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.

Delaware (State or other jurisdiction of incorporation or organization)		52-1736882 (I.R.S. Employer Identification No.)
127 Public Square 1500 Key Tower Cleveland, Ohio (Address of principal executive offices)		44114-1221 (Zip Code)

216-781-0083
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant 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 o 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 (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of July 31, 2009 there were 30,720,470 shares of Common Stock, par value $.01 per share, outstanding.

 

 

OM Group, Inc.
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION			2
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			44
Item 4. Controls and Procedures			44
PART II — OTHER INFORMATION			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 6. Exhibits			46
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Signatures			47
EX-31.1
EX-31.2
EX-32

Part I — FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

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

		June 30,				December 31,
		2009				2008
(In thousands, except share data)
ASSETS:
Current assets
Cash and cash equivalents		$	268,273			$	244,785
Accounts receivable, less allowances			111,680				130,217
Inventories			268,711				306,128
Refundable and prepaid income taxes			64,404				55,059
Other current assets			34,845				59,227
Total current assets			747,913				795,416
Property, plant and equipment, net			242,508				245,202
Goodwill			232,136				268,677
Intangible assets			82,033				84,824
Notes receivable from joint venture partner, less allowance			13,915				13,915
Other non-current assets			31,199				26,393
Total assets		$	1,349,704			$	1,434,427
LIABILITIES:
Current liabilities
Current portion of long-term debt		$	—			$	80
Accounts payable			83,052				89,470
Accrued income taxes			11,419				17,677
Accrued employee costs			18,791				31,168
Other current liabilities			21,762				21,074
Total current liabilities			135,024				159,469
Long-term debt			—				26,064
Deferred income taxes			28,658				26,764
Other non-current liabilities			45,299				44,052
Total liabilities			208,981				256,349
EQUITY:
OM Group, Inc. 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; 30,429,327 shares issued in 2009 and 30,317,403 shares issued 2008			304				303
Capital in excess of par value			566,159				563,454
Retained earnings			558,757				602,365
Treasury stock (166,332 in 2009 and 136,328 shares in 2008, at cost)			(6,014	)			(5,490	)
Accumulated other comprehensive loss			(24,061	)			(29,983	)
Total OM Group, Inc. stockholders’ equity			1,095,145				1,130,649
Noncontrolling interest			45,578				47,429
Total equity			1,140,723				1,178,078
Total liabilities and equity		$	1,349,704			$	1,434,427

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Three Months Ended June 30,								Six Months Ended June 30,
(In thousands, except per share data)		2009				2008				2009				2008
Net sales		$	203,352			$	510,825			$	395,058			$	991,620
Cost of products sold			168,918				384,802				334,009				728,931
Gross profit			34,434				126,023				61,049				262,689
Selling, general and administrative expenses			33,581				42,444				68,439				84,476
Goodwill impairment, net			35,000				—				37,629				—
Gain on termination of retiree medical plan			(4,693	)			—				(4,693	)			—
Operating profit (loss)			(29,454	)			83,579				(40,326	)			178,213
Other income (expense):
Interest expense			(236	)			(547	)			(532	)			(907	)
Interest income			236				408				533				874
Foreign exchange gain (loss)			(216	)			102				865				748
Other expense, net			(160	)			(284	)			(210	)			(194	)
			(376	)			(321	)			656				521
Income (loss) from continuing operations before income tax expense			(29,830	)			83,258				(39,670	)			178,734
Income tax expense			(3,480	)			(22,306	)			(5,729	)			(49,451	)
Income (loss) from continuing operations, net of tax			(33,310	)			60,952				(45,399	)			129,283
Loss from discontinued operations, net of tax			(325	)			(362	)			(61	)			(731	)
Consolidated net income (loss)			(33,635	)			60,590				(45,460	)			128,552
Net (income) loss attributable to the noncontrolling interest			(1,696	)			(4,358	)			1,852				(17,100	)
Net income (loss) attributable to OM Group, Inc.		$	(35,331	)		$	56,232			$	(43,608	)		$	111,452
Earnings per common share — basic:
Income (loss) from continuing operations attributible to OM Group, Inc. common shareholders		$	(1.16	)		$	1.88			$	(1.44	)		$	3.73
Loss from discontinued operations attributible to OM Group, Inc. common shareholders			(0.01	)			(0.01	)			—				(0.02	)
Net income (loss) attributable to OM Group, Inc. common shareholders		$	(1.17	)		$	1.87			$	(1.44	)		$	3.71
Earnings per common share — assuming dilution:
Income (loss) from continuing operations attributible to OM Group, Inc. common shareholders		$	(1.16	)		$	1.86			$	(1.44	)		$	3.69
Loss from discontinued operations attributible to OM Group, Inc. common shareholders			(0.01	)			(0.01	)			—				(0.02	)
Net income (loss) attributable to OM Group, Inc. common shareholders		$	(1.17	)		$	1.85			$	(1.44	)		$	3.67
Weighted average shares outstanding
Basic			30,256				30,072				30,222				30,051
Assuming dilution			30,256				30,314				30,222				30,365
Amounts attributable to OM Group, Inc. common shareholders:
Income (loss) from continuing operations, net of tax		$	(35,006	)		$	56,594			$	(43,547	)		$	112,183
Loss from discontinued operations, net of tax			(325	)			(362	)			(61	)			(731	)
Net income (loss)		$	(35,331	)		$	56,232			$	(43,608	)		$	111,452

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)		2009				2008				2009				2008
Consolidated net income (loss)		$	(33,635	)		$	60,590			$	(45,460	)		$	128,552
Foreign currency translation adjustments			16,266				(317	)			5,643				9,064
Reversal of accumulated unrecognized gain on retiree medical plan			(137	)			—				(137	)			—
Reclassification of hedging activities into earnings, net of tax			132				328				90				487
Unrealized gain (loss) on cash flow hedges, net of tax			(185	)			(274	)			326				(766	)
Net change in accumulated other comprehensive income (loss)			16,076				(263	)			5,922				8,785
Comprehensive income (loss)			(17,559	)			60,327				(39,538	)			137,337
Comprehensive (income) loss attributable to noncontrolling interest			(1,699	)			(4,359	)			1,851				(17,103	)
Comprehensive income (loss) attributable to OM Group, Inc.		$	(19,258	)		$	55,968			$	(37,687	)		$	120,234

