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 March 31, 1998
Commission File Number 0-22572
OM GROUP, INC.
(exact name of registrant as specified in its charter)
Delaware 52-1736882
(state or other jurisdiction of (I.R.S., Employer
incorporation or organization) Identification Number)
Tower City
50 Public Square
3800 Terminal Tower
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1998: Common Stock, $.01 Par Value - 22,064,127
shares.
<PAGE>
INDEX
OM GROUP, INC.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- March 31, 1998 and
December 31, 1997
Condensed consolidated statements of income -- Three months ended
March 31, 1998 and 1997
Condensed consolidated statements of cash flows -- Three months
ended March 31, 1998 and 1997
Notes to condensed consolidated financial statements -
March 31, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings - Not applicable
Item 2. Changes in Securities - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(15) Independent Accountants' Review Report
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
Page 1
<PAGE>
Part I Financial Information
Item 1 Financial Statements
OM GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
March 31, December 31,
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,100 $ 13,193
Accounts receivable 92,122 80,602
Inventories 223,598 219,201
Other current assets 15,387 11,753
-------- --------
Total Current Assets 339,207 324,749
PROPERTY, PLANT AND EQUIPMENT
Land 3,936 2,867
Buildings and improvements 52,079 49,939
Machinery and equipment 183,656 162,938
Furniture and fixtures 9,792 8,615
-------- --------
249,463 224,359
Less accumulated depreciation 78,816 74,112
-------- --------
170,647 150,247
OTHER ASSETS
Goodwill and other intangible assets 177,223 116,751
Other assets 14,279 9,316
-------- --------
TOTAL ASSETS $701,356 $601,063
======== ========
Page 2
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 184 $ 219
Accounts payable 51,324 67,521
Other accrued expenses 27,143 32,942
-------- --------
Total Current Liabilities 78,651 100,682
LONG-TERM LIABILITIES
Long-term debt 284,380 170,334
Deferred income taxes 20,869 20,555
Other long-term liabilities 7,690 8,251
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 30,000,000 shares;
issued 22,209,346 shares 222 222
Capital in excess of par value 189,281 189,281
Retained earnings 126,235 117,465
Treasury stock (145,219 shares in 1998
and 142,720 shares in 1997, at cost) (5,234) (4,829)
Foreign currency translation adjustments (738) (898)
-------- --------
Total Stockholders' Equity 309,766 301,241
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $701,356 $601,063
======== ========
See notes to condensed Consolidated Financial Statements
Page 3
<PAGE>
Part I Financial Information
Item 1 Financial Statements
OM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars, except per share data)
(Unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
OPERATIONS
Net sales $138,098 $110,055
Cost of products sold 103,468 83,477
------- -------
34,630 26,578
Selling, general and
administrative expenses 14,097 10,882
------- -------
INCOME FROM OPERATIONS 20,533 15,696
OTHER INCOME (EXPENSE)
Interest expense (3,979) (3,666)
Interest income 108 21
Foreign exchange gain 178 285
------- -------
(3,693) (3,360)
------- -------
INCOME BEFORE INCOME TAXES 16,840 12,336
Income taxes 5,671 4,120
------- -------
NET INCOME $11,169 $ 8,216
======= =======
Net income per common share $0.51 $0.44
Net income per common share - assuming dilution $0.49 $0.43
Dividends paid per common share $0.09 $0.08
See notes to condensed Consolidated Financial Statements
Page 4
<PAGE>
Part I Financial Information
Item 1 Financial Statements
OM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Three Months Ended
March 31,
-------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Net income $11,169 $ 8,216
Items not affecting cash:
Depreciation and amortization 6,517 5,001
Foreign exchange gain (178) (285)
Deferred income taxes (1,226) 46
Changes in operating assets and liabilities (22,221) (28,112)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (5,939) (15,134)
INVESTING ACTIVITIES
Expenditures for property, plant and equipment, net (16,385) (7,875)
Acquisition of businesses (94,043) (123,745)
------- ---------
NET CASH USED IN INVESTING ACTIVITIES (110,428) (131,620)
FINANCING ACTIVITIES
Dividend payments (1,986) (1,501)
Long-term borrowings 114,000 150,047
Payments of long-term debt (66) (1,400)
Purchase of treasury stock (950)
Proceeds from exercise of stock options 111 64
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 111,109 147,210
Effect of exchange rate changes on cash 165 (97)
------- -------
(Decrease) increase in cash (5,093) 359
Cash and cash equivalents at beginning of period 13,193 7,818
------- -------
Cash and cash equivalents at end of period $ 8,100 $ 8,177
======= =======
See notes to condensed Consolidated Financial Statements
Page 5
<PAGE>
Part I Financial Information
Item 1 Financial Statements
OM GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1998
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. For
further information refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
In June, 1997, SFAS No. 130, "Reporting Comprehensive Income", was
issued. SFAS No. 130 establishes new standards for reporting
comprehensive income and its components. The Company adopted SFAS
No. 130 in the first quarter of fiscal year 1998. The Company's
comprehensive income, which includes net income of $11,169 and foreign
currency translation adjustments of $160, did not differ materially
from net income.
