| OM GROUP INC Item 1A Risk Factors Our business faces significant risks |
| These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem immaterial |
| Our business, financial condition and results of operations could be materially adversely affected by any of these risks |
| These risks should be read in conjunction with the other information in this report |
| EXTENDED BUSINESS INTERRUPTION AT OUR FACILITIES COULD HAVE AN ADVERSE IMPACT ON OPERATING RESULTS Our results of operations are dependent in large part upon our ability to produce and deliver products promptly upon receipt of orders and to provide prompt and efficient service to our customers |
| Any disruption of our day-to-day operations could have a material adverse effect on our business, customer relations and profitability |
| Our Kokkola and Harjavalta, Finland facilities and the Cawse mine and processing facility in Australia are the primary refining and production facilities for our products |
| The GTL smelter in the DRC is a primary source for cobalt raw material feed |
| Our Cleveland, Ohio facility serves as our corporate headquarters |
| These facilities are critical to our business, and a fire, flood, earthquake or other disaster or condition that damaged or destroyed any of these facilities could disable them |
| Any such damage to, or other condition interfering with the operation of, these facilities would have a material adverse effect on our business, financial position and results of operations |
| WE ARE AT RISK FROM FLUCTUATIONS IN THE PRICE OF OUR PRINCIPAL RAW MATERIALS The principal raw materials we use in manufacturing base metal chemistry products are cobalt and nickel, and the cost of these raw materials fluctuates due to actual or perceived changes in supply and demand, changes in cobalt and nickel reference/market prices and changes in availability from suppliers |
| Fluctuations in the prices of cobalt and nickel have been significant in the past and we believe price fluctuations are likely to occur in the future |
| Our ability to pass increases in raw material prices through to our customers by increasing the prices of our products is an important factor in our business |
| The extent of our profitability depends, in part, on our ability to maintain the differential between our product prices and raw material prices, and we cannot guarantee that we will be able to maintain an appropriate differential at all times |
| We may be required under US GAAP accounting rules to write down the carrying value of our inventory when cobalt and nickel prices decrease |
| In periods of raw material metal price declines or declines in the selling price of the Company’s finished products, inventory carrying values could exceed the amount the Company could realize on sale, resulting in a charge against inventory that could adversely affect our operating results |
| 8 _________________________________________________________________ WE ARE AT RISK FROM UNCERTAINTIES IN THE SUPPLY OF SOME OF OUR PRINCIPAL RAW MATERIALS Historically, we have sourced our supply of cobalt primarily from the DRC, Australia and Finland |
| Production problems or political or civil instability in supplier 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 |
| If a substantial interruption should occur in the supply of cobalt from the DRC or elsewhere, we may not be able to obtain as much cobalt from other sources as would be necessary to satisfy our requirements at prices comparable to our current arrangements and our operating results could be adversely impacted |
| Historically, we have sourced our supply of nickel primarily from Australia, Finland and Brazil |
| If a substantial interruption should occur in the supply of nickel, we may not be able to obtain as much nickel as would be necessary to satisfy our requirements and our operating results could be adversely impacted |
| WE ARE EXPOSED TO FLUCTUATIONS IN FOREIGN EXCHANGE RATES, WHICH MAY ADVERSELY AFFECT OUR OPERATING RESULTS We have manufacturing and other facilities in North America, Europe, Asia-Pacific and Africa, and we market our products worldwide |
| Although most of our raw material purchases and product sales are transacted in US dollars, liabilities for non-US operating expenses and income taxes are denominated in local currencies |
| In addition, fluctuations in exchange rates may affect product demand and may adversely affect the profitability in US dollars of products provided by us in foreign markets where payment for our products is made in the local currency |
| Accordingly, fluctuations in currency rates may affect our operating results |
| OUR SUBSTANTIAL INTERNATIONAL OPERATIONS SUBJECT US TO RISKS, WHICH MAY INCLUDE UNFAVORABLE POLITICAL, REGULATORY, LABOR AND TAX CONDITIONS IN OTHER COUNTRIES Our business is subject to risks related to the differing legal and regulatory requirements and the social, political and economic conditions of many jurisdictions |
| In addition to risks associated with fluctuations in foreign exchange rates, risks inherent in international operations include the following: • potential supply disruptions as a result of political instability or civil unrest in countries in which we have operations, especially the DRC and surrounding countries; • agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system; • foreign customers may have longer payment cycles; • foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including currency exchange controls; • general economic conditions in the countries in which we operate could have an adverse effect on our earnings from operations in those countries; • unexpected adverse changes in foreign laws or regulatory requirements may occur, including with respect to export duties and quotas; and • compliance with a variety of foreign laws and regulations may be difficult |
| Our overall success as a global business depends, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions |
| We cannot assure you that we will implement policies and strategies that will be effective in each location where we do business |
| Furthermore, we cannot be sure that any of the foregoing factors will not have a material adverse effect on our business, financial condition or results of operations |
| 9 _________________________________________________________________ WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION AND MAY INCUR UNANTICIPATED COSTS OR LIABILITIES ARISING OUT OF ENVIRONMENTAL MATTERS We are subject to stringent laws and regulations relating to the storage, handling, disposal, emission and discharge of materials into the environment, and we have expended, and may be required to expend in the future, substantial funds for compliance with such laws and regulations |
| In addition, we may from time to time be subjected to claims for personal injury, property damages or natural resource damages made by third parties or regulators |
| Our annual environmental compliance costs were dlra7dtta4 million in 2005 |
| In addition, we made capital expenditures of approximately dlra3dtta9 million in 2005 in connection with environmental compliance |
| As of December 31, 2005, we had reserves of dlra8dtta8 million, which we believe to be sufficient to cover our estimated liabilities at that time |
| However, given the many uncertainties involved in assessing liability for environmental claims, our current reserves may prove to be insufficient |
| We continually evaluate the adequacy of our reserves and adjust reserves when determined to be appropriate |
| In addition, our current reserves are based only on known sites and the known contamination on those sites |
| It is possible that additional remediation sites will be identified in the future or that unknown contamination at previously identified sites will be discovered |
| This could require us to make additional expenditures for environmental remediation or could result in exposure to claims in the future |
| THE COMPANY IS CURRENTLY IN A TRANSITIONAL PERIOD AS WE DEVELOP AND IMPLEMENT A NEW STRATEGIC PLAN As a result of changes to the Company’s executive officers and members of the board of directors during 2005, the Company is currently in a transitional period and may make changes, which could be material, to the Company’s business, operations, financial condition and results of operations |
| It is impossible to predict what these changes will be and the impact they will have on the Company’s future results of operations |
| SEC INVESTIGATION As previously disclosed, the SEC’s Division of Enforcement is conducting an informal investigation resulting from the self reporting by the Company of an internal investigation |
| This internal investigation was conducted in 2004 by the audit committee of our board of directors in connection with the previous restatement of our financial results for the periods prior to December 31, 2003 |
| We are cooperating fully with the SEC informal investigation, but we cannot assure you that the SEC’s Division of Enforcement will not take any action that would adversely affect us |
| ADVERSE RESOLUTION OF LITIGATION MAY HARM OUR OPERATING RESULTS OR FINANCIAL CONDITION We are party to lawsuits in the normal course of business |
| Litigation can be expensive, lengthy and disruptive to normal business operations |
| Moreover, the results of complex legal proceedings are difficult to predict |
| An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, operating results, or financial condition |
| For additional information regarding certain of the lawsuits in which we are |