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Six Months Ended June 30,
(In thousands)		2009				2008
Operating activities
Consolidated net income (loss)		$	(45,460	)		$	128,552
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
Loss from discontinued operations			61				731
Depreciation and amortization			26,755				27,538
Share-based compensation expense			3,128				4,658
Tax deficiency (excess tax benefit) from exercise/vesting of share awards			422				(1,111	)
Foreign exchange gain			(865	)			(748	)
Goodwill impairment charges, net			37,629				—
Gain on termination of retiree medical plan			(4,693	)			—
Gain on cobalt forward purchase contracts			—				(4,002	)
Interest income received from consolidated joint venture partner			—				3,776
Other non-cash items			6,197				(2,524	)
Changes in operating assets and liabilities
Accounts receivable			18,569				(52,992	)
Inventories			37,416				(62,827	)
Accounts payable			(6,417	)			(12,299	)
Other, net			(5,108	)			(13,835	)
Net cash provided by operating activities			67,634				14,917
Investing activities
Expenditures for property, plant and equipment			(15,363	)			(16,512	)
Proceeds from loans to consolidated joint venture partner			—				4,514
Professional fees related to acquisitions			—				(3,775	)
Proceeds from settlement of cobalt forward purchase contracts			—				7,661
License agreement			(1,500	)			—
Expenditures for software			(891	)			(1,232	)
Net cash used for investing activities			(17,754	)			(9,344	)
Financing activities
Payments of revolving line of credit and long-term debt			(26,141	)			(45,438	)
Borrowings from revolving line of credit			—				70,000
Distributions to joint venture partners			—				(14,934	)
Payment related to surrendered shares			(524	)			(3,251	)
Proceeds from exercise of stock options			—				872
(Tax deficiency) excess tax benefit from exercise/vesting of share awards			(422	)			1,111
Net cash provided by (used for) financing activities			(27,087	)			8,360
Effect of exchange rate changes on cash			695				1,268
Cash and cash equivalents
Increase in cash and cash equivalents			23,488				15,201
Balance at the beginning of the period			244,785				100,187
Balance at the end of the period		$	268,273			$	115,388

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Six Months Ended June 30,
(In thousands)		2009				2008
Common Stock — Shares Outstanding, net of Treasury Shares
Beginning balance			30,181				30,061
Shares issued under share-based compensation plans			82				116
			30,263				30,177
Common Stock — Dollars
Beginning balance		$	303			$	301
Shares issued under share-based compensation plans			1				2
			304				303
Capital in Excess of Par Value
Beginning balance			563,454				554,933
Share-based compensation — employees			2,993				4,503
Share-based compensation — non-employee directors			135				155
(Tax deficiency) excess tax benefit from exercise/vesting of share awards			(422	)			1,111
Shares issued under share-based compensation plans			(1	)			870
			566,159				561,572
Retained Earnings
Beginning balance, as originally reported			602,365				467,726
Adoption of EITF No. 06-10 in 2008			—				(193	)
Beginning balance, as adjusted			602,365				467,533
Net income (loss) attributable to OM Group, Inc.			(43,608	)			111,452
			558,757				578,985
Treasury Stock
Beginning balance			(5,490	)			(2,239	)
Reacquired shares			(524	)			(3,251	)
			(6,014	)			(5,490	)
Accumulated Other Comprehensive Income (Loss)
Beginning balance			(29,983	)			7,665
Foreign currency translation			5,643				9,064
Reclassification of hedging activities into earnings, net of tax benefit of $31 and $171 in 2009 and 2008, respectively			90				487
Unrealized gain (loss) on cash flow hedges, net of tax (expense) benefit of ($115) and $269 in 2009 and 2008, respectively			326				(766	)
Reversal of accumulated unrecognized gain on retiree medical plan			(137	)			—
			(24,061	)			16,450
Total OM Group Inc. Stockholders’ Equity			1,095,145				1,151,820
Noncontrolling interest
Beginning balance			47,429				52,314
Net income (loss) attributable to the noncontrolling interest			(1,852	)			17,100
Distributions to joint venture partners			—				(14,934	)
Foreign currency translation			1				3
			45,578				54,483
Total Equity		$	1,140,723			$	1,206,303

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 diversified global developer, producer and marketer of value-added specialty chemicals and advanced materials that are essential to complex chemical and industrial processes. 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.

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, 2009 and the results of its operations and its comprehensive income for the three and six months ended June 30, 2009 and 2008 and the results of its cash flows and changes in stockholders’ equity for the six months ended June 30, 2009 and 2008 have been included. The Company evaluated subsequent events through August 6, 2009, the date the financial statements were issued. The balance sheet at December 31, 2008 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, 2008.

During the second quarter of 2009, the Company corrected an immaterial error related to its 2008 financial statements, which had the effect of increasing cost of products sold by $1.5 million and net loss attributable to OM Group, Inc. by $1.0 million. As disclosed in the First Quarter 2009 Form 10-Q, during the first quarter of 2009, the Company corrected another immaterial error related to its 2008 financial statements, which had the effect of increasing income tax expense by $1.9 million and net loss attributable to OM Group, Inc. by $1.0 million. The Company believes these errors, individually and in the aggregate, are not material to its 2008 financial statements.

Note 2 — Recently Issued Accounting Standards

Accounting Standards adopted in 2009:

SFAS No. 165: In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events.” This standard establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and shall be applied to subsequent events not addressed in other applicable generally accepted accounting principles. SFAS No. 165, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS No. 165 during the second quarter of 2009. See Note 1 for the required disclosure.

SFAS No. 157: In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements but does not require any new fair value measurements. SFAS No. 157 only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments (SFAS No. 123R “Share Based Payment”). As of January 1, 2008, in accordance with FASB Staff Position (“FSP”) 157-2, the Company has adopted the provisions of SFAS No. 157 with respect to financial assets and liabilities that are measured at fair value within the financial statements. As of January 1, 2009, the Company adopted SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities measured at fair value on a non-recurring basis. Examples of nonfinancial assets include goodwill, intangibles, and other long-lived assets. The adoption did not have a material impact on the Company’s results of operations or financial position but did change the disclosures related to nonfinancial assets and nonfinancial liabilities measured at fair value on a non-recurring basis. See Note 7.