In June, 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", was issued. SFAS No. 131 changes
the standards for reporting financial results by operating segments
and related products and services, geographic areas, and major
customers. The Company must adopt SFAS No. 131 no later than year-end
1998; adoption of this statement is not expected to have a material
impact on the Company.
Note B Inventories
Inventories consist of the following:
March 31, December 31,
1998 1997
-------- --------
Raw materials and supplies $109,019 $110,477
Finished goods 112,000 107,989
-------- --------
221,019 218,466
LIFO reserve 2,579 735
-------- --------
Total inventories $223,598 $219,201
======== ========
Page 6
<PAGE>
Part I Financial Information
Item 1 Financial Statements
Note C 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 D Acquisitions
The Company acquired Auric Corporation (Fidelity) and Dussek Campbell
Limited (Belleville) in January and February, 1998, respectively, for an
aggregate amount of approximately $94 million. The acquisitions were
financed through bank borrowings.
These acquisitions, which had combined fiscal 1997 sales aggregating
approximately $60 million, have been recorded using the purchase method
of accounting. Accordingly, the Company's results of operations reflect
the impact of Fidelity and Belleville from their respective dates of
acquisition.
Note E Computation of Earnings per Share
The following table sets forth the computation of net income per common
share and net income per common share - assuming dilution:
Three Months Ended
March 31,
---------------------
1998 1997
------- ------
Net income $11,169 $8,216
Weighted average number of shares outstanding 22,064 18,627
Dilutive effect of stock options 756 700
------- ------
Weighted average number of shares outstanding -
assuming dilution 22,820 19,327
====== ======
Net income per common share $.51 $.44
====== ======
Net income per common share - assuming dilution $.49 $.43
====== ======
Page 7
<PAGE>
Part I
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997
Net sales for the three months ended March 31, 1998 were $138.1 million,
an increase of 25.5% compared to the same period for 1997. The increase
in sales resulted principally from an increase in physical volume of
products sold and the acquisition of Fidelity.
Cobalt market prices ranged from $18 to $20 per pound during the three
month period ended March 31, 1998 compared to a range of $19 to $22 per
pound during the same period in 1997. The market price of nickel ranged
from $2.37 to $2.69 per pound during the three months ended March 31,
1998 compared to $2.88 to $3.66 per pound during the same period in
1997.
Pounds of product sold by the Company were approximately 46.9 million
pounds in the three month period ended March 31, 1998, compared to 34.4
million pounds in the same period in 1997. The following table sets
forth the pounds of carboxylates, salts and powders sold during each
period:
Three Months Ended March 31, Percentage
(in millions of pounds) 1998 1997 Change
---- ---- ------
Carboxylates 14.4 11.7 23.1%
Salts 21.7 14.8 46.6%
Powders 10.8 7.9 36.7%
---- ---- -----
46.9 34.4 36.3%
==== ==== =====
The increase in physical volume of carboxylate product sold reflects 1.2
million pounds of product sold as a result of the Belleville acquisition
and increased sales of carboxylates in Europe. The increase in physical
volume of salt products sold reflects 5.5 million pounds of nickel salt
products sold as a result of the Fidelity acquisition. The increase in
physical volume of powder products sold reflects 3.0 million pounds of
copper powder products sold as a result of the acquisition of SCM Metal
Products, Inc. (SCM), which occurred at the end of January, 1997 and for
which in 1998 there were three months of sales.
Gross profit increased to $34.6 million for the three month period ended
March 31, 1998, a 30.3% increase over the same period in 1997. The
improvement in gross profit was primarily the result of higher physical
volumes of product sold. Cost of products sold decreased to 74.9% for
the three months ended March 31, 1998 from 75.9% of net sales during the
same period of 1997 primarily because of improved product mix.
Page 8
<PAGE>
Part I
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Selling, general and administrative expenses increased to 10.2% of net
sales for the first three months of 1998 compared to 9.9% of net sales
in the same period in 1997 primarily due to the acquisition of Fidelity.
Other expense in 1998 was $3.7 million compared to $3.4 million in 1997,
due primarily to increased interest expense on higher outstanding
borrowings as a result of the acquisition of Fidelity.
Income taxes as a percentage of income remained approximately the same
at 33.7% for the first three months of 1998 compared to 33.4% in the
same period in 1997.
Net income for the three month period ended March 31, 1998 was $11.2
million, an increase of $3.0 million from the same period in 1997, due
to the aforementioned factors.
Liquidity and Capital Resources
During the three month period ended March 31, 1998, the Company's net
working capital increased by approximately $36 million, compared to
1997. This increase was primarily the result of additional working
capital associated with the acquisitions of Fidelity and Belleville.
