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

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

Commission file number 001-12515

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 No.)
127 Public Square
1500 Key Tower
Cleveland, Ohio		44114-1221
(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 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller Reporting Company o
				(Do not check if a smaller reporting company)

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

As of July 31, 2010, there were 30,865,261 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		27
Item 3. Quantitative and Qualitative Disclosures about Market Risk		45
Item 4. Controls and Procedures		45
PART II — OTHER INFORMATION
Item 1A. Risk Factors		45
Item 6. Exhibits		46
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Exhibit 101.1 INSTANCE DOCUMENT
Exhibit 101.2 SCHEMA DOCUMENT
Exhibit 101.3 CALCULATION LINKBASE DOCUMENT
Exhibit 101.4 LABELS LINKBASE DOCUMENT
Exhibit 101.5 PRESENTATION LINKBASE DOCUMENT
Exhibit 101.6 DEFINITION LINKBASE DOCUMENT
Signatures		47
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Part I — FINANCIAL INFORMATION

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

		June 30,				December 31,
(In thousands, except share data)		2010				2009
ASSETS
Current assets
Cash and cash equivalents		$	401,436			$	355,383
Accounts receivable, less allowances			167,995				123,641
Inventories			266,408				287,096
Refundable and prepaid income taxes			43,547				44,474
Other current assets			49,291				32,394
Total current assets			928,677				842,988
Property, plant and equipment, net			258,161				227,115
Goodwill			301,934				234,189
Intangible assets			150,539				79,229
Notes receivable from joint venture partner, less allowance			13,915				13,915
Other non-current assets			46,801				46,700
Total assets		$	1,700,027			$	1,444,136
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	20,000			$	—
Accounts payable			149,402				139,173
Accrued income taxes			10,759				7,522
Accrued employee costs			27,073				18,168
Other current liabilities			46,191				24,099
Total current liabilities			253,425				188,962
Long-term debt			120,000				—
Deferred income taxes			29,046				27,453
Uncertain tax positions			14,961				15,733
Pension liability			58,621				15,799
Other non-current liabilities			23,892				20,057
Stockholders’ equity:
Preferred stock, $.01 par value:
Authorized 2,000,000 shares, no shares issued or outstanding			—				—
Common stock, $.01 par value:
Authorized 90,000,000 shares; 30,709,999 shares issued in 2010 and 30,435,569 shares issued in 2009			307				304
Capital in excess of par value			576,158				569,487
Retained earnings			619,897				584,508
Treasury stock (202,556 shares in 2010 and 166,672 shares in 2009, at cost)			(7,234	)			(6,025	)
Accumulated other comprehensive income (loss)			(27,949	)			(16,969	)
Total OM Group, Inc. stockholders’ equity			1,161,179				1,131,305
Noncontrolling interest			38,903				44,827
Total equity			1,200,082				1,176,132
Total liabilities and equity		$	1,700,027			$	1,444,136

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands, except per share data)		2010				2009				2010				2009
Net sales		$	303,099			$	203,352			$	606,296			$	395,058
Cost of products sold (excluding restructuring charges)			234,816				168,918				465,677				334,009
Restructuring charges			293				—				807				—
Gross profit			67,990				34,434				139,812				61,049
Selling, general and administrative expenses			37,585				33,581				77,428				68,439
Goodwill impairment, net			—				35,000				—				37,629
Restructuring charges			92				—				178				—
Gain on termination of retiree medical plan			—				(4,693	)			—				(4,693	)
Operating profit (loss)			30,313				(29,454	)			62,206				(40,326	)
Other income (expense):
Interest expense			(1,644	)			(236	)			(2,313	)			(532	)
Interest income			219				236				386				533
Foreign exchange gain (loss)			(4,224	)			(216	)			(7,400	)			865
Other expense, net			(384	)			(160	)			(393	)			(210	)
			(6,033	)			(376	)			(9,720	)			656
Income (loss) from continuing operations before income tax expense			24,280				(29,830	)			52,486				(39,670	)
Income tax expense			(18,283	)			(3,480	)			(22,632	)			(5,729	)
Income (loss) from continuing operations, net of tax			5,997				(33,310	)			29,854				(45,399	)
Loss from discontinued operations, net of tax			(518	)			(325	)			(381	)			(61	)
Consolidated net income (loss)			5,479				(33,635	)			29,473				(45,460	)
Net (income) loss attributable to the noncontrolling interest			7,310				(1,696	)			5,916				1,852
Net income (loss) attributable to OM Group, Inc.		$	12,789			$	(35,331	)		$	35,389			$	(43,608	)
Earnings per common share — basic:
Income (loss) from continuing operations attributable to OM Group, Inc. common shareholders		$	0.44			$	(1.16	)		$	1.18			$	(1.44	)
Loss from discontinued operations attributable to OM Group, Inc. common shareholders			(0.02	)			(0.01	)			(0.02	)			—
Net income (loss) attributable to OM Group, Inc. common shareholders		$	0.42			$	(1.17	)		$	1.16			$	(1.44	)
Earnings per common share — assuming dilution:
Income (loss) from continuing operations attributable to OM Group, Inc. common shareholders		$	0.43			$	(1.16	)		$	1.17			$	(1.44	)
Loss from discontinued operations attributable to OM Group, Inc. common shareholders			(0.01	)			(0.01	)			(0.01	)			—
Net income (loss) attributable to OM Group, Inc. common shareholders		$	0.42			$	(1.17	)		$	1.16			$	(1.44	)
Weighted average shares outstanding — basic			30,471				30,256				30,388				30,222
Weighted average shares outstanding — assuming dilution			30,591				30,256				30,522				30,222
Amounts attributable to OM Group, Inc. common shareholders:
Income (loss) from continuing operations, net of tax		$	13,307			$	(35,006	)		$	35,770			$	(43,547	)
Loss from discontinued operations, net of tax			(518	)			(325	)			(381	)			(61	)
Net income (loss)		$	12,789			$	(35,331	)		$	35,389			$	(43,608	)

OM Group, Inc. and Subsidiaries
Unaudited Statements of Consolidated Comprehensive Income (Loss)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2010				2009				2010				2009
Consolidated net income (loss)		$	5,479			$	(33,635	)		$	29,473			$	(45,460	)
Foreign currency translation adjustments			(5,381	)			16,266				(7,929	)			5,643
Reversal of accumulated unrecognized gain on retiree medical plan			—				(137	)			—				(137	)
Reclassification of hedging activities into earnings, net of tax			979				132				1,215				90
Unrealized gain (loss) on cash flow hedges, net of tax			(3,042	)			(185	)			(4,266	)			326
Net change in accumulated other comprehensive income (loss)			(7,444	)			16,076				(10,980	)			5,922
Comprehensive income (loss)			(1,965	)			(17,559	)			18,493				(39,538	)
Comprehensive (income) loss attributable to noncontrolling interest			7,315				(1,699	)			5,924				1,851
Comprehensive income (loss) attributable to OM Group, Inc.		$	5,350			$	(19,258	)		$	24,417			$	(37,687	)