SFAS No. 160: In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,

an amendment of Accounting Research Bulletin No. 51”. SFAS No. 160 requires (i) that noncontrolling (minority) interests be reported as a component of shareholders’ equity, (ii) that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, (iii) that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, (iv) that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and (v) that sufficient disclosures are provided that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The Company adopted SFAS No. 160 on January 1, 2009. The adoption did not have any impact on the Company’s results of operations or financial position but did change the financial statement presentation related to noncontrolling (minority) interests. The financial statement presentation requirement has been applied retrospectively for all periods presented. Certain reclassifications have been made to prior period amounts to conform to the current period presentation under SFAS No. 160. The adoption resulted in a $47.4 million reclassification of noncontrolling minority interests from long-term liabilities to equity on the December 31, 2008 Unaudited Condensed Consolidated Balance Sheet.

SFAS No. 141R: In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”. SFAS No. 141R changes how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R requires restructuring and acquisition-related costs to be recognized separately from the acquisition and establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The Company adopted SFAS No. 141R on January 1, 2009. SFAS No. 141R will be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009.

SFAS No. 161: On March 19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement 133.” SFAS No. 161 enhances required disclosures regarding derivatives and hedging activities, including how: (i) an entity uses derivative instruments, (ii) derivative instruments and related hedged items are accounted for under SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities” and (iii) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company adopted SFAS No. 161 on January 1, 2009. The adoption did not have any impact on the Company’s results of operations or financial position but did change the disclosures related to derivative instruments held by the Company. See Note 6.

FSP No. 142-3: In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. 142-3 allows the Company to use its historical experience in renewing or extending the useful life of intangible assets. The Company adopted FSP No. 142-3 on January 1, 2009. The Company will apply SFAS No. 142-3 prospectively to intangible assets acquired after January 1, 2009. The adoption did not have any impact on the Company’s results of operations, financial position or related disclosures.

EITF No. 08-6: In November 2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 08-6, “Equity Method Investment Accounting Considerations.” EITF No. 08-6 addresses a number of matters associated with the impact that SFAS No. 141R and SFAS No. 160 might have on the accounting for equity method investments. EITF No. 08-6 provides guidance on how an equity method investment should initially be measured, how it should be tested for impairment and how changes in classification from equity method to cost method should be treated, as well as other issues. The Company adopted EITF No. 08-6 on January 1, 2009. The Company will apply EITF No. 08-6 prospectively. The adoption did not have any impact on the Company’s results of operations, financial position or related disclosures.

FSP EITF No. 03-6-1: In June 2008, the FASB ratified FSP EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which clarifies EITF No. 03-6, “Participating Securities and the Two-Class Method Under FAS No. 128.” FSP EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, “Earnings per Share.” Under EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of EPS pursuant to the two-class method. The Company adopted EITF 03-6-1 on January 1, 2009. Share-based payment awards granted by the Company do not contain nonforfeitable rights to dividends, therefore the adoption did not have any impact on the Company’s results of operations, financial position or related disclosures.

FSP FAS No. 141(R)-1: In April 2009, the FASB issued FSP FAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities

Assumed in a Business Combination That Arise from Contingencies”. FSP FAS No. 141(R)-1 requires an acquirer to recognize assets acquired and liabilities assumed in a business combination that arise from contingencies at fair value, if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would be recognized in accordance with SFAS No. 5, “Accounting for Contingencies.” FSP FAS No. 141(R)-1 will be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009.

FSP FAS No. 107-1 and APB No. 28-1: In April 2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” amending FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” effective for interim reporting periods ending after June 15, 2009. FSP FAS No. 107-1 and APB No. 28-1 requires disclosure about the fair value of financial instruments in interim periods. The Company adopted FSP FAS No. 107-1 and APB No. 28-1 in the second quarter of 2009. The adoption did not have any impact on the Company’s results of operations or financial position but did change the disclosures related to financial instruments held by the Company. See Note 7.

Accounting Standards Not Yet Adopted

FSP FAS No. 132(R)-1: In December 2008, the FASB issued FSP FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” amending FASB Statement No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” effective for fiscal years ending after December 15, 2009. The Company will adopt FSP FAS No. 132(R)-1 in the fourth quarter of 2009. FSP FAS No. 132(R)-1 requires an employer to disclose investment policies and strategies, categories, fair value measurements, and significant concentration of risk among its pension or other postretirement benefit plan assets. The adoption of FSP FAS No. 132(R)-1 will change the disclosures related to pension assets but is not expected to have a material effect on the Company’s consolidated financial statements.

SFAS No. 167: In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46R. SFAS No. 167 amends FASB Interpretation (“FIN”) No. 46 (revised December 2003), “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. SFAS No. 167 requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. SFAS No. 167 is effective for annual periods beginning after Nov. 15, 2009. The Company has not determined the effect, if any, the adoption of SFAS No. 167 will have on its results of operations or financial position.

Note 3 — Inventories

Inventories consist of the following:

		June 30,				December 31,
		2009				2008
Raw materials and supplies		$	147,804			$	168,060
Work-in-process			17,375				14,797
Finished goods			103,532				123,271
		$	268,711			$	306,128

The December 31, 2008 balance includes the effect of a $27.7 million charge to reduce the carrying value of certain inventories to market value, which was lower than cost at December 31, 2008, due primarily to the declining price of cobalt in the second half of 2008. Reductions in carrying value at December 31 are deemed to establish a new cost basis. Inventory is not written up if estimates of market value subsequently improve.

Note 4 – Goodwill and Other Intangible Assets

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 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, SFAS No. 142 requires a second step to determine the implied fair value of goodwill of the reporting unit, and to compare it 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 it had been acquired in a business combination.

Under SFAS No. 142, reporting units are defined as an operating segment or one level below an operating segment (i.e. component level or reporting unit). The Company tests goodwill at the component level. The Company’s reporting units are Advanced Materials, Electronic Chemicals, Advanced Organics, Ultra Pure Chemicals (“UPC”) and Photomasks. The Company is organized into two segments: Advanced Materials and Specialty Chemicals. The Specialty Chemicals segment is comprised of Electronic Chemicals, Advanced Organics, UPC and Photomasks.

