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Equity Analysis and Business Evaluation of OM Group Kelsey Cottrell [email protected] Nancy Hoang [email protected] Zach Scott [email protected] George Ramirez [email protected]
Equity Analysis and Business Evaluation of OM Group
Kelsey Cottrell [email protected]
Nancy Hoang [email protected]
Zach Scott [email protected]
George Ramirez [email protected]
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TABLE OF CONTENTS
EXECUTIVE SUMMARY 7
INDUSTRY ANALYSIS 8 ACCOUNTING ANALYSIS 10 FINANCIAL ANALYSIS 11 VALUATION ANALYSIS 13
COMPANY OVERVIEW 15
INDUSTRY OVERVIEW 20
FIVE FORCES MODEL 21
RIVALRY AMONG EXISTING FIRMS 22 INDUSTRY GROWTH RATE 23 CONCENTRATION 24 DIFFERENTIATION 25 SWITCHING COSTS 26 LEARNING AND SCALE ECONOMIES 26 FIXED-VARIABLE COSTS 28 EXCESS CAPACITY 29 EXIT BARRIERS 29 CONCLUSION 29 THREAT OF NEW ENTRANTS 30 ECONOMIES OF SCALES 30 FIRST MOVER ADVANTAGE 31 ACCESS TO CHANNELS OF DISTRIBUTION AND RELATIONSHIPS 33 LEGAL BARRIERS 33 CONCLUSION 33 THREAT OF SUBSTITUTE PRODUCTS 34 RELATIVE PRICE PERFORMANCE 34 BUYER’S WILLINGNESS TO SWITCH 35 CONCLUSION 35 BARGAINING POWER OF CUSTOMERS 35 DIFFERENTIATION 36 PRICE SENSITIVITY 36 NUMBER OF CUSTOMERS 37 CONCLUSION 37 BARGAININGN POWER OF SUPPLIER 37
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NUMBER OF SUPPLIERS 38 SWITCHING COSTS 38 CONCLUSION 38 KEY SUCCESS FACTORS FOR THE INDUSTRY 39 CUSTOMER RELATIONS 39 INNOVATION AND ADVANCED TECHNOLOGY 40 MERGERS AND ACQUSITIONS 40 INVESTMENT IN RESEARCH AND DEVELOPMENT 40
COMPETITIVE ADVANTAGE ANALYSIS 41
KEY SUCCESS FACTORS FOR OM GROUP 41 DIFFERENTIATION 43 INVESTING IN RESEARCH AND DEVELOPMENT 43 SUPERIOR PRODUCT QUALITY 44 CONCLUSION 45
INTRODUCTION TO ACCOUNTING ANALYSIS 45
KEY ACCOUNTING POLICIES 46
TYPE ONE ACCOUNTING POLICIES 47
CUSTOMER RELATIONS 47
MERGERS AND ACQUISITIONS 47
RESEARCH AND DEVELOPMENT 48
TECHNOLOGICAL ADVANCEMENTS AND INNOVATION 48
TYPE TWO ACCOUNTING POLICIES 49
GOODWILL 49
RESEARCH AND DEVELOPMENT 50
LEASES 50
DEFINED PENSION PLANS 51 CONCLUSION 51
ASSESS DEGREES OF POTENTIAL ACCOUNTING FLEXIBILITY 52
GOODWILL 52 RESEARCH AND DEVELOPMENT 53
ACTUAL ACCOUNTING STRATEGIES 54
GOODWILL 54
RESEARCH AND DEVELOPMENT 55 PENSION 56 OPERATING LEASES 57
CONCLUSION 57
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QUALITY OF DISCLOSURE 57
QUALITATIVE ANALYSIS 58 CONCLUSION 59
IDENTIFYING POTENTIAL RED FLAGS 59
GOODWILL 59 RESEARCH AND DEVELOPMENT 59
UNDOING ACCOUNTING DISTORTIONS 60
GOODWILL 60 RESEARCH AND DEVELOPMENT 61
FINANCIAL STATEMENTS 62
BALANCE SHEET 64 INCOME STATEMENT 64 CONCLUSION 66
INTRODUCTION TO FINANCIAL ANALYSIS 66
LIQUIDITY RATIOS 66
CURRENT RATIO 67
QUICK ASSET RATIO 68 CONCLUSION 69
OPERATING EFFICIENCY 69 INVENTORY TURNOVER 70
ACCOUNTS RECEIVABLE TURNOVER 71
WORKING CAPITAL TURNOVER 72
DAYS SUPPLY INVENTORY 73
DAYS SALES OUTSTANDING 74
CASH TO CASH CYCLE 75 CONCLUSION 76
PROFITABILITY RATIOS 76
GROSS PROFIT MARGIN 77
OPERATING PROFIT MARGIN 78
NET PROFIT MARGIN 79
ASSET TURNOVER 80
RETURN ON ASSETS 81
RETURN ON EQUITY 82 CONCLUSION 83
CAPITAL STRUCTURE RATIOS 83
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DEBT TO EQUITY 84
DEBT SERVICE MARGIN 85 TIMES INTEREST EARNED 86
ALTMAN Z SCORE 87 CONCLUSION 88
FINANCIAL FORECASTING 88
INCOME STATEMENT 89
RESTATED INCOME STATEMENT 92
DIVIDENDS 95
BALANCE SHEET 95
RESTATED BALANCE SHEET 99
STATEMENT OF CASH FLOWS 99
COST OF CAPITAL ESTIMATION 104
COST OF DEBT 104
COST OF EQUITY 105
BACKDOOR COST OF EQUITY 107
WEIGHTED AVERAGE COST OF CAPITAL 107
METHOD OF COMPARABLES 109
PRICE TO BOOK RATIO 109 FORWARD PRICE EARNINGS RATIO 110 ENTERPRISE VALUE/EBITDA 110
ENTERPRISE VALUE/REVENUE 111
PRICE/EBITA 112
P.E.G. RATIO 112
ENTERPRISE VALUE/FREE CASH FLOWS 113
CONCLUSION 113
INTRINSIC VALUATION MODELS 114
DISCOUNTED DIVIDENDS 115
DISCOUNTED FREE CASH FLOWS MODEL 116 RESIDUAL INCOME MODEL 117 AS STATED RESIDUAL INCOME MODEL 118 RESTATED RESIDUAL INCOME MODEL 118 LONG RUN RESIDUAL INCOME MODEL 119 ABNORMAL EARNINGS GROWTH VALUATION 122 AS STATED ABNORMAL EARNINGS GROWTH VALUATION 123
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RESTATED ABNORMAL EARNINGS GROWTH VALUATION 124 FINAL RECOMMENDATION 125
APPENDIX 126
BALANCE SHEET 126 INCOME STATEMENT 126 R&D CAPITALIZATION 127 GOODWILL IMPAIRMENT 127 DISCOUNTED DIVIDENDS APPROACH 128 DISCOUNTED FREE CASH FLOW 128 RESIDUAL INCOME 130 RESTATED RESIDUAL INCOME 131 AEG VALUATION 132 RESTATED AEG VALUATION 133 REGRESSIONS 134
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Executive Summary
Analyst Recommendation: SELL (OVERVALUED)
ObservedPrice(04/1/2015 30.87$ Score 2010 2011 2012 2013 2014
As-Stated 3.46 2.02 2.34 3.47 3.74
52WeekRange 21.87-33.61 Re-Stated 2.89 1.64 1.71 2.46 2.61
Revenue 245263
MarketCap 933.51
SharesOutstanding 30.24 Comparables Price Result
AsStated Re-stated P/E N/A N/A
BookvalueperShare 27.65$ 22.62 P/B 79.34 Undervalued
ReturnonEquity -17.26% -0.73% ForwardP/E 18.58 Overvalued
ReturnonAssets 1.18% -0.004 DividendPayout N/A N/A
P.E.G 7.35 Overvalued
AdjR^2 Beta 2FactorKe EV/EBITDA 30.50 FairlyValued
3month 34.70% 1.91 19.60% EV/Revenue 43.34 Undervalued
1Year 34.70% 1.91 19.60% EV/FCF 77.97 Undervalued
2Years 34.70% 1.91 19.60% Price/EBITDA 24.30 Overvalued
7Years 34.70% 1.91 19.62%
10Years 35.75% 1.91 19.60%
ValuationModel As-Stated Re-Stated
BackdoorKe 10% DiscountedDividends 15.56$ N/A
WACCBT 16.44% DiscountedFreeCashFlows 4.29$ N/A
WACCAT 16.25% ResidualIncome 6.37$ 5.39$
Beta(YahooFinance) 1.76 longRunResidualIncome 23.30$ 20.40$
Lower Expected Upper AbnormalEarningsGrowth 5.12$ 3.73$
Bound Value Bound
SizeAdjustedKe 15.10% 20.00% 42.19%
WACCBT 12.60% 16.44% 33.85%
IntrinsicValuationModels
AltmansZ-Score
MethodtoComparables
CostofCapital
OMGroup-April1,2015
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Industry Analysis
OM Group Inc. is a diversified industrial growth company serving multiple markets
including automotive systems, electronic devices, aerospace, general industrial and
renewable energy. The company serves in three continents with the majority of its
operations located outside the United States. They compete in the specialty chemicals
industry with companies such as Huntsman Corporation, Quaker Chemical Corporation,
and Olin Corporation. These companies are closely related in corporate structure and
values, which is why we chose them to be in our sample industry. After six years of
recovering from the Great Recession, the global demand for specially chemicals is finally
growing, showing positive signs (Specialty Chemicals Magazine). In order to fully
understand the industry, it is important to conduct a Five Forces Model, which can be
seen below.
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The threat of new entrants in the specialty chemicals industry is low because this
is such a competitive and highly specialized industry. Therefore, it takes a lot of time and
dedication to break through into the industry. Existing firms already have their contracts
in place and a distinct cost structure, while new firms will have to have a difficult time
negotiating contracts. This causes the industry to have a lot more knowledgeable firms
that are on a fairly competitive basis with each other.
This then causes the rivalry among existing firms to be moderately high. This is
due to the specialty chemicals industry being so highly competitive. In order for a firm to
gain its customer base, it must be off of previous work accomplished. Therefore, in order
to differentiate from firm to firm, they must create value that is worth more to the
customer than its competitor.
The threat of substitute products in this industry is low because it is based off of
contract work. The firms in this industry function off of the specific needs of the
customers, therefore, the products are more valued based off of quality rather than
quantity. This causes the threat of substitute products to be low because most products
are the only one of its kind.
In this industry, the bargaining power of the customer is low because there are
not many competitive firms in the specialty chemicals industry. Since the options are
very limited, if a customer were to go to another firm for their needs, there is a
possibility that the quality of the product is much lower than the initial.
However, on the other end, the number of suppliers in this industry is even less.
There are only a handful of supplier that are licensed to create the supplies that the
needed in this sector. This causes the bargaining power of the supplier to be high
because there are not many options for the buyer has to purchase from. Therefore
companies in this industry have a greater bargaining power over its suppliers. Overall,
the specialty chemicals industry is very competitive.
Using the Five Forces Model, it can be concluded that the industry works highly
off of differentiation to distinguish the different companies from one another. There are
a lot more customers out there then suppliers, thus causing the industry to continue
growing.
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Accounting Analysis
In order to conduct an accurate analysis, it was necessary to analyze the
accounting practices and policies of OM Group. By doing an evaluating the accounting
analysis, we are able to depict a more accurate value of the firm. This evaluation arises
because of the degree of flexibility when it comes to reporting information under GAAP.
A low level of disclosure means that a firm is not disclosing all their information and is
concealing information that may hurt the value of the firm. However, firms with high
levels of disclosure means that they disclose all relevant information that may either add
or lower the value of the firm. We valued OM Group's level of disclosure through Type 1
and Type 2 accounting policies.
Type 1 policies compare the amount of disclosure of a firm according to its key
success factors. Type 1 policies for OM Group are disclosures of information regarding
customer relations, mergers and acquisitions, research and development, technological
advancement and innovation. In relation to the industry, OM Group discloses about the
same amount of information regarding their key success factors as its benchmark
competitors.
Type 2 accounting policies for OM Group include goodwill and research and
development. These items in their financial statements are seen as having a high degree
of flexibility when recording and change an investor's depiction of the firm. These Type 2
policies are seen as potential red flags.
Goodwill is the first Type 2 policy that is evaluated. It is a potentially distortive
item that can overstate assets and understate expenses if not impaired properly.
Goodwill accounts for a large amount of OM Group’s assets, even when compared to its
competitors. We concluded that OM Group has not properly impaired their goodwill, so
we restated this on the restated financial statements.
Next, we concluded that because R&D is an intangible asset and cannot be clearly
defined; it is something that should be looked at further. R&D is marked as a red flag
because it accounts for 60% of total operating income. This is a significant amount
compared to the total average of 30% for its benchmark competitors.
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Through our evaluation, we have determined that OM Group’s amount of
information available to the public is not an accurate depiction for a valuation. This is a
cause for re-statement of their financials to account for the goodwill and R&D, which can
be seen later in this valuation.
Financial Analysis
The financial analysis is looking over a firm’s financial information and comparing
it against the other competing firms to measure their overall performance. This includes
all financial ratios, forecasting information, and estimating cost of capital. First, we will
analyze the liquidity, operating efficiency, profitability, and capital structure ratios.
Liquidity ratios evaluate a firm’s ability to meet their short-term obligations.
Operating efficiency ratios are used to represent the internal structure of a firm’s
efficiency and how they utilize their assets and manage their liabilities over a period of
time. The liquidity ratios that were evaluated consist of the following: current ratio, quick
asset ratio, inventory turnover, days sales outstanding, accounts receivable turnover,
day’s supply of inventory, inventory turnover, cash to cash cycle, and working capital
turnover. Looking at the ratio analysis their ability to convert their assets to cash is
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relatively average. Overall OM Group is underperforming as a company. These ratios
show the ability of OM Group to convert sales revenue to profit.
The profitability ratios we used are gross profit margin, operating profit margin,
net profit margin, asset turnover, return on assets (ROA), and return on equity (ROE).
Profitability ratios evaluate the ability of a firm to generate earnings and yield a profit.
They also depict the company’s overall efficiency and performance. OM Group is less
efficient in managing their costs and applying their assets to create a profit. Overall, OM
Group is underperforming compared to its competitors and the industry average.
Capital structure ratios evaluate the methods a firm is able to acquire capital and
how their operations are portrayed. We analyzed the following capital structure ratios:
debt to equity, debt service margin, times interest earned, and Altman’s Z-score. The
capital structure of a firm demonstrates how its operations are being financed. Altman’s
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Z-score is the most important ratio used because it measures the possibility that a given
firm will go bankrupt.
Next, we forecasted our financials for OM Group. Forecasting data helps
determine the valuation models. We forecasted out over 10 years using growth rates
consistent with the company's past performance. The further out the forecast goes, the
less reliable it becomes, so more emphasis is placed on the first couple of years.