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

		Six Months Ended June 30,
(In thousands)		2010				2009
Operating activities
Consolidated net income (loss)		$	29,473			$	(45,460	)
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
Income (loss) from discontinued operations			381				61
Depreciation and amortization			26,846				26,755
Share-based compensation expense			2,779				3,128
Tax deficiency (excess tax benefit) on exercise/vesting of share awards			(93	)			422
Foreign exchange (gain) loss			7,400				(865	)
Goodwill impairment charges, net			—				37,629
Restructuring charges			985				—
Gain on termination of retiree medical plan			—				(4,693	)
Other non-cash items			3,992				6,197
Changes in operating assets and liabilities, excluding the effect of business acquisitions
Accounts receivable			(31,744	)			18,569
Inventories			48,148				37,416
Accounts payable			3,944				(6,417	)
Other, net			3,763				(5,108	)
Net cash provided by operating activities			95,874				67,634
Investing activities
Expenditures for property, plant and equipment			(10,802	)			(15,363	)
Acquisitions			(171,979	)			—
Other, net			(350	)			(2,391	)
Net cash used for investing activities			(183,131	)			(17,754	)
Financing activities
Payments of long-term debt and revolving line of credit			(105,000	)			(26,141	)
Proceeds from the revolving line of credit			245,000				—
Debt issuance costs			(2,596	)			—
Tax deficiency (excess tax benefit) on exercise/vesting of share awards			93				(422	)
Proceeds from exercise of stock options			3,802				—
Payment related to surrendered shares			(1,209	)			(524	)
Net cash provided by (used for) financing activities			140,090				(27,087	)
Effect of exchange rate changes on cash			(6,782	)			695
Cash and cash equivalents
Increase in cash and cash equivalents from continuing operations			46,051				23,488
Discontinued operations — net cash provided by operating activities			2				—
Balance at the beginning of the period			355,383				244,785
Balance at the end of the period		$	401,436			$	268,273

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

		Six Months Ended June 30,
(In thousands)		2010				2009
Common Stock — Shares Outstanding, net of Treasury Shares
Beginning balance			30,269				30,181
Shares issued under share-based compensation plans			238				82
			30,507				30,263
Common Stock — Dollars
Beginning balance		$	304			$	303
Shares issued under share-based compensation plans			3				1
			307				304
Capital in Excess of Par Value
Beginning balance			569,487				563,454
Share-based compensation — employees			2,647				2,993
Share-based compensation — non-employee directors			132				135
(Tax deficiency) excess tax benefit from exercise/vesting of share awards			93				(422	)
Shares issued under share-based compensation plans			3,799				(1	)
			576,158				566,159
Retained Earnings
Beginning balance			584,508				602,365
Net income (loss) attributable to OM Group, Inc.			35,389				(43,608	)
			619,897				558,757
Treasury Stock
Beginning balance			(6,025	)			(5,490	)
Reacquired shares			(1,209	)			(524	)
			(7,234	)			(6,014	)
Accumulated Other Comprehensive Income (Loss)
Beginning balance			(16,969	)			(29,983	)
Foreign currency translation			(7,929	)			5,643
Reclassification of hedging activities into earnings, net of tax benefit of $427 and $31 in 2010 and 2009, respectively			1,215				90
Unrealized gain (loss) on cash flow hedges, net of tax expense of $1,398 and $115 in 2010 and 2009, respectively			(4,266	)			326
Reversal of accumulated unrecognized gain on retiree medical plan			—				(137	)
			(27,949	)			(24,061	)
Total OM Group Inc. stockholders’ equity			1,161,179				1,095,145
Noncontrolling interest
Beginning balance			44,827				47,429
Net income (loss) attributable to the noncontrolling interest			(5,916	)			(1,852	)
Foreign currency translation			(8	)			1
			38,903				45,578
Total equity		$	1,200,082			$	1,140,723

See accompanying notes to unaudited condensed consolidated financial statements.

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

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

Note 1 – Basis of Presentation

OM Group, Inc. (“OMG” or the “Company”) is a global solutions provider of specialty chemicals, advanced materials, electrochemical energy storage, and technologies crucial to enabling its customers to meet increasingly stringent market and application requirements. The Company believes it is the world’s largest refiner of cobalt and producer of cobalt-based specialty products.

The consolidated financial statements include the accounts of OMG and its consolidated subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company has a 55% interest in a joint venture (“GTL”) that has a smelter in the Democratic Republic of Congo (the “DRC”). The joint venture is consolidated because the Company has a controlling interest in the joint venture. Noncontrolling interest is recorded for the remaining 45% interest.

On January 29, 2010, the Company completed the acquisition of EaglePicher Technologies, LLC. The financial position, results of operations and cash flows of EaglePicher Technologies are included in the Unaudited Condensed Consolidated Financial Statements from the date of acquisition.

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 presentation of the financial position of the Company at June 30, 2010 and the results of its operations and its comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 and the results of its cash flows and changes in total equity for the six months ended June 30, 2010 and 2009 have been included. The balance sheet at December 31, 2009 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, 2009.

Note 2 — Recently Issued Accounting Guidance

Accounting Guidance adopted in 2010:

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity which will not become effective until interim and annual periods beginning after December 15, 2010. This guidance requires companies to disclose transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers as well as activity in Level 3 fair value measurements. The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increased disclosures regarding inputs and valuation techniques of the fair value measurements. See Note 9 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q for disclosures related to the new guidance.

In June 2009, the FASB issued guidance on “Consolidation of Variable Interest Entities” to require an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This guidance requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. The Company adopted this guidance on January 1, 2010 and such adoption did not have any effect on the Company’s results of operations or financial position.

Accounting Guidance Not Yet Adopted

In March 2010, the FASB issued guidance that recognizes the milestone method as an acceptable revenue recognition method for substantive milestones in research or development arrangements. This guidance sets forth requirements for an entity to recognize consideration that is contingent upon achievement of a substantive milestone as revenue in the period in which the milestone is achieved. In addition, this guidance requires disclosure of certain information with respect to arrangements that contain milestones. This guidance is effective for interim and annual reporting periods beginning on or after June 15, 2010. The Company has not determined the effect, if any, the adoption of this guidance will have on its results of operations or financial position.

In October 2009, the FASB issued guidance on multiple-deliverable revenue arrangements that addresses the unit of accounting for arrangements involving multiple deliverables. This guidance is effective for annual periods beginning after June 15, 2010. The guidance also addresses how arrangement consideration should be allocated to separate units of accounting, when applicable, and expands the disclosure requirements for multiple-deliverable arrangements. The Company has not determined the effect, if any, the adoption of this guidance will have on its results of operations or financial position.

Note 3 — Acquisition

On January 29, 2010, the Company completed the acquisition of EaglePicher Technologies LLC from EaglePicher Corporation for approximately $172 million in cash. Based in Joplin, Missouri, EaglePicher Technologies is a leader in portable power solutions and energy storage technologies serving aerospace, defense and medical markets and is developing technologies in advanced power storage to serve alternative energy storage markets. EaglePicher Technologies product offerings can be grouped into two broad categories: (i) proprietary battery products and (ii) complementary battery support products that consist of energetic devices, chargers, battery management systems and distributed products. In fiscal year 2009, EaglePicher Technologies recorded revenues of approximately $125 million, of which approximately 60 percent came from its defense business, approximately 33 percent from its aerospace business, and the remainder from its medical and other businesses. The acquisition of EaglePicher Technologies furthers the Company’s growth strategy and expands its presence in the battery market.