To test goodwill for impairment, the Company is required to estimate the fair value of each of its reporting units. Since quoted market prices in an active market are not available for the Company’s reporting units, the Company uses other valuation techniques. The Company has developed a model to estimate the fair value of the reporting units utilizing a discounted cash flow valuation technique (“DCF model”). The Company selected the DCF model as it believes it is comparable to what would be used by market participants to estimate its fair value. The impairment test incorporates the Company’s estimates of future cash flows; allocations of certain assets, liabilities and cash flows among reporting units; future growth rates; terminal value amounts; and the applicable weighted-average cost of capital (the “WACC”) used to discount those estimated cash flows. These estimates are based on management’s judgment. The estimates and projections used in the estimate of fair value are consistent with the Company’s current forecast and long-range plans.

The Company conducts its annual goodwill impairment test as of October 1. The results of the testing as of October 1, 2008 confirmed the fair value of each of the reporting units exceeded its carrying value and therefore no impairment loss was required to be recognized. However, during the fourth quarter of 2008, indicators of potential impairment caused the Company to conduct an additional impairment test as of December 31, 2008. Those indicators included the fact that the Company’s stock has been trading below net book value per share since the end of the second quarter of 2008, the incurrence of operating losses in the fourth quarter of 2008 and revisions made to the 2009 plan, and significant deterioration in the capital markets in the fourth quarter of 2008 that resulted in an increase to the respective WACC calculations.

The results of the testing as of December 31, 2008 confirmed the carrying value of the UPC reporting unit exceeded its fair value. As such, the Company undertook a preliminary step-two analysis in accordance with SFAS No. 142 in order to determine the amount of the goodwill impairment. In the fourth quarter of 2008, the Company recorded an estimated goodwill impairment charge of $8.8 million (of a total of $33.0 million of goodwill related to the UPC reporting unit). The Company finalized the step-two analysis during the first quarter of 2009 and concluded the goodwill impairment charge for UPC was $4.7 million; therefore, the Company recorded a $4.1 million adjustment in the first quarter of 2009 to reverse a portion of the 2008 charge.

During the first quarter of 2009 additional 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. In accordance with SFAS No. 142, the Company completed step one of the impairment analysis and concluded that, as of March 31, 2009, the carrying value of its Advanced Organics reporting unit exceeded its fair value. As such, the Company undertook a preliminary step-two analysis in accordance with SFAS No. 142 in order to determine the amount of the goodwill impairment. In the first quarter of 2009, the Company recorded an estimated goodwill impairment charge of $6.8 million to write off all of the goodwill related to the Advanced Organics reporting unit. The Company finalized step two of the impairment analysis in the second quarter of 2009 and determined that no adjustment to the $6.8 million charge was necessary.

During the second quarter of 2009 the Company again revised its 2009 forecast and outlook beyond 2009 to reflect the continued economic downturn and, consequently, the Company’s assumptions regarding growth and recovery trends in the markets it serves. Also during the second quarter of 2009, the Company updated its assumption with respect to the probability of future cash flows from opportunities related to a license agreement associated with UPC. The license agreement was an existing asset of UPC when it was acquired from Rockwood Specialties Group, Inc. in 2007. Based on the uncertain impact the current state of the economy may have on both the timing and execution of activities from this license agreement, the Company has concluded that no estimated future cash flows from the license agreement should be included in the valuation of the UPC reporting unit. The Company continues to own the license agreement and therefore would participate in any future market opportunities should they occur.

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 required as of June 30, 2009. In accordance with SFAS No. 142, the Company completed step-one of the impairment analysis and concluded that, as of June 30, 2009, the carrying value of its UPC and Photomasks reporting units exceeded their estimated fair values. As such, the

Company undertook a preliminary step-two analysis in accordance with SFAS No. 142 in order to determine the amount of the goodwill impairment. 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 $35.0 million and $37.6 million impairment charges in the three and six months ended June 30, 2009, respectively, were lower assumptions for revenue and volume growth in 2009 and beyond and the associated impact on operating cash flow from these reduced projections, and the change in the Company’s assumption with respect to the probability of future cash flows from opportunities related to the UPC license agreement. The Company reviewed and updated as deemed necessary all of the assumptions used in its DCF model during the annual and 2009 interim impairment testing. The estimates and judgments that most significantly affect the fair value calculation are future operating cash flow assumptions and the WACC used in the DCF model. The Company believes the assumptions used in the annual and 2009 interim impairment testing were consistent with the risk inherent in the business models of the reporting units at the time the impairment tests were performed. Any adjustments to the $35.0 million estimate will be recorded upon finalization of step two of the impairment analysis, which the Company expects to complete in the third quarter of 2009. The total amount of goodwill of the UPC and Photomasks reporting units prior to the impairment charge was $28.5 million and $22.3 million, respectively.

The Company determined that the estimated fair value of the Advanced Materials and Electronic Chemicals reporting units exceeded their carrying values, therefore; no goodwill impairment existed in those reporting units as of June 30, 2009. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment testing for the Advanced Materials and Electronic Chemicals reporting units, the Company applied a hypothetical 5% decrease to the estimated fair value and separately applied a hypothetical increase of 100 basis points to the WACC and determined that there would still be no impairment of goodwill for the Advanced Materials and Electronic Chemicals reporting units.

The change in the carrying amount of goodwill by segment is as follows:

		Advanced				Specialty
		Materials				Chemicals				Consolidated
Balance at December 31, 2008		$	103,326			$	165,351			$	268,677
Foreign currency translation adjustments			—				1,088				1,088
Q4 2008 goodwill impairment charge adjustment			—				4,139				4,139
2009 goodwill impairment charge			—				(41,768	)			(41,768	)
Balance at June 30, 2009		$	103,326			$	128,810			$	232,136

During the second quarter of 2009, the Company determined that the license agreement in the UPC reporting unit, as previously discussed, and certain indefinite-lived trade names in its Photomasks reporting unit were impaired due to downward revisions in estimates of future revenue and cash flows. As a result, the Company recorded an impairment charge of $0.9 million for the license agreement and $0.3 million related to the indefinite-lived trade names in the second quarter of 2009 in selling, general and administrative expenses in the Unaudited Condensed Statements of Consolidated Operations.

