2006, the Company loaned $2.8 million to MPI Nickel, with no stated repayment date. Interest on this loan accrues at LIBOR plus 1% and is payable quarterly.

Note 5 — Income Taxes

The income tax provision is based on the application of a forecasted annual effective income tax rate applied to the current quarter’s year-to-date pre-tax income. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings, taxing jurisdictions in which the earnings will be generated, the Company’s ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. The tax effects of discrete items, including the effect of changes in tax laws, tax rates, certain circumstances with respect to valuation allowances or other unusual or non-recurring items, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual effective income tax rate.

The Company’s effective tax rates are as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2005				2006				2005
Effective income tax rate			12.1	%			24.7	%			15.7	%			24.7	%

The effective income tax rate is lower than the United States statutory rate primarily due to a higher proportion of earnings in jurisdictions having lower statutory tax rates (primarily in Finland at 26%), a tax “holiday” from income taxes in Malaysia and the recognition of previously unrecognized tax benefits of NOL carryovers in Australia which were partially offset by losses in the United States with no corresponding tax benefit. As discussed in the Company’s 2005 Form 10-K, the Malaysian tax holiday expires on December 31, 2006.

During the three months ended June 30, 2006, the Company adjusted its estimated annual effective income tax rate from its previous projection of 25.4% to 18.0%, excluding discrete items. As a result, the Company recognized $1.7 million ($0.06 per basic and diluted share) less income tax expense for the three months ended June 30, 2006 than if 18.0% had been utilized in the first quarter of 2006. The change in the annual effective tax rate resulted from a change in the mix of earnings within the tax jurisdictions in which the Company operates, an increase in forecasted earnings for the year, and changes in foreign currency exchange rates.

The difference between the estimated annual effective income tax rate of 18.0% and the 15.7% estimated annual effective income tax rate for the six months ended June 30, 2006 is due to the $0.2 million tax impact on the $12.2 million gain on the sale of the Company’s investment in Weda Bay, which represents a discrete item in the second quarter of 2006.

Note 6 — Pension and Other Postretirement Benefit Plans

The Company sponsors a defined contribution plan covering all eligible U.S. employees. To be eligible for the plan, an employee must be a full-time associate for at least six months and at least 21 years of age. Company contributions are determined by the board of directors annually and are computed based upon a percentage of individual participant compensation. The Company also sponsors a non-contributory, nonqualified supplemental executive retirement plan for certain employees, providing benefits beyond those covered in the defined contribution plan.

The Company has a funded non-contributory defined benefit pension plan for certain retired employees in the United States related to the Company’s divested SCM business. The Company also has an unfunded supplemental executive retirement plan (“SERP”) that was executed as of January 1, 2004 for the former Chief Executive Officer and other unfunded postretirement benefit plans (“OPEB”), primarily health care and life insurance for certain employees and non-employees in the United States. The Company uses an October 31 measurement date for both its pension and postretirement benefit plans.

Set forth below is a detail of the net periodic pension expense for the defined benefit plans for the three and six months ended June 30:

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
Pension Benefits
Interest cost		$	306			$	305			$	612			$	610
Amortization of unrecognized net loss			67				54				134				108
Expected return on plan assets			(228	)			(236	)			(456	)			(472	)
FAS 88 curtailment loss			—				—				—				4,728
Total expense		$	145			$	123			$	290			$	4,974
Other Postretirement Benefits
Service cost		$	33			$	17			$	66			$	34
Interest cost			60				63				120				126
Amortization of unrecognized prior service cost			10				10				20				20
Total expense		$	103			$	90			$	206			$	180

During the first six months of 2005, the Company recorded a $4.7 million curtailment loss related to the SERP for the former Chief Executive Officer.