Financial forecasting uses ratios, trends, and assumptions to forecast future income
statement, balance sheet, and statement of cash flows balances.
Finally, the last step in the valuation process is cost of capital. Cost of capital
consists of cost of equity and cost of debt. After finding the cost of equity and cost of
debt we are then able to compute the weighted average cost of capital. WACC is the
average cost to a firm of obtaining capital from both debt and equity sources
(Textbook). The cost of debt is shown as a weighted average of interest rates a firm
pays on debt. OM Group’s cost of debt was found to be 3.527%. The cost of equity is
calculated through the Capital Asset Pricing Model (CAPM). The formula includes the risk
free rate (Rf), systematic risk (beta), the market risk premium (MRP), and adds a Size
Premium (SP). We calculated a market beta of 1.91 and cost of equity to be 17.30%.
Also we calculated the 2 factor Ke which is 20%. Finally, WACC was calculated on a
before and after tax basis. We calculated the before WACC before tax to be 16.44% and
after tax WACC to be 16.25%.
Valuation Analysis
After conducting our industry analysis, accounting analysis, and financial analysis,
we were able to value OM Group with different valuation models. Our valuation of OM
Group is relative to OM Group’s April 1, 2015 observed price of $30.87. By comparing
the results we got from the different models, we are then able to classify OM Group as
undervalued, fairly valued, or overvalued.
We used two different valuation methods. The first is called method of
comparables, and it involves using industry trends and ratios to estimate a share price
for OM Group. Because this method is based on industry numbers, it does not carry as
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much weight as the second method of valuation. The second method is called the
intrinsic valuation method, and it uses the figures we forecasted in our financial analysis.
The five intrinsic models that we used to value OM Group are the discounted dividends,
free cash flows, residual income, long run residual income, and abnormal earning
growth. Intrinsic valuation models are much more reliable than the method of
comparables. Our valuation places the most weight on the residual income and abnormal
earnings growth models, because these have a higher explanatory power than the
others because they are less sensitive to estimation errors. By using these models and
taking the position of a 10% analyst we are able to conclude that OM Group is
overvalued.
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Company Overview
OM Group, Inc. is a technology-driven, specialty chemicals industrial company
headquartered in Cleveland, Ohio and formed in 1991. It operates through three
different segments: Magnetic Technologies, Battery Technologies, and Specialty
Chemicals. OM Group aims to meet the requirements of a demanding industry by
utilizing the latest technology and remaining innovative in its diverse segments. OM
Group serves global markets and has over 87 manufacturing facilities in North America,
Europe, and Asia. It serves a wide range of industries worldwide and supplies over 4,000
customers, including BMW, Siemens, General Electric, and Sherwin Williams. OM Group
continues to expand its technology portfolio and produce innovative ideas to succeed
against competitors such as Huntsman, Olin, and Quaker. The chart below, shows the
portion of net sales for each segment. In the chart, you can see that the Magnetic
Technologies segment brings in over half of OM Group’s revenue.
Source: OM Group, Inc., www.omgi.com
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Magnetic Technologies Segment
The Magnetic Technologies segment develops, manufactures, and sells industrial-
use magnetic materials. In August of 2011, OM Group acquired Vacuumschmelze (VAC),
a manufacturer of industrial-use magnetic materials. VAC’s magnetic technologies
products range from soft magnets to permanent magnets, and serve a wide range of
end-markets with high-growth potential such as aerospace, automotive systems,
electrical installation, and renewable energy markets. Some examples of VAC’s products
are exhaust gas recirculation coolers, loading motors for cargo planes, and current
transformers. VAC works closely with its customers and is able to meet their specific and
custom requirements. Among its customers, Tyco International, Siemens, Bosch, and
General Electric are some on the list of companies who have returned to OM Group to
conduct business. The Magnetic Technologies segment brought in about 53% of net
sales and was responsible for over half of the total assets in 2013. The Magnetic
Technologies segment also operates 27 facilities across North America, Europe, and
Asia.
Battery Technologies Segment
The smallest of the three segments is the Battery Technologies segment, which
supplies batteries, battery management systems and energetic devices. OM Group
acquired EaglePicher Technologies, a company who creates integrated power solutions,
in December of 2009 for $171.9 million. The Battery Technology segment serves
markets such as aerospace, defense, medical, and alternative/grid energy storage
(AGES). The aerospace division, for example, has helped create battery materials that
have provided, “1.9 billion cell-hours in space without a mission failure” and they have,
“458 satellites in orbit.” EaglePicher works to deliver high-quality and technologically
advanced energy solutions. EaglePicher has contracted clientele such as Lockheed
Martin, Boeing, Raytheon, and St. Jude Medical. The Battery Technology segment
brought in 15% of OM Group’s revenue in 2013 with a total of $150.3 million and
operating profits of $21.8 million.
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Specialty Chemicals Segment
The Specialty Chemicals segment develops and distributes chemicals that create
semiconductors for electronic and industrial applications, which are contracted for the
needs of the customers. The product lines in the Special Chemicals segment are
Photomasks, Advanced Organics, and Electronic Chemicals. The products from this
segment range from very basic parts to high-tech components. They serve customers
such as Compeq, Western Digital, Unitech, and Sherwin-Williams. Customers are
attracted to the Specialty Chemicals segment because it uses unique and innovative
technology that has been specifically patented by and for OM Group. The Specialty
Chemicals segment brought in 32% of revenue in 2013 with a total of $522.6 million in
net sales. The Specialty Chemicals segment has 36 facilities throughout North America,
Europe, and Asia.
Revenue Growth Rates
Although some of OM Group’s competitors are bigger in size, the growth rates
over the last five years for OM Group have been relatively similar to its competitors, with
a few exceptions. We chose three benchmark competitors that represent the industry as
a whole: Huntsman Corporation (HUN), Quaker Chemical Corporation (KWR), and Olin
Corporation (OLN). We interpreted that OM Group’s total revenue decreased as well as
its competitors. It can be concluded that OM Group’s sales went down in 2013 from
previous years, while sales in the Specialty Chemicals Industry are expected to increase
in the next five years (SeekingAlpha.com). The reason for this expected increase in sales
and profitability is due to “the optimistic outlook for China, Other Asia and other
emerging markets, where manufacturing activities-notably automobile and electronic
production-are expanding significantly” (SeekingAlpha.com). According to OM Group’s
10-K, the decrease in sales in 2013 was due to the divestiture of the Advanced Materials
business, which had a $280.8 million impact. Another reason for the declining growth
rate was caused by the lower rare earth prices, which caused a $113.3 million impact.
OM Group’s 10-K states that, “excluding these two items, net sales increased 0.8% in
2013 compared to 2012.”
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Total Asset Values
The chart below shows the total asset values for the last five years for OM Group
and its peers. OM Group’s total assets are significantly less than its top competitors,
Huntsman and Olin, yet it still managed to produce similar growth rates, as seen in the
Total Revenue chart above.
Stock Price Performance
OM Group is a publicly traded company and is represented by the stock ticker,
OMG. KeyBanc Capital Markets-2014 Basic Materials Conference reports that OM Group
had cash dividends of $0.075/share in the first quarter of 2014. The report also states
that OM Group returned $5 million to its shareholders through June 30, 2014.
The chart below shows OM Group’s stock performance over the last five years.
The prices went down significantly from 2012 to 2013, due to the decrease in sales from
the divestiture of the Advanced Materials and the lower rare earth prices, as previously
discussed. As shown below, stock prices have been on a steady incline coming in to
2014.
Company 2011 2012 2013 2014
OMG 1,419,600 1,544,500 1,157,500 1,067,500
HUN 11,221,000 11,187,000 11,079,000 11,578,000
KWR 683,231 708,226 729,395 765,860
OLN 1,961,100 2,184,700 2,515,000 2,241,000
Industry Average 3,821,232.75 3,906,106.50 3,870,223.74 3,913,090
Total Revenues-In Millions
Company 2010 2011 2012 2013 2014
OMG 1,772,710 2,873,832 2,499,400 1,783,100 1,419,500
HUN 8,714,000 8,657,000 8,884,000 9,188,000 11,002,000
KWR 449,430 511,152 536,634 584,146 665,526
OLN 2,048,700 2,449,600 2,777,700 2,802,800 2,698,100
Industry Average 3,246,210 3,622,896 3,674,433 3,589,511.50 3,946,282
Total Asset Value-In Millions
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The picture below is depicting the cumulative total shareholder returns and compares
OM Group to the S&P 500 index and the S&P 500 Specialty Chemicals Index. OM Group,
remained steady with the S&P 500 Specialty Chemicals Index from 2010 through 2013,
then started slightly underperforming from 2013 to 2014. In order to maximize the
returns of their shareholders, OM Group must find a way to increase their dividends
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Source: (AccountingCoach.com)
Industry Overview
The specialty chemicals industry sector creates materials that are used on the
basis of their performance or function of which other sectors rely. The industry’s success
strategy is to grow through innovation, customer development, new mergers and
accusations, and research and development. Most often, the products produced in the
specialty chemicals industry are specially designed and manufactured for specific
customers. A key factor in the industry is that it is a growing market in the developing
countries. Also, the industry has also been experiencing heavy merging and increasing
acquisitions. ”The predicted growth rates for the [specialty chemical industry] in” 2013–
2018 are 2.0% for the three major regions (North America, Western Europe and Japan),
and 3.8% on a global basis” (IHS.com). There are more countries becoming involved in
the specialty chemicals industry, and with the recent spread of technology, and rapid
growth in developing countries results is a distinct shift in consumption. Many countries’
standard of living is increasing, which causes growth for the industry. The companies we
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chose as OM Group’s competitors are Quaker Chemical Corporation, Huntsman
Corporation, and Olin Corporation. Overall, the specialty chemical industry is gradually
growing worldwide.
Five Forces Model
The Five Forces model helps determine the average profitability of an industry
using five competitive forces that shape the industry. It is an analysis and classification
tool used to help find the average earnings for a company. This model helps conclude
the firm's worth and whether the firm's stock price is over or undervalued. The five
forces consist of threat of new entrants, bargaining power of suppliers, bargaining power
of customers, threat of substitute products, and rivalry among existing competitors.
These five forces will help determine what the company does well and what it needs to
improve on. There are three categories in which the forces are grouped into, high, low
or moderate competition.
The Specialty Chemical industry has a low threat of new entrants because it
requires extreme amounts of research and development and there are high start up
costs, sunk costs, and switching costs. Because of these high costs, it is more
challenging to enter the specialty chemicals industry. The bargaining power of suppliers
is high for specialty chemicals because having minimal suppliers and limited substitute
products causes the supplier to have power over setting prices. The bargaining power of
customers is low because the industry has many customers and there is no room for
price fluctuation. The threat of substitute products is low because the unique materials
used cannot be interchanged. Once a product is made, the products serve particular
functions and there is no product that could easily substitute it. The rivalry among
existing competitors is moderately high because the specialty chemical industry has
many competitors putting pressure on prices.
Overall, the five forces model is essential to making conclusions about the
profitability of a firm. The profitability of the specialty chemicals industry is low because
of the slow growth over the last few years. This is mainly caused by the increase in
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competition in the industry. The industry is expanding to developing countries, which is
causing more competition and a larger and a more aggressive industry as a whole.
Rivalry Among Existing Firms
Assessing a business' competitors is key to an effective business evaluation. The
specialty chemical industry is unique because no company has all the same segments.
The companies that are closely in competition with OM Group are Huntsman
Corporation, Quaker Chemical Corporation, and Olin Corporation. We chose these
competitors based off total sales, total assets, market cap, and gross margin. The rivalry
among these existing firms is moderately high. The important components that will be
analyzed to gain an understanding of the rivalry in the specialty chemicals sector are
industry growth rate, concentration, differentiation, switching costs, economies of
scale/learning, fixed-variable costs, excess capacity, and exit barriers.
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Industry Growth Rate
The industry growth rate is the increase in size or scale of all the companies in a
certain industry. In order to completely understand an industry's growth rate we need to
focus on a company's success, which not only is determined by its internal actions but
by its competition as well. Furthermore, the industry growth rate helps determine
whether or not we want to buy and sell market shares. For example, OM Group focuses
their strategy on future acquisitions, which is why they are constantly looking for new
companies to acquire. The larger companies have greater brand recognition and more
resources to set them apart in the industry. The specialty chemical industry’s competitive
advantage is that each company is unique and they offer a wide range of specialty
items. The specialty chemical industry is typically dependent on the current global
conditions. If the economy is declining, gaining access to cheaper raw materials
becomes tougher because the raw materials become more expensive. Firms are
competing for market share and customers through differentiation, concentration and
innovation. The table below shows the percentage change in revenue for OM Group and
its competitors.
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The specialty chemical industry slowed down during economic downturn and now
is beginning to grow at a steady rate, with some years better than others. One of the
many reasons for fluctuations in growth is the market for raw materials. A mineral that is
scarce and high in demand will drive prices up. In conclusion, the specialty chemical
industry is continually developing and is a very competitive industry to thrive and
succeed. From a global perspective, the specialty chemical industry is expanding to
developing countries that are beginning to industrialize such as Asia and the Middle East,
which means there is growth expected in the future.
Concentration
Concentration refers to the amount of competition in the industry. Competition in
the industry can be determined by the company's market share and sales. The specialty
chemical sector has over 400 companies worldwide, however most are very small and do
not pose a threat. The unique specialty sectors each company encompasses are
important because competition determines if the company is a price setter or price taker.
In this case, the specialty chemical industry is both. Price takers let the markets decide
its prices. Since the industry uses many minerals like cobalt, nickel, and rare earth
minerals it heavily relies upon the market to determine the price of its products. The
more expensive a product is to receive from its supplier, the harder it is to drive the
price down. The industry is also considered a price setter because of their unusual
product menu. They are able to charge premiums on the specialty of these products and
customization of these items. Overall, we have found that the specialty chemical industry
is both a price setter and a price taker.
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In terms of market share, HUN has most of the shares and OLN is gaining more
shares over the years. OMG and KWR are also growing just have significantly less
shares. The reason Huntsman has most of the market shares is because it is one of the
largest leading specialty chemical companies. When comparing competing firms, the
graph and chart depicts the growth of each firm in comparison to its competitors.
Differentiation
Differentiation refers to the uniqueness of the products. Product differentiation
can create a competitive advantage for companies. When firms have high levels of
differentiation, there is less competition. For smaller businesses, product differentiation
can provide a distinct competitive advantage over larger companies. For instance, each
company in the industry is vastly different from all of its competitors. This allows for
companies to be price setters because a majority of their products offer distinct benefits.
For example, OM Group operates through Magnetic Technologies, Battery Technologies,
and Specialty Chemicals segments, all of which are rare sectors. All of these segments
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are very distinct so products in this market cannot be found in other markets. Therefore,
all the firms in the industry have different products to offer. In conclusion, the specialty
chemical industry has high differentiation because of the unique product design.