Note 5 — Debt

The Company has a Revolving Credit Agreement (the “Revolver”) with availability of up to $100.0 million, including up to the equivalent of $25.0 million in Euros or other foreign currencies. The Revolver includes an “accordion” feature under which the Company may increase the availability by $50.0 million to a maximum of $150.0 million subject to certain conditions and discretionary approvals of the lenders. At June 30, 2009, the Company was in compliance with such conditions but would need to obtain incremental credit commitments by new and/or existing lenders under the existing terms and conditions of the Revolver to access the accordion feature. To date the Company has not sought to borrow under the accordion feature. Obligations under the Revolver are guaranteed by each of the Company’s U.S. subsidiaries and are secured by a lien on the assets of the Company and such subsidiaries. The Revolver contains certain covenants, including financial covenants, that require the Company to (i) maintain a minimum net worth and (ii) not exceed a certain debt to adjusted earnings ratio. As of June 30, 2009, the Company was in compliance with all of the covenants under the Revolver. Minimum net worth is defined as an amount equal to the sum of $826.1 million plus 75% of consolidated net income for each quarter ending after March 1, 2007 for which consolidated net income is positive. Minimum net worth was $1,050.1 million at June 30, 2009. Consolidated net worth, defined as total OM Group, Inc. stockholders’ equity, was

$1,095.1 million at June 30, 2009. The Company is required to maintain a debt to adjusted earnings ratio of consolidated net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) of no more than 3.5 times. Consolidated net debt is defined as consolidated total debt less cash and cash equivalents. At June 30, 2009, the Company had no consolidated net debt. The Revolver includes a cross default provision whereby an event of default under other debt obligations, as defined, will be considered an event of default under the Revolver. The Company has the option to specify that interest be calculated based either on a London interbank offered rate (“LIBOR”) plus a calculated margin amount, or on a base rate. The applicable margin for the LIBOR rate ranges from 0.50% to 1.00%. The Revolver also requires the payment of a fee of 0.125% to 0.25% per annum on the unused commitment. The margin and unused commitment fees are subject to quarterly adjustment based on a certain debt-to-adjusted-earnings ratio. The Revolver provides for interest-only payments during its term, with principal due at maturity on December 20, 2010. During the second quarter of 2009, the Company repaid the outstanding revolver balance of $25.0 million with available cash on hand. The outstanding Revolver balance was $0 and $25.0 million at June 30, 2009 and December 31, 2009, respectively.

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 six 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, 2009 or December 31, 2008.

During the second quarter of 2009, the Company repaid the remaining $1.1 million balance of a term loan with available cash on hand. The balance of the term loan was $1.1 million at December 31, 2008.

Debt consists of the following:

		June 30,				December 31,
		2009				2008
Revolving credit agreement		$	—			$	25,000
Notes payable — bank			—				1,144
			—				26,144
Less: Short-term debt			—				—
Less: Current portion of long-term debt			—				80
Total long-term debt		$	—			$	26,064

Note 6 — 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 banks 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 Sheet. 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, 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 June 30, 2009, the notional quantity of open contracts designated as cash flow hedges under SFAS No. 133 was 1.5 million pounds. The Company had no cash flow hedges at December 31, 2008. The outstanding contracts as of June 30, 2009 had maturities ranging up to 2 months. As of June 30, 2009, AOCI(L) includes a cumulative loss of $0.3 million, net of tax, related to these contracts, all of which is expected to be reclassified to earnings within the next twelve months.

Fair Value Hedges

From time to time, the Company enters into certain cobalt forward purchase contracts designated as fair value hedges. At December 31, 2008, the notional quantity of open contracts designated as fair value hedges under SFAS No. 133 was 0.3 million pounds. The Company had no fair value hedges at June 30, 2009.

Other Forward Contracts

During 2007, the Company entered into cobalt forward purchase contracts to establish a fixed margin and mitigate the risk of price volatility related to the sales during the second quarter of 2008 of cobalt-containing finished products that were priced based on a formula that included a fixed cobalt price component. These forward purchase contracts were not designated as hedging instruments under SFAS No. 133. Accordingly, these contracts were adjusted to fair value as of the end of each reporting period, with the gain or loss recorded in cost of products sold. The Company had no forward contracts at June 30, 2009 or December 31, 2008.

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 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 $9.5 million at June 30, 2009. The Company designated these derivatives as cash flow hedges of its forecasted foreign currency denominated expense. The outstanding contracts as of June 30, 2009 had maturities ranging up to 8 months. As of June 30, 2009, AOCI(L) includes a cumulative gain of $0.7 million, net of tax, related to these contracts, all of which is expected to be reclassified to earnings within the next twelve months.

The following table summarizes the fair value of derivative instruments designated as hedging instruments under SFAS No. 133 as recorded in the Unaudited Condensed Consolidated Balance Sheets:

		Derivative Assets
		June 30, 2009						December 31, 2008
		Balance sheet location		Fair value				Balance sheet location		Fair value
Euro forward contracts		Other current assets		$	1,000			n/a		$	—
Commodity contracts		n/a			—			Other current assets			143
Total				$	1,000					$	143

		Derivative Liabilities
		June 30, 2009						December 31, 2008
		Balance sheet location		Fair value				Balance sheet location		Fair value
Commodity contracts		Other current liabilities		$	438			Other current liabilities		$	200
Total				$	438					$	200

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 SFAS No. 133 Fair Value Hedging Relationships

				Amount of Gain (Loss) on Derivative
		Location of Gain (Loss)		Recognized in Income
		on Derivative		Three Months Ended
		Recognized in Income		June 30, 2009				June 30, 2008
Commodity contracts		Cost of products sold		$	—			$	(3,036	)

				Amount of Gain (Loss) on Derivative
		Location of Gain (Loss)		Recognized in Income
		on Derivative		Six Months Ended
		Recognized in Income		June 30, 2009				June 30, 2008
Commodity contracts		Cost of products sold		$	227			$	(2,988	)

