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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 April 30, 2011, there were 31,003,463 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		23
Item 3. Quantitative and Qualitative Disclosures about Market Risk		35
Item 4. Controls and Procedures		35
PART II — OTHER INFORMATION
Item 1A. Risk Factors		36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 6. Exhibits
Exhibit 31.1		37
Exhibit 31.2		37
Exhibit 32		37
Exhibit 101.1 INSTANCE DOCUMENT		37
Exhibit 101.2 SCHEMA DOCUMENT		37
Exhibit 101.3 CALCULATION LINKBASE DOCUMENT		37
Exhibit 101.4 LABELS LINKBASE DOCUMENT		37
Exhibit 101.5 PRESENTATION LINKBASE DOCUMENT		37
Exhibit 101.6 DEFINITION LINKBASE DOCUMENT		37
Signatures		37
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

Item 1. Unaudited Financial Statements

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

		March 31,				December 31,
(In thousands, except share data)		2011				2010
ASSETS
Current assets
Cash and cash equivalents		$	409,235			$	400,597
Restricted cash on deposit			74,829				68,096
Accounts receivable, less allowance of $5,031 in 2011 and $5,187 in 2010			178,112				155,465
Inventories			299,703				293,625
Refundable and prepaid income taxes			40,861				40,740
Other current assets			48,546				44,602
Total current assets			1,051,286				1,003,125
Property, plant and equipment, net			252,786				256,098
Goodwill			306,995				306,888
Intangible assets, net			150,836				153,390
Notes receivable from joint venture partner, less allowance of $5,200 in 2011 and 2010			13,915				13,915
Other non-current assets			40,463				39,292
Total assets		$	1,816,281			$	1,772,708
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	30,000			$	30,000
Accounts payable			113,281				105,900
Liability related to joint venture partner injunction			74,829				68,096
Accrued income taxes			12,649				8,321
Accrued employee costs			25,876				37,932
Deferred revenue			9,634				9,417
Other current liabilities			27,155				24,658
Total current liabilities			293,424				284,324
Long-term debt			90,000				90,000
Deferred income taxes			23,964				23,499
Uncertain tax positions			14,952				14,796
Pension liabilities			52,598				58,107
Other non-current liabilities			26,354				25,364
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; 30,745,608 shares issued in 2011 and 30,725,792 shares issued in 2010			307				307
Capital in excess of par value			581,044				578,948
Retained earnings			698,534				667,882
Treasury stock (208,157 shares in 2011 and 202,556 shares in 2010, at cost)			(7,427	)			(7,234	)
Accumulated other comprehensive income (loss)			2,304				(3,119	)
Total OM Group, Inc. stockholders’ equity			1,274,762				1,236,784
Noncontrolling interests			40,227				39,834
Total equity			1,314,989				1,276,618
Total liabilities and equity		$	1,816,281			$	1,772,708

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Three Months Ended
		March 31,
(In thousands, except per share data)		2011				2010
Net sales		$	331,345			$	303,197
Cost of products sold (excluding restructuring charge)			249,011				230,861
Restructuring charges			296				514
Gross profit			82,038				71,822
Selling, general and administrative expenses			44,207				39,843
Restructuring charges			71				86
Operating profit			37,760				31,893
Other income (expense):
Interest expense			(1,422	)			(669	)
Interest income			220				167
Foreign exchange gain (loss)			475				(3,176	)
Other, net			(5	)			(9	)
			(732	)			(3,687	)
Income from continuing operations before income tax expense			37,028				28,206
Income tax expense			(5,746	)			(4,349	)
Income from continuing operations, net of tax			31,282				23,857
Income (loss) from discontinued operations, net of tax			(240	)			137
Consolidated net income			31,042				23,994
Net (income) loss attributable to the noncontrolling interests			(390	)			(1,394	)
Net income attributable to OM Group, Inc.		$	30,652			$	22,600
Earnings per common share — basic:
Income from continuing operations attributable to OM Group, Inc. common stockholders		$	1.01			$	0.74
Income (loss) from discontinued operations attributable to OM Group, Inc. common stockholders			(0.01	)			0.01
Net income attributable to OM Group, Inc. common stockholders		$	1.00			$	0.75
Earnings per common share — assuming dilution:
Income from continuing operations attributable to OM Group, Inc. common stockholders		$	1.01			$	0.74
Income (loss) from discontinued operations attributable to OM Group, Inc. common stockholders			(0.01	)			—
Net income attributable to OM Group, Inc. common stockholders		$	1.00			$	0.74
Weighted average shares outstanding — basic			30,526				30,303
Weighted average shares outstanding — assuming dilution			30,695				30,451
Amounts attributable to OM Group, Inc. common stockholders:
Income from continuing operations, net of tax		$	30,892			$	22,463
Income (loss) from discontinued operations, net of tax			(240	)			137
Net income		$	30,652			$	22,600

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Three Months Ended
		March 31,
(In thousands)		2011				2010
Consolidated net income		$	31,042			$	23,994
Foreign currency translation adjustment			4,964				(2,548	)
Reclassification of hedging activities into earnings, net of tax			—				236
Unrealized gain (loss) on cash flow hedges, net of tax			359				(1,224	)
Pension liability adjustment			100				—
Net change in accumulated other comprehensive income (loss)			5,423				(3,536	)
Comprehensive income			36,465				20,458
Comprehensive (income) loss attributable to noncontrolling interest			(393	)			(1,391	)
Comprehensive income attributable to OM Group, Inc.		$	36,072			$	19,067