The purchase price has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The Company is in the process of finalizing its purchase price allocation with respect to intangible asset and pension valuations; therefore, the purchase price allocation is preliminary and subject to change. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the acquisition date. The purchase price exceeded the fair value of the net assets acquired, resulting in $68.8 million of goodwill, of which $22.3 million is deductible for tax purposes. The excess purchase price over net assets acquired reflects the Company’s view that this acquisition will add broad technical expertise in battery applications, which will be critical to the Company’s growth in battery materials and technologies. The following represents the preliminary allocation of the purchase price:

Accounts Receivable		$	12,144
Inventory			27,459
Other current assets			1,936
Property, plant and equipment			44,469
Other assets			5,276
Customer relationships			37,000
Know-how			18,600
Developed technology			3,100
Tradename			20,700
Goodwill			68,803
Total assets acquired			239,487
Net pension obligations			42,902
Other liabilities			24,606
Total liabilities assumed			67,508
		$	171,979

Customer relationships represent the estimated value of relationships with customers acquired in connection with the acquisition. Developed technology and know-how represent a combination of processes, patents and trade secrets developed through years of experience in development and manufacturing of EaglePicher Technologies products. Tradename represents the EaglePicher name that the Company will continue to use. The weighted-average amortization periods for customer relationships, know-how and developed technology acquired are 17 years, 20 years and 15 years, respectively. The tradename is an indefinite-lived asset that will be tested for impairment at least annually.

In connection with the EaglePicher Technologies acquisition, the Company incurred a total of $3.5 million in acquisition-related costs, of which $2.2 million was recognized during the six months ended June 30, 2010 and $1.3 million was recognized in the fourth quarter of 2009. Acquisition-related costs are included in Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations. A significant portion of these expenses were related to investment banking and due diligence fees.

EaglePicher Technologies is operated and reported within a new segment called Battery Technologies. The Battery Technologies segment uses the percentage of completion method to recognize a portion of its revenue. The majority of defense contracts use units-of-delivery while the majority of aerospace contracts use cost-to-cost as the basis to measure progress toward completing the contract. Under cost-to-cost, revenue is recognized based on the ratio of cost incurred compared to management’s estimate of total costs expected to be incurred under the contract. The percentage of completion method requires the use of estimates of costs to complete long-term contracts. The estimation of these costs requires substantial judgment on the part of management due to the duration of the contracts as well as the technical nature of the products involved. Contract revenues and cost estimates are reviewed periodically and adjustments are reflected in the accounting period such amounts are determined. Significant contracts are reviewed at least quarterly. Anticipated losses on contracts are recorded in full in the period in which the loss becomes evident.

Note 4 — Restructuring

During 2009, the Company announced, and began to implement, a restructuring plan for the Company’s Advanced Organics business within the Specialty Chemicals segment to better align the cost structure and asset base to industry conditions resulting from weak customer demand, commoditization of the products and overcapacity in the European carboxylate business. The restructuring plan includes exiting of the Manchester, England manufacturing facility and workforce reductions at the Company’s Belleville, Ontario, Canada; Kokkola, Finland; Franklin, Pennsylvania and Westlake, Ohio locations. The restructuring plan includes the elimination of 100 employee positions, including two in Westlake, five in Belleville, six in Franklin, 15 in Kokkola and 72 in Manchester. The majority of position eliminations were completed by mid-2010. The restructuring plan does not involve the discontinuation of any material product lines or other functions.

During the three and six months ended June 30, 2010, the Company recorded restructuring charges totaling $0.4 million and $1.0 million, respectively, in the Unaudited Condensed Consolidated Statements of Operations. The Company will continue to incur severance, decommissioning and demolition costs, lease termination costs and other exit costs that will be expensed as incurred. The Company has incurred and expects to incur the following restructuring charges:

										Charges (reversals)				Additional
		Total charges				Total charges				incurred in the six				charges
		expected to				incurred through				months ended				expected to
		be incurred				December 31, 2009				June 30, 2010				be incurred
Cash charges
Workforce reductions		$	6,228			$	4,967			$	1,135			$	126
Decommissioning, demolition and lease termination charges			2,264				25				231				2,008
			8,492				4,992				1,366				2,134
Non-cash charges
Fixed asset impairment			5,536				5,536				—				—
Inventory impairment			1,890				1,890				—				—
Other charges			(91	)			290				(381	)			—
			7,335				7,716				(381	)			—
Total charges		$	15,827			$	12,708			$	985			$	2,134

The following table presents the activity and balances related to the restructuring program:

		Workforce
		reductions				Other charges				Total
Balance at December 31, 2009		$	4,859			$	25			$	4,884
Charges/(reversals)			1,135				(150	)			985
Foreign currency translation adjustment			(344	)			(26	)			(370	)
Cash payments			(3,014	)			(178	)			(3,192	)
Non-cash (charges)/reversals			—				381				381
Balance at June 30, 2010		$	2,636			$	52			$	2,688

The restructuring accrual represents future cash payments and is recorded on the June 30, 2010 Unaudited Condensed Consolidated Balance Sheet in Other current liabilities. Workforce reduction payments, primarily severance, are expected to be completed by the first half of 2011.

Note 5 — Inventories

Inventories consist of the following:

		June 30,				December 31,
		2010				2009
Raw materials and supplies		$	129,891			$	150,113
Work-in-process			40,691				15,952
Finished goods			95,826				121,031
		$	266,408			$	287,096

Note 6 — Pension Plans

As a result of the EaglePicher Technologies acquisition, the Company assumed $42.9 million of net pension obligations, which consists of projected benefit obligations of $182.7 million offset by the fair value of plan assets of $139.8 million. The Company also has a funded, non-contributory, defined benefit pension plan for certain retired employees in the United States related to the Company’s divested SCM Metal Products, Inc. business. Pension benefits are paid to plan participants directly from pension plan assets. In addition, the Company has an unfunded obligation to its former chief executive officer in settlement of an unfunded supplemental executive retirement plan (“SERP”). Certain non-U.S. employees are covered under other defined benefit plans. These non-U.S. plans are not material.

The expected long-term rate of return on defined benefit plan assets reflects management’s expectations of long-term rates of return on funds invested to provide for benefits included in the projected benefit obligations. The Company has established the expected long-term rate of return assumption for plan assets by considering historical rates of return over a period of time that is consistent with the long-term nature of the underlying obligations of these plans. The historical rates of return for each of the asset classes used by the Company to determine its estimated rate of return assumption were based upon the rates of return earned by investments in the equivalent benchmark market indices for each of the asset classes. The basis for the selection of the discount rate for each plan is determined by matching the timing of the payment of the expected obligations under the defined benefit plans against the corresponding yield of high-quality corporate bonds of equivalent maturities. Actuarial assumptions used in the calculation of the EaglePicher Technologies pension obligations are as follows:

Discount rate			5.5% - 5.8%
Expected return on pension plan assets			6.75% - 8.25%
Cash balance interest credit			4.25%
Rate of compensation increase			3.50%

Set forth below is a detail of the net periodic expense for the U.S. pension defined benefit plans, including expense related to EaglePicher Technologies since the date of acquisition:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Pension Benefits
Interest cost		$	2,814			$	342			$	4,801			$	684
Service cost			261				—				436				—
Amortization of unrecognized net loss			84				54				168				108
Expected return on plan assets			(2,573	)			(197	)			(4,361	)			(394	)
Total expense		$	586			$	199			$	1,044			$	398

As a result of the assumption of the EaglePicher Technologies pension obligations, the Company expects to contribute an additional $3.1 million to its pension plans in 2010, for a total of $3.9 million. The Company has contributed $1.0 million to its pension plans in the six months ended June 30, 2010.