Switching Costs
Switching costs represent the cost for a customer to transfer from one firm to
another. In the specialty chemicals industry there are limited alternatives. Once a
specialty item is produced, it can only serve its original purpose. For example, OM
Group’s Magnetic Technologies segment does not have much room for substitution. This
segment uses rare earth minerals exclusively from China, so the switching costs are very
high. Normally, products are specified in the early production stages so there are limited
alterations that can be done without significant cost implications. Companies aim to
make high switching costs to gain loyal customers. Overall, the switching costs in the
specialty chemicals industry are high once the product has begun the production stage.
The opportunity costs associated with switching costs are high because the machines
cannot be used to create different products. The industry makes it tough and costly to
switch to a different competitor because of the unique specialty products produced from
each company. In general, it’s hard for customers to get the same comparable product
elsewhere.
Learning Economies
The main difference between the economies of learning, economies of scale and
economies of slope is production. Economies of learning is focused on becoming a
specialist in the industry and improving its efficiency. Research and development can
help a company become more efficient and produce less waste. Also, by being in a
learning economy, it leads to creating a better sense of management, which in turn
speeds up the process, making the company resourceful and proficient. Learning
economies play an important role in the specialty chemical industry because of the
uniqueness of their products and how much research and development goes into each
product. From OM Group’s 10-K, they state their research and development programs
27
are part of their strategy to grow the business through new products, applications and
markets. Below, is the research and development for OMG and its competitors excluding
OLIN because they had little R&D.
Above, shows that the specialty chemical industry uses significant amounts of
research and development. So in conclusion, the learning economies are important to
the industry as a whole by creating competitive advantages and reducing production
costs. Economies of learning plays a bigger role in the specialty chemicals industry
because of the amount of research and development required to produce just one
product. Companies in this specialty chemicals industry invest large amounts of money
in R&D and require knowledgeable employees, which makes economies of learning so
important in this industry.
Scale of Economies
Economies of scale is when you produce more to reduce production costs.
Economies of scale are the cost advantages companies use to determine the scale of the
activity. For example, in a commodity market, companies usually manufacture their
products in bulk to create economies of scale, while in the specialty chemical industry
they have to be flexible because of their unique product designs.
Economies of scale in the specialty chemical industry is important because in
order to decrease costs, there needs to be an increase in production. Economies of scale
is even more important in a commodity or restaurant industry where it is necessary to
have products produced in bulk. The idea of economies of scale is important when
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looking at the total assets a company has. The graph below shows the total assets of
OM Group and its competitors.
The specialty chemical industry is highly competitive sector. From the graph we
see that all companies are slowly growing over time, meaning the industry as a whole is
growing. Because the companies and the industry as a whole are growing, the firms are
able to increase production and open more facilities worldwide.
Fixed-Variable Cost
Fixed costs are not dependent on production output while variable costs differ
depending on the level of sales. The specialty chemicals industry has high fixed costs
because of the customized products, but it is also common for cost per unit to decrease
as production output increases. Operational leverage is a measurement of the
combination of fixed and variable cost. That being said, companies with low production
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and a higher gross profit margin have higher leverage. As production increases, each
sale contributes less to fixed costs and more to profitability. The higher the operating
leverage, the greater the risk.
Excess Capacity
Excess capacity is when it is possible to decrease average cost by increasing the
output, and it can be measured by the amount of added output that will reduce the
average cost to a minimum. In the specialty chemical industry, excess capacity is not a
problem. For example, many companies use rare minerals that will never be available in
abundance. When a company has excess capacity it can also mean that the firm has
increased pressure in respect to pricing followed by a decrease in income. Excess
capacity is determined by the level of competition in an industry.
Exit Barriers
There are high exit barriers in the specialty chemical industry due to limited
switching costs. Therefore, having entry and exit barriers increases rivalry and
competition, which is beneficial for companies. The exit barriers are high in the specialty
chemical industry because of the increasing amount of competition. The unique design
and process of the products lead to significant differentiation. Additionally, a large
amount of R&D is spent in this industry so the barriers to exit are high. Companies in the
industry tend to have a lot of money invested into their equipment and
products. Mergers and acquisitions are becoming more prevalent in the industry to gain
more market share.
Conclusion
We conclude that the rivalry against existing firms for the specialty chemical
industry is highly competitive. The high exit barriers create more competition and high
levels of differentiation. The products the industry produces and manufacture are very
limited. In the specialty chemicals market there are limitations when switching within the
industry. The specialty chemical industry has both price setter and price taker
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characteristics. OM Group and its competitors are in a constantly growing industry.
There is minimal excess capacity and high fixed costs in the specialty chemicals industry
because of the product’s unique design.
Threat of New Entrants
For threat of new entrants, we look at what barriers to entry exist in an industry
and how likely it is that new firms will try to enter that industry. Threat of new entrants
consists of five factors: scale economies, first mover advantage, distribution access,
relationships, and legal barriers. As analysts, we use these five factors to determine
what position a company is in, in comparison to competitors.
Economies of Scale
Scale economies occur when a firm lowers their total costs by producing in higher
quantities. Scale economies can cause new firms to suffer initially from a cost
disadvantage to the existing firms in that industry because they face the choice of
having either to invest in large capacity, which might not be utilized right away, or to
enter with less than optimum capacity (textbook). Companies in the specialty chemicals
industry can serve a number of different markets including automotive, defense, space,
medical, and industrial and most of their products are customized and tailored to the
specific customers’ needs. Most firms in the specialty chemicals industry do not have the
option to produce in high quantities in order to reduce costs. Some of the raw materials
that they use are only available in limited quantities from limited suppliers. In OM
Group’s specialty chemicals segment, for example, new products and customers often
require a long qualification process, as stated in their 10-K. This means that scale
economies does not apply to OM Group or this industry.
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First Mover Advantage
A first mover advantage exists when a firm has advantages that put it ahead of
the competition and potential new entrants. Some advantages include, being able to set
industry standards or enter exclusive arrangements with suppliers of cheap raw
materials. These firms may also acquire scarce government licenses to operate in
regulated industries (textbook). A first mover advantage in the specialty chemicals
industry can be acquired through intensive research and development. Some firms may
not be able to obtain cheap raw materials, like in the case of OM Group’s Magnetic
Technology segment, where certain rare earth mineral’s price can fluctuate and are
actually available in limited quantity from a supplier in China. Some firms, however, do
invest in research and development and have a number of licenses and agreements with
close customers. Below is a table and chart with the total research and development
spending from firms in the specialty chemicals industry as a percentage of total sales,
which shows how much firms in this industry spend on R&D compared to each other.
Total R&D as a percentage of Total Sales
2013 2012 2011 2010 2009
OM Group 2.27% 2.08% 1.72% 0.99% 1.06%
Huntsman 1.26% 1.36% 1.48% 1.63% 1.89%
Quaker Chemical 2.95% 2.81% 2.75% 2.87% 3.32%
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The chart makes it easier to compare the different firms’ R&D spending, through
5 years. This shows that OMG is holding true to its mission of “being focused on
developing new products and entering new markets” (OMG 10-K) even though they are
competing in a fragmented market. Compared even to its larger competitors, OM Group
spends around the same amount on R&D. OM Group is a prime contractor or
subcontractor for numerous U.S. government programs including U.S. government
customers through its Battery Technologies segment (OMG 10-K). The relationships with
these key clients, how much it invests in R&D, and the fact that there are only a few
competitors qualified to supply to the principal markets of the Battery Technologies
segment are what give OM Group a first mover advantage. Overall, OM Group has some
first mover advantages through some of its segments.
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Access to Channels of Distribution and Relationships
Limited capacity in the existing distribution channels and high costs of developing
new channels can act as powerful barriers to entry (textbook). OM Group mostly sells its
products directly to the customers, who then incorporate these products into their sub-
assemblies or final assemblies. This means that they have access to many channels of
distribution because these channels are already well developed. They also hold key
relationships with large customers, like in the case of its Battery Technologies segment
where they hold agreements with numerous U.S. government programs (OMG 10-K).
This reason alone is a barrier to entry that is hard to overcome. These relationships are
key when entering the specialty chemicals industry and make it very difficult for new
firms to enter.
Legal Barriers
There are many industries where legal barriers such as patents and copyrights in
research-intensive industries limit entry (textbook). These barriers can also include
licensing regulations and patents. Firms in the specialty chemicals industry can often
hold certifications that allow them to supply to specific markets. Firms looking to enter
this industry will also find that there are numerous environmental regulations that they
must follow when it comes to the manufacturing of their products. OM Group for
example, like other firms in this industry, is subject to a variety of environmental and
pollution control laws and regulations in the jurisdiction in which it operates (textbook).
As is the case with other companies in similar industries, they face exposure, potential
claims, and legal proceedings involving environmental matters (textbook).
Conclusion
Firms looking to enter into the specialty chemicals industry will find that entry is
very difficult. There are a number of barriers to entry, which OM Group and its
competitors have crossed off with key relationships, knowledge, and years of experience
in the field. These relationships, plus extensive investment in research and development
are key in succeeding and holding your market share in the industry. Even though scale
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economies is non existent in this industry, potential new entrants will find it very difficult
to acquire the connections to raw materials necessary to get started in this business.
Because OM Group is so diversified, having three different large segments helps it hold
its ground in the special chemicals industry. Overall, threat of new entrants is low.
Threat of Substitute Products
Threat of substitute products is something that firms in any industry must be
aware of how it relates to them. Relevant substitutes are not necessarily those that have
the same form as the existing product, but those that perform the same function
(textbook). Like previously mentioned, the treat of substitute products in the specialty
chemicals industry is very low.
Relative Price and Performance
Relative price and performance in the specialty chemicals industry plays a big role
in existing competition among firms. Firms in the specialty chemicals industry can
sometimes have very high raw material prices. Companies pass on the cost of these raw
materials to customers through higher prices on their products. These high prices can
determine the overall performance of the competitor’s products and the firms
themselves, because if prices are high, customers will move on to a cheaper option. This
will lower the firm’s total sales.
The size of a firm can sometimes be an important factor in how well it can handle
high raw material prices. The firms that we chose to represent the specialty chemicals
industry are not all the same size. Larger firms are often in a better financial position
than their smaller counterparts. This means that they can have a better relative price
and performance for their products. Even though OM Group is slightly smaller than some
of its competitors, it handles its pricing fairly well.
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Buyer’s Willingness to Switch
Sometimes a firm’s performance depends on how likely it is that the buyer will
switch to a competitor. This is purely based on whether the buyer feels that one product
or service serves the same purpose as another for a lower price. This can be somewhat
of a danger for firms in the specialty chemicals industry if raw material prices get too
high. Since some firms are in a better financial position, the firms with a slight financial
disadvantage will have trouble adjusting to those higher raw material prices. This can
cause buyers to look for alternatives elsewhere. In the specialty chemicals industry, it is
not very likely that a buyer will switch among different competitors, because of the
strong relationships that are developed between suppliers and buyers.
Conclusion
Firms in the specialty chemicals industry can have threats of substitute products
in some segments where there is a limited availability of raw materials. Also, because
some firms are in a better financial position, can cause an imbalance of market share
among firms, which leads to buyers switching to a competitor for better prices. This is
because the firms that are not in a good financial position cannot handle high raw
material prices very well. Even then however, operating in different segments, like OM
Group, can give a firm enough diversity to handle price hikes well. Overall, the threat for
substitute products is moderately low.
Bargaining Power of Customers
The bargaining power of customers relates to the effect the customer has on the
prices. This happens when the buyer is organized and a desirable client, which leads to
revenue for the supplier. Also this can happen when there are more buyers than
suppliers. In terms of the special chemical industry the customers do not have much say
on the prices. The specialization of the industry prevents customers from demanding
special prices. The majority of the work done in the industry uses raw materials with
36
high costs that are directly passed down to the customer (OMG 10-K). Most of the
customers in the industry are repeat customers with long standing relationships with
their suppliers. For example, OM Group’s has various loyal customers that continue to do
business on a regular basis and make up a large portion of their contracted work. (OMG
10-K). The suppliers have control of the prices because of the limited products. In order
to effectively understand the bargaining power of the customer, two main concepts must
be understood. First, price sensitivity is the degree to which the buyer cares to bargain
on price. Second, relative bargaining power controls the degree to which they will be
able to drive prices down.
Differentiation
Differentiation is used to analyze the company’s purpose to separate one product
from another. In the specialty chemicals industry companies’ are limited to the service
and function. Specialty chemicals are sold on the basis of their performance or purpose,
rather than composition. All in all, specialty chemicals are very difficult to differentiate.
This is important to the industry because it creates low power of the customers to
demand price due to the high level of technology and raw material cost that is
associated with specialty chemicals.
Price Sensitivity
Price sensitivity is the effect of a price increased or decreased. In order to stay
and remain competitive, companies must compete with price. In the specialty chemicals
industry, revenue is sensitive to the cost of raw materials. Price sensitivity can be a large
factor in the company’s revenue from year to year. The way companies in the specialty
chemical industry compensate for increasing raw materials cost is increasing the selling
price (OMG 10-K). If the price of raw materials is high then the overall price of a good
will is higher. For example, one of OM Group’s larger segments, Magnetic Technologies,
uses the rare earth minerals, dysprosium and neodymium. The minerals are
concentrated in China and prices are continually on the rise. Minerals and metals, like
cobalt and nickel are also greatly impacted during industrial expansion and recession.
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Thus, businesses are actively in search to diminish costs in order to obtain higher
productivity. If the price becomes too high for a certain product, then customers will
look for substitute goods therefore decreasing demand for a company's products.
Number of Customers
The specialty chemicals industry has many different customers. The large number
of buyers reduces the bargaining power of the additional companies. OM Group has
approximately 4,000 customers worldwide, such as Lockheed Martin, General Electric,
PPG Industries and Raytheon. Companies in this industry must work with their
customers based on the unique product requirements. Since the demand for the
products is spread out among a large customer base, none of the customers have an
impact on the price of the products.
Conclusion
In conclusion, price sensitivity is high because of the rarity of its products in the
specialty chemical industry. Its prices fluctuate with the economy and the prices of raw
materials. The cheaper the raw materials are, the cheaper the product will be. Also,
since its products are high in value and made especially for customers, it optimizes the
cost structure causing limited price variation. Most of the industry utilizes established
customer relationships to continue business, but with the wide customer base the
customers have very little impact on the price of the goods.
Bargaining Power of Suppliers
The relative bargaining power between the supplier and buyer is directly
correlated and is indicative of each other in an industry. However, two main instances
occur that give suppliers more bargaining power. First, the supplier has an advantage
when there is a limited supply of companies available and a minimal amount of
substitutes available to its customers. Second, if the buyer contracts the seller to provide
38
a product that is critical to their business, the supplier has much more control and
power.