Location of Gain

Amount of Gain (Loss) on Related

Hedged Items in SFAS

(Loss) on Related

Hedged Item Recognized in Income

No. 133 Fair Value

Hedged Item

Three Months Ended

Relationships

Recognized in Income

June 30, 2009

June 30, 2008

Commodity contracts

Firm commitment

Cost of products sold

$

—

$

3,036

Location of Gain

Amount of Gain (Loss) on Related

Hedged Items in SFAS

(Loss) on Related

Hedged Item Recognized in Income

No. 133 Fair Value

Hedged Item

Six Months Ended

Relationships

Recognized in Income

June 30, 2009

June 30, 2008

Commodity contracts

Firm commitment

Cost of products sold

$

(227

)

$

2,988

Derivatives in SFAS No. 133 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, 2009			June 30, 2008				June 30, 2009				June 30, 2008
Euro forward contracts	$	474		$	—			$	985			$	—
Commodity contracts		(659	)		(274	)			(659	)			(766	)
Total	$	(185	)	$	(274	)		$	326			$	(766	)

		Location of Gain (Loss)		Amount of Gain (Loss) Reclassified								Amount of Gain (Loss) Reclassified from
		Reclassified from		from AOCI(L) into Income (Effective								AOCI(L) into Income (Effective Portion)
		AOCI(L) into Income		Portion) for the Three Months Ended								for the Six Months Ended
		(Effective Portion)		June 30, 2009				June 30, 2008				June 30, 2009				June 30, 2008
Euro forward contracts		Cost of products sold		$	203			$	—			$	245			$	—
Commodity contracts		Net sales			(335	)			(328	)			(335	)			(487	)
Total				$	(132	)		$	(328	)		$	(90	)		$	(487	)

Amount of Gain (Loss)

Location of Gain (Loss)

Recognized on Derivative in

Amount of Gain (Loss) Recognized on

on Derivative

Income (Ineffective Portion) for

Derivative in Income (Ineffective

Recognized in Income

the Three Months Ended*

Portion) for the Six Months Ended*

(Ineffective Portion)

June 30, 2009

June 30, 2008

June 30, 2009

June 30, 2008

Euro forward contracts

n/a

$

—

$

—

$

—

$

—

Commodity contracts

n/a

—

—

—

—

Total

$

—

$

—

$

—

$

—

Derivatives Not Designated as Hedging Instruments under SFAS No. 133

		Location of Gain (Loss)		Amount of Loss Recognized in								Amount of Gain Recognized in
		Recognized in Income		Income on Derivative for the Three								Income on Derivative for the Six
		on Derivative		Months Ended								Months Ended
				June 30, 2009				June 30, 2008				June 30, 2009				June 30, 2008
Commodity contracts		Cost of products sold		$	—			$	(1,780	)		$	—			$	4,002
Total				$	—			$	(1,780	)		$	—			$	4,002

Note 7 — 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, 2009				Assets (Level 1)				Inputs (Level 2)				Inputs (Level 3)
Assets:
Foreign currency forward contracts		$	1,000			$	—			$	1,000			$	—
Total		$	1,000			$	—			$	1,000			$	—
Liabilities:
Commodity Contracts		$	438			$	—			$	438			$	—
Total		$	438			$	—			$	438			$	—

The Company uses significant other observable inputs to value derivative instruments used to hedge foreign currency and copper price volatility; therefore, they are classified within Level 2 of the valuation hierarchy

Cobalt forward purchase contracts are classified as Level 3, as their valuation is based on the expected future cash flows discounted to present value. Future cash flows are estimated using a theoretical forward price as quoted forward prices are not available. The following table provides a reconciliation of derivatives measured at fair value on a recurring basis which used Level 3 inputs for the period of December 31, 2008 to June 30, 2009:

		Fair Value Measurements
		Using Significant
		Unobservable Inputs (Level 3)
		Derivatives
December 31, 2008		$	(57	)
Total realized or unrealized gains (losses):
Included in earnings			227
Included in other comprehensive income			—
Purchases, issuances, and settlements			(170	)
Transfers in and/or out of Level 3			—
June 30, 2009		$	—

In accordance with the provisions of SFAS No. 142, goodwill of the UPC reporting unit was written down to its implied fair value of $28.3 million after completing step two in the first quarter of 2009. The resulting $4.1 million adjustment to the estimated goodwill impairment charge of $8.8 million recorded in the fourth quarter of 2008 was included in earnings for the first quarter of 2009. In the second quarter of 2009, the Company recorded an additional $21.0 million goodwill impairment charge related to the UPC reporting unit to write down goodwill with a carrying value of $28.5 million to its implied fair value of $7.5 million and recorded an impairment charge of $14.0 million related to the Photomasks reporting unit to write down goodwill with a carrying value of $22.3 million to its implied fair value of $8.3. Goodwill related to the Advanced Organics reporting unit with a carrying amount of $6.8 million was written down to its implied fair value of $0, resulting in an impairment charge of $6.8 million, which was included in earnings for the six months ended June 30, 2009. The fair value measurement of the reporting unit under the step-one analysis and the step-two analysis in their entirety are classified as Level 3 inputs.

As of June 30, 2009 the Company had an indefinite-lived trade name intangible asset in its Photomasks reporting unit and a license agreement in its UPC reporting unit that were accounted for at fair value on a nonrecurring basis due to downward revisions in estimates of future revenue and cash flows. The indefinite-lived trade name intangible asset was determined to have a fair value of $3.3 million resulting in a charge of $0.3 million, and the license agreement was determined to have no value resulting in a charge of

$0.9 million. Both charges were included in earnings for the three and six months ended June 30, 2009. The fair value measurements were calculated using unobservable inputs (discounted cash flow analyses), classified as Level 3, requiring significant management judgment due to the absence of quoted market prices or observable inputs for assets of a similar nature.

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. 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 8 — 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 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,
		2009				2008				2009				2008
United States		$	(19,291	)		$	(3,594	)		$	(34,308	)		$	(3,017	)
Outside the United States			(10,539	)			86,852				(5,362	)			181,751
		$	(29,830	)		$	83,258			$	(39,670	)		$	178,734

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Effective income tax rate			-11.7	%			26.8	%			-14.4	%			27.7	%

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 US statutory rate. In the three and six months ended June 30, 2009, US tax expense related to foreign earnings repatriation is fully offset by foreign tax credits and US losses. The effective income tax rate for the three and six months ended June 30, 2008 is lower than the U.S. statutory rate due primarily to income earned in foreign tax jurisdictions with lower statutory tax rates than the U.S. (primarily Finland) and a tax holiday in Malaysia. In the three and six months ended June 30, 2008, these factors were partially offset by tax expense related to foreign earnings repatriation during 2008.