Note 7 — Debt

On March 8, 2010, the Company entered into a new $250.0 million secured revolving credit facility (the “Revolver”). The Revolver replaced the Company’s prior revolving credit facility that was scheduled to expire in December 2010. The Revolver includes an “accordion” feature under which the Company may increase the Revolver’s availability by $75.0 million to a maximum of $325.0 million, subject to certain customary conditions and the agreement of current or new lenders to accept a portion of the increased commitment. To date the Company has not sought to borrow under the accordion feature. Obligations under the Revolver are guaranteed by the Company’s present and future subsidiaries (other than immaterial subsidiaries, joint ventures and certain foreign subsidiaries) and are secured by a lien on substantially all of the personal property assets of the Company and subsidiary guarantors, except that the lien on the shares of first-tier foreign subsidiaries is limited to 65% of such shares.

The Revolver requires the Company to maintain a minimum consolidated interest coverage ratio of no less than 3.50 to 1.00 and a maximum consolidated leverage ratio of not more than 2.50 to 1.00. At June 30, 2010, the Company’s interest coverage ratio was 48.34 to 1.00 and its leverage ratio was 0.85 to 1.00. Both of the financial covenants are tested quarterly for each trailing four consecutive quarter period. Other covenants in the Revolver limit consolidated capital expenditures to $50.0 million per year and also limit the Company’s ability to incur additional indebtedness, make investments, merge with another corporation, dispose of assets and pay dividends. As of June 30, 2010, the Company was in compliance with all of the covenants under the Revolver.

The Company has the option to specify that interest be calculated based either on a London interbank offered rate (“LIBOR”) or on a variable base rate, plus, in each case, a calculated applicable margin. The applicable margins range from 1.25% to 2.00% for base rate loans and 2.25% to 3.00% for LIBOR loans. The Revolver also requires the payment of a fee of 0.375% to 0.5% per annum on the unused commitment and a fee on the undrawn amount of letters of credit at a rate equal to the applicable margin for LIBOR loans. The applicable margins and unused commitment fees are subject to adjustment quarterly based upon the leverage ratio. The Revolver provides for interest-only payments during its term, with all unpaid principal due at maturity on March 8, 2013. Outstanding borrowings under the Revolver totaled $140.0 million at June 30, 2010, and the outstanding borrowings under the prior credit facility were $0.0 million at December 31, 2009. At June 30, 2010, the weighted average interest rate for the outstanding borrowings under the Revolver was 2.9%, and the weighted average interest rate for the outstanding borrowings under the Revolver together with the related interest rate swap agreements was 3.2%.

The Company incurred fees and expenses of $2.5 million related to the Revolver. These fees and expenses were deferred and are being amortized to interest expense over the three-year term of the Revolver.

During 2008, the Company’s Finnish subsidiary, OMG Kokkola Chemicals Oy (“OMG Kokkola”), entered into a €25 million credit facility agreement (the “Credit Facility”). Under the Credit Facility, subject to the lender’s discretion, OMG Kokkola can draw short-term loans, ranging from one to nine months in duration, in U.S. dollars at LIBOR plus a margin of 0.55%. The Credit Facility has an indefinite term, and either party can immediately terminate the Credit Facility after providing notice to the other party. The Company agreed to unconditionally guarantee all of the obligations of OMG Kokkola under the Credit Facility. There were no borrowings outstanding under the Credit Facility at June 30, 2010 or December 31, 2009.

Note 8 — Derivative Instruments

The Company enters into derivative instruments and hedging activities to manage, where possible and economically efficient, commodity price risk, foreign currency exchange rate risk and interest rate risk related to borrowings. It is the Company’s policy to execute such instruments with creditworthy counterparties and not enter into derivative instruments for speculative purposes. All derivatives are reflected on the balance sheet at fair value and recorded in Other current assets and Other current liabilities in the Unaudited Condensed Consolidated Balance Sheets. The accounting for the fair value of a derivative depends upon whether it has been designated as a hedge and on the type of hedging relationship. Changes in the fair value of derivative instruments are recognized immediately in earnings, unless the derivative is designated as a hedge and qualifies for hedge accounting. Under hedge accounting, recognition of derivative gains and losses can be matched in the same period with that of the hedged exposure and thereby minimize earnings volatility. To qualify for designation in a hedging relationship, specific criteria must be met and appropriate documentation prepared.

For a fair value hedge, the change in fair value of the hedging instrument and the change in fair value of the hedged item attributable to the risk being hedged are both recognized currently in earnings. For a cash flow hedge, the effective portion of the change in fair value of a hedging instrument is initially recognized in Accumulated other comprehensive income (loss) (“AOCI(L)”) in Stockholders’ equity and subsequently reclassified to earnings when the hedged item affects income. The ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in earnings. For a net investment hedge of a foreign subsidiary, the effective portion of the change in fair value of the hedging instrument is reported in AOCI(L) as part of the cumulative translation adjustment, while the ineffective portion is recognized immediately in earnings. The Company does not enter into net investment hedges.

Commodity Price Risk

The Company enters into derivative instruments and hedging activities to manage commodity price risk. The Company, from time to time, employs derivative instruments in connection with certain purchases and sales of inventory in order to establish a fixed margin and mitigate the risk of price volatility. Some customers request fixed pricing and the Company may use a derivative to mitigate price risk. The Company makes or receives payments based on the difference between a fixed price (as specified in each individual contract) and the market price of the commodity being hedged. These payments will offset the change in prices of the underlying sales or purchases and effectively fix the price of the hedged commodity at the contracted rate for the contracted volume. While this hedging may limit the Company’s ability to participate in gains from favorable commodity price fluctuations, it eliminates the risk of loss from adverse commodity price fluctuations.

Derivative instruments employed by the Company to manage commodity price risk include cash flow and fair value hedges as well as some contracts that are not designated as accounting hedges.

Cash Flow Hedges

From time to time, the Company enters into copper forward sales contracts that are designated as cash flow hedges. At December 31, 2009, the notional quantity of open contracts designated as cash flow hedges in accordance with the “Derivatives and Hedging” topic of the Accounting Standards Codification (“ASC”) was 1.3 million pounds. The Company had no copper forward sales contracts designated as cash flow hedges at June 30, 2010.

Fair Value Hedges

From time to time, the Company enters into certain cobalt forward purchase contracts designated as fair value hedges. The Company had no cobalt forward purchase contracts designated as fair value hedges at June 30, 2010 and December 31, 2009.

Foreign Currency Exchange Rate Risk

The functional currency for the Company’s Finnish operating subsidiary is the U.S. dollar since a majority of its purchases and sales are denominated in U.S. dollars. Accordingly, foreign currency exchange gains and losses related to transactions of this subsidiary denominated in other currencies (principally the Euro) are included in earnings. While a majority of the subsidiary’s raw material purchases are in U.S. dollars, it also has some Euro-denominated expenses. Beginning in 2009, the Company entered into foreign currency forward contracts to mitigate a portion of the earnings volatility in those Euro-denominated cash flows due to changes in the Euro/U.S. dollar exchange rate. The Company had Euro forward contracts with notional values that totaled 22.2 million Euros and 1.5 million Euros at June 30, 2010 and December 31, 2009, respectively. The Company designated these derivatives as cash flow hedges of its forecasted foreign currency denominated expense. The outstanding contracts as of June 30, 2010 had maturities ranging up to 6 months. As of June 30, 2010, AOCI(L) included a cumulative loss of $2.7 million, net of tax, related to these contracts, all of which is expected to be reclassified to earnings within the next six months.

