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OM Group 2006 Fourth Quarter Results

Published on 2007-03-06. Author : SpecialChem

CLEVELAND -- OM Group, Inc. (NYSE: OMG) announced strong financial results for the fourth quarter and full year ended December 31, 2006. (Note: On March 1, 2007, the company announced that it had completed the sale of its Nickel business to Norilsk Nickel for $408 million in cash, on a debt-free/cash-free basis, plus a net working capital adjustment. Therefore, the company's results for 2006 and 2005 reflect the Nickel business as a discontinued operation. The company's continuing operations include its Specialties business, ongoing corporate expenses and other income/expenses of the company's continuing operations. On February 5, 2007, the company announced that it had called for redemption all $400 million of its outstanding 9.25% Senior Subordinated Notes due 2011. The Notes will be redeemed on March 7, 2007. Interest expense related to the Notes is classified in continuing operations.)

Net sales for the fourth quarter of 2006 were $172.1 million, compared to $151.5 million reported in the corresponding three-month period of 2005. Gross profit increased to $46.8 million in the fourth quarter of 2006 versus $25.0 million in the fourth quarter a year ago. Loss from continuing operations before accounting changes was $17.0 million, or $0.58 per diluted share in 2006, compared to a loss of $0.1 million in 2005.

Income from discontinued operations, including the results of the Nickel business, was $73.8 million in the 2006 fourth quarter compared to $9.5 million a year ago. Net sales of the Nickel business were $278.4 million in the fourth quarter of 2006 compared to $124.9 million a year ago, reflecting dramatically higher nickel prices.

Net income in the 2006 period was $56.8 million, or $1.93 per diluted share, compared to $11.6 million, or $0.40 per diluted share, in the 2005 period.

Selling, general and administrative expenses (SG&A) in the fourth quarter of 2006 were $35.0 million, or 20 percent of net sales, compared with $10.5 million, or 7 percent of net sales in 2005, primarily due to insurance proceeds of $19.0 million related to the shareholder litigation that was settled in 2005 which were a credit to SG&A. Also included in SG&A in 2006 is a $3.2 million charge related to settlement of litigation with our former CEO related to his termination in 2005. Corporate expenses for the fourth quarter of 2006 were $12.6 million, compared with income of $10.7 million a year ago, due primarily to the insurance proceeds in 2005 and the charge related to the former CEO noted above.

Income tax expense in the 2006 period includes $14.1 million for additional U.S. income taxes on undistributed foreign earnings, which the company plans to repatriate in 2007 in connection with the redemption of the Notes. Previously, such earnings were permanently reinvested overseas and therefore no U.S. income taxes were applicable.

In the fourth quarter of 2006, the average price of cobalt was $18.66 per pound compared with $12.51 per pound in the fourth quarter of 2005. The fourth quarter 2006 average price was significantly impacted by a 40 percent increase in December. The average price of nickel for the fourth quarter of 2006 was $15.00 per pound versus $5.73 per pound in the fourth quarter of 2005.

FULL-YEAR RESULTS

Net sales in 2006 were $660.1 million, versus $617.5 million in 2005. Gross profit increased to $184.7 million in 2006, compared with $101.0 million in 2005. Income from continuing operations before accounting changes was $23.6 million in 2006 compared to a loss of $12.4 million in 2005. Net income was $216.1 million, or $7.31 per diluted share, in 2006, compared to net income of $38.9 million, or $1.36 per diluted share, a year ago.

Income from discontinued operations, including the results of the Nickel business, was $192.2 million in 2006 compared to $49.0 million a year ago. Net sales of the Nickel business were $790.9 million in 2006 compared to $632.1 million a year ago.