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Three Months Ended March 31,
(In thousands)		2011				2010
Operating activities
Consolidated net income		$	31,042			$	23,994
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
(Income) loss from discontinued operations			240				(137	)
Depreciation and amortization			13,309				13,173
Share-based compensation expense			2,080				1,674
Foreign exchange (gain) loss			(475	)			3,176
Restructuring charges			367				600
Other non-cash items			(444	)			1,235
Changes in operating assets and liabilities, excluding the effect of business acquisitions
Accounts receivable			(21,468	)			(25,805	)
Inventories			(5,391	)			35,237
Accounts payable			7,276				1,753
Other, net			(12,887	)			(4,682	)
Net cash provided by operating activities			13,649				50,218
Investing activities
Expenditures for property, plant and equipment			(3,328	)			(4,581	)
Acquisitions			(4,107	)			(171,979	)
Other, net			—				(104	)
Net cash used for investing activities			(7,435	)			(176,664	)
Financing activities
Payments of revolving line of credit			—				(105,000	)
Proceeds from the revolving line of credit			—				245,000
Debt issuance costs			—				(2,483	)
Proceeds from exercise of stock options			16				3,792
Payment related to surrendered shares			(193	)			(1,209	)
Other, net			—				92
Net cash provided by (used for) financing activities			(177	)			140,192
Effect of exchange rate changes on cash			2,601				(3,394	)
Cash and cash equivalents
Increase in cash and cash equivalents from continuing operations			8,638				10,352
Discontinued operations — net cash provided by operating activities			—				2
Balance at the beginning of the period			400,597				355,383
Balance at the end of the period		$	409,235			$	365,737

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Three Months Ended March 31,
(In thousands)		2011				2010
Common Stock — Shares Outstanding, net of Treasury Shares
Beginning balance			30,523				30,269
Shares issued under share-based compensation plans			14				236
			30,537				30,505
Common Stock — Dollars
Beginning balance		$	307			$	304
Shares issued under share-based compensation plans			—				3
			307				307
Capital in Excess of Par Value
Beginning balance			578,948				569,487
Share-based compensation — employees			2,005				1,606
Share-based compensation — non-employee directors			75				68
Excess tax benefit from exercise/vesting of share awards			—				92
Shares issued under share-based compensation plans			16				3,789
			581,044				575,042
Retained Earnings
Beginning balance			667,882				584,508
Net income attributable to OM Group, Inc.			30,652				22,600
			698,534				607,108
Treasury Stock
Beginning balance			(7,234	)			(6,025	)
Reacquired shares			(193	)			(1,209	)
			(7,427	)			(7,234	)
Accumulated Other Comprehensive Income (Loss)
Beginning balance			(3,119	)			(16,969	)
Foreign currency translation adjustment			4,964				(2,548	)
Pension liability adjustment			100				—
Reclassification of hedging activities into earnings, net of tax benefit of $83 in 2010			—				236
Unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of $97 and $430 in 2011 and 2010, respectively			359				(1,224	)
			2,304				(20,505	)
Total OM Group Inc. stockholders’ equity			1,274,762				1,154,718
Noncontrolling interest
Beginning balance			39,834				44,827
Net income (loss) attributable to the noncontrolling interest			390				1,394
Foreign currency translation			3				(3	)
			40,227				46,218
Total equity		$	1,314,989			$	1,200,936

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 March 31, 2011 and the results of its income, comprehensive income (loss), cash flows and changes in total equity for the three months ended March 31, 2011 and 2010 have been included. The balance sheet at December 31, 2010 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, 2010.

Note 2 — Recently Issued Accounting Guidance

Accounting Guidance adopted in 2011:

In March 2010, the Financial Accounting Standards Board (“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. The Company adopted this guidance on January 1, 2011 and such adoption did not have a material effect on the Company’s 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. 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 adopted this guidance on January 1, 2011 and such adoption did not have any effect on the Company’s results of operations or financial position.

Note 3 — Restructuring

During 2009, the Company commenced a restructuring plan for its Advanced Organics business within the Specialty Chemicals segment to better align the cost structure and asset base of its European carboxylate business to industry conditions resulting from weak customer demand, commoditization of products and overcapacity in that market. The restructuring plan included exiting 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 included 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 first quarter of 2011 and 2010, the Company recorded restructuring charges of $0.4 million and $0.6 million, respectively, in the Statements of Consolidated Income. The Company has incurred and expects to incur the following restructuring charges:

										Charges incurred				Additional
		Total charges				Total charges				in the three				charges
		expected to				incurred through				months ended				expected to
		be incurred				December 31, 2010				March 31, 2011				be incurred
Cash charges
Workforce reductions		$	6,349			$	6,225			$	89			$	35
Decommissioning, demolition and lease termination charges			1,809				1,238				278				293
			8,158				7,463				367				328
Non-cash charges
Fixed asset impairment			5,536				5,536				—				—
Inventory impairment/other charges			1,809				1,809				—				—
			7,345				7,345				—				—
Total charges		$	15,503			$	14,808			$	367			$	328

Decommissioning and demolition of the Manchester, England facility began in 2010 and is expected to be completed during the first half of 2011. Cash charges were for severance, decommissioning and demolition costs, lease termination costs and other exit costs. The Company expects to continue to incur costs for severance, decommissioning and demolition, lease termination and other exit costs through June 30, 2011. Such costs will be expensed as incurred.

The following table presents the activity and accrued liability balance related to the restructuring program:

		Workforce				Other
		reductions				charges				Total
Balance at December 31, 2010		$	401			$	6			$	407
Charges			89				278				367
Foreign currency translation adjustment			11				—				11
Cash payments			(21	)			(239	)			(260	)
Balance at March 31, 2011		$	480			$	45			$	525

The restructuring accrual represents future cash payments and is recorded on the Unaudited Condensed Consolidated Balance Sheets in Other current liabilities.

Note 4 — Inventories

Inventories consist of the following:

		March 31,				December 31,
		2011				2010
Raw materials and supplies		$	134,064			$	134,655
Work-in-process			46,122				41,909
Finished goods			119,517				117,061
		$	299,703			$	293,625

Note 5 — Debt

The Company has a secured Revolving Credit Agreement (the “Revolver”) with availability of up to $250.0 million. 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 March 31, 2011, the Company’s interest coverage ratio was 22.67 to 1.00 and its leverage ratio was 0.67 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 March 31, 2011, 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 $120.0 million at March 31, 2011 and December 31, 2010. At March 31, 2011, the weighted average interest rate for the outstanding borrowings under the Revolver was 2.79%, and the weighted average interest rate for the outstanding borrowings under the Revolver together with the related interest rate swap agreements was 3.16%. See Note 7 for further discussion of the interest rate swap agreements.