Note 7 — Earnings Per Share

The following table sets forth the computation of basic and diluted income per common share from continuing operations before cumulative effect of change in accounting principle:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Income from continuing operations before cumulative effect of change in accounting principle		$	53,514			$	10,474			$	71,674			$	22,254
Weighted average shares outstanding			29,319				28,473				29,316				28,463
Dilutive effect of stock options and restricted stock			170				46				96				82
Weighted average shares outstanding — assuming dilution			29,489				28,519				29,412				28,545
Income from continuing operations before cumulative effect of change in accounting principle per common share — basic		$	1.82			$	0.37			$	2.44			$	0.78
Income from continuing operations before cumulative effect of change in accounting principle per common share — assuming dilution		$	1.81			$	0.37			$	2.43			$	0.78

The following table sets forth the computation of basic and diluted net income per common share:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Net income		$	53,115			$	11,315			$	71,288			$	23,879
Weighted average shares outstanding			29,319				28,473				29,316				28,463
Dilutive effect of stock options and restricted stock			170				46				96				82
Weighted average shares outstanding — assuming dilution			29,489				28,519				29,412				28,545
Net income per common share — basic		$	1.81			$	0.40			$	2.43			$	0.84
Net income per common share — assuming dilution		$	1.80			$	0.40			$	2.42			$	0.84

Note 8 — Comprehensive Income

Comprehensive income, net of related tax effects, for the three months ended June 30, 2006 and 2005 was $50.5 million and $3.6 million, respectively. Comprehensive income, net of related tax effects, for the six months ended June 30, 2006 and 2005 was $73.5 million and $18.3 million, respectively.

Note 9 — Commitments and Contingencies

James P. Mooney ceased to be employed as the Company’s Chief Executive Officer in January 2005. The Company is currently engaged in pending litigation with Mr. Mooney in federal court in Florida. The Company brought suit against Mr. Mooney seeking disgorgement of certain bonuses and profits he received during his tenure as Chief Executive Officer and has filed a declaratory judgment asking the court to determine if Mr. Mooney’s termination should be considered “with cause” such that he would not be entitled to any severance benefits. Mr. Mooney has asserted a counterclaim against the Company seeking damages based on additional bonuses he alleges he is owed and other additional payments he claims he is entitled to under his employment agreement and for the release of shares of stock which the Company has held pending the resolution of its claims.

In addition, Mr. Mooney filed suit against the Company in Delaware state court seeking advancement and reimbursement of his attorney’s fees in connection with the pending Florida litigation and other related matters. In the first quarter of 2006, this matter was settled, and the Company is now paying Mr. Mooney’s attorney’s fees on an ongoing basis.

The SEC’s Division of Enforcement is conducting an informal investigation resulting from the self reporting by the Company of the internal investigation conducted in 2004 by the audit committee of the Company’s board of directors in connection with the previously filed restatement of the Company’s financial results for the periods prior to December 31, 2003. The Company is cooperating fully with the SEC informal investigation.

During 2005, the Company reversed a $5.5 million tax contingency accrual that was originally established in July 2003 upon the sale of the Company’s Precious Metals Group (“PMG”) as the liability is no longer probable. Such amount had previously been included in Retained Liabilities of Businesses Sold in the Consolidated Balance Sheets. The contingency relates to a tax matter in Brazil for which the Company has indemnified the PMG buyer under terms of the PMG sale agreement. Although the contingency is no longer probable, the likelihood of an unfavorable outcome of this contingency is reasonably possible based on the length of time expected before the matter is closed and the inherent risk of changes in the political or legal situation in Brazil.

The Company is a party to various other legal proceedings incidental to its business and is subject to a variety of environmental and pollution control laws and regulations in the jurisdictions in which it operates. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings involving environmental matters. A number of factors affect the cost of environmental remediation, including the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing improvements in remediation

techniques. Taking these factors into consideration, the Company has estimated the undiscounted costs of remediation, which will be incurred over several years. The Company accrues an amount consistent with the estimates of these costs when it is probable that a liability has been incurred. At June 30, 2006 and December 31, 2005 the Company has recorded environmental liabilities of $5.8 million and $8.8 million, respectively, primarily related to remediation and decommissioning at the Company’s closed manufacturing sites in Newark, New Jersey; St. George, Utah and Vasset, France. The Company has recorded $5.3 million in other current liabilities and $0.5 million in Other non-current liabilities as of June 30, 2006.