Capital expenditures increased in 1998, primarily due to expansion at
various plant facilities. These increased cash needs were funded
through cash generated by operations as well as additional borrowings
under the Company's revolving credit facility and private placements
with insurance companies.
The Company believes that it will have sufficient cash generated by
operations and through its credit facilities to provide for its future
working capital and capital expenditure requirements and to pay
quarterly dividends on its common stock, subject to the Board's
discretion. Subject to several limitations in its credit facilities,
the Company may incur additional borrowings under this line to finance
working capital and certain capital expenditures, including, without
limitation, the purchase of additional raw materials.
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. The foregoing discussion includes forward-looking
statements relating to the business of the Company. Such forward-
looking statements are subject to uncertainties and factors relating to
the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the
Company, that could cause actual results of the Company to differ
materially from those matters expressed in or implied by such forward-
Page 9
<PAGE>
Part I
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
looking statements. The Company believes that the following factors,
among others, could affect its future performance and cause actual
results of the Company to differ materially from those expressed in or
implied by forward-looking statements made by or on behalf of the
Company: (a) the price and supply of raw materials, particularly
cobalt, copper and nickel; (b) demand for metal-based specialty
chemicals in the mature markets in the United States and Europe;
(c) demand for metal-based specialty chemicals in Asia-Pacific and other
less mature markets, which geographic areas are an announced focus of
the Company's activities; (d) the effect of non-currency risks of
investing in and conducting operations in foreign countries, together
with fluctuations in currency exchange rates upon the Company's
international operations, including those relating to political, social,
economic and regulatory factors; (e) the availability and cost of
personnel trained in Year 2000 modifications and the ability to locate
and correct all relevant computer codes.
Page 10
<PAGE>
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K
The following exhibits are included herein:
Exhibit (15) Independent Accountants' Review Report
Exhibit (15) Letter re: Unaudited Interim Financial Information
Exhibit (27) Financial Data Schedule
The following report on Form 8-K was filed during the three months ended
March 31, 1998:
1) The Company's Current Report on Form 8-K filed with the Commission
on February 10, 1998 regarding the Company's acquisition of Auric
Corporation.
Page 11
<PAGE>
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.
May 8, 1998 OM GROUP, INC.
/s/ James M. Materna
--------------------
James M. Materna
Chief Financial Officer
(Duly authorized signatory of OM Group, Inc.)
Page 12
<PAGE>
Independent Accountants' Review Report
Stockholders and Board of Directors
OM Group, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
OM Group, Inc. as of March 31, 1998, and the related condensed consolidated
statements of income and cash flows for the three-month periods ended March 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of OM Group, Inc. as of December 31,
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended, not presented herein, and in our report
dated February 3, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Ernst & Young LLP
Cleveland, Ohio
May 5, 1998
<PAGE>
Acknowledgment of Independent Accountants
Stockholders and Board of Directors
OM Group, Inc.
We are aware of the incorporation by reference in the following Registration
Statements of OM Group, Inc. of our report dated May 5, 1998, relating to the
unaudited condensed consolidated interim financial statements of OM Group, Inc.
which are included in its Form 10-Q for the quarter ended March 31, 1998:
Registration
Number Description Filing Date
- ------------ ----------------------------------------- ----------------
33-74674 OM Group, Inc. Long-Term Incentive
Compensation Plan - Form S-8
Registration Statement - 1,015,625 Shares January 27, 1994
333-07529 OMG Americas, Inc. Employees' Profit
Sharing Plan -- Form S-8 Registration
Statement -- 250,000 Shares July 3, 1996
333-07531 OM Group, Inc. Non-Employees Directors'
Equity Plan -- Form S-8 Registration
Statement -- 250,000 Shares July 3, 1996
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Ernst & Young LLP
Cleveland, Ohio
May 5, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
This schedule contains summary financial information extracted from the OM
Group, Inc. Consolidated Balance Sheets at March 31, 1998 (Unaudited) and the OM
Group, Inc. Consolidated Statements of Income for the three months ended March
31, 1998 (Unaudited) and is qualified in its entirely by reference to such
financial statements.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1998
<CASH> 8,100
<SECURITIES> 0
<RECEIVABLES> 92,122
<ALLOWANCES> 0
<INVENTORY> 223,598
<CURRENT-ASSETS> 339,207
<PP&E> 249,463
<DEPRECIATION> 78,816
<TOTAL-ASSETS> 701,356
<CURRENT-LIABILITIES> 78,651
<BONDS> 0
0
0
<COMMON> 222
<OTHER-SE> 189,281
<TOTAL-LIABILITY-AND-EQUITY> 701,356
<SALES> 138,098
<TOTAL-REVENUES> 138,098
<CGS> 103,468
<TOTAL-COSTS> 117,565
<OTHER-EXPENSES> (286)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,979
<INCOME-PRETAX> 16,840
<INCOME-TAX> 5,671
<INCOME-CONTINUING> 11,169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,169
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