The Company incurred fees and expenses of $2.6 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.

The Company’s Finnish subsidiary, OMG Kokkola Chemicals Oy (“OMG Kokkola”), has 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 March 31, 2011 or December 31, 2010.

Note 6 — Pension Plans

At March 31, 2011 and December 31, 2010, the Company had pension liabilities of $53.3 million and $58.8 million, respectively, the majority of which were assumed in the EaglePicher Technologies acquisition. The EaglePicher Technologies pension plans consist of four non-contributory defined benefit pension plans. The Technologies Salaried Plan is a defined benefit, cash balance plan that covers EaglePicher Technologies salaried employees hired prior to January 1, 2007. The Technologies Hourly Plan is a defined benefit plan that covers EaglePicher Technologies non-union hourly employees hired prior to January 1, 2007 and union hourly employees hired

prior to May 3, 2008. The Company also assumed two frozen defined benefit pension plans. Pension benefits are paid to plan participants directly from pension plan assets.

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 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”). Payments under the SERP are made directly from the Company. Certain non-U.S. employees are covered under other defined benefit plans. These non-U.S. plans are not material.

Set forth below is a detail of the net periodic expense for the U.S. pension defined benefit plans:

		Three Months Ended
		March 31,
		2011				2010
Interest cost		$	2,699			$	1,987
Service cost			268				175
Amortization of unrecognized net loss			98				84
Expected return on plan assets			(2,573	)			(1,788	)
Total expense		$	492			$	458

Note 7 — 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.

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 March 31, 2011, the notional quantity of open contracts designated as cash flow hedges in accordance with the “Derivatives and Hedging” topic of the ASC was 1.3 million pounds of copper. The outstanding contracts as of March 31, 2011 had maturities ranging up to two months. As of March 31, 2011, AOCI(L) includes a cumulative gain of $0.3 million, net of tax, related to these contracts, all of which is expected to be reclassified to earnings within the next three months. The Company had no copper forward sales contracts designated as cash flow hedges at December 31, 2010. No hedge ineffectiveness was recorded in income in the first quarter of 2011 or 2010 for these hedges.

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 fair value hedges during the first quarter of 2011 or the year ended December 31, 2010.

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. From time to time, the Company enters 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 no Euro forward contracts at March 31, 2011 and December 31, 2010, respectively.

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, acquisition 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 both March 31, 2011 and December 31, 2010. The outstanding contracts as of March 31, 2011 had maturities ranging up to 14 months. As of March 31, 2011, AOCI(L) included a cumulative loss of $0.3 million related to these contracts, of which $0.3 million is expected to be reclassified to earnings within the next twelve months. No hedge ineffectiveness was recorded in income in the three months ended March 31, 2011 or March 31, 2010 for these hedges.

The following table summarizes the fair value of derivative instruments recorded in the Unaudited Condensed Consolidated Balance Sheets:

		Derivatives Designated as Hedging Instruments
		Derivative Assets
		March 31, 2011						December 31, 2010
		Balance sheet location		Fair value				Balance sheet location		Fair value
Commodity contracts		Other current assets		$	374			Other current assets		$	—
Total				$	374					$	—

		Derivative Liabilities
		March 31, 2011						December 31, 2010
		Balance sheet location		Fair value				Balance sheet location		Fair value
Interest rate swap agreements		Other current liabilities			(311	)		Other current liabilities			(393	)
Total				$	(311	)				$	(393	)

		Derivatives Not Designated as Hedging Instruments
		Derivative Liabilities
		March 31, 2011						December 31, 2010
		Balance sheet location		Fair value				Balance sheet location		Fair value
Commodity contracts		Other current liabilities		$	—			Other current liabilities		$	(378	)
Total				$	—					$	(378	)

The following table summarizes the effect of derivative instruments:

Derivatives in Cash Flow Hedging Relationships
		Amount of Gain (Loss) on Derivative Recognized
		in AOCI(L) (Effective Portion) for the Three
		Months Ended
		March 31, 2011				March 31, 2010
Euro forward contracts		$	—			$	(1,170	)
Commodity contracts			277				(54	)
Interest rate swap agreements			82				—
Total		$	359			$	(1,224	)

		Location of Gain (Loss)		Amount of Gain (Loss) Reclassified from
		Reclassified from		AOCI(L) into Income (Effective Portion) for the
		AOCI(L) into Income		Three Months Ended
		(Effective Portion)		March 31, 2011			March 31, 2010
Euro forward contracts		Cost of products sold		$	—		$	(15)
Commodity contracts		Net sales			—			(221)
Total				$	—		$	(236)

		Derivatives Not Designated as Hedging Instruments
				Amount of Gain (Loss) Recognized in
		Location of Gain		Income on Derivative for the Three
		(Loss) Recognized in		Months Ended March 31,
		Income on Derivative		2011				2010
Commodity contracts		Net sales		$	(407	)		$                —
Total				$	(407	)		$                —

Note 8 — 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		March 31, 2011				Assets (Level 1)				Inputs (Level 2)				Inputs (Level 3)
Assets:
Commodity contracts		$	374			$	—			$	374			$	—
Total		$	374			$	—			$	374			$	—
Liabilities:
Interest rate swap agreements		$	(311	)		$	—			$	(311	)		$	—
Total		$	(311	)		$	—			$	(311	)		$	—

The Company uses significant other observable inputs to value commodity contracts and interest rate swap agreements; therefore, they are classified within Level 2 of the valuation hierarchy. The fair value for these contracts is determined based on copper prices and interest rates, respectively. There were no transfers into or out of Levels 1, 2 or 3 in the first quarter of 2011.