Interest Rate Risk

The Company is exposed to interest rate risk primarily through its borrowing activities. If needed, the Company predominantly utilizes U.S. dollar-denominated borrowings to fund its working capital and investment needs. There is an inherent rollover risk for borrowings as they mature and are renewed at current market rates. From time to time, the Company enters into derivative instruments and hedging activities to manage, where possible and economically efficient, interest rate risk related to borrowings. The Company uses interest rate swap agreements to partially reduce risks related to floating rate financing agreements that are subject to changes in the market rate of interest. Terms of the interest rate swap agreements require the Company to receive a variable interest rate and pay a fixed interest rate. The Company’s interest rate swap agreements and its variable rate financings are predominately based upon the three-month LIBOR. The Company had interest rate swaps with notional values that totaled $60.0 million at June 30, 2010. The outstanding contracts as of June 30, 2010 had maturities ranging up to 23 months. As of June 30, 2010, AOCI(L) included a cumulative loss of $0.3 million related to these contracts. The Company had no outstanding interest rate derivatives at December 31, 2009.

The following table summarizes the fair value of derivative instruments designated as hedging instruments in accordance with the “Derivatives and Hedging” topic of the ASC as recorded in the Unaudited Condensed Consolidated Balance Sheets:

		Derivative Assets
		June 30, 2010						December 31, 2009
		Balance sheet location		Fair value				Balance sheet location		Fair value
Euro forward contracts		Other current assets		$	—			Other current assets		$	258
Total				$	—					$	258

		Derivative Liabilities
		June 30, 2010						December 31, 2009
		Balance sheet location		Fair value				Balance sheet location		Fair value
Euro forward contracts		Other current liabilities		$	3,705			Other current liabilities		$	—
Commodity contracts		Other current liabilities			—			Other current liabilities			226
Interest rate swap agreements		Other current liabilities			286			Other current liabilities			—
Total				$	3,991					$	226

The following table summarizes the effect of derivative instruments for the three and six months ended June 30 as recorded in the Unaudited Condensed Consolidated Statements of Operations:

Derivatives in Fair Value Hedging Relationships

Amount of Gain (Loss) on Derivative

Amount of Gain (Loss) on Derivative

Location of Gain

Recognized in Income for the

Recognized in Income for the

(Loss) on Derivative

Three Months Ended

Six Months Ended

Recognized in Income

June 30, 2010

June 30, 2009

June 30, 2010

June 30, 2009

Commodity contracts

Cost of products sold

$

—

$

—

$

—

$

227

Location of Gain

Amount of Gain (Loss) on Related

(Loss) on Related

Hedged Item Recognized in Income

Hedged Items in Fair

Hedged Item

for the Three Months Ended

Value Relationships

Recognized in Income

June 30, 2010

June 30, 2009

Commodity contracts

Firm commitment

Cost of products sold

$

—

$

—

Location of Gain

Amount of Gain (Loss) on Related

(Loss) on Related

Hedged Item Recognized in Income

Hedged Items in Fair

Hedged Item

for the Six Months Ended

Value Relationships

Recognized in Income

June 30, 2010

June 30, 2009

Commodity contracts

Firm commitment

Cost of products sold

$

—

$

(227

)

Derivatives in Cash Flow Hedging Relationships
		Amount of Gain (Loss) on Derivative								Amount of Gain (Loss) on Derivative
		Recognized in AOCI(L) (Effective Portion)								Recognized in AOCI(L) (Effective
		for the Three Months Ended								Portion) for the Six Months Ended
		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
Euro forward contracts		$	(2,756	)		$	474			$	(3,926	)		$	985
Commodity contracts			—				(659	)			(54	)			(659	)
Interest rate swaps			(286	)			—				(286	)			—
Total		$	(3,042	)		$	(185	)		$	(4,266	)		$	326

		Location of Gain (Loss)		Amount of Gain (Loss) Reclassified								Amount of Gain (Loss) Reclassified
		Reclassified from		from AOCI(L) into Income (Effective								from AOCI(L) into Income (Effective
		AOCI(L) into Income		Portion) for the Three Months Ended								Portion) for the Six Months Ended
		(Effective Portion)		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
Euro forward contracts		Cost of products sold		$	(979	)		$	203			$	(994	)		$	245
Commodity contracts		Net sales			—				(335	)			(221	)			(335	)
Total				$	(979	)		$	(132	)		$	(1,215	)		$	(90	)

Location of Gain (Loss)

Amount of Gain (Loss) Recognized

Amount of Gain (Loss) Recognized on

on Derivative

on Derivative in Income (Ineffective

Derivative in Income (Ineffective

Recognized in Income

Portion) for the Three Months Ended*

Portion) for the Six Months Ended*

(Ineffective Portion)

June 30, 2010

June 30, 2009

June 30, 2010

June 30, 2009

Euro forward contracts

n/a

$

—

$

—

$

—

$

—

Commodity contracts

n/a

—

—

—

—

Interest rate swaps

n/a

—

—

—

Total

$

—

$

—

$

—

$

—

Note 9 — Fair Value Disclosures

The following table shows the Company’s assets and liabilities accounted for at fair value on a recurring basis:

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
Description		June 30, 2010				Assets (Level 1)				Inputs (Level 2)				Inputs (Level 3)
Liabilities:
Foreign currency forward contracts		$	3,705			$	—			$	3,705			$	—
Interest rate swaps			286				—				286				—
Total		$	3,991			$	—			$	3,991			$	—

The Company uses significant other observable inputs to value derivative instruments used to hedge foreign currency volatility and interest rate swaps; therefore, they are classified within Level 2 of the valuation hierarchy. The fair value for these contracts is determined based on foreign exchange and interest rates. There were no transfers into or out of Levels 1, 2 or 3 in the first six months of 2010.

The Company also holds financial instruments consisting of cash, accounts receivable and accounts payable. The carrying amounts of cash, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. The carrying value of the Company’s Revolver approximates fair value due to the variable interest rate terms. Derivative instruments are recorded at fair value as indicated in the preceding disclosures. Fair values for investments held at cost are not readily available, but are estimated to approximate fair value. Cost method investments are evaluated for impairment quarterly. The Company has a $2.0 million investment in Quantumsphere, Inc. (“QSI”) accounted for under the cost method. The Company and QSI have agreed to co-develop new, proprietary applications for the high-growth, high-margin clean-energy and portable power sectors. In addition, the Company has the right to market and distribute certain QSI products.

Note 10 — Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The Internal Revenue Service is currently examining the Company’s 2007 U.S. federal income tax return. This examination is expected to be completed in 2010.

The Company’s interim income tax provisions are based on the application of an estimated annual effective income tax rate applied to year-to-date income (loss) from continuing operations before income tax expense. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including forecasts of the Company’s projected annual earnings (including specific subsidiaries projected to have pretax income and pretax losses), 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.