Number of Suppliers
The number of suppliers in the specialty chemical industry is very limited based
on the uniqueness of the products that are being manufactured. There is not much
competition for suppliers in this industry because the number of suppliers is very limited
and most products being produced are customized solely to the buyer’s specifications. In
comparison to the number of consumers, the suppliers have high bargaining power
because they are the sole supplier. The specialty chemical industry gets its materials
from a small number of suppliers, which limits its ability to demand prices for materials.
The prices that the suppliers of raw material demand directly affect the price that the
industry will charge for its products.
Switching Costs
Switching costs refers to a firm’s ability to readily switch from one supplier to
another based solely on price. This is an enabler for price competition to play a greater
role if the switching costs are low. The extent that one is able to easily switch costs is
dependent on the company and industry that it is in. In an industry that is highly
specialized, OM Group only has one supplier; therefore there is not much room for
switching costs in this field. This gives BASF SE, OM Groups supplier, a better advantage
because they are relied solely upon by OM Group. The industry gets its materials from
sources that fluctuate during economic downturns and have regulatory laws imposed on
them (KWR 10-K). The limited supply makes switching costs high.
Conclusion
To view the specialty chemicals industry in a broad perspective, it can be seen
that the bargaining power of the supplier in this industry is relatively high in regards to
other industries. In other industries like food, technology, or services, there are usually
more firms involved, thus giving the customer more options to take their business
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elsewhere if they believe prices are too high. In regards to the bargaining power
between OM Group and BASF SE, there is not much room for negotiations here because
OM Group has no other suppliers, thus no other options. This means that essentially,
BASF SE can charge OM Group a premium for the specialty products that are being
manufactured.
Key Success Factors for Industry
When a company is trying to manage its success, it must hold a strong position as
one of the top players in the industry. Therefore, by developing key success factors, a
company is able to create a competitive advantage for themselves and make them stand
out from their competitors. Companies in the specialty chemicals industry narrow their
focus on close customer relations, innovation and advanced technology, mergers and
acquisitions, and investing in research and development. These key success factors work
to provide greater benefits and services to customers at a better price than its
competitors while creating value.
Customer Relations
Relationships with customers are crucial when it comes to the growth of a
company in any industry. Close contact and a good relations with customers are
extremely important for the specialty chemicals industry because companies are
essentially competing to fulfill the needs of its customers. The products that are
designed and manufactured in the specialty chemicals industry are custom and require a
lot of input from the customer. This is especially true when these relationships are with
key customers who trust the company and the business. For example, OM Group is able
to build a strong relationship with its buyers, giving them a more likely chance they will
continue to purchase from them. It is relationships like these that set companies apart
from the competition.
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Innovation and Advanced Technology
The specialty chemicals industry is constantly developing and growing. Because of
this, by focusing on innovation and advancing in technology, OM Group is able to
compete with its benchmark competitors in this industry. The constant change in this
industry is what makes innovation a key success factor for this firm. In order for OM
Group to keep up with its competitors and be more attractive to customers, it has to
stay ahead of the game. Customers in search of specialty chemicals products will be
more attracted to a company with advanced products and designs because the quality of
the desired product will be higher and more cutting-edge. This is one of the specific
drivers that OM Group focuses on that helps them keep a competitive advantage.
Mergers and Acquisitions
A key factor that plays a big role in the success of any firm in an industry is
mergers and acquisitions. If careful planning and efficient financing are taken into
consideration, merging and acquiring firms can be very beneficial to a company in the
specialty chemicals industry. A company will decide to acquire another company for
many reasons such as diversification, growth, and to eliminate competition. OM Group is
a company that has acquired other companies. This created diversification in OM Group’s
portfolio and has helped offset the loss in some of their underperforming segment.
Acquisitions can also benefit a company by increase growth simply by adding another
successful firm to its company. OM Group was able to successfully eliminate one of their
competitors and used it to their advantage by acquiring one of the companies they
compete against. This has eliminated some of their future competition within the
industry and increased their market share by purchasing something that would add
value to their firm.
Investing in Research and Development
Although investing in research and development can be expensive, it is crucial for
companies in the specialty chemicals industry. This industry is constantly changing,
which is why successful companies need to stay ahead of the game and more
41
importantly, ahead of their competitors. This is why research and development is one of
the core competencies that OM Group relies on to do well. Research and development
plays a big role in how OM Group stays on top of their customers’ demands and fulfills
their contracts in the most manageable way possible.
Competitive Advantage Analysis
Competitive advantage strategies can be broken down into two separate
divisions: cost leadership and differentiation. Cost leadership refers to supplying the
same product or service at a price that is lower than its competitors. Some divisions of
this include having lower input costs, economies of scale and scope, efficient production,
and simpler product designs. On the other hand, differentiation refers to supplying a
product that is unique to customers at a lower cost than the premium that is willing to
be paid. Some divisions of differentiation include superior product quality and variety,
flexibility of design, and investment in brand image. When it comes to the specialty
chemical industry, focusing on differentiation will allow a firm to create and add value to
a product rather than focusing on cost leadership. By matching a firm’s core
competencies and key success factors, it will be able to create a strategy that puts it
above its customers.
Key Success Factors for OM Group
There are four main key success factors that OM Group relies very heavily on:
customer relations, mergers and acquisitions, investments in R&D and technological
advancement and use of innovation.
Customer relations play a big role in creating repeat business for OM Group.
Through strong relationships, OM Group is able to build and manage their relationships
with its customers and hopefully persuade them to come back to OM Group for their
other needs. OM Group’s Battery Technologies segment maintains contracts with the
United States Government. This is because there are not many firms are qualified to
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supply to this segment’s main market. Its three customers account for half of the sales
in this segment (OLIN 10-K).
Acquiring other companies is a business strategy that OM Group utilizes and being
able to smoothly transition and merge companies is a tactic that will highly benefit the
company. One of OM Group’s strategies is to grow primarily through synergistic
acquisitions as they state in the 2013 10-K. OM Group has acquired three key companies
in the last five years relating to their Magnetic Technologies and Battery Technologies
segments. The most recent was their acquisition of Ener-Tek International Inc., a
designer, developer and manufacturer of high-performance lithium-ion and silver-zinc
cells and batteries for niche applications in defense and aerospace markets, for $24
million (OMG 10-K). They also acquired Vacuumschmelze GmbH & Co. KG (VAC) of
Hanau, Germany, a global market leader in advanced materials and specialty magnetics,
for approximately 700 million Euros, including $50 million in common stock in August of
2011 (OMG 10-K). Finally, in December of 2009 they expanded their battery
technologies segment by acquiring Eagle Picher Technologies LLC, (EaglePicher) a
wholly owned subsidiary of EaglePicher Corporation for $171.9 million (OMG 10-K).
Through these acquisitions OM Group is making sure it can hold its market share in its
industry.
Investments in research and development play a large role in how OM Group can
emerge as a market leader through the creation of products that fit the need of every
customer. OM Group is aware of the importance of this, which is why it has to invest
large sums of money towards R&D in the past. These costs show that OM Group is
constantly working on growing and developing new and innovative products for
customers.
Lastly, technological advancement and innovation is something that sets OM
Group apart from its competitors. By employing the latest technology to go about their
operations, OM Group is able to create highly innovative products that others cannot.
OM Group puts a large amount of focus on improving their ideas and creating
breakthrough products. The 2013 Annual Report states, “As we enter 2014, we expect
innovation to be a driving force for profitability growing our business and enhancing our
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position in markets that reward technology.” Joe Scaminace, the CEO and Chairman of
OM Group provided examples of innovation going on in OM Group in a 2014 conference
call (SeekingAlpha.com). One of the examples he gives is from the Battery Technologies
segment serving the medical market. He states that EaglePicher is, “producing batteries
to meet the heavy demand within the leadless pacemaker market. Two years in the
making, this design has been validated and FDA cleared and is now being implanted in
patients around the world. It’s one-tenth the size of a traditional pacemaker and
performed as an outpatient procedure” (SeekingAlpha.com).
Differentiation
When it comes to choosing between cost leadership and differentiation, a
company should choose the characteristic that fits best with both the industry and
company. With OM Group, the focus is more heavily on differentiation than cost
leadership because knowledge based industries such as the specialty chemicals industry
works heavily to set themselves apart from others while doing focusing on innovation.
In order for a firm to successfully follow the differentiation strategy, three things
must be satisfied: (1) the need to identify one or more attributes of the service
customers value, (2) positioning itself to meet these needs in a unique manner, and (3)
achieving it at a cost lower than the price the customer is willing to pay for the product
(Textbook). Through differentiation, the firm will be able to fulfill the customers needs
better than the competing firms, at a price lower than the premium the customer is
willing to pay. This allows the firm to avoid major competition in a very innovative
industry.
Investing in Research and Development
Research and development plays a big role on how OM Group operates in such a
competitive industry. R&D programs are part of the strategy to grow the business
through new products, applications and markets (OMG 10-K). Just in 2013 alone, the
company incurred $26.3 million to R&D to create sustainable and innovative products to
“fulfill customer orders and execute customer products” (OMG 10-K). This plays a big
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role in ensuring that OM Group is able to create efficient products that are up to par with
the needs of its customers (OMG 10-K). Because OM Group is in a specialized industry,
intensive R&D is necessary to serve attractive global market needs.
Competitors, such as Olin, are able to protect their intellectual property through
the use of patents, trademarks, and copyrights. This authorizes that the right and use of
their ideas to only individuals that have access to them. However, companies like Quaker
devote the majority of their funds to research and development laboratories. This works
to improve and modify the formulations to provide chemical specialties in each of its
manufacturing sectors (KWR 10-K). Research and development plays a big role in the
intellectual property that a company has and allows them to compete with others who
are partaking in innovative projects.
Superior Product Quality
With more than 4,000 customers in over 50 industries world wide, providing a
reliable product is an important factor that differentiates OM Group from its competitors.
Superior product quality provides OM Group with a platform to competitively compete
within the industry. In order to address customers’ complex applications and demanding
requirements, three things must be required: innovation, high quality, and sustainability
(Textbook).
In this industry, innovation is a prime determinant for success. When performing
such a wide variety of tasks, innovation is crucial in becoming an industry leader. This
attribute is what has moved OM Group to the top of the specialty chemicals
sector. Because the commerce is specialized to a great extent, OM Group relies heavily
on patents and trade secrets to protect their intellectual property. Therefore, one must
continuously come up with creative and unique solutions to the existing problems its
customer faces. Lack of innovation in such a customized industry will result in customers
taking their business elsewhere.
After studying the industry, it can be determined that a high quality product is
essential in keeping customers from seeking a different manufacturer (OMG 10-K). This
is a highly useful differentiation strategy because it eliminates competitors who produce
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products that are not up to par with the customers’ standards. For example, OM Group
specifically designs and manufactures basic materials for specific customers who then
goes on to integrate them into their own product. Therefore, the customers’ products
are dependent on the quality of OM Group’s products. Without a quality product,
customers are less likely to repeat business transactions and seek other alternatives to
their needs.
In a chemically based industry, sustainability is an enabler for developing
reputation and maintaining a good foothold for creating a long-term customer base.
Furthermore, it develops a better reputation and further attracts customers who care
about their environmental footprint. In the long run, sustainability can act as a cost
saving method. By becoming more efficient in various sectors, for example cutting
electricity cost, a company is able to better mitigate the risks associated with the
uncertainty of valuable resources. When it comes to rare earth metals that OM Group
develops, utilizing them in the best manner possible with not only benefit the company
but also reduce the environmental impact that OM maintains. However, when examining
their internal structure, if OM Group were to improve upon the process of creating their
products, they will be able to keep a sustainable business that will benefit them long
term.
Conclusion
Differentiation is a big player in how a company is able to provide the customer
with a product at a price that they are more willing to pay than the premium. Through
superior product quality and investments on research and development, OM Group is
able to distinguish themselves from other market players in the same industry. By
focusing on these qualities, OM is creates crucial service for its customers.
Introduction to Accounting Analysis
After our initial examination of the industry based on the five forces model, it is
important to look at the accounting analysis that evaluates the degree to which OM
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Group captures their underlying business economics (Textbook). This process is going to
evaluate the degree of falsified information OM Group has on their financial statements.
The following things will be addressed in the accounting analysis: key accounting
policies, degrees of potential accounting flexibility, actual accounting strategy, quality of
disclosure, and lastly, identifying any potential red flags. By beginning with the key
accounting policies of OM Group, we work to bridge their key accounting policies with
their key success factors that were discussed previously. Then, the need to assess the
degree of potential accounting flexibility must be evaluated to show what items a
company chooses to disclose to the public. Once that is completed, it is important to
evaluate the actual accounting strategies that are utilized based on the different
standards of accounting policies that is used by OM Group compared to its competitors.
This creates a degree of falsified information that is shown on the financial statements.
Last, any potential red flags must be identified for OM to distribute sound information to
the public. By providing reliable information in the accounting analysis, OM Group is able
to provide authentic data that is later used in the financial statement analysis. The
different parts of the accounting analysis are discussed in further detail below.
Key Accounting Policies
To first evaluate OM Group’s accounting strategy, it must be clear what the two
types of accounting policies they utilize. By taking their key success factors, we are able
to determine OM Group’s characteristics and competitive advantage. First, issues may
arise because of impaired financial statements that derive from distinct accounting
policies used to value a company. These policies are classified as Type One and Type
Two accounting policies. The first policy studies the relationship between key success
factors that shape OMG and the operations that make up for it. The following Type One
policies will be discussed: customer relations, mergers and acquisitions, research and
development, and technological advancement and use of innovation. The second
regards OM Group’s accounting methods that distort items on their balance sheet. These
distortions subsequently affect the overall perceived value of the firm. The following
Type Two policies will be discussed: goodwill, leases, and research and development.
47
Type One Accounting Policies
Type One accounting policies compare the amount of disclosure of the benchmark
competitors according to their key success factors. This contrast creates a distinction
between OM Group and its competitors and allows for the evaluation of how well their
internal structures are managed. Some of the key success factors that OM Group
evaluates are customer relations, mergers and acquisitions, research and development,
and technological advancement and innovation. Essentially, the business activities that
are disclosed increase the value of a firm for the business investors.
Customer Relations
OM Group and its related competitors know that by maintaining a good
relationship with their customers, there is a bigger chance of creating repeat business.
Almost acting as an industry standard, customer relations can be built through
maintaining strong relationships with buyers. This means that the more customer
relations one has, the more business and revenue that the firm is able to draw in. As
mentioned earlier, OM Group contracts work for the United States Government, one of
their biggest customers in its battery segment. This is made possible through managing
and facilitating a strong relationship to meet all of its needs.
Mergers and Acquisitions
To maintain competitive in the specialty chemicals industry, a firm must be able
to work to become a market leader in all segments of the industry. One way that is
possible is through mergers and acquisitions. This enables a firm to essentially purchase
assets that add value to their company, and hopefully eliminate weaker segments of
their firm. To remain competitive in the specially chemicals industry, OM Group has
acquired multiple smaller companies, creating a niche for its different sectors. This
shows OM Group’s commitment to being a market leader and adding value to their
business. Mergers and acquisitions is a value added activity that is disclosed in the
goodwill section, which is discussed later.