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.

Note 9 — 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 2011.

During 2008 and 2009, the Company recorded tax benefits related to its election to take foreign tax credits on prior year U.S. tax returns. As of March 31, 2011, the Company has a receivable of $38.0 million (included in Refundable and prepaid income taxes on the Unaudited Condensed Consolidated Balance Sheets) related to amending its U.S. tax returns. The Company expects to receive this refund in the second half of 2011.

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 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 Company evaluates the estimated annual effective income tax rate on a quarterly basis based on current and forecasted earnings by tax jurisdiction, including the impact of foreign currency exchange rate movements. The estimated annual effective tax rate may be significantly impacted by foreign currency exchange rate movements and changes to the mix of forecasted earnings by tax jurisdiction. Adjustments to the estimated annual effective tax rate are recorded in the period such estimates are revised. 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 from continuing operations before income tax expense consists of the following:

		Three Months Ended March 31,
		2011				2010
United States		$	(1,884	)		$	(7,673	)
Outside the United States			38,912				35,879
		$	37,028			$	28,206

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

		Three Months Ended March 31,
		2011				2010
Effective income tax rate			15.5	%			15.4	%

The effective tax rate for the three months ended March 31, 2011 is 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 and Taiwan), the effect of foreign currency translation 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 ended March 31, 2011, there is no U.S. tax expense related to the planned repatriation of foreign earnings during 2011 due to utilization of foreign tax credits and U.S. losses.

In the first quarter of 2010, the Company recorded discrete tax benefit items totaling $4.0 million. Of this amount, $2.6 million related to GTL, of which the Company’s portion was $1.4 million. The GTL discrete tax item is primarily related to a return–to-provision adjustment as a result of additional depreciation from revaluation of the fixed assets at December 31, 2009. The revaluation is 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. The Company also recorded a discrete benefit of $0.9 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 quarter of 2010. Without the discrete items, the effective tax rate for the three months ended March 31, 2010 would have been 29.6%. This rate is 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. This was partially offset by losses in certain jurisdictions (including the U.S.) with no corresponding tax benefit. In the three months ended March 31, 2010, there is no U.S. tax expense related to the planned repatriation of foreign earnings during 2010 due to utilization of 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 $1.1 million and $2.0 million and increased net income per diluted share by approximately $0.04 and $0.07 in the three months ended March 31, 2011 and 2010, respectively.

Note 10 — Earnings Per Share

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

		Three Months Ended
		March 31,
		2011				2010
(in thousands, except per share amounts)
Income from continuing operations attributable to OM Group, Inc. common stockholders		$	30,892			$	22,463
Weighted average shares outstanding — basic			30,526				30,303
Dilutive effect of stock options and restricted stock			169				148
Weighted average shares outstanding — assuming dilution			30,695				30,451
Earnings per common share:
Income from continuing operations attributable to OM Group, Inc. common stockholders — basic		$	1.01			$	0.74
Income from continuing operations attributable to OM Group, Inc. common stockholders — assuming dilution		$	1.01			$	0.74

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

		Three Months Ended
		March 31,
		2011				2010
(in thousands, except per share amounts)
Net income attributable to OM Group, Inc. common stockholders		$	30,652			$	22,600
Weighted average shares outstanding — basic			30,526				30,303
Dilutive effect of stock options and restricted stock			169				148
Weighted average shares outstanding — assuming dilution			30,695				30,451
Earnings per common share:
Net income attributable to OM Group, Inc. common stockholders — basic		$	1.00			$	0.75
Net income attributable to OM Group, Inc. common stockholders — assuming dilution		$	1.00			$	0.74

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 first quarter of 2011 and 2010, stock options to purchase 0.1 million and 0.2 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 antidilutive.

Note 11 — Commitments and Contingencies

In October 2010, GTL was served in Jersey, Channel Islands, with an injunction obtained by Marange Investments (Proprietary) Limited (“Marange”), which restrains La Générale des Carrières et des Mines (“Gécamines”) (a partner in GTL) from removing any

of its assets from the island of Jersey up to the amount of 14.5 million British Pounds, pending the resolution of proceedings brought by Marange against Gécamines in the Supreme Court of South Africa. In January 2011, Marange obtained a new order amending the injunction to include an additional claim for 5.0 million British Pounds. As a result, GTL has been enjoined from making payments to Gécamines under the Long Term Slag Sales Agreement between GTL and Gécamines up to the value of 19.5 million British Pounds.

In March 2009, GTL was served in Jersey, Channel Islands, with an injunction obtained by FG Hemisphere Associates LLC (“FG Hemisphere”), which was 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 (the “Arbitration Awards”). One of the terms of the injunction prohibits GTL from making payments to Gécamines, including amounts payable for raw material purchases under the Long Term Slag Sales Agreement. In November 2010, the Royal Court of Jersey (the “Court”) released its Final Judgment in favor of FG Hemisphere for the full amount of the Arbitration Awards. The Court rejected Gécamines’ argument that it was not an organ of the DRC and rejected GTL’s various arguments, including that the Court did not have jurisdiction to seize monies to be paid to Gécamines under the Long Term Slag Sales Agreement between GTL and Gécamines on the basis that such monies are not held in Jersey. In December 2010, GTL appealed the decision of the Court; as a condition of not paying FG Hemisphere such monies prior to appeal, the Court requires that all amounts owed by GTL to Gécamines (up to the amount of the Arbitration Awards), including monies payable under the Long Term Slag Sales Agreement, be deposited into the Court. As a result, as of March 31, 2011 and December 31, 2010, $74.8 million and $68.1 million, respectively, has been deposited with the Court. Until the appeal is resolved, additional amounts due from GTL to Gécamines, up to the amount of the Arbitration Awards, will be deposited with the Court as they become due. While there can be no assurances with respect to the final outcome of either matter, the Company believes that, based on the information currently available to it, these matters will not have a material adverse effect upon its financial condition or results of operations.