Income (loss) from continuing operations before income tax expense consists of the following:

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
United States		$	(2,486	)		$	(19,291	)		$	(10,159	)		$	(34,308	)
Outside the United States			26,766				(10,539	)			62,645				(5,362	)
		$	24,280			$	(29,830	)		$	52,486			$	(39,670	)

The Company’s effective income tax rates are as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Effective income tax rate			75.3	%			-11.7	%			43.1	%			-14.4	%

The effective income tax rates above are affected by significant discrete items. In the three and six months ended June 30, 2010, the Company recorded discrete tax expense items totaling $10.4 million and $6.4 million, respectively (after a $4.0 million discrete tax benefit recorded in the first quarter of 2010). For these periods, the Company recorded discrete tax expense related to the GTL joint venture of $11.4 million and $8.8 million, respectively, of which the Company’s share is 55% ($6.3 million and $4.9 million, respectively). See discussion of GTL tax items below. The Company also recorded a discrete benefit of $1.0 million related to its prior year uncertain tax positions as a result of a change in estimate based on additional information that became available during the first six months of 2010. The three and six months ended June 30, 2010 include a discrete benefit of $0.7 million related to a change in the Taiwanese legislative tax rate enacted during the second quarter 2010. Excluding discrete items, the Company recorded tax expense of $7.9 million on pretax income of $24.3 million for the three months ended June 30, 2010. For the six months ended June 30, 2010, excluding discrete items, the Company recorded tax expense of $16.2 million on pretax income of $52.5 million. Without the discrete items, the effective tax rate for the three and six months ended June 30, 2010 would have been 32.5% and 30.9%, respectively. These rates are lower than the U.S. statutory tax rate primarily due to income earned in tax jurisdictions with lower

statutory rates than the U.S. (primarily Finland, which has a 26% statutory tax rate) and a tax holiday in Malaysia, partially offset by losses in certain jurisdictions (including the U.S.) with no corresponding tax benefit. In the three months and six months ended June 30, 2010, there was no U.S. tax expense related to the planned repatriation of foreign earnings during 2010 due to the ability to utilize foreign tax credits and current year U.S. losses.

During the three months ended June 30, 2010, $11.4 million of tax expense was recorded by GTL, primarily related to recognition of an allowance against GTL’s prepaid tax asset. In July 2010, certain companies doing business in the DRC, including GTL, received notification from the DRC tax authorities that requests to utilize tax overpayments to offset more than 20% of 2010 taxes payable would not be granted. Based on past precedent set by the DRC tax authorities, GTL had previously estimated it would be able to utilize its prepaid tax asset to offset more than 20% of its future tax obligations. In addition, during the second quarter of 2010, it was determined that GTL was no longer subject to certain import taxes that had been assessed through the first quarter of 2010. Given these changes, the Company updated its estimation of the realizability of GTL’s prepaid tax asset in the DRC and recorded an allowance of $11.5 million against the prepaid tax asset in the second quarter of 2010. A key factor in the Company’s analysis for realization of the prepaid tax asset includes the contractual term of the current smelter feed supply agreement. Additional feed options exist that could potentially extend the recoverability period of the prepaid tax asset. The Company will re-evaluate the allowance quarterly for changes in estimates, including changes in feed supply arrangements, that would indicate a change in the realizability of the prepaid tax asset. The Company’s 55% share of the charge reduced net income per diluted share by $0.21 in the three and six months ended June 30, 2010. In addition, during the six months ended June 30, 2010, GTL recorded a $2.6 million tax benefit primarily related to a return-to-provision adjustment related to the DRC tax return as a result of additional depreciation from revaluation of the tax basis of fixed assets at December 31, 2009. The revaluation was dependent on information provided by the DRC government that was not available at the time of the filing of the Company’s 2009 Form 10-K.

In the three and six months ended June 30, 2009, the Company recorded discrete tax expense items totaling $1.0 million and $5.7 million, respectively. Of these amounts, $0.6 million of income and $5.3 million of expense in the three and six months ended June 30, 2009, respectively, related to GTL in the DRC, of which the Company’s share is 55%. Excluding discrete items, the Company recorded tax expense of $2.5 million on pretax losses of $29.8 million for the three months ended June 30, 2009. For the six months ended June 30, 2009, excluding discrete items, the Company recorded no tax on pretax losses of $39.7 million. These tax expense amounts are different from those that would be calculated using the U.S. statutory tax rate of 35% primarily due to the non-deductible goodwill and intangible asset impairment charges, losses in certain jurisdictions for which there is no tax benefit, and income in certain foreign jurisdictions with tax rates lower than the U.S. statutory rate. In the three and six months ended June 30, 2009, U.S. tax expense related to foreign earnings repatriation is fully offset by foreign tax credits and U.S. losses.

The Malaysian tax holiday, which results from an investment incentive arrangement and expires on December 31, 2011, reduced income tax expense by $0.9 million and $3.0 million in the three and six months ended June 30, 2010, respectively. The benefit of the tax holiday on net income per diluted share was $0.03 and $0.10 in the three and six months ended June 30, 2010, respectively. The Malaysian tax holiday had no impact on the three and six months ended June 30, 2009 due to consolidated losses in that period.

Note 11 — Earnings Per Share

The following table sets forth the computation of basic and diluted income (loss) per common share from continuing operations attributable to OM Group, Inc. common shareholders:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except per share amounts)		2010				2009				2010				2009
Income (loss) from continuing operations attributable to OM Group, Inc. common shareholders		$	13,307			$	(35,006	)		$	35,770			$	(43,547	)
Weighted average shares outstanding — basic			30,471				30,256				30,388				30,222
Dilutive effect of stock options and restricted stock			120				—				134				—
Weighted average shares outstanding — assuming dilution			30,591				30,256				30,522				30,222
Earnings per common share:
Income (loss) from continuing operations attributable to OM Group, Inc. common shareholders — basic		$	0.44			$	(1.16	)		$	1.18			$	(1.44	)
Income (loss) from continuing operations attributable to OM Group, Inc. common shareholders — assuming dilution		$	0.43			$	(1.16	)		$	1.17			$	(1.44	)

The following table sets forth the computation of basic and diluted net income (loss) per common share attributable to OM Group, Inc. common shareholders:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except per share amounts)		2010				2009				2010				2009
Net income (loss) attributable to OM Group, Inc. common shareholders		$	12,789			$	(35,331	)		$	35,389			$	(43,608	)
Weighted average shares outstanding — basic			30,471				30,256				30,388				30,222
Dilutive effect of stock options and restricted stock			120				—				134				—
Weighted average shares outstanding — assuming dilution			30,591				30,256				30,522				30,222
Earnings per common share:
Net income (loss) attributable to OM Group, Inc. common shareholders — basic		$	0.42			$	(1.17	)		$	1.16			$	(1.44	)
Net income (loss) attributable to OM Group, Inc. common shareholders — assuming dilution		$	0.42			$	(1.17	)		$	1.16			$	(1.44	)

The Company uses the treasury stock method to calculate the effect of outstanding share-based compensation awards, which requires the Company to compute total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award, (b) the amount of unearned share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Shares under share-based compensation awards for which the total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share.

In the three and six months ended June 30, 2010, stock options to purchase 0.2 million and 0.4 million shares of common stock, respectively, were excluded from the calculation of dilutive earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would have been anti dilutive.

As the Company had a loss from continuing operations for the three and six months ended June 30, 2009, the effect of including dilutive securities in the earnings per share calculation would have been antidilutive. Accordingly, all shares under share-based compensation awards were excluded from the calculation of loss from continuing operations attributable to OM Group, Inc. common shareholders assuming dilution and net loss attributable to OM Group, Inc. common shareholders assuming dilution for the three and six months ended June 30, 2009.