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Research and Development
By being on top of the most recent studies and developments, a firm is able to
provide the most efficient and up to date technologies for its customers. In this case,
OM Group has contributed a large sum of its money toward R&D programs. Because of
their vast number of specially products for their customers, not all of its product will be
the same. This means that OM Group has to develop products that meet every single
need that its customers have, while also keeping costs down. It is found that the most
efficient way of doing this is contributing more money in R&D in the beginning and
creating an effective product without wasting a lot of time and resources. The market
that OM Group competes in is highly competitive, primarily on innovative products that
best fit the needs of its customers. This means that OM Group is not the only company
out of our sample industry that relies heavily on R&D. Quaker Corp. claims to contribute
“continuous and extensive research and development to ensure [their] solutions are
always cutting-edge and optimized for their purpose (KWR website). By allowing R&D to
be a priority, OM Group and its competitors can minimize costs and create the best
product for its customers. This type of disclosure if adds intrinsic value of a company
and is discussed further one of the later sections.
Technological Advancement and Innovation
Technological advancement and innovation and R&D work together in creating a
product that best meets the need of its customers. Many firms in this industry put a lot
of money into advanced technology in order to create an innovative product. This
creates value and gives a firm a competitive advantage above its competitors. Through
advancement, technology, innovation and R&D, OM Group is able to stand out from
others in this industry and meet fluctuating demands. This type of disclosure allows us
to judge how far advanced OM Group is relation to its competitors and determine the
success of both the firm and the industry.
Type Two Accounting Policies
Type Two accounting policies arises due to the flexibility of accounting standards
that are accepted. Through this flexibility, managers can mold their financial data in their
49
favor to make a firm look like it is in better shape than it remains. These financial
statements that are being distorted have a high degree of flexibility when it comes to
recording, which changes the investor’s value and perception of a firm. For the specialty
chemicals industry, we find that OM and its competitors have two significant items on
that should be restated on their financial statements: goodwill and research and
development.
Goodwill
Goodwill arises through the acquisition of another firm or entity for a premium
value. Goodwill can be derived from taking the price that the firm pays for the new
acquisition minus the fair market value of the new firm. This formula shows the highest
amount of money a firm would pay in order to book that competitive advantage that the
acquired firm holds (Textbook). Under GAAP, intangible assets, such as goodwill, do not
need to be amortized over time, thus many firms fail to take into account the
impairment over the time the asset was actually last. For OM Group, goodwill represents
their acquisitions and the excess of cost over the fair value of the identifiable net assets
that have been acquired (OM 10-K). There are many circumstances under current
accounting rules where for OM can make a non-cash charge to operating earnings for
good impairment, for example, if future operating performance at one or more of their
business units were to fall below current levels or if future cash flow estimates decline
(OM 10-K). This impairment, consisting of the write-off of one of OM Group’s significant
unamortized intangible assets will negatively affect their operation results and equity
book value (OM 10-K). The chart below shows OM’s operating income prior to
impairment and the results of restating goodwill.
50
Operating Income After Goodwill Impairment
2009 2010 2011 2012 2013
Operating income before impairment -0.98 122.60 31.20 -4.70 41.10
Goodwill impairment 16.24 46.84 61.38 108.9 108.64
Operating income after impairment -17.22 75.76 -30.18 -113.60 -67.54
Research and Development
Research and development plays an important role in helping a firm become a
market leader in its industry. R&D programs allow a firm to enhancing the
understanding of the specialty products that their customers are requesting. By
engaging heavily in R&D, a firm is able to enhance product quality and efficiency to
provide the best product available.
Leases
There are two types of leases, therefore two types of ways leases can be
recorded. The first is an operational lease, which solely gives the right to use the
property. This results in the lease being written off as an operating expense, thus has no
effect on the balance sheet. The second lease is considered a capital lease where some
ownership risk gets passed off. This means that when it is written off, it may be
accounted for as an asset as well as a liability (stern.nyu.edu). OM Group’s lease
expenses are recorded based on the straight-line method and include office space,
equipment, and land under long-term operating leases (OM 10-K). Expenses for
operating leases were $8.8 million in 2013, $9.6 million in 2012 and $10.7 million in
2011. However, operating leases did not account for very much of OM’s financial
statements, thus did not meet the threshold of needing to be restated.
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Defined Pension Plans
Pension plans are set aside to provide a future stream of cash flow for employees
upon retirement. Furthermore, a defined pension plan provides a fixed, pre-established
benefit plan for when an employee chooses to retire (IRS.gov). For employers, the more
that is contributed to these plans allows for a greater deduction than in a defined
contribution plan (IRS.gov). It is found that although helpful in that sense, it is more
complex and can be costly to keep up with (IRS.gov). For OM Group, overall operating
results can fluctuate between positive and negative due to the expenses that are
recorded for the defined benefit pension plans (OM 10-K). Under GAAP, pension
expenses use actuarial valuations as a measure of calculations. However, this is
dependent upon a multitude of assumptions which include discount rates for future
payment obligations, expected rate of increase in future compensation, and assumptions
made in regards to long-term rate of returns on pension plans (OM 10-K). Therefore, the
level of returns on pension plan assets and changes that take place during actuarial
assumptions can have a material adverse impact on liquidity. However, in comparison,
defined pension plans do not play a large enough role in restatements.
Conclusion
Type One accounting policies gives a broad view of the company in regards to the
industry by evaluating the key success factors of a firm. While on the other hand, type
two accounting policies evaluate the level of flexibility that a firm holds when recording
and restating their financial information. Through the flexibility of the GAAP, a company
has many methods and reasons of which they can distort their financial statements. By
misreporting their earnings, they tend to present misleading information that can
potentially change the perception of their firm. In the specialty chemicals industry, two
of the most common things that tend to be restated is goodwill and research and
development, both of which make up a significant portion of OM’s financial statements.
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Assess Degrees of Potential Accounting Flexibility
Every competing firm in the industry has a select level of accounting flexibility due
to the fact that they offer different type two policies. In the specialty chemical industry,
research and development is a key success factor in differentiating the firms. However,
in contrast, the restaurant industry may not have significant amounts of R&D that takes
up a significant portion of their balance sheet. Because the numbers that GAAP takes
into account are merely estimates, there is leeway to misrepresent data. By taking
advantage of the flexibility of GAAP on these standards, investors are able to construe
the value of the business. For OM Group, goodwill and R&D play a large role in their
financial statements therefore need to be restated, while leases and pension plans do
not make up a significant portion of their statements.
Goodwill
When evaluating OM’s goodwill from the past five years, it can be seen that total
goodwill has increased from 2009-2012 with a drop in 2013. The increasing amount of
goodwill is due to the investments made by OM Group by acquiring smaller companies to
add value to its portfolio. Because OM Group is an acquisition driven company, the hope
is to gain a better margin, growth, and lower cost margin by acquiring this competitive
advantage. Such investments include the acquisition of VAC in 2011 resulting with a
$55.9 million in changes. However, the drop in goodwill in 2013 is attributable to the
Advanced Metal industry with the divestiture of their Cobalt based business. After a
$1.116 million loss, OM Group decided it was better to sell of this part of the company
that was not profitable. This shows that goodwill has a significant effect on OM’s
financial statements, therefore needs to be restated.
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Goodwill as a Percentage of Net Fixed Assets
2009 2010 2011 2012 2013
Total Goodwill 234.2 306.9 544.5 543.2 432.7
Total Net Fixed Assets 227.1 256.1 482.3 496.8 345.6
Goodwill/Net Fixed Assets 103.1% 119.8% 112.9% 109.3% 125.2%
Research and Development
OM Group’s commitment to research and development over the past five years
follows the same pattern as goodwill. As seen below total R&D from 2009-2012 steadily
increases over time and slopes down in the year 2013. In the following chart, it can be
seen that R&D in 2009 rose from 9.2 million to 11.8 million in the year 2010. This
pattern increases to 32.2 in 2012, primarily due to the acquisition of VAC in August 2011
(OM 10-K). Also, because of the divestiture of OM’s Cobalt business in 2012, R&D is
seen to decrease to 26.3 million. However, these numbers do not include the
development and application engineering costs incurred in conjunction with meeting the
needs of the customers and executing their projects (OM 10-K)
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R&D as a percentage of Operating Income
2009 2010 2011 2012 2013
Total R&D 9.20 11.80 24.40 32.20 26.30
Total Operating Income -0.98 122.60 31.20 -4.70 41.10
R&D/Operating Income -938.8% 9.6% 78.2% -685.1% 64.0%
Actual Accounting Strategy
When managers have accounting flexibility, they can either use it to communicate
a firm’s economic situation or to hide the firm’s true performance (textbook). The
flexibility of disclosure can benefit the investor but also hurt the firm. Firms can either
use an aggressive or conservative accounting strategy. Aggressive accounting is the
misrepresentation of a firm’s financial statements to make them seem better than they
actually are. Conservative accounting often provides managers with opportunities for
“income smoothing,” which may prevent analysts from recognizing poor performance in
a timely fashion (textbook). They both can be misleading. OM Group uses an aggressive
accounting strategy because managers have strong incentives to use accounting
discretion to manage earnings. OM Group did not impair goodwill, which leads to higher
retained earnings which leads to aggressive accounting.
Goodwill
OM Group discloses a lot of goodwill. OM Group had goodwill of $432.7 million
and $528.3 million at December 31, 2013 and 2012 (OMG 10-K). The extreme amounts
of goodwill results mostly from its acquisitions. OLIN, KWR, HUN all give relatively the
same amount of disclosure of their goodwill information including detail of impairment of
goodwill. There was no impairment loss to be recorded the last two fiscal years for OM
Group. Since OM Group did not impair goodwill, it leads to higher retained earnings
55
which leads to aggressive accounting. The following chart shows the goodwill to net
fixed assets ratio for OM Group and three of its competitors.
When evaluating the firms with over the 30 percent of goodwill compared to the
net fixed assets, OM Group has an aggressive accounting strategy because they are not
impairing goodwill, which ultimately leads to high reported earnings. OMG, OLIN, and
KWR are well over the 30 percent threshold of goodwill to net fixed asset ratio unlike
HUN whose goodwill is impaired every year. Since HUN impairs their goodwill, they are
using a more conservative accounting approach.
Research and Development
OM Group has low transparency in research and development compared to its
competitors. They do not show their numbers over previous years on their income
statement. OM Group only a gives a few details about R&D in one short paragraph. The
paragraph does state expenses but other companies like Huntsman and Quaker talk
heavily about R&D thoroughly throughout their 10-K. Quaker gives footnotes
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throughout their 10-K explaining its R&D and where it comes from. OLIN discloses very
little for R&D also. The graph below shows the total R&D relative to the total operating
income for OM Group.
The graph shows how for most years out of the five that is evaluated, R&D makes up a
large part, if not more, of OMG’s total operating income. This tells us how significant it is
to capitalize R&D in order to include R&D’s benefits in the balance sheet.
Pensions
OM Group has gained a lot of defined pension plans in the last two years. As a
result from the VAC acquisition, OMG gained a large amount of pension plans. They now
hold pension obligations of 182.7 million as of December 31, 2013 all of which are
unfunded (OMG 10-K). OM Group discloses a lot of their pension plans. OM Group has
increased their discount rate for pension plans over the last year causing a higher
present value. Overall, OM Group has an abundance of defined pension plans but not
enough to restate it in its financials.
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Operating Leases
OM Group has very little operating leases. It has a high disclosure of the
operating leases. OM Group rents office space, equipment, and land under long-term
operating leases. Their operating lease expense was $8.8 million in 2013, $9.6 million in
2012 and $10.7 million in 2011 (OMG 10-K). The numbers are insignificant to
recapitalize and restate in their financials. OM Group’s competitors also disclose an
abundance of information about their leases.
Conclusion
From our evaluation of OM Group’s accounting strategy, we concluded that it uses
an aggressive accounting strategy. When using an aggressive accounting strategy this
means that it is overstating their retained earnings and assets. Also it means that net
income and equity is overstated.
Quality of Disclosure
Quality of disclosure is important in determining a firm's accounting quality
because it makes it more or less easy for someone to find the firms accounting quality
and use its financial statements to understand business reality (textbook). When
determining the amount of disclosure of a firm, managers have to consider how it will
affect the company short term and long term.
While accounting rules require a certain amount of minimum disclosure from the
Generally Accepted Accounting Principles, managers have considerable choice in the
matter (textbook). This leads to significant amount of information shared or left out. It
is important to determine if a firm has high or low disclosure because it determines the
accounting quality of the valuation of the firm.
When choosing the amount of disclosure a firm is willing to share in their
financials, companies must decide which information to disclose whether it be good or
bad. There are advantages and disadvantages to sharing information with the public.
When a company shares more about their company than the rest of the industry, the
insiders may take advantage of the information for their own benefit.
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OM Group provides adequate disclosures to assess the company’s business
strategy and its economic consequences. For example, OM Group uses rare earth
materials that are only available from a few suppliers, mainly in China. Political instability
and economical changes may affect the market price and availability of the rare earth
minerals. A substantial increase in the price or an interruption in supply of rare earth
materials may cause our customers to look for substitute materials or processes which
could lead to reduced demand for our products (OMG 10-K). Also under GAAP, it writes
down the carrying value of their inventory when the rare earth minerals price falls, which
in turn can reduce their profit margins. Overall, OM Group clearly discloses a large
amount of information for their business strategy and economic consequences.
The firm adequately explains its current performance. The Management
Discussion and Analysis (MD&A) section of the annual report provides opportunity to
help analyst understand the reasons behind a firms performance changes (textbook).
OM Group completed a divestiture of their cobalt-based Advanced Materials business. It
lost $112 million and the firm is projected to not meet the revenue standards. OM Group
adequately explains its key accounting policies and assumptions through their footnotes.
It has a long footnote directly explaining their significant accounting policies. OM Group
sharing the bad information as well as the good helps us get a better valuation of the
firm. Overall, OM Group’s transparency is high for evaluating the company's current
performance.
Qualitative Analysis
With a high level of quality of disclosure, a firm can be more accurately evaluated.
Management can distort information to make it seem better than it actually seems. OM
Group discloses a large amount of information. It clearly discloses specific information
from each of their segments. OM Group provides good description of each product
segment revenues, expenses. OM Group also discloses all of their properties like
locations, size, leased or not, and nature of the facility. In conclusion, OM Group’s
transparency is high.
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Conclusion
Overall, the quality of disclosure is important when analyzing a company. OM
Group discloses a large amount of information making it easy to conduct an intensive
business analysis of the firm.
Identifying Potential Red Flags
Red Flags are items in a company’s financial statements that might look suspicious or
potentially distortive items that may have to be analyzed more in depth. Red flags do
not necessarily mean that there was intentional wrongdoing, but they are definitely
something worth looking into with more detail. For OM Group, the red flags that we will
be looking into are goodwill and research & development.