Although it is difficult to quantify the potential impact of compliance with or liability under environmental protection laws, the Company believes that any amount it may be required to pay in connection with environmental matters, as well as other legal proceedings arising out of operations in the normal course of business, is not reasonably likely to exceed amounts accrued by an amount that would have a material adverse effect upon its financial condition, results of operations, or cash flows.

Note 10 — Debt

Debt consists of the following.

		June 30, 2006				December 31, 2005
Senior Subordinated Notes		$	400,000			$	400,000
Note payable — banks			1,745				17,250
Deferred gain on termination of fair value hedges			5,596				5,984
Fair value of interest rate swaps (fair value hedges)			(4,085	)			(1,388	)
			403,256				421,846
Less: Current portion of long-term debt			—				5,750
Total long-term debt		$	403,256			$	416,096

In November 2004, the Company entered into a note payable with a Finnish bank with principal a balance of $23.0 million which was payable in 48 equal installments beginning in January 2005 and ending December 2008. The balance of this loan was $17.3 million at December 31, 2005. The Company repaid the balance outstanding of $14.4 million in May 2006.

Note 11 — Special Charges and DRC Smelter Shut-down

In years prior to 2004, the Company refinanced the capital contribution for the 25% minority shareholder in its joint venture in the Democratic Republic of Congo (“DRC”). At December 31, 2005 the receivables from this partner were $25.2 million, net of a $4.2 million valuation allowance. During the first six months of 2006, the Company recorded an additional $1.0 million valuation allowance. At June 30, 2006, the receivables from this partner were $24.2 million, net of a $5.2 million valuation allowance. The receivables are due in full on December 31, 2008 ($22.9 million) and December 31, 2010 ($6.5 million).

On January 11, 2005, James P. Mooney’s employment with the Company was terminated and he ceased to be its Chief Executive Officer. On that date, the Company recorded a charge of $8.7 million related to his termination in accordance with Mr. Mooney’s employment agreement and a SERP. Such amount includes termination benefits based on salary, estimated bonus (as calculated per the provisions in the agreement) and certain benefits to be paid over the remaining term of the agreement, as well as the actuarially-determined present value of amounts to be paid under a supplemental executive retirement plan. The Company is examining its alternatives for recovery against Mr. Mooney, including claims for disgorgement under the Sarbanes-Oxley Act of 2002. Any such claims would be recognized when settled.

During the first half of 2005, the Company’s joint venture in the DRC shut-down its smelter as scheduled for approximately four months for regular maintenance and production improvements. The impact of the shut-down reduced the Company’s operating profit by approximately $2.0 million and $9.4 million for the three and six months ended June 30, 2005, respectively. Income from continuing operations, representing the Company’s 55% share in the joint venture, was reduced by approximately $1.1 million and $5.2 million for the three and six months ended June 30, 2005, respectively. The smelter resumed operations in May 2005.

Note 12 — Reportable Segments

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the chief executive officer.

The Company has two reportable operating segments — Specialties and Nickel. The Company realigned management responsibilities effective for the first quarter of 2006. As a result, the former Cobalt segment has been renamed the Specialties segment and the Electronic Chemicals business unit, formerly a component within the Nickel reportable segment, was realigned to the Specialties reportable segment. Because the Company changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change, the corresponding information for prior periods has been reclassified to conform to the current year reportable segment presentation.