The factors impacting the company's full-year results include the benefit of rising cobalt prices during 2006, higher by-product sales, a favorable shift in product mix and a gain on the sale of an investment in equity securities of $12.2 million. 2005 results were negatively impacted by the planned maintenance shut-down of the company's joint venture smelter located in the Democratic Republic of Congo during the first four months of 2005. SG&A increased by $33.6 million in 2006 versus 2005, and corporate expenses increased $29.1 million over the same period, both increases due primarily to income in 2005 of $27.5 million from insurance proceeds related to shareholder litigation.

Operating activities of continuing operations provided cash of $95.0 million during 2006, versus negative cash flow from operations of $7.3 million in 2005. The increase was primarily due to higher income in 2006 and a $74.0 million payment in 2005 to settle the shareholder litigation. The cash balance at December 31, 2006 was $282.3 million

BUSINESS SEGMENT RESULTS

In the first quarter of 2006, the company realigned management responsibilities. As a result, the former Cobalt Group was renamed the Specialties segment. The Electronic Chemicals business unit, formerly included in the Nickel reportable segment, was realigned into the Specialties reportable segment. The corresponding information for 2005 has been reclassified to conform to the current year reportable segment presentation.

SPECIALTIES

The Specialties segment includes three business units that represent product line groupings around end markets: 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. Net sales were $660.1 million and operating profit was $115.3 million in 2006, compared with net sales of $617.5 million and operating profit of $36.1 million in 2005.

The increase in net sales was due primarily to increased sales volumes, increased copper by-product sales and sales attributable to Plaschem, which was acquired in March 2006. These increases to net sales were partially offset by lower product selling prices caused by the decrease in cobalt prices in the first half of 2006 compared with 2005. The increase in operating profit is due primarily to the increasing cobalt prices in 2006 compared to 2005, increased copper by-product sales, a favorable shift in product mix, increased volumes and the 2005 shut-down of the DRC smelter.

OUTLOOK

"In 2006, we believe we took several concrete steps to reposition the company through portfolio optimization, further balance sheet enhancements, broad-based operational excellence initiatives and a clear mandate to move rapidly toward the market-facing specialty chemicals/specialty materials business model that we have embraced," said Joseph M. Scaminace, chairman and chief executive officer. "With the sale of our Nickel business now complete, we enter 2007 in the midst of a substantive transformation. That said, this company's direction has never been clearer. Our path forward will see our return as an industry leader, recognized for our market proximity, customer relationships and innovation capabilities. Our work is far from complete, but the momentum behind our pace of change is accelerating."

At the end of the third quarter of 2006, the company indicated that it would suspend its past practice of offering earnings guidance. The company believes that significant metal price volatility makes the practice increasingly less meaningful to current or prospective shareholders who use the company's expectations to form a view of future performance.

ABOUT OM GROUP, INC.

OM Group is a leading, vertically integrated international producer and marketer of value-added, metal-based specialty chemicals and related materials. Headquartered in Cleveland, Ohio, OM Group operates manufacturing facilities in the Americas, Europe, Asia and Africa.

FORWARD-LOOKING STATEMENTS

The foregoing discussion may include forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions and 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. These uncertainties and factors could cause actual results of the company to differ materially from those expressed or implied in the forward-looking statements contained in the foregoing discussion. Such uncertainties and factors include: the direction and pace of our strategic transformation, including our use of proceeds from the sale of our Nickel business on March 1, 2007 and identification of potential acquisitions; the speed and sustainability of price changes in cobalt; the potential for lower of cost or market write-downs of the carrying value of inventory necessitated by decreases in the market price of cobalt or the selling prices of the Company's finished products; the availability of competitively priced supplies of raw materials, particularly cobalt; the risk that new or modified internal controls, implemented in response to the 2004 investigation by the audit committee of the Company's board of directors and the Company's examination of its internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, are not effective and need to be improved; 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 and conducting operations in foreign countries, including political, social, economic and regulatory factors; the effect of changes in domestic or international tax laws; the outcome of the previously announced SEC Division of Enforcement review of the investigation conducted by the Company's audit committee; and the general level of global economic activity and demand for the Company's products.

Source: OM Group


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