Note 12 — Commitments and Contingencies

In March 2009, GTL was served in the Jersey Islands with an injunction obtained by FG Hemisphere Associates LLC (“FG Hemisphere”), which is seeking to enforce two arbitration awards made in 2003 by an arbitral tribunal operating under the auspices of the International Court of Arbitration against the DRC and Société Nationale D’Electricité for $108.3 million. FG Hemisphere asserts that Gécamines (a partner in GTL) is an organization of the DRC and that FG Hemisphere is entitled to enforce the arbitral awards in the Jersey Islands against any assets of Gécamines and the DRC located in that jurisdiction (including monies paid or to be paid by GTL to Gécamines or the DRC). GTL has been enjoined from making payments to the DRC and Gécamines under the Long Term Slag Sales Agreement between GTL and Gécamines. The Company does not believe the Royal Court of Jersey (the “Court”) has jurisdiction over the assets of GTL, including monies paid or to be paid to Gécamines. A hearing was held on this issue in June 2010, but the Court has not yet delivered its decision. Until that decision is delivered, GTL will continue to comply with the terms of the injunction. As a result, the amount due from GTL to Gécamines (included in Accounts payable on the Unaudited Condensed Consolidated Balance Sheets) has increased to $57.7 million at June 30, 2010 from $23.3 million at December 31, 2009. While there can be no assurances with respect to the final outcome of this process, the Company believes that, based on the information currently available to it, this matter will not have a material adverse effect upon its financial condition, results of operations or cash flows.

The Company has potential contingent liabilities with respect to environmental matters related to its former Precious Metals Group (“PMG”) operations in Brazil. The Company has been informed by the purchaser of the PMG operations of potential environmental issues at three of the operating locations in Brazil. Environmental cost sharing arrangements are in place between the original owner and operator of those PMG operations, the Company and the subsequent purchaser of the PMG operations. The Company has reviewed the limited information made available to it on the environmental conditions and is awaiting more detailed information from the purchaser of PMG. The Company cannot currently evaluate whether or not, or to what extent, it will be responsible for any remediation costs until more detailed information is received.

The Company is subject to a variety of environmental and pollution control laws and regulations in the jurisdictions in which it operates. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings involving environmental matters. A number of factors affect the cost of environmental remediation, including the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing improvements in remediation techniques. Taking these factors into consideration, the Company estimates the undiscounted costs of remediation, which will be incurred over several years, and accrues an amount consistent with the estimates of these costs when it is probable that a liability has been incurred. At June 30, 2010 and December 31, 2009, the Company has recorded environmental liabilities of $2.5 million and $2.8 million, respectively, related to remediation and decommissioning at the Company’s closed manufacturing sites in Newark, New Jersey and Vasset, France. In addition, at June 30, 2010, the Company has a $1.3 million environmental liability associated with the Joplin, Missouri site acquired in the EaglePicher Technologies acquisition. Although it is difficult to quantify the potential impact of compliance with, or liability under, environmental protection laws, the Company believes that any amount it may be required to pay in connection with environmental matters is not reasonably likely to exceed amounts accrued by an amount that would have a material adverse effect upon its financial condition, results of operations or cash flows.

From time to time, the Company is subject to various legal and regulatory proceedings, claims and assessments that arise in the normal course of business. The ultimate resolution of such proceedings, claims and assessments is inherently unpredictable and, as a result, the Company’s estimates of liability, if any, are subject to change and actual results may materially differ from the Company’s estimates. The Company’s estimate of any costs to be incurred as a result of these proceedings, claims and assessments are accrued when the liability is considered probable and the amount can be reasonably estimated. The Company believes the amount of any potential liability with respect to legal and regulatory proceedings, claims and assessments will not have a material adverse effect upon its financial condition, results of operations or cash flows.

Note 13 — Goodwill

Goodwill is tested for impairment on an annual basis and more often if indicators of impairment exist. The goodwill impairment test is a two-step process. During the first step, the Company estimates the fair value of the reporting unit (with goodwill) and compares that amount to the carrying value of that reporting unit. If the estimated fair value of the reporting unit is less than its carrying value, the “Intangibles—Goodwill and Other” topic of the ASC requires a second step to determine the implied fair value of goodwill of the reporting unit, and a comparison of that amount to the carrying value of the goodwill of the reporting unit. This second step includes valuing all of the tangible and intangible assets and liabilities of the reporting unit as if they had been acquired in a business combination.

In the three and six months ended June 30, 2009, the Company recorded non-cash charges of $35.0 million and $37.6 million, respectively, in the Specialty Chemicals segment for the impairment of goodwill related to the Advanced Organics, Ultra Pure Chemicals (“UPC”) and Photomasks reporting units. (The charge is net of a $4.1 million adjustment to the estimated goodwill impairment charge of $8.8 million taken in the fourth quarter of 2008 related to the UPC reporting unit as a result of the Company finalizing its impairment analysis in the first quarter of 2009.)

During the first quarter of 2009, impairment indicators caused the Company to conduct an interim impairment test for its Advanced Organics reporting unit. Those indicators included operating losses in excess of forecast in the first quarter of 2009 and revisions made to the 2009 forecast and outlook beyond 2009 as a result of the decline in the Company’s business outlook primarily due to further deterioration in certain end markets. As a result of this impairment analysis, the Company concluded that, as of March 31, 2009, the carrying value of its Advanced Organics reporting unit exceeded its estimated fair value. In the first quarter of 2009, the Company recorded a goodwill impairment charge of $6.8 million to write off all of the goodwill related to the Advanced Organics reporting unit.

The Company concluded that operating losses in certain reporting units for the first six months of 2009 and the revisions to estimated future cash flows and growth rates were potential indicators of impairment and an interim goodwill impairment test was performed as of June 30, 2009. In the second quarter of 2009, the Company recorded an estimated goodwill impairment charge of $35.0 million to write off $21.0 million of goodwill related to the UPC reporting unit and $14.0 million of goodwill related to the Photomasks reporting unit.

The primary factors contributing to the goodwill impairment charges in 2009 were lower assumptions for revenue and volume growth in 2009 and beyond and the associated impact on operating cash flow from these reduced projections. The Company reviewed and updated as deemed necessary all of the assumptions used in its discounted cash flow (“DCF”) model during the 2009 impairment testing. The estimates and judgments that most significantly affect the fair value calculation are future operating cash flow assumptions and the weighted average cost of capital used in the DCF model. The Company believes the assumptions used in the 2009 impairment testing were consistent with the risk inherent in the business models of the reporting units at the time the impairment tests were performed.

Note 14 — Termination of Retiree Medical Plan

In June 2009, the Company announced a plan to terminate its unfunded postretirement medical and life insurance plan. As a result of such action, benefits available to eligible employees and retirees ceased on August 31, 2009. The Company recognized a $4.7 million gain on the termination for the three and six months ended June 30, 2009. The $4.7 million gain, which is included in Corporate for segment reporting, is net of reversal of unrecognized actuarial gain of $0.1 million.