The Specialties segment includes three business units: Advanced Organics, which produces products for the tire, coatings and inks, additive and chemicals markets; Inorganics, which produces products for the powder metallurgy, battery, ceramic and chemical markets; and Electronic Chemicals, which produces products for the semiconductor finishing, memory disk, general metal finishing and printed circuit board finishing markets. The Nickel segment includes nickel-based products. The Company’s products are essential components in numerous complex chemical and industrial processes, and are used in many end markets, such as rechargeable batteries, coatings, custom catalysts, liquid detergents, lubricants and fuel additives, plastic stabilizers, polyester promoters, adhesion promoters for rubber tires, colorants, petroleum additives, magnetic media, metal finishing agents, cemented carbides for mining and machine tools, diamond tools used in construction, stainless steel, alloy and plating applications. The Company’s products are sold in various forms such as solutions, crystals, powders, cathodes and briquettes. Intersegment sales are accounted for at the same prices as if the sales were made to third parties. The Company’s Corporate segment is comprised of general and administrative expenses and share-based compensation not allocated to the segments.

While its primary manufacturing sites are in Finland, the Company also has manufacturing and other facilities in Australia, Canada, the United States, Europe and Asia-Pacific, and the Company markets its products worldwide. Further, approximately 24% 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.

The following table reflects the results of the segments:

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2005				2006				2005
Business Segment Information
Net Sales
Specialties		$	174,972			$	148,405			$	319,509			$	320,871
Nickel			171,760				178,851				341,214				376,791
Intercompany sales between segments:
Specialties			184				(174	)			(1,906	)			(484	)
Nickel			(16,752	)			(12,373	)			(34,044	)			(30,537	)
		$	330,164			$	314,709			$	624,773			$	666,641
Income (loss) from operations
Specialties		$	32,692			$	10,231			$	52,346			$	21,492
Nickel			35,902				10,637				53,708				36,476
Corporate (a)			(10,177	)			(464	)			(18,368	)			(17,283	)
		$	58,417			$	20,404			$	87,686			$	40,685
Interest expense		$	(9,936	)		$	(10,259	)		$	(19,732	)		$	(20,252	)
Foreign exchange gain (loss)			1,066				(1,482	)			1,577				(2,812	)
Gain on sale of investments in equity securities			12,223				2,359				12,223				2,359
Other income, net			494				1,501				4,044				3,494
		$	3,847			$	(7,881	)		$	(1,888	)		$	(17,211	)
Income from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle		$	62,264			$	12,523			$	85,798			$	23,474
Expenditures for property, plant & equipment
Specialties		$	3,230			$	3,511			$	5,288			$	4,770
Nickel			4,814				2,917				6,410				3,965
		$	8,044			$	6,428			$	11,698			$	8,735
Depreciation and amortization
Specialties		$	7,654			$	7,819			$	15,363			$	15,556
Nickel			4,220				4,074				8,379				8,049
Corporate			337				499				685				1,035
		$	12,211			$	12,392			$	24,427			$	24,640

		June 30,				December 31,
		2006				2005
Total assets
Specialties		$	745,136			$	739,332
Nickel			535,455				440,564
Corporate			45,544				40,377
		$	1,326,135			$	1,220,273

Note 13 — 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. 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, 2006
						Combined				Combined
						Guarantor				Non-guarantor
Balance Sheet Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Current assets:
Cash and cash equivalents		$	26,575			$	(1,318	)		$	143,220			$	—			$	168,477
Accounts receivable, less allowances			508,192				109,833				333,735				(801,022	)			150,738
Inventories			—				40,941				266,928				—				307,869
Other current assets			2,011				4,018				74,848				—				80,877
Total current assets			536,778				153,474				818,731				(801,022	)			707,961
Property, plant and equipment, net			—				37,045				327,095				—				364,140
Goodwill			75,830				68,908				37,950				—				182,688
Intercompany receivables			329,886				202				942,796				(1,272,884	)			—
Investment in subsidiaries			98,561				—				2,160,527				(2,259,088	)			—
Note receivable from joint venture partner, less allowances			—				—				24,179				—				24,179
Other non-current assets			5,880				12,761				28,526				—				47,167
Total assets		$	1,046,935			$	272,390			$	4,339,804			$	(4,332,994	)		$	1,326,135
Current liabilities:
Accounts payable		$	4,000			$	97,581			$	385,155			$	(349,988	)		$	136,748
Other current liabilities			11,322				16,197				45,070				—				72,589
Total current liabilities			15,322				113,778				430,225				(349,988	)			209,337
Long-term debt			401,511				—				1,745				—				403,256
Deferred income taxes			—				—				20,296				—				20,296
Other non-current liabilities and minority interest			18,545				14,707				48,639				—				81,891
Intercompany payables			202				526,741				1,197,024				(1,723,967	)			—
Stockholders’ equity			611,355				(382,836	)			2,641,875				(2,259,039	)			611,355
Total liabilities and stockholders’ equity		$	1,046,935			$	272,390			$	4,339,804			$	(4,332,994	)		$	1,326,135