The Malaysian tax holiday, which results from an investment incentive arrangement and expires on December 31, 2011, reduced income tax expense by $2.1 million and $4.0 million in the three and six months ended June 30, 2008, respectively. The benefit of the tax holiday on net income per diluted share was approximately $0.07 and $0.13 in the three and six months ended June 30, 2008, respectively.

Note 9 — 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, 2009								June 30, 2009
		2009				2008				2009				2008
(in thousands, except per share amounts)
Income (loss) from continuing operations attributable to OM Group, Inc. common shareholders		$	(35,006	)		$	56,594			$	(43,547	)		$	112,183
Weighted average shares outstanding — basic			30,256				30,072				30,222				30,051
Dilutive effect of stock options and restricted stock			—				242				—				314
Weighted average shares outstanding — assuming dilution			30,256				30,314				30,222				30,365
Earnings per common share:
Income (loss) from continuing operations attributable to OM Group, Inc. common shareholders — basic		$	(1.16	)		$	1.88			$	(1.44	)		$	3.73
Income (loss) from continuing operations attributable to OM Group, Inc. common shareholders — assuming dilution		$	(1.16	)		$	1.86			$	(1.44	)		$	3.69

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,
		2009				2008				2009				2008
(in thousands, except per share amounts)
Net income (loss) attributable to OM Group, Inc. common shareholders		$	(35,331	)		$	56,232			$	(43,608	)		$	111,452
Weighted average shares outstanding — basic			30,256				30,072				30,222				30,051
Dilutive effect of stock options and restricted stock			—				242				—				314
Weighted average shares outstanding — assuming dilution			30,256				30,314				30,222				30,365
Earnings per common share:
Net income (loss) attributable to OM Group, Inc. common shareholders — basic		$	(1.17	)		$	1.87			$	(1.44	)		$	3.71
Net income (loss) attributable to OM Group, Inc. common shareholders — assuming dilution		$	(1.17	)		$	1.85			$	(1.44	)		$	3.67

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 stock options and restricted

stock 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.

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. 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 them from the calculation of diluted earnings per share. For the three months ended June 30, 2008, share-based compensation awards for 128,023 shares were excluded from the diluted earnings per share calculation because they were antidilutive. For the six months ended June 30, 2008, share-based compensation awards for 172,725 shares were excluded from the diluted earnings per share calculation because they were antidilutive.

Note 10 — Commitments and Contingencies

The Company has contingent liabilities related to the former Precious Metals Group (“PMG”) operations in Brazil. The contingencies, which remain the responsibility of the Company to the extent the matters relate to the 2001-2003 period during which the Company owned PMG, are potential assessments by Brazilian taxing authorities related to duty drawback tax for items sold by PMG, and certain VAT and/or Service Tax assessments. The Company has assessed the current likelihood of an unfavorable outcome of these contingencies and concluded that it is reasonably possible but not probable. If the ultimate outcome of these contingencies is unfavorable, the loss, based on exchange rates at June 30, 2009, could be up to $12.2 million and would be recorded in discontinued operations.

The Company also has potential contingent liabilities with respect to environmental matters related to its former PMG operations in Brazil. The Company has been informed by the purchaser of the PMG operations of 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 is reviewing information made available to it on the environmental conditions, but cannot currently evaluate whether or not, or to what extent, it will be responsible for any remediation costs.

The Company is a party to various other legal proceedings incidental to its business and is subject to a variety of environmental and pollution control laws and regulations in the jurisdictions in which it operates. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings involving environmental matters. A number of factors affect the cost of environmental remediation, including the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing improvements in remediation techniques. Taking these factors into consideration, the Company 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, 2009 and December 31, 2008, the Company has recorded environmental liabilities of $2.9 million and $3.4 million, respectively, primarily related to remediation and decommissioning at the Company’s closed manufacturing sites in Newark, New Jersey and Vasset, France.

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

Note 11 — 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 will cease 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 12 — 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 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 total number of shares of common stock available for awards under the 2007 Plan (including any annual stock issuances made to non-employee directors) is 3,000,000. The 2007 Plan provides that no more than 1,500,000 shares of common stock may be the subject of awards that are not stock options or stock appreciation rights. In addition, no more than 250,000 shares of common stock may be awarded to any one person in any calendar year, whether in the form of stock options, restricted stock or another form of award. The 2007 Plan provides that all options granted must have an exercise price of not less than the per share fair market value on the date of grant and must have a term of no more than ten years.

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 of $1.4 million and $3.0 million for the three and six months ended June 30, 2009, respectively, and $2.4 million and $4.5 million for the three and six months ended June 30, 2008, respectively. At June 30, 2009, there was $6.2 million of total unrecognized compensation expense related to nonvested share-based awards. That cost is expected to be recognized as follows: $2.8 million in the remaining six months of 2009, $2.4 million in 2010, $0.9 million in 2011 and $0.1 million in 2012. 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 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, the 2007 Plan provides that shares are to be 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 3,474 and 6,714 shares to non-employee directors during the three and six months ended June 30, 2009, respectively and 972 and 2,750 shares to non-employee directors during the three and six months ended June 30, 2008, 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 188,003 and 166,675 shares of common stock during the first six months of 2009 and 2008, 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 first six months of 2009 and 2008 was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted-average assumptions:

		2009				2008
Risk-free interest rate			2.1	%			2.6	%
Dividend yield			—				—
Volatility factor of Company common stock			0.59				0.47
Weighted-average expected option life (years)			6.0				6.0
Weighted-average grant-date fair value		$	11.23			$	27.90

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, 2009			294,989			$	26.03
Granted during the first six months of 2009			188,003			$	11.23
Granted during the first six months of 2008			166,675			$	27.90
Vested during the first six months of 2009			138,416			$	23.85
Vested during the first six months of 2008			162,495			$	16.55
Forfeited during the first six months of 2009			14,367			$	15.83
Forfeited during the first six months of 2008			4,001			$	45.22
Non-vested at June 30, 2009			330,209			$	18.81
Non-vested at June 30, 2008			344,739			$	24.07

No options were exercised in the first six months of 2009. The Company received cash payments of $0.1 million and $0.9 million during the three and six months ended June 30, 2008, respectively, 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 $0.4 million during the first six months of 2008. The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option.