Goodwill
Goodwill is a potentially distortive item, that if not impaired properly can overstate assets
and understate expenses, which can in turn overstate a company’s total net earnings for
the year. Generally, if goodwill makes up more than 30% of net fixed assets, it is
something to look into. If this is the case, it might mean that the company has not
assumed a fair lifespan for its goodwill, and thus has not impaired goodwill properly.
Goodwill makes up a very large part of OMG’s non-current assets. Even when compared
to it’s competitors like Huntsman who also have a lot of goodwill in relation to their net
fixed assets, OMG’s ratio is still a lot greater. Because OMG’s goodwill to net fixed assets
ratio is so high we have concluded that they are using an aggressive method of
accounting and therefore found goodwill to be a potential red flag.
Research and Development
Research and Development is an intangible asset that can also be potentially distortive.
This is because research and development’s benefits cannot be clearly defined since they
are not certain and happen in the future. Generally, if research and development
expense reduces operating income by more than 20%, it is something that should be
looked into more closely. If R&D expense makes up a large part of a company’s
60
operating income, then it can be distortive in that it understates assets. By capitalizing
R&D and spreading it out over a 5 year life, like in the case of our analysis, we can apply
the benefit that R & d contributes to the firm’s assets in its balance sheet from year to
year. OM Group’s research and development spending is pretty significant especially
when compared to its competitors. For most years, R&D is at least 60% of total
operating income. This is compared to an average of about 30% for the competing
companies. For this reason we have decided to mark research and development as a red
flag.
Undoing Accounting Distortions
Undoing accounting distortions is a major part of the accounting analysis because it is
what leads to the restatement of a firm’s financial statements. Any items on a company’s
statements that are material enough to change an investor’s opinion on the value of the
company as a whole are looked into with more detail. Two items that we identified as
potentially distortive and material items in OMG’s financials are goodwill and research &
development. We found these to be material because goodwill made up more than 30%
of net fixed assets and R&D made up much more than 20% of total operating income.
Goodwill
Goodwill is a non-current asset that companies state on their balance sheet when they
purchase or acquire a company for a greater amount than that company’s equity is
worth. OMG has a lot of goodwill stated on their financials, which is why we decided to
gradually impair it over a period of five years. The following table shows how we spread
out the goodwill over five years while adding new goodwill from year to year.
NewGW 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2008 268.7 53.74 53.74 53.74 53.74 53.74
2009 -34.5 -6.9 -6.9 -6.9 -6.9 -6.9
2010 72.7 14.54 14.54 14.54 14.54 14.542011 237.6 47.52 47.52 47.52 47.52 47.52
2012 -1.3 -0.26 -0.26 -0.26 -0.26 -0.26
2013 -110.5 -22.1 -22.1 -22.1 -22.1 -22.12014 -180.1 -36.02 -36.02 -36.02 -36.02 -36.02
GoodwillImpairment
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This following table shows the effect that the goodwill impairments have from year to
year. Each year we impair a specific amount of goodwill and it slowly decreases the total
amount of goodwill that OMG has. Here we show how much goodwill OMG impaired and
how much they should have impaired. They only impaired goodwill in 2008 and 2009.
We adjusted what they should have expensed accordingly. The impairments for 2010-
2013 we got from the last table we looked at.
These changes cause assets to decrease. It also causes expenses to increase through
the goodwill impairment account in the income statement. This in turn cases total net
earnings to decrease.
Research and Development
Research and development is an expense that is recognized only in the income
statement as an expense and not on the balance sheet as an asset. This means that
firms potentially do not recognize any of the benefits of R&D because these benefits for
the most part happen in the future and are not certain. We went ahead and capitalized
R&D to show it as an asset on the balance sheet through the account Capitalized R&D
benefit. We capitalized R&D by spreading it out over a five-year period from year to year
and adjusting the amount that the firm stated as R&D expense. We then created the
capitalized R&D benefit asset account and adjusted that as well. The following table
shows the capitalized R&D spread out over 5 years from year to year starting with 2008.
2008 2009 2010 2011 2012 2013 2014
BB 268.7 277.5 226.76 252.62 428.84 318.64 99.5
new 0 -34.5 72.7 237.6 -1.3 -110.5 -180.1
did 8.8 37.5 0 0 0 0 195.4
should -8.8 16.24 46.84 61.38 108.9 108.64 -162.6
adjstEB 277.5 226.76 252.62 428.84 318.64 99.5 82
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This next table shows how much the firm expensed for R&D compared to how much
they should have expensed along with the adjustment that we made to R&D in the
income statement.
These adjustments cause the R&D expense account in the income statement to
decrease. Assets also increase through the capitalized R&D benefit account. This in turn
also causes total net earnings for the year to increase by the amount that we adjusted
to R&D expense in the case of our analysis on OMG.
Financial Statements
The following are OMG’s stated and restated balance sheets and income statements for
the last five years (2009-2013). The major changes are the restatement of the
capitalized R&D in the balance sheet and the impairment of goodwill on the balance
sheet as well. These two changes affect the income statement too.
Exp. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2008 10.8 1.08 2.16 2.16 2.16 2.16 1.08
2009 9.2 0.92 1.84 1.84 1.84 1.84 0.92
2010 11.8 1.18 2.36 2.36 2.36 2.36 1.182011 24.4 2.44 4.88 4.88 4.88 4.88 2.44
2012 32.2 3.22 6.44 6.44 6.44 6.44 3.22
2013 26.3 2.63 5.26 5.26 5.26 5.26 2.632014 26 2.6 5.2 5.2 5.2 5.2 2.6
R&DCapitalization
2008 2009 2010 2011 2012 2013 2014ShouldExp. 1.08 3.08 5.18 8.8 14.46 19.23 22.46DidExp. 10.8 9.2 11.8 24.4 32.2 26.3 26AdjstR&Dexp. -9.72 -6.12 -6.62 -15.6 -17.74 -7.07 -3.54
OM Group Inc.
Balance Sheet and Income Statement
($ in millions except earnings per share)
As stated: RestatedAs stated: RestatedAs stated: RestatedAs stated: RestatedAs stated: RestatedAs stated: RestatedAs stated: Restated
2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014
ASSETS Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Current assets
Cash and cash equivalents 244.8 244.8 355.4 355.4 400.6 400.6 292.1 292.1 227.6 227.6 118.4 118.4 91.7 91.7
Restricted cash on deposit 0 0 0 0 68.1 68.1 92.8 92.8 22.8 22.8
Accounts receivable, less allowance 130.2 130.2 123.6 123.6 155.5 155.5 212.2 212.2 174.6 174.6 150.7 150.7 134.5 134.5
Inventories 306.1 306.1 287.1 287.1 293.6 293.6 615 615 463.1 463.1 240.9 240.9 228.4 228.4
Refundable and prepaid income taxes 55.1 55.1 44.5 44.5 40.7 40.7 42.5 42.5 3.2 3.2
Other current assets 59.2 59.2 32.4 32.4 44.6 44.6 54.8 54.8 48.3 48.3 32.3 32.3 21.5 21.5
Total current assets 795.4 795 843 843 1003 1003 1309 1309 940 940 542 542.3 476.1 476.1
Non-current Assets
Property, plant and equipment, net 245.2 245.2 227.1 227.1 256.1 256.1 482.3 482.3 496.8 496.8 345.6 345.6 308.3 308.3
Capitalized R&D Benefit 9.7 9.7 15.8 15.8 22.4 22.4 38 38 55.7 55.7 62.8 62.8 66.34 66.34
Goodwill 268.7 8.8 277.5 234.2 8.8 16.2 226.8 306.9 54.20 252.7 544.5 115.60 428.9 543.2 224.50 318.7 432.7 333.10 99.60 252.6 162.60 333.10 82
Intangible assets 84.8 84.8 79.2 79.2 153.4 153.4 433.3 433.3 429.7 429.7 403 403 324.8 324.8
Notes receivable from joint venture partner, less allowance13.9 13.9 13.9 13.9 13.9 13.9 16 16 16 16
Other non-current assets 26.4 26.4 46.7 46.7 39.3 39.3 84.2 84.2 74.1 74.1 59.5 59.5 57.7 57.7
Total Non-current Assets 639 657.5 601.1 609.5 769.6 738 1560 1483 1560 1391 1241 970.5 943.4 839.2
TOTAL ASSETS 1434.4 1453 1444 1453 1773 1741 2870 2792 2499 2331 1783 1513 1420 1315
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Short-term debt 0 0 0 0 0 0 0 0 0 0 0 0
Current portion of long-term debt 0.1 0.1 0 0 30 30 13.3 13.3 13.3 13.3 0 0 12.5 12.5
Accounts payable 89.5 89.5 139.2 139.2 105.9 105.9 170.5 170.5 128.4 128.4 93.6 93.6 74.7 74.7
Liability related to joint venture partner injuntion0 0 0 0 68.1 68.1 92.8 92.8 22.8 22.8
Accrued income taxes 17.7 17.7 7.5 7.5 8.3 8.3 19.8 19.8 23.9 23.9 4.2 4.2 5.6 5.6
Accrued employee costs 31.2 31.2 18.2 18.2 37.9 37.9 49.7 49.7 41.8 41.8 36.2 36.2 34.9 34.9
Deferred income taxes 0 0 0 0 0 0 23.4 23.4 4.7 4.7 74.8 74.8
Purchase price of VAC payable to seller 0 0 0 0 0 0 0 0 75.4 75.4 52.5 52.5 46.2 46.2
Deferred revenue 0 0 0 0 9.4 9.4
Other current liabilities 21.1 21.1 24.1 24.1 24.7 24.7 79 79 69 69 59.2 59.2 51.8 51.8
Total current liabilities 159.6 160 189 189 284 284 449 449 379 379 246 245.7 225.7 225.7
Non-current Liabilities
Long-term debt 26.1 26.1 0 0 90 90 663.2 663.2 454.1 454.1
Deferred income taxes 26.8 26.8 27.5 27.5 23.5 23.5 129.9 129.9 121.5 121.5 102.5 102.5 74.8 74.8
Minority interests 47.4 47.4 15.7 15.7 14.8 14.8
Pension liabilities 0 0 0 0 58.1 58.1 204.2 204.2 233.8 233.8 220.5 220.5 244.4 244.4
Purchase price of VAC payable to seller 0 0 0 0 0 0 86.5 86.5 11.3 11.3 11.3 11.3
Other non-current liabilities 44.1 44.1 35.9 35.9 25.4 25.4 62 62 55.4 55.4 43.3 43.3 37.7 37.7
Total Non-Current Liabilities 144.4 144.4 79.1 79.1 211.8 211.8 1146 1146 876.1 876.1 377.6 377.6 356.9 356.9
TOTAL LIABILITIES 304 304 268 268 496 496 1594 1594 1255 1255 623 623.3 583 583
Stockholders equity:
Common stock, $.01 par value: 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Capital in excess of par value 563.5 563.5 569.5 569.5 578.9 578.9 625.5 625.5 631.1 631.1 639.8 639.8 647.3 647.3
Retained earnings 602.4 18.5 620.9 584.5 10.1 18.5 592.9 667.9 50.3 18.5 636.1 705.8 96.1 18.5 628.2 671 187.3 18.5 502.2 587.2 288.8 18.5 316.9 405.3 288.8 184.64 301.1
Treasury stock -5.8 -5.7 -6 -6 -7.2 -7.2 -7.4 -7.4 -7.7 -7.7 -22.3 -22.3 -58.2 -58.2
Accumulated other comprehensive income-30 -30 -17 -17 -3.1 -3.1 -93.4 -93.4 -88 -88 -45.2 -45.2 -158 -158
Total OM Group, Inc. stockholders equity1130.4 1149 1131 1140 1237 1205 1231 1153 1207 1038 1160 889.5 836.9 732.7
Noncontrolling interests 0 0 44.7 44.7 39.8 39.8 44.6 44.6 37.3 37.3 0 0
TOTAL STOCKHOLDER'S EQUITY1130.4 1149 1176 1184 1277 1245 1275 1198 1244 1075 1160 889.5 837 733
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY1434.4 1453 1444 1453 1773 1741 2870 2792 2499 2331 1783 1513 1420 1315
Balance Sheet
OM Group’s balance sheets above show the changes in the company’s total
assets, liabilities, and equity. The impairment of goodwill causes assets to decrease.
This in turn also causes expenses to rise and net income to decrease. The capitalizing
of the research and development causes assets to increase. This also causes R&D
expense to decrease and net income to increase.
Income Statement
OM Group’s income statements below show the effect that impairing goodwill
and capitalizing research & development has on total net income. This effect of these
changes is much more apparent on the income statement because you can see the
drastic change in net income caused simply by the impairment of goodwill. The
decrease of R&D expense does not help balance things out. Even though the decrease
in R&D expense is suppose to increase total net income, which it does with OM Group,
the effect that the goodwill impairment has on net income far outweighs R&D’s effect
on net income.
As stated: Restated As stated: Restated As stated: Restated As stated: Restated As stated: Restated As stated: Restated As stated: Restated
2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014
Net sales 1,736.80 1,736.80 871.70 871.70 1,196.60 1,196.60 1419.6 1419.6 1544.4 1544.4 1157.5 1157.5 1067.5 1067.5
Cost of goods sold 1,384.30 1,384.30 693.80 693.80 910.10 910.10 1178.7 1178.7 1300.8 1300.8 899.1 899.1 829.3 829.3
Restructuring charges 12.10 12.10 1.80 1.80
Gross profit 352.50 352.50 165.80 165.80 284.70 284.70 240.90 240.90 243.60 243.60 258.40 258.40 238.2 238.2
Selling, general and administrative expenses155.30 155.30 124.13 124.13 150.00 150.00 195 195 219 219 191 191 181.9 181.9
Research & Development 10.80 9.7 1.10 9.20 6.1 3.10 11.80 6.6 5.20 24.4 15.6 8.8 32.2 17.7 14.5 26.3 7.1 19.2 26 3.54 22.46
Goodwill impairment, net 8.80 8.8 - 37.50 16.20 53.70 46.80 46.80 61.40 61.40 108.90 108.90 108.60 108.60 195.4 162.6 32.8
Restructuring charges 0.65 0.65 0.24 0.24
Gain on termination of retiree medical plan 4.70- 4.70-
Gain on sale of property 9.7 9.7 2.9 2.9
Operating profit (loss) 177.60 196.10 0.98- 11.08- 122.66 82.46 31.20 14.60- 4.70- 95.90- 41.10 60.40- 165.10- 1.04
other 5.30- 5.30- 0.07- 0.07- 15.30- 15.30-
Interest expense -22.1 -22.1 -43.2 -43.2 -11.3 -11.3 -2.6 -2.6
Accelerated amortization of deferred financing fees -6.5 -6.5 -1 -1
Foreign exchange gain (loss) 11.1 11.1 -0.8 -0.8 8 8 -6.5 -6.5
Loss on divestiture of Advance Materials business -111.6 -111.6 1.7 1.7
Other 6.4 6.4 6.6 6.6 12 12 -0.3 -0.3
Other income, net 5.30- 5.30- 0.07- 0.07- 15.30- 15.30- 4.60- 4.60- -43.9 -43.9 -103.9 -103.9 -7.7 -7.7
Income (loss) from continuing operations172.30 190.80 1.05- 11.15- 107.36 67.16 26.60 19.20- 48.60- 139.80- 62.80- 164.30- 172.80- 6.66-
Income tax expense (benefit) 16.10- 16.10- 20.90- 20.90- 29.70- 29.70- 17.9 17.9 3.2 3.2 -10.7 -10.7 -0.5 -0.5
Income (loss) from continuing operations, net of tax156.20 174.70 21.95- 32.05- 77.66 37.46 44.50 1.30- 45.40- 136.60- 73.50- 175.00- 172.30- 6.16-
Income (loss) from discontinued operations, net of tax0.10 0.10 1.50 1.50 0.73 0.73 2.2 2.2 -0.4 -0.4 -12.3 -12.3 -0.3 -0.3
Consolidated net income (loss) 156.30 174.80 20.45- 30.55- 78.39 38.19 46.70 0.90 45.80- 137.00- 85.80- 187.30- 172.60- 6.46-
Net (income) loss attributable to noncontrolling interests21.30- 21.30- 2.60 2.60 5.00 5.00 -4.7 -4.7 7.1 7.1 1.8 1.8
Net income (loss) attributable to OM Group,135.00 153.50 17.85- 27.95- 83.39 43.19 42.00 3.80- 38.70- 129.90- 84.00- 185.50- 172.60- 6.46-
Income Summmary 18.5 10.1 40.2 45.8 91.2 101.50 166.14
Total Dr.Total Cr. Total Dr. Total Cr. Total Dr. Total Cr. Total Dr. Total Cr. Total Dr. Total Cr. Total Dr. Total Cr. Total Dr. Total Cr.