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 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 March 31, 2011 and December 31, 2010, the Company has recorded environmental liabilities of $1.4 million and $1.5 million, respectively, related to remediation and decommissioning at the Company’s closed manufacturing sites in Newark, New Jersey and Vasset, France. In addition, at March 31, 2011, 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. During the first quarter of 2011, the Company recorded income of $1.2 million in selling, general and administrative expenses for an insurance recovery related to environmental remediation at the Newark, New Jersey site.

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 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 Unaudited Condensed Statements of Consolidated Income 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 $2.2 million and $1.8 million for the three months ended March 31, 2011 and 2010, respectively. At March 31, 2011, there was $12.3 million of total unrecognized compensation expense related to nonvested share-based awards. That cost is expected to be recognized as follows: $4.8 million in the remaining nine months of 2011, $4.9 million in 2012, $2.5 million in 2013 and $0.1 million in 2014. 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 price of the Company’s common stock on the NYSE on the last trading day of the quarter. The Unaudited Condensed Statements of Consolidated Income include share-based compensation expense for common stock granted to non-employee directors as a component of Selling, general and administrative expenses in the amount of $0.1 million for the three months ended March 31, 2011 and 2010. The Company issued 1,935 and 2,124 shares to non-employee directors during the three months ended March 31, 2011 and 2010, 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 200,200 and 235,350 shares of common stock during the three months ended March 31, 2011 and 2010, respectively. In addition, during the three months ended March 31, 2011, the Company awarded stock options to purchase 5,289 shares of common stock with a vesting period of one year to its chief executive officer in connection with achievement in 2010 under the Company’s high-performance incentive plan.

The fair value of options granted during the three months ended March 31, 2011 and 2010 was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted-average assumptions:

		2011				2010
Risk-free interest rate			2.8	%			2.7	%
Dividend yield			—				—
Volatility factor of Company common stock			0.56				0.58
Weighted-average expected option life (years)			6.0				6.0
Weighted-average grant-date fair value		$	20.01			$	17.23

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, 2011			397,914			$	17.07
Granted during the first three months of 2011			205,489			$	20.01
Vested during the first three months of 2011			(182,742	)		$	18.64
Forfeited during the first three months of 2011			(1,967	)		$	18.62
Non-vested at March 31, 2011			418,694			$	18.16
Non-vested at January 1, 2010			337,812			$	18.96
Granted during the first three months of 2010			235,350			$	17.23
Vested during the first three months of 2010			(169,709	)		$	21.10
Forfeited during the first three months of 2010			(1,668	)		$	18.69
Non-vested at March 31, 2010			401,785			$	18.60

A summary of the Company’s stock option activity for the three months ended March 31, 2011 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, 2011			1,071,454			$	36.27
Granted			205,489			$	36.51
Exercised			(533	)		$	30.66
Expired unexercised			—			$	—
Forfeited			(1,967	)		$	34.21
Outstanding at March 31, 2011			1,274,443			$	36.31				6.92			$	6,399
Vested or expected to vest at March 31, 2011			1,241,372			$	36.31				6.87			$	6,265
Exercisable at March 31, 2011			855,749			$	38.33				5.79			$	4,579

The Company received cash payments of $3.8 million during the three months ended March 31, 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 three months ended March 31, 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.

Restricted Stock — Performance-Based Awards

During the first three months of 2011 and 2010, the Company awarded 117,770 and 120,200 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 2011 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) percentage and average return on net assets, in each case over a three-year performance period ending December 31, 2013. Shares awarded during 2010 and 2009 will vest upon the satisfaction of established performance criteria based on consolidated EBITDA margin measured against a predetermined peer group, and average return on net assets, in each case over three-year performance periods ending December 31, 2012 and 2011, respectively.

The performance period for the shares awarded during 2008 ended on December 31, 2010. Such shares 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, 2010. Based upon the level of satisfaction of the performance objectives, as determined by the Compensation Committee in February 2011, 1,773 performance-based shares vested and were issued in the first quarter of 2011. Upon vesting, employees surrendered 578 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 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 three months ended March 31, 2011 is as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Non-vested at January 1, 2011			253,975			$	32.90
Granted			117,770			$	36.51
Vested			(1,773	)		$	58.57
Forfeited			(54,502	)		$	57.71
Non-vested at March 31, 2011			315,470			$	29.82
Expected to vest at March 31, 2011			100,988

Restricted Stock Units — Performance-Based Awards

During the three months ended March 31, 2011 and 2010, the Company awarded 17,125 and 19,850 performance-based restricted stock units, respectively, to employees outside the U.S. that vest subject to the Company’s financial performance for three-year performance periods ending on December 31, 2013 and December 31, 2012, respectively. 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 the “Stock Compensation” topic of the ASC. Accordingly, the Company records these awards as a component of other non-current liabilities on the Unaudited Condensed Consolidated Balance Sheets. 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 2011 and 2010 performance-based restricted stock awards described above.

The Company recognizes expense related to performance-based restricted stock units ratably over the requisite performance 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 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 three months ended March 31, 2011 is as follows:

		Units
Non-vested at January 1, 2011			38,530
Granted			17,125
Forfeited			(770	)
Non-vested at March 31, 2011			54,885
Expected to vest at March 31, 2011			14,760

Restricted Stock — Time-Based Awards

During the three months ended March 31, 2011 and 2010, the Company awarded 60,825 and 62,400 shares of time-based restricted stock, respectively, that vest three years from the date of grant, subject to the respective recipient remaining employed by the Company on that date. In addition, during the three months ended March 31, 2011, the Company awarded 2,767 shares of time-based restricted stock with a vesting period of one year to its chief executive officer in connection with achievement in 2010 under the Company’s high-performance annual incentive program. 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 $2.3 million for the 2011 awards and $1.9 million for the 2010 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 total of 15,575 shares of time-based restricted stock awarded during 2008 vested during the three months ended March 31, 2011. Upon vesting, employees surrendered 5,023 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.