		December 31, 2005
						Combined				Combined
						Guarantor				Non-guarantor
Balance Sheet Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Current assets:
Cash and cash equivalents		$	14,286			$	729			$	99,603			$	—			$	114,618
Accounts receivable, less allowances			521,724				104,655				330,721				(828,822	)			128,278
Inventories			—				46,953				257,604				—				304,557
Other current assets			2,813				6,925				47,917				—				57,655
Total current assets			538,823				159,262				735,845				(828,822	)			605,108
Property, plant and equipment, net			—				35,212				333,917				—				369,129
Goodwill			75,830				68,908				34,385				—				179,123
Intercompany receivables			255,830				—				1,013,751				(1,269,581	)			—
Investment in subsidiaries			92,347				—				2,160,527				(2,252,874	)			—
Note receivable from joint venture partner, less allowances			—				—				25,179				—				25,179
Other non-current assets			6,541				11,571				23,622				—				41,734
Total assets		$	969,371			$	274,953			$	4,327,226			$	(4,351,277	)		$	1,220,273
Current liabilities:
Current portion of long-term debt		$	—			$	—			$	5,750			$	—			$	5,750
Accounts payable			4,000				90,040				392,289				(382,932	)			103,397
Other current liabilities			8,658				19,522				30,712				—				58,892
Total current liabilities			12,658				109,562				428,751				(382,932	)			168,039
Long-term debt			404,596				—				11,500				—				416,096
Deferred income taxes			—				—				21,461				—				21,461
Other non-current liabilities and minority interest			15,584				15,195				47,365				—				78,144
Intercompany payables			—				530,435				1,185,238				(1,715,673	)			—
Stockholders’ equity			536,533				(380,239	)			2,632,911				(2,252,672	)			536,533
Total liabilities and stockholders’ equity		$	969,371			$	274,953			$	4,327,226			$	(4,351,277	)		$	1,220,273

		Three Months Ended June 30, 2006
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	56,683			$	391,471			$	(117,990	)		$	330,164
Cost of products sold			—				41,716				316,405				(117,990	)			240,131
Gross profit			—				14,967				75,066				—				90,033
Selling, general and administrative expenses			—				16,797				14,819				—				31,616
Income (loss) from operations			—				(1,830	)			60,247				—				58,417
Interest expense			(9,617	)			(3,139	)			(14,292	)			17,112				(9,936	)
Foreign exchange gain (loss)			—				(79	)			1,145				—				1,066
Gain on sale of investment			—				—				12,223				—				12,223
Other income, net			3,708				544				13,354				(17,112	)			494
Income (loss) from continuing operations before income taxes and minority interest			(5,909	)			(4,504	)			72,677				—				62,264
Income tax expense			—				—				(7,511	)			—				(7,511	)
Minority interest share of (income) loss			—				—				(1,239	)			—				(1,239	)
Income (loss) from continuing operations			(5,909	)			(4,504	)			63,927				—				53,514
Income (loss) from discontinued operations, net of tax			(918	)			519				—				—				(399	)
Net income (loss)		$	(6,827	)		$	(3,985	)		$	63,927			$	—			$	53,115