37 37 50.9 50.9 119.5 119.5 195.5 195.5 351.9 351.9 460.2 460.2 683.88 683.88
Difference in Net Income 18.50- 10.10 40.20 45.80 91.20 101.50 166.14-
Conclusion
The differences seen in the stated and restated statements are the effects of the
accounting methods that OMG chooses to use in the stating of their financials. The
capitalizing of research & development actually helps a firm because it accounts for the
benefits that R&D creates in a certain time period. In the case of our analysis, we
assume R&D to have a five-year lifespan. Goodwill impairment however, has the
opposite effect, because we expense goodwill gradually over its assumed five-year life.
This increased OMG’s expenses and in turn, decreased their net income. This is most
likely the reason why OMG decided not to impair goodwill. Goodwill helped them realize
better results than if they would have impaired it. This is just an example of how a firm
can use the flexibility they have with type two accounting policies to their advantage.
Introduction of Financial Analysis
Financial analysis must be conducted to assess the performance of OM Group in
relation to its stated goals and strategy (textbook). Two principal tools are utilized for
the financial analysis: the ratio analysis and the cash flow analysis. By running the ratio
analysis, we are able to assess how OM Group’s “line items” on its financial statements
relate to one another (textbook). This gives us a measure of comparables that allows us
to evaluate and better forecast its past performance with future performances. On the
other hand, the cash flow analysis examines a firm’s liquidity and its operating,
investment, and financing cash flows. The completion of these processes allows us
evaluate OM Group’s financial forecasting and cost of capital estimation.
Liquidity Ratios
Liquidity is degree to which an asset can be converted into cash without
affecting the value of the asset itself. In order for a firm to keep its competitive
advantage within an industry, it must be able to efficiently meet its short-term
obligations. These obligations can be observed through the liquidity ratios, which also
help describe a firm’s financial standing. In this section we will observe two of the most
important liquidity ratios: the current asset and the quick asset ratio.
67
Current Ratio
The current ratio is measured by the firm’s current assets divided by the current
liabilities. It is an important ratio because it examines liquidity by showing the firms
ability to cover its short-term obligations. A firm with a current ratio above 1 suggests
that its short-term assets can cover its debts and that it is financially healthy. This
allows the firm to pay its next year of bills and obligations. However, the ability to pay
back short-term debt is relative to how quickly a firm can convert its current assets to
cash. If a firm has a current ratio below 1, it is seen as financial unhealthy. A current
ratio below 1 does not necessarily mean a firm will go bankrupt because it can finance
its debts in a numerous ways.
OM Group has the highest current ratio from 2009 to 2011 but it is declining
toward the industry average. The other firms in the industry have a ratio slightly above
2, showing the sustainable current ratio for the industry. The high ratio that OM Group
began with was not sustainable in the long run with their high cash and inventory. The
cash decreased as they invested more cash on research and development of new
products to increase the firm’s value of future operations.
2009 2010 2011 2012 2013 2014
HUN 2.29 1.95 2.16 1.89 1.93 2.16
KWR 1.75 1.61 1.69 1.50 1.46 2.81
OLIN 1.99 2.13 2.43 2.58 2.51 2.16
OMG 4.46 3.53 2.92 2.48 2.21 2.11
Industry Avg 2.62 2.31 2.30 2.11 2.03 2.31
0.000.501.001.502.002.503.003.504.004.505.00
Current Ratio
68
Quick Asset Ratio
The quick ratio, also known as the acid test, measures a firm’s ability to cover its
current liabilities with near cash assets (Financial Statement Analysis and Security
Valuation). The numerator of this ratio indicates the different cash maturities of a firm
i.e. cash, short-term investments, and receivables. It only includes “quick assets” in the
numerator, thus excludes inventories because it is does not have a quick conversion to
cash and usually is sold on credit. Ideally, a higher quick asset ratio is preferred
because it shows that the company is in a better liquidity position and it means that a
company is more financially secure in the short term. In its previous years, OM Group
was able to keep a relatively low inventory supply, however as time progressed, that
number increased, causing the overall quick asset ratio to go down. This increase in OM
Group’s quick asset ratio may be attributed to the distressed environment that did not
allow for keeping a low inventory supply. In 2014, it can be noted that OM Group’s
quick asset ratio number is 1, meaning that they are generating $1 of liquid assets to
cover each $1 of their liabilities. Although a higher number is preferred, their quick
asset ratio is still sufficient to run their operations.
2009 2010 2011 2012 2013 2014
HUN 1.53 1.17 1.15 0.91 0.97 1.11
KWR 1.34 1.32 1.72 2.07 1.27 2.04
OLIN 0.77 0.74 0.70 0.63 0.70 $0.66
OMG 2.53 2.20 1.33 1.12 1.10 1.00
Industry Avg 1.54 1.36 1.22 1.18 1.01 1.20
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Ax
is T
itle
Quick Asset
69
Conclusion
In short, the liquidity ratios are used to determine how well a company is able to
turn short-term assets into cash to cover short-term obligations. In this sense, a lower
ratio reveals that a firm is in danger of not meeting their short-term obligations. When
matched up with its competitors, it is revealed that when comparing 2014 ratios to
2009, OM Group moves toward the industry average because it is unable to keep their
ratios as high as the previously observed years.
Operating Efficiency Ratios
These ratios represent the internal structure of a firm’s efficiency and how they
utilize their assets and manage their liabilities over a period of time. These formulas are
deemed necessary because they briefly comment on the internal structure of a
company and how well it is performing in a constantly changing industry. The operating
efficiency ratios are linked to the liquidity ratios because they measure the effective of
the firm based on how quickly they can conduct operations. For example, if a firm is
having trouble turning accounts receivables, the efficiency ratios can be used to signal
an increasing danger of liquidity if liquidity begins to slide out of line with credit terms
(HSCCPA.com). In this section the following ratios will be explained: inventory turnover,
accounts receivable turnover, working capital turnover, days supply inventory, days
sales outstanding, and cash to cash cycle.
70
Inventory Turnover
Inventory turnover is the measure of how quickly a company turns its inventory
into sales. It is measured by dividing cost of goods sold by inventory and it relatively
low in the specialty chemicals industry. With the industry depending more on contracted
work than continual production, a higher inventory turnover is prevented. A higher
inventory turnover is generally good because it shows that inventories are not stagnant
and depreciating in storage. In an industry that is constantly evolving, it is important to
get inventories sold because products can easily become obsolete. OM Group has the
lowest inventory turnover out of its competitors but is increasing towards industry
trends. The industry turnover is generally around 6 but the outlier is OLIN, which
maintain turnover around 9.
2009 2010 2011 2012 2013 2014
HUN 5.65 5.58 6.10 5.03 5.36 4.77
KWR 5.89 5.77 6.16 6.48 6.54 6.34
OLIN 9.88 8.68 8.91 8.96 10.90 8.82
OMG 2.42 3.10 1.92 2.81 3.73 3.63
Industry Avg 5.96 5.78 5.77 5.82 6.63 5.89
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Inventory Turnover
71
Accounts Receivable Turnover
Accounts receivable turnover is the total sales divided accounts receivable. It
displays a firm’s ability to collect its outstanding accounts receivable. The higher the
accounts receivable turnover, the faster accounts receivables are collected. The industry
is closely grouped however the graph shows it takes Quaker (KWR) more time than its
competitors to collect on its receivables. The industry does not have a high A/R
turnover but OM Group is closely correlated to the industry average, which shows
industry efficient business operations.
2009 2010 2011 2012 2013 2014
HUN 7.63 6.55 7.34 7.29 7.18 6.95
KWR 4.15 4.68 4.53 4.59 4.40 4.04
OLIN 7.56 8.22 8.25 7.11 8.92 7.87
OMG 7.05 7.70 6.69 8.85 7.68 7.94
Industry Avg 6.60 6.78 6.70 6.96 7.05 6.70
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Account Recievable Turnover
72
Working Capital Turnover
Working capital turnover is a company’s total sales divided by working capital
and shows how well their current assets cover their current liabilities. It is an important
ratio to consider because it compares improvement of firms sales growth and how that
covers its capital investments and debts. The industry shows disparity and is not easily
comparable between firms. However, it does show that OM group has increased their
working capital turnover over time to reach an industry average. This improvement is a
good sign and displays OM’s ability to use revenues and cover debts.
2009 2010 2011 2012 2013 2014
HUN 3.33 4.73 5.29 5.77 5.54 4.28
KWR 4.56 4.76 4.47 4.17 3.68 3.38
OLIN 1.33 1.66 1.65 2.76 3.90 5.11
OMG 1.33 1.66 1.65 2.76 3.90 4.26
Industry Avg 2.64 3.21 3.26 3.86 4.26 4.26
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Working Capital Turnover
73
Days Supply Inventory
The days supply inventory measures the average number of days that a firm
holds their inventory, determining the efficiency of their internal inventory
management. A surplus of inventory can build up when sales are slow, which is often
taken as a red flag indicating that demand of the product is dropping (FSASV). The
graph below indicates that OM Group is the obvious outlier when compared to its
competitors. The other companies show a steady line, which is evidence that they have
a more consistent inventory turnover rate. OM Group’s days supply inventory is well
above all of its competitors and the industry average. This can be attributed to the
specialty products that are being produced that are being held for when its customers
are ready for the product.
2009 2010 2011 2012 2013 2014
HUN 64.55 65.42 59.88 72.54 68.14 76.52
KWR 61.99 63.22 59.24 56.34 55.77 57.6
OLIN 36.45 41.50 40.39 40.18 33.01 40.81
OMG 148.97 116.14 187.83 128.16 96.46 99.15
Industry Avg 77.99 71.57 86.84 74.31 63.34 68.51
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00
Ax
is T
itle
Days Supply Inventory
74
Days Sales Outstanding
Days sales outstanding, sometimes called days in accounts receivable, is the
average collection period to collect cash from sales. Having a low days sales
outstanding number means that a firm is able to collect their accounts receivables
quickly while having a high DSO number can represent selling their product on credit
and taking longer to receive their money. In the specialty chemicals industry, the
industry average for companies such as OMG, OLIN, KWR, and HUN averaged around
55 in 2013 with OMG having a DSO of 47. This number can be used as a proxy to
measure whether a firm as a good collections department, revealing that OM Group
does a relatively good job at collecting their accounts receivables.
2009 2010 2011 2012 2013 2014
HUN 47.86 55.76 49.74 50.05 50.80 52.49
KWR 87.95 78.00 80.50 79.47 82.88 90.3
OLIN 48.31 44.42 44.26 51.32 40.93 46.37
OMG 51.75 47.43 54.56 41.26 47.52 45.99
Industry Avg 58.97 56.40 57.26 55.53 55.53 58.79
0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00
100.00
Days Sales Outstanding
75
Cash to Cash Cycle
This ratio represents the amount of time in days it takes a firm to sell off its
inventory and collect on the receivables from their sales. This number is computed by
adding the days sales outstanding and days supply inventory numbers. The lower the
number indicates a firm’s liquidity level. The graph below displays that OM Group’s cash
to cash cycle number is substantially higher than its competitors and the industry
average. This number strongly suggests that OM is having a harder time efficiently
selling its inventories and takes longer than average to collect their receivables.
2009 2010 2011 2012 2013 2014
HUN 112.41 121.17 109.62 122.59 118.94 129.01
KWR 149.94 141.22 139.74 135.81 138.65 147.9
OLIN 84.76 85.92 84.65 91.50 73.94 87.18
OMG 200.72 163.57 242.39 169.43 143.98 145.14
Industry Avg 136.96 127.97 144.10 129.83 118.88 127.30
0.00
50.00
100.00
150.00
200.00
250.00
300.00
Ax
is T
itle
Cash to Cash Cycle
76
Conclusion
If OM Group wants to compete on a more competitive basis with the benchmark
companies, they need to fix their internal problems and better utilize their assets and
manage their liabilities. It is trailing behind its competitors and underperforms in these
major areas.
Profitability Ratios
The purpose of profitability ratios is to evaluate the ability of a firm to generate
earnings and yield a profit. In this section, we will discuss the ratios that determine
whether OM Group is able to effectively retain the earnings from revenue generated.
These ratios include: gross profit margin, operating profit margin, net profit margin,
asset turnover, return on assets, return on equity, internal growth rate, and sustainable
growth rate.
77
Gross Profit Margin
The gross profit margin is calculated by dividing a firm’s gross profit (total
revenue – cost of goods sold) by total sales. This ratio shows the percentage of money
left over after covering the initial costs of the sales that were made in a period. It is
better for the gross profit margin to be high, in order to show that a firm has enough
money to cover other costs. The following graph shows OM Group’s gross profit margin
compared to the three competitors and the industry average. It can be seen OM Group
is aligned with the industry average and most of the other competitors. This graph
shows a fairly stable trend, however Quaker is highly segmented from its competitors
with a much higher gross profit margin than the others. OM Group’s gross profit margin
decreases from 2010 to 2012, but heads toward industry near 2014. This is overall is a
good sign for OM Group.