A total of 22,760 shares of time-based restricted stock awarded during 2007 vested during the three months ended March 31, 2010. Upon vesting, employees surrendered 7,923 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. In addition, 4,127 shares granted during 2009 to the Company’s chief executive officer in connection with achievement in 2008 under the Company’s high-performance annual incentive program vested during the three months ended March 31, 2010. Upon vesting, the Company’s chief executive officer surrendered 1,310 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.

A summary of the Company’s time-based restricted stock awards for the three months ended March 31, 2011 is as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Nonvested at January 1, 2011			99,025			$	32.67
Granted			63,592			$	36.51
Vested			(15,575	)		$	58.41
Forfeited			(400	)		$	30.66
Nonvested at March 31, 2011			146,642			$	31.61
Expected to vest at March 31, 2011			140,642

Restricted Stock Units — Time-Based Awards

During the three months ended March 31, 2011 and 2010, the Company awarded 9,095 and 10,550 time-based restricted stock units, respectively, 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 the “Stock Compensation” topic of the ASC. Accordingly, the Company records these awards as a component of other non-current liabilities on the Unaudited Condensed Consolidated Balance Sheets. 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 three months of 2011 is as follows:

		Units
Nonvested at January 1, 2011			13,850
Granted			9,095
Forfeited			(200	)
Nonvested at March 31, 2011			22,745
Expected to vest at March 31, 2011			20,040

Note 13 — Reportable Segments

The Company is organized into three operating segments: Advanced Materials, Specialty Chemicals and Battery Technologies. Intersegment transactions are generally recognized based on current market prices and are eliminated in consolidation. General and administrative expenses not allocated to the operating segments are included in Corporate in the segment table set forth below.

The Advanced Materials segment consists of Inorganics, the DRC smelter joint venture and metal resale. The Advanced Materials segment manufactures inorganic products using unrefined cobalt and other metals and serves the battery materials, powder metallurgy, ceramic and chemical end markets.

The Specialty Chemicals segment is comprised of Electronic Chemicals, Advanced Organics, Ultra Pure Chemicals (“UPC”) and Photomasks. Electronic Chemicals develops and manufactures products for the printed circuit board, memory disk, general metal finishing and photovoltaic markets. Advanced Organics offers products for the coating and inks, chemical and tire markets. UPC develops, manufactures and distributes a wide range of ultra-pure chemicals used in the manufacture of electronic and computer components such as semiconductors, silicon chips, wafers and liquid crystal displays. Photomasks manufactures photo-imaging masks (high-purity quartz or glass plates containing precision, microscopic images of integrated circuits) and reticles for the semiconductor, optoelectronics, microelectronics and micro electro mechanical systems industries under the Compugraphics brand name.

The Battery Technologies segment, which consists of the EaglePicher Technologies business acquired on January 29, 2010, provides advanced batteries, battery management systems, battery-related research and energetic devices for the defense, aerospace and medical markets. In the defense market, Battery Technologies develops battery products for missile launch vehicles, missiles, guided bombs and other weapons systems. It also provides primary (non-rechargeable) and secondary (rechargeable) batteries, battery management systems, battery chargers, and energetic devices for diverse defense applications such as unmanned vehicles, sub-munitions, mines, sonabuoys, and fuzes. In the aerospace market, Battery Technologies designs, manufactures and qualifies primary and secondary batteries for satellites, aircraft, packaging of cells and other special applications. In the medical market, Battery Technologies designs, builds and qualifies miniature batteries to power implantable medical devices.

The Company has manufacturing and other facilities in North America, Europe, Africa and Asia-Pacific, and the Company markets its products worldwide. Further, approximately 16% of the Company’s investment in property, plant and equipment is located in the DRC, where the Company operates a smelter through a 55%-owned joint venture.

There are a limited number of supply sources for cobalt. Production problems or political or civil instability in supplier countries, primarily the DRC, Finland and Russia, as well as increased demand in developing countries may affect the supply and market price of cobalt. In particular, political and civil instability in the DRC may affect the availability of raw materials from that country. Any raw material supply disruption from the DRC could have a material adverse effect on our business, financial condition or results of operations.

The following table reflects the results of the Company’s reportable segments:

		Three Months Ended March 31,
		2011				2010
Business Segment Information
Net Sales
Advanced Materials		$	180,080			$	169,964
Specialty Chemicals			120,583				115,030
Battery Technologies (a)			30,976				18,589
Intersegment items			(294	)			(386	)
		$	331,345			$	303,197
Operating profit
Advanced Materials		$	32,117			$	29,258
Specialty Chemicals			13,734				15,341
Battery Technologies (a)			2,122				(1,505	)
Corporate			(10,213	)			(11,201	)
			37,760				31,893
Interest expense			(1,422	)			(669	)
Interest income			220				167
Foreign exchange gain (loss)			475				(3,176	)
Other, net			(5	)			(9	)
			(732	)			(3,687	)
Income from continuing operations before income tax expense		$	37,028			$	28,206
Expenditures for property, plant & equipment
Advanced Materials		$	1,019			$	3,133
Specialty Chemicals			1,402				736
Battery Technologies (a)			907				712
		$	3,328			$	4,581
Depreciation and amortization
Advanced Materials		$	5,072			$	5,018
Specialty Chemicals			5,630				6,080
Battery Technologies (a)			2,485				1,598
Corporate			122				477
		$	13,309			$	13,173

(a)		Includes activity since the acquisition of EaglePicher Technologies on January 29, 2010.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

OM Group, Inc. 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 Company is executing a strategy to grow through continued product innovation, as well as tactical and strategic acquisitions. The strategy is part of a transformational process to leverage the Company’s core strengths in developing and producing value-added specialty products for dynamic markets while reducing the impact of metal price volatility on financial results. The strategy is designed to allow the Company to deliver sustainable and profitable volume growth in order to drive consistent financial performance and enhance the Company’s ability to continue to build long-term shareholder value.