Note 15 — Share-Based Compensation

Under the 2007 Incentive Compensation Plan (the “2007 Plan”), the Company may grant stock options, stock appreciation rights, restricted stock awards and phantom stock and restricted stock unit awards to selected employees and non-employee directors. The 2007 Plan also provides specifically for the issuance of common stock to non-employee directors as all or part of their annual compensation for serving as directors, as may be determined by the board of directors. The Unaudited Condensed Statements of Consolidated Operations include share-based compensation expense for option grants, restricted stock awards and restricted stock unit awards granted to employees as a component of Selling, general and administrative expenses in the amount of $1.0 million and $2.8

million for the three and six months ended June 30, 2010, respectively, and $1.4 million and $3.0 million for the three and six months ended June 30, 2009, respectively. At June 30, 2010, there was $7.4 million of total unrecognized compensation expense related to nonvested share-based awards. That cost is expected to be recognized as follows: $2.2 million in the remaining six months of 2010, $3.1 million in 2011, $2.0 million in 2012 and $0.1 million in 2013. Unearned compensation expense is recognized over the vesting period for the particular grant. Total unrecognized compensation cost will be adjusted for future changes in actual and estimated forfeitures and fluctuations in the fair value of restricted stock unit awards.

Non-employee directors of the Company currently are paid a portion of their annual retainer in unrestricted shares of common stock. For purposes of determining the number of shares of common stock to be issued, shares are valued at the average of the high and low sale price of the Company’s common stock on the NYSE on the last trading day of the quarter. The Company issued 1,956 and 4,080 shares to non-employee directors during the three and six months ended June 30, 2010, respectively and 3,474 and 6,714 shares to non-employee directors during the three and six months ended June 30, 2009, respectively.

Stock Options

Options granted generally vest in equal increments over a three-year period from the grant date. Upon any change in control of the Company, as defined in the applicable plan, or upon death, disability or retirement, the stock options become 100% vested and exercisable. The Company accounts for options that vest over more than one year as one award and recognizes expense related to those awards on a straight-line basis over the vesting period. The Company granted stock options to purchase 238,050 and 188,003 shares of common stock during the six months ended June 30, 2010 and 2009, respectively. Included in the 2009 grants are stock options to purchase 7,703 shares of common stock with a vesting period of one year, which were granted to the Company’s chief executive officer in connection with payment of his 2008 high-performance bonus.

The fair value of options granted during the six months ended June 30, 2010 and 2009 was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted-average assumptions:

		2010				2009
Risk-free interest rate			2.7	%			2.1	%
Dividend yield			—				—
Volatility factor of Company common stock			0.58				0.59
Weighted-average expected option life (years)			6.0				6.0
Weighted-average grant-date fair value		$	17.23			$	11.23

The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the term of the options being valued. The dividend yield assumption is zero, as the Company intends to continue to retain earnings for use in the operations of the business and does not anticipate paying dividends in the foreseeable future. Expected volatilities are based on historical volatility of the Company’s common stock. The expected term of options granted is determined using the simplified method allowed by Staff Accounting Bulletin (“SAB”) No. 110 as historical data was not sufficient to provide a reasonable estimate. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.

The following table sets forth the number of shares and weighted-average grant-date fair value:

						Weighted
						Average Fair
						Value at Grant
		Shares				Date
Non-vested at January 1, 2010			337,812			$	18.96
Granted during the first six months of 2010			238,050			$	17.23
Vested during the first six months of 2010			(169,709	)		$	21.10
Forfeited during the first six months of 2010			(7,869	)		$	17.34
Non-vested at June 30, 2010			398,284			$	17.04
Non-vested at January 1, 2009			307,289			$	26.10
Granted during the first six months of 2009			188,003			$	11.23
Vested during the first six months of 2009			(129,366	)		$	24.78
Forfeited during the first six months of 2009			(14,367	)		$	15.83
Non-vested at June 30, 2009			351,559			$	18.91

The Company received cash payments of $3.8 million during the six months ended June 30, 2010 in connection with the exercise of stock options. The Company may use authorized and unissued or treasury shares to satisfy stock option exercises and restricted stock awards. The Company does not settle stock options for cash. The total intrinsic value of options exercised was $2.1 million during the six months ended June 30, 2010. The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option. There were no options exercised in the six months ended June 30, 2009.

A summary of the Company’s stock option activity for the six months ended June 30, 2010 is as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
(Aggregate intrinsic value in thousands)		Shares				Price				Term (Years)				Value
Outstanding at January 1, 2010			1,035,942			$	35.37
Granted			238,050			$	30.67
Exercised			(168,787	)		$	22.52
Expired unexercised			(4,699	)		$	53.83
Forfeited			(7,869	)		$	32.06
Outstanding at June 30, 2010			1,092,637			$	36.28				7.04			$	796
Vested or expected to vest at June 30, 2010			1,068,065			$	36.31				6.99			$	775
Exercisable at June 30, 2010			694,354			$	39.00				5.87			$	378

Restricted Stock — Performance-Based Awards

During the first six months of 2010 and 2009, the Company awarded 121,700 and 87,250 shares, respectively, of performance-based restricted stock that vest subject to the Company’s financial performance. The number of shares of restricted stock that ultimately vest is based upon the Company’s achievement of specific measurable performance criteria. A recipient of performance-based restricted stock may earn a total award ranging from 0% to 100% of the initial grant, with target being 50% of the initial grant. The shares awarded during 2010 will vest upon the satisfaction of established performance criteria based on consolidated EBITDA Margin (defined as operating profit plus depreciation and amortization expense divided by revenue) measured against a predetermined peer group, and average return on net assets, in each case over a three-year performance period ending December 31, 2012. The shares awarded during 2009 will vest upon the satisfaction of the same performance criteria, measured in each case over a three-year performance period ending December 31, 2011. In addition, 60,200 shares were awarded during 2008 and will vest upon the satisfaction of established performance criteria based on consolidated operating profit and average return on net assets, measured in each case over a three-year performance period ending December 31, 2010.

The performance period for 86,854 shares awarded during 2007 ended on December 31, 2009. A total of 80,600 of the shares awarded during 2007 were subject to vesting based upon the level of satisfaction of established performance criteria based on the Company’s consolidated operating profit and average return on net assets, in each case over the three-year performance period ended December 31, 2009. Based upon the level of satisfaction of the performance objectives as determined by the Compensation Committee in March 2010, 74,676 performance-based shares vested and were issued in the first quarter of 2010. Upon vesting, employees surrendered 26,651 shares of common stock to the Company to pay required minimum withholding taxes applicable to the vesting of restricted stock. The surrendered shares are held by the Company as treasury stock. The remaining 6,254 shares issued in 2007 did not vest as the Company did not meet an established earnings target during any one of the years in the three-year performance period ended December 31, 2009.

The value of the performance-based restricted stock awards was based upon the market price of an unrestricted share of the Company’s common stock at the date of grant. The Company recognizes expense related to performance-based restricted stock ratably over the requisite performance period based upon the number of shares that are anticipated to vest. The number of shares anticipated to vest is evaluated quarterly and compensation expense is adjusted accordingly. Upon any change in control of the Company, as defined in the applicable plan, or upon retirement, the shares become 100% vested at the target level. In the event of death or disability, a pro rata number of shares remain eligible for vesting at the end of the performance period.

A summary of the Company’s performance-based restricted stock awards for the six months ended June, 2010 is as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Non-vested at January 1, 2010			221,579			$	37.52
Granted			121,700			$	30.67
Vested			(74,676	)		$	41.43
Forfeited			(12,928	)		$	42.87
Non-vested at June 30, 2010			255,675			$	32.84
Expected to vest at June 30, 2010			27,410