A summary of the Company’s stock option activity for the first six months of 2009 is as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term (Years)				Value
Outstanding at January 1, 2009			890,589			$	38.86
Granted			188,003			$	20.12
Exercised			—			$	—
Expired unexercised			(6,033	)		$	53.22
Forfeited			(14,367	)		$	30.39
Outstanding at June 30, 2009			1,058,192			$	35.56				7.17			$	3,102
Vested or expected to vest at June 30, 2009			1,030,090			$	35.43				7.13			$	2,996
Exercisable at June 30, 2009			727,983			$	34.98				6.37			$	1,570

Restricted Stock — Performance-Based Awards

During the first six months of 2009 and 2008, the Company awarded 87,250 and 57,550 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 2009 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 over a three-year performance period ending December 31, 2011. The shares awarded during 2008 will vest upon the satisfaction of established performance criteria based on consolidated operating profit and average return on net assets over a three-year performance period ending December 31, 2010. In addition, 86,854 shares were awarded during 2007, and 80,600 of those shares will vest upon the satisfaction of established performance criteria based on the Company’s consolidated

operating profit and average return on net assets over a three-year performance period ending December 31, 2009. The remaining 6,254 shares will vest if the Company meets an established earnings target during the year ending 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 service 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 shall remain eligible for vesting at the end of the performance period.

A summary of the Company’s performance-based restricted stock awards for the first six months of 2009 is as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Non-vested at January 1, 2009			226,814			$	41.03
Granted			87,250			$	18.87
Vested			(86,610	)		$	28.61
Forfeited			(5,475	)		$	26.34
Non-vested at June 30, 2009			221,979			$	37.53
Expected to vest at June 30, 2009			75,589

The performance period for the shares of restricted stock awarded during 2006 ended on December 31, 2008. During the first six months of 2009, a total of 86,610 shares vested upon the determination by the Compensation Committee that the performance targets relating to the shares were satisfied and that the shares were earned at the maximum (100%) level. Upon vesting, employees surrendered 24,654 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.

Restricted Stock Units — Performance-Based Awards

During the first six months of 2009, the Company awarded 22,480 performance-based restricted stock units to employees outside the U.S. that vest subject to the Company’s financial performance for the three-year performance period ending December 31, 2011. These awards will be settled in cash based on the value of the Company’s common stock at the vesting date. Since the awards will be settled in cash, they are recorded as a liability award in accordance with SFAS No. 123(R). Accordingly, the Company records these awards as a component of other non-current liabilities on the balance sheet. The fair value of the award, which determines the measurement of the liability on the balance sheet, is remeasured at each reporting period until the award is settled. Fluctuations in the fair value of the liability awards are recorded as increases or decreases to compensation expense. Over the life of these awards, the cumulative amount of compensation expense recognized will match the actual cash paid. The number of restricted stock units that ultimately vest is based upon the Company’s achievement of the same performance criteria as the 2009 performance-based restricted stock awards described above.

The Company recognizes expense related to performance-based restricted stock units ratably over the requisite service period based upon the number of units that are anticipated to vest. The number of units 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 units become 100% vested at the target level. In the event of death or disability, a pro rata number of units shall remain eligible for vesting at the end of the performance period.

A summary of the Company’s performance-based restricted stock unit awards for the first six months of 2009 is as follows:

		Units
Non-vested at January 1, 2009			—
Granted			22,480
Forfeited			(600	)
Non-vested at June 30, 2009			21,880
Expected to vest at June 30, 2009			—

Restricted Stock — Time-Based Awards

During the first six months of 2009 and 2008, the Company awarded 24,850 and 17,675 shares of time-based restricted stock that vest three years from the date of grant, subject to the respective recipient remaining employed by the Company on that date. In addition, the Company awarded 4,127 shares of time-based restricted stock with a vesting period of one year to its chief executive officer in connection with payment of his 2008 high-performance bonus. The value of the restricted stock awards, based upon the market price of an unrestricted share of the Company’s common stock at the respective dates of grant, was $0.6 million for the 2009 awards and $1.0 million for the 2008 awards. Compensation expense is being recognized ratably over the vesting period. Upon any change in control of the Company, as defined in the applicable plan, or upon retirement, the shares become 100% vested. A pro rata number of shares will vest in the event of death or disability prior to the stated vesting date.

A summary of the Company’s time-based restricted stock awards for the first six months of 2009 is as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Nonvested at January 1, 2009			60,235			$	45.63
Granted			28,977			$	20.12
Vested			(18,600	)		$	28.76
Forfeited			(3,800	)		$	29.77
Nonvested at June 30, 2009			66,812			$	40.16
Expected to vest at June 30, 2009			66,024

A total of 18,600 shares of time-based restricted stock awarded during 2006 vested on May 1, 2009. Upon vesting, employees surrendered 5,350 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.

Restricted Stock Units — Time-Based Awards

During the first six months of 2009, the Company awarded 4,400 time-based restricted stock units to employees outside the U.S. These awards will be settled in cash based on the value of the Company’s common stock at the vesting date. Since the awards will be settled in cash, they are recorded as a liability award in accordance with SFAS No. 123(R). Accordingly, the Company records these awards as a component of other non-current liabilities on the balance sheet. The fair value of the award, which determines the measurement of the liability on the balance sheet, is remeasured at each reporting period until the award is settled. Fluctuations in the fair value of the liability awards are recorded as increases or decreases to compensation expense. Over the life of these awards, the cumulative amount of compensation expense recognized will match the actual cash paid. The restricted share units vest three years from the date of grant, subject to the respective recipient remaining employed by the Company on that date. Upon any change in control of the Company, as defined in the applicable plan, or upon retirement, the units become 100% vested. A pro rata number of units will vest in the event of death or disability prior to the stated vesting date.

A summary of the Company’s time-based restricted stock unit awards for the first six months of 2009 is as follows:

		Units
Nonvested at January 1, 2009			—
Granted			4,400
Forfeited			(200	)
Nonvested at June 30, 2009			4,200
Expected to vest at June 30, 2009			3,965