On January 29, 2010, the Company completed the acquisition of EaglePicher Technologies, LLC which is operated and reported within the Battery Technologies segment. The results of operations of EaglePicher Technologies have been included in the results of the Company from the date of acquisition.

Segments

The Company is organized into three operating segments: Advanced Materials, Specialty Chemicals and Battery Technologies. The Advanced Materials segment consists of Inorganics, a joint venture that operates a smelter in the Democratic Republic of Congo (“DRC”) and metal resale. The Specialty Chemicals segment is comprised of Electronic Chemicals, Advanced Organics, Ultra Pure Chemicals (“UPC”) and Photomasks. The Battery Technologies segment is comprised of the EaglePicher Technologies business.

The Advanced Materials segment manufactures inorganic products using unrefined cobalt and other metals and serves the battery materials, powder metallurgy, ceramics and chemical end markets by providing products with functional characteristics critical to the success of the Company’s customers. These products improve the electrical conduction of rechargeable batteries used in portable electronic devices such as cellular phones, video cameras, portable computers and power tools as well as various types of electric vehicles. The smelter joint venture (Groupement pour le Traitement du Terril de Lubumbashi Limited (“GTL”)) is consolidated in the Company’s financial statements because the Company has a controlling interest in the joint venture. The GTL smelter is a primary source of the Company’s cobalt raw material feed.

The Specialty Chemicals segment consists of the following:

Electronic Chemicals: Electronic Chemicals develops and manufactures products for the printed circuit board, memory disk, general metal finishing, and photovoltaic markets. Chemicals developed and manufactured for the printed circuit board market include oxide treatments, electroplating additives, etching technology and electroless copper processes used in the manufacturing of printed circuit boards widely used in computers, communications, military/aerospace, automotive, industrial and consumer electronics applications. Chemicals developed and manufactured for the memory disk market include electroless nickel solutions and preplate chemistries for the manufacture of hard drive memory disks used in memory and data storage applications. Memory disk applications include computer hard drives, digital video recorders, MP3 players, digital cameras and business and enterprise servers. Chemicals developed and manufactured for the photovoltaic industry focus on proprietary chemistries and processes used to manufacture solar cells.

Advanced Organics: Advanced Organics offers products for the coating and inks, chemical and tire markets. Products for the coatings and inks market promote drying and other performance characteristics. Within the chemical markets, the products accelerate the curing of polyester resins found in reinforced fiberglass. In the tire market, the products promote the adhesion of metal to rubber. During 2009, the Company commenced a restructuring plan to better align the cost structure and asset base of its European carboxylate business to industry conditions resulting from weak customer demand, commoditization of products and overcapacity in that market. The restructuring plan included exiting the Manchester, England manufacturing facility and workforce reductions at the Belleville, Ontario, Canada; Kokkola, Finland; Franklin, Pennsylvania and Westlake, Ohio locations. 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.

Ultra Pure Chemicals: UPC develops, manufactures and distributes a wide range of ultra-pure chemicals used in the manufacture of electronic and computer components such as semiconductors, silicon chips, wafers and liquid crystal displays. These products include chemicals used to remove controlled portions of silicon and metal; cleaning solutions;

photoresist strippers, which control the application of certain light-sensitive chemicals; edge bead removers, which aid in the uniform application of other chemicals; and solvents. UPC also develops and manufactures a broad range of chemicals used in the manufacturing of photomasks and provides a range of analytical, logistical and development support services to the semiconductor industry. These include Total Chemicals Management, under which the Company manages clients’ entire electronic process chemicals operations, including coordination of logistics services, development of application-specific chemicals, analysis and control of customers’ chemical distribution systems and quality audit and control of all inbound chemicals.

Photomasks: Photomasks manufactures photo-imaging masks (high-purity quartz or glass plates containing precision, microscopic images of integrated circuits) and reticles for the semiconductor, optoelectronics, microelectronics and micro electro mechanical systems industries under the Compugraphics brand name. Photomasks are a key enabling technology to the semiconductor and integrated circuit industries and perform a function similar to that of a negative in conventional photography.

The Battery Technologies segment, which consists of the EaglePicher Technologies business acquired on January 29, 2010, provides advanced batteries, battery management systems, battery-related research and energetic devices for the defense, aerospace and medical markets. In the defense market, Battery Technologies develops battery products for missile launch vehicles, missiles, guided bombs and other weapons systems. It also provides primary (non-rechargeable) and secondary (rechargeable) batteries, battery management systems, battery chargers, and energetic devices for diverse defense applications such as unmanned vehicles, sub-munitions, mines, sonabuoys, and fuzes. In the aerospace market, Battery Technologies designs, manufactures and qualifies primary and secondary batteries for satellites, aircraft, packaging of cells and other special applications. In the medical market, Battery Technologies designs, manufactures and qualifies miniature batteries to power implantable medical devices. Battery Technologies has a 45% interest in Diehl & EaglePicher GmbH (“D&EP”), which manufactures thermal batteries for military applications and customized battery packs for the defense, electronics and communication industries. The investment in D&EP is accounted for under the equity method.

Key Market Factors Affecting Advanced Materials Operations

The Company’s business is critically connected to both the availability and price of raw materials. The primary raw material used by the Advanced Materials segment is unrefined cobalt. Unrefined cobalt is obtained from three basic sources: primary cobalt mining, as a by-product of another metal (typically copper or nickel), and from recycled material. Cobalt raw materials include ore, concentrate, slag, scrap and metallic feed. The availability of unrefined cobalt is dependent on global market conditions, cobalt prices and the prices of copper and nickel. Also, political and civil instability in supplier countries, variability in supply and worldwide demand, including demand in developing countries such as China, have affected and will likely continue to affect the supply and market price of raw materials. The Company attempts to mitigate changes in availability of raw materials by maintaining adequate inventory levels and long-term supply relationships with a variety of suppliers. The GTL smelter in the DRC is a primary source for the Company’s cobalt raw material feed. After smelting in the DRC, cobalt/copper white alloy is sent to the Company’s refinery in Kokkola, Finland.

The cost of the Company’s raw materials fluctuates due to changes in the cobalt reference price, actual or perceived changes in supply and demand of raw materials, and changes in availability from suppliers. The Company attempts to mitigate increases in raw material prices by passing through such increases to its customers in the prices of its products and by entering into sales contracts that contain variable pricing that adjusts based on changes in the price of cobalt. During periods of rapidly changing metal prices, however, there may be price lags that can impact the short-term profitability and cash flow from operations of the Company both positively and negatively. Fluctuations in the price of cobalt have historically been significant and the Company believes that cobalt price fluctuations are likely to continue in the future. Fluctuations in the price of copper can also impact the short-term profitability and cash flow from operations of the Company both positively and negatively. Declines in the selling prices of the Company’s finished goods, which can result from decreases in the reference price of cobalt or other factors, can result in the Company’s inventory carrying value being written down to a lower market value.

Executive Overview

The Company’s Advanced Materials segment achieved improved year-over-year results, driven primarily by increased demand across all end markets that resulted in increased sales and product volumes. This increase in end market demand was partially offset by the impact of a decrease in the average cobalt reference price in the first quarter of 2011 compared with the first quarter of 2010, which resulted in lower product selling prices. Specialty Chemicals also experienced increased demand in Electronic Chemicals, UPC and the coatings and additive markets in Advanced Organics. The increased demand in Specialty Chemicals was partially offset by unfavorable price/mix due primarily to increasing raw material costs. Improved operating profit in Battery Technologies was due to

favorable product mix, increased volume and $1.5 million of charges in the first quarter of 2010 related to purchase price accounting for acquired inventories and deferred revenue that did not recur in the first quarter of 2011.

Consolidated Results of Operations

Consolidated results of operations are set forth below and are followed by a more detailed discussion of each segment.

First Quarter of 2011 Compared With First Quarter of 2010

	Three Months Ended March 31,
(thousands of dollars & percent of net sales)		2011								2010
Net sales		$	331,345							$	303,197
Cost of products sold (excluding restructuring charges)			249,011								230,861
Restructuring charges			296								514
Gross profit			82,038				24.8	%			71,822				23.7	%
Selling, general and administrative expenses			44,207				13.3	%			39,843				13.1	%
Restructuring charges			71								86
Operating profit			37,760				11.4	%			31,893				10.5	%
Other expense, net			(732	)							(3,687	)
Income from continuing operations before income tax expense			37,028								28,206
Income tax expense			(5,746	)							(4,349	)
Income from continuing operations, net of tax			31,282								23,857
Income (loss) from discontinued operations, net of tax			(240	)							137
Consolidated net income			31,042								23,994
Net (income) loss attributable to the noncontrolling interest			(390	)							(1,394	)
Net income		$	30,652							$	22,600

The following table identifies, by segment, the components of change in net sales for the first quarter of 2011 compared with the first quarter of 2010:

2010 Net Sales		$	303,197
Increase in 2011 from:
Advanced Materials			10,116
Specialty Chemicals			5,553
Battery Technologies			12,387
Intersegment items			92
2011 Net Sales		$	331,345

Net sales increased $28.1 million, or 9%, primarily due to increased cobalt volume in Advanced Materials ($14.8 million) and increased product volume in Specialty Chemicals ($4.6 million), together with a full quarter of sales for Battery Technologies compared to two months of sales in the first quarter of 2010. Advanced Materials copper by-product sales also were higher ($8.0 million) due to the higher average copper price in the first quarter of 2011 compared with the first quarter of 2010 and increased volume. The average cobalt reference price decreased from $20.11 in the first quarter of 2010 to $18.38 in the first quarter of 2011, which resulted in lower product selling prices ($11.3 million). Advanced Materials also experienced a decrease in cobalt metal resale ($2.6 million) due to the decrease in the average cobalt reference price.

Gross profit increased to $82.0 million in the first quarter of 2011 compared with $71.8 million in the first quarter of 2010. In Advanced Materials, gross profit increased due to increased cobalt volume ($7.4 million) in the first quarter of 2011 compared to the comparable 2010 period, $5.4 million favorable manufacturing and distribution expenses and a $3.5 million increase in profit associated with copper by-product sales due to both higher price and increased volume. These improvements to gross profit in the Advanced Materials segment were partially offset by a decrease in the average cobalt reference price in the first quarter of 2011 compared with the first quarter of 2010, which resulted in lower product selling prices ($9.3 million) and higher process-based

material costs ($3.1 million). In the Specialty Chemicals segment, gross profit was impacted by unfavorable price/mix ($3.2 million) partially offset by increased volume ($2.4 million) and favorable manufacturing and distribution expenses ($1.6 million). In Battery Technologies, gross profit was positively affected by purchase price adjustments that did not recur, favorable product mix and increased volume in the first quarter of 2011 compared to the first quarter of 2010.

Selling, general and administrative expenses (“SG&A”) increased to $44.2 million in the first quarter of 2011, compared with $39.8 million in the first quarter of 2010. The increase in SG&A was primarily attributable to the increase in net sales discussed above, higher employee compensation and benefit costs and increased professional service fees, all partially offset by a $1.2 million insurance recovery related to environmental remediation at the Company’s closed manufacturing site in Newark, New Jersey in the first quarter of 2011. The first quarter of 2010 included $2.2 million in transaction costs related to the acquisition of EaglePicher Technologies.

The following table identifies, by segment, the components of change in operating profit for the first quarter of 2011 compared with the first quarter of 2010:

(In thousands)
2010 Operating Profit		$	31,893
Increase (decrease) in 2011 from:
Advanced Materials			2,859
Specialty Chemicals			(1,607	)
Battery Technologies			3,627
Corporate			988
2011 Operating Profit		$	37,760