2009 2010 2011 2012 2013 2014
HUN 13.76% 15.79% 16.40% 18.18% 15.82% 16.57%
KWR 34.74% 35.44% 32.59% 33.71% 35.79% 35.7%
OLIN 20.16% 14.88% 19.74% 19.99% 19.14% 17%
OMG 19.02% 23.79% 16.97% 15.77% 22.32% 22.31%
Industry Avg 21.92% 22.48% 21.42% 21.91% 23.27% 22.97%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
Gross Profit Margin
78
Operating Profit Margin
The operating profit margin is calculated by dividing a firm’s operating profit by
total sales. The operating profit margin shows us the percentage of money that is left
over after covering other costs like, selling, general, and administrative costs, labor
costs, and operating costs. The following graph shows OM Group’s operating profit
margin compared to the three competitors and the industry average. At first, this graph
appears to be all over the place. But after taking a closer look it is mostly OM Group
that has a odd up and down trends in its operating profit margin. Towards the later
years, however, it shows a sign of improving towards the industry average. OLIN has
only one year where it had a very low margin, but for the most part, the other two
competitors seem to follow a pretty stable trend.
2009 2010 2011 2012 2013 2014
HUN -0.91% 4.43% 5.40% 7.55% 4.60% 5.47%
KWR 5.78% 8.85% 8.48% 8.93% 9.77% 10.1%
OLIN 11.92% 4.41% 11.42% 11.85% 11.39% 9%
OMG -11.29% 10.25% 2.20% -0.30% 3.55% 37.78%
Industry Avg 1.37% 6.98% 6.87% 7.01% 7.33% 15.61%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Operating Profit Margin
79
Net Profit Margin
The net profit margin is calculated by dividing a firm’s net profit by its total sales.
The net profit margin tells us how much a firm has left over as profit to invest back into
the company, or give out as dividends. The following graph shows OM Group’s net
profit margin compared to the three competitors and the industry average. This graph
is not very stable, but like previously, OM Group that has a very up and down trend
with its net profit margin. However, it shows a decreasing trend from 2010 to 2013.
This is mostly due to some major acquisitions and divestitures that OM Group took part
in in the last few years.
2009 2010 2011 2012 2013 2014
HUN 1.44% 0.35% 2.26% 3.24% 1.16% 2.79%
KWR 3.87% 6.27% 7.06% 7.09% 8.07% 7.6%
OLIN 8.86% 4.09% 12.32% 6.85% 7.10% 5%
OMG -2.05% 6.97% 2.96% -2.51% -7.26% -16.17%
Industry Avg 3.03% 4.42% 6.15% 3.67% 2.27% -0.27%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Net Profit Margin
80
Asset Turnover
The asset turnover ratio measures sales revenue per dollar of net operating
assets put in place (Financial Statement Analysis and Security Valuation). This ratio links
the balance sheet with the income statement by dividing sales by the previous years
total assets. This is referred to as a lag ratio because links together two years by
reflecting the previous years ending asset balance by the current years balance. As you
can see below, OM Group trails behind the other competitors when it comes to
effectively using their assets to create revenue. However, it can be noted that as time
progresses, OM Group’s asset turnover ratio increases, which can be attributed to the
acquisition of VAC in 2011. After that acquisition, OM Group was able to do a better job
of increasing their sales revenue from their operating assets.
2009 2010 2011 2012 2013 2014
HUN 96.3% 107.2% 128.8% 129.2% 124.7% 126.00%
KWR 100% 108% 127% 121% 125% 131%
OLIN 88% 82% 96% 89% 91% 80%
OMG 60% 69% 51% 66% 77% 81%
Industry Avg 86.2% 91.4% 100.7% 101.5% 104.2% 104.6%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
Asset Turnover
81
Return on Asset
Return on asset, or ROA, is a common measure of the profitability of a firm’s
operations by telling us how much a profit a firm is able to generate from each dollar of
assets invested (textbook). It gives a starting point for financial leverage by describing
how many dollars per asset that is able to utilize for each dollar invested by
shareholders. In the graph below, taking the total assets of the previous year and
dividing it by the net income of the current year calculates ROA. The graph shows that
the industry standard is decreasing in the most recent years but the OM Group line
indicates that it is far below industry average. This can be attributed to OM Group’s
inability to convert its assets into earnings. It can be seen that the restated line follows
the same as the original OM Group line, however, in 2014 it levels off rather than
decreasing.
2009 2010 2011 2012 2013 2014
HUN 1.39% 0.37% 2.91% 4.19% 1.44% 3.50%
KWR 4.00% 8.00% 10.00% 9.00% 10.00% 10%
OLIN 7.79% 3.35% 11.80% 6.11% 6.43% 4%
OMG -1.24% 5.77% 2.37% -1.35% -3.36% -9.7%
Restated OMG -0.02 0.03 0.00 -0.05 -0.08 0.00
Industry Avg 2.00% 4.09% 5.37% 2.66% 1.31% 1.42%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Return on Asset
82
Return on Equity
The return on equity formula is derived by taking the current years net income
and dividing it by the years stockholder’s equity at the beginning of the year or the
previous years end amount. It represents the amount of net income a firm holds that is
returned as a portion of shareholders equity. It takes the money shareholders have
invested into the firm, which results in a ratio to measure the company’s profitability.
When compared to its competitors below, OM Group falls below its competition in
regards to efficiently use a company’s equity to create revenue. However, even after
the restated financials, the ROE decreases at quicker rate than OMG as stated, signaling
that the affects of restatements did not improve the amount of equity at all. The graph
shows that overall, the specialty chemicals industry is very volatile in regards to return
on equity.
2010 2011 2012 2013 2014
HUN 1.72% 13.73% 20.44% 6.75% 15.20%
KWR 18.22% 18.86% 17.34% 17.06% 16.90%
OLIN 9.19% 29.11% 15.18% 17.89% 9.54%
OMG 7.09% 3.29% -3.03% -6.75% -0.73%
Restated OMG 3.65% -0.31% -10.84% -17.25% -0.73%
Industry Avg 9.05% 16.25% 12.48% 8.74% 10.23%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
Return on Equity
83
Conclusion
OM Group, in comparison to its competitors, is has lower profitability ratios. This
can be indicated by their unstable net profit margin, asset turnover ratio, and return on
asset. This may be a cause for concern in the upcoming years in order for OM Group to
be able to compete with its competitors.
Capital Structure Ratios
Capital structure ratios evaluate the methods a firm is able to acquire capital and
how their operations are portrayed. In order to understand how a firm acquires capital,
both debt and equity must be evaluated. Debt important in capital structure because it
is used to examine how much of a firms assets are being financed with debt.
Concurrently, equity is important to maximize shareholder wealth. By holding on to
more debt, whether short or long term, there is greater risk that it leads to higher
leverage. The capital structure ratios that we will be discussing is composed of the debt
to equity ratio, times interest earned, debt to service margin, and the Altman Z-Score.
84
Debt to Equity Ratio
The debt to equity ratio is a measure of a firm's leverage which helps determine
how much debt a company is using. We use this ratio to help understand how well the
OM Group and its competitors are doing. The higher a firm’s leverage indicates it has
more debt to equity. To find debt to equity we divided total liabilities by total
stockholders equity. According to the graph below, OM Group has the lowest ratio
indicating good financing decisions. Also, OM Group has no short-term debt, which also
helps with having a lower debt to equity ratio. Below shows OM Group’s debt to equity
as well as the industries debt to equity. OM Group’s restated ratios are more levered
out and stable than when it was not restated.
2009 2010 2011 2012 2013 2014
HUN 3.63 3.71 3.87 3.69 3.32 4.64
KWR 1.53 1.40 0.98 0.85 0.69 0.82
OLIN 1.57 1.47 1.48 1.78 1.55 1.66
OMG 0.23 0.39 1.25 1.01 0.54 0.61
Restated OMG 0.18 0.28 0.57 0.54 0.41 0.44
Industry Avg 1.43 1.45 1.63 1.57 1.30 1.63
0.000.501.001.502.002.503.003.504.004.505.00
Debt to Equity
85
Debt Service Margin
Debt service margin measures the adequacy of cash provided by operations to
cover required annual installment payments on the principal amount of long-term
liabilities. When evaluating a company, it should have a low debt service margin. If the
company has a high debt service margin, then the company has more debt to pay off.
OM Group has a very low debt service margin compared to the industry average.
Overall, OM Group’s low debt service margin is very good for the firm. The industry
average is seen to be greater than OMG, HUN, and KWR because of the segmentation
of OLIN in years 2012 through 2014. If OLIN were omitted from those years, the overall
industry average would be on par with the remaining companies.
2009 2010 2011 2012 2013 2014
HUN 0.69 -0.03 0.18 0.42 0.32 0.35
KWR 0.02 0.14 0.08 0.25 0.31 0.18
OLIN $7.56 $5.38 $0.90 $18.35 $10.97 $22.74
OMG 0.60 0.68 0.49 0.62 0.65 0.75
Industry Avg 2.22 1.54 0.41 4.91 3.06 6.01
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
Debt Service Margin
86
Times Interest Earned
Times interest earned measures a company’s ability to pay off any interest
charges that might accrue as they become due. A higher ratio indicates that a firm is
able to pay off its interest rates in a timely manner. To arrive at the times interest
earned formula can be computed by taking the earnings before interest and taxes and
dividing it by the interest expense incurred that period. A high times interest-earning
ratio means that there are sufficient earnings to meet any interest payments that may
occur while lower rates indicate that a company struggles to make interest payments in
a timely manner. It is important to note that if the times interest earned ratio is lower
than 1, then the company does not generate enough funds to meet all of its interest
expense. Compared to the other companies, OM Group has a relatively stable times
interest earned ratio and it does not deviate as much as some of the competitors.
However, it is obvious that OM Group is having trouble paying their interest payments
because their ratio is below zero, even in the most recent years due to operating losses.
2009 2010 2011 2012 2013 2014
HUN -0.30 1.79 2.43 3.74 2.68 3.09
KWR 4.28 8.84 12.73 14.70 24.92 33.02
OLIN 15.74 2.75 7.37 9.81 7.42 4.64
OMG -1.412 0.109 -3.637 -2.443
Industry Avg 6.58 4.46 5.28 7.09 7.85 9.58
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
Times Interest Earned
87
Altman Z-Score
The Altman Z-Score is a formula that determines the likelihood that a company
will become bankrupt. It uses eight performance variables to compute five formulas of
different weight, all added together to determine the probability a company will fail.
This ratio is a good tool at determining the current financial status of a company. The
Z-Score can be computed as the following:
Altman Z-Score=1.2A+1.4B+3.3C+0.6D+1.0E
Where:
A=Working Capital/Total Assets
B=Retained Earnings/Total Assets
C-EBIT/Total Assets
D=Market Value of Equity/Total Liabilities
E=Sales/Total Assets
To interpret this formula, it is important to know that a high z-score indicates
that a company is less likely to go bankrupt. There are four ways that the z-score can
be broken down based on the likelihood of their future existence. A z-score above 3 is
considered to be a safe zone. A z-score between 2.99 and 2.70 is an area where
companies should exercise caution. A z-score between 1.8 and 2.7 indicates a good
chance of going bankrupt within 2 years. Last, a z-score below 1.80 is determining to
mean that financial problems will be high. In this formula, the score is directly
correlated to the probability of bankruptcy.
As of 2014, OM Group has an Altman z-score of 3.74 which indicates that it is in
what is considered the “safe zone.” When looking at their restated financials, OM Group
has an Altman z-score of 2.61, indicating that there is a good chance that they may go
bankrupt in the future. By taking merely the working capital, total assets, retained
earnings, EBIT, market value of equity, total liabilities, and sales, we were able to
successfully determine that despite all the other issues that they are having with their
operations and internal management, they are still considered being far from bankrupt.
88
Conclusion
In contrast to its competitors, OM Group shows mostly positive results when
running the capital structure ratios. OM Group is performing well in most of the ratios,
however could improve on their times interest earned ratio by paying off their interest
expenses as soon as they accrue. Other than that, OM Group does a fair job at up
against its competitors.
Financial Forecasting
Financial forecasting allows for the forecasting of OM Group’s future income
statement, balance sheet, and statement of cash flows. This is achieved through the
evaluation of ratios, trends and assumptions that gives a direction as to where the
company is headed financially. However, the further we draw out the forecast, the less
reliable the information becomes, meaning more emphasis is placed on the first few
years. By using OM Group’s current income statement, balance sheet, and statement of
cash flows, we were able to forecast these statements out 10 years beginning in 2014.
2009 2010 2011 2012 2013 2014
HUN 1.541 1.975 2.072 2.259 2.399 2.008
KWR 2.52 3.08 3.53 3.30 3.19 2.91
OLIN 2.28 2.44 2.71 2.3 2.75 3.04
OMG 4.7 3.46 2.02 2.34 3.47 3.74
Restated OMG 4.55 2.89 1.64 1.71 2.46 2.61
Industry Avg 3.118 2.769 2.394 2.382 2.854 2.862
0.0000.5001.0001.5002.0002.5003.0003.5004.0004.5005.000
Altman Z score
89
Income Statement
The starting point of our forecast is the income statement. Using assumptions
based on trends from past years and the ratio analysis that we ran, we forecasted some
of the relevant elements of the income statement, including: net sales, cost of goods
sold, gross profit, research and development, total operating costs, operating profit,
and net income. The first component from the income statement that we forecasted
was the annual sales growth. The reason we started with the sales growth is because it
is a good indicator of where the company is headed in future years. Spotting trends in
the sales growth is pretty straightforward. OM Group’s sales growth did appear to be a
bit up and down at first. It did, however, show an improving trend starting in 2011.
From this trend we made the assumption that OM Group’s sales growth is on its way up
to a higher point. To be realistic we decided to slowly improve OM Group’s sales growth
through 2017, and from then on we steadily increased sales growth to a leveled out
point of 10.02% in 2021.
From here we made a common size version of the income statement. To make
the common size income statement we took every component of the income statement
as a percentage of total sales. This is a key step in the forecast process because it
allows us to spot trends in OM Group’s numbers more easily as percentages than if we
were to look at the raw numbers on the income statement. After getting the sales
growth rate and the common sized statement we were able to forecast sales for years
2015 through 2025. From here, we used the common size income statement to forecast
the other relevant elements as a percentage of the forecasted sales. Just as our
assumption showed, OM Group’s sales are slowly going to grow through the next ten
years. Finally to forecast R&D, we took a ratio of R&D as a percentage of sales, and
then kept it stable for the next ten years, since for the most part, OMG’s R&D
expenditures have been very stable from year to year, staying at around 1.75% of total
sales.
90
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Net sales 1737 872 1197 1420 1544 1158 1068 977.83 926.59 905.28 937.15 997.31 1083.48 1192.04 1311.49 1442.90 1587.47 1746.54
Cost of goods sold 1384 694 910 1179 1301 899 829 799.86 750.17 727.85 747.84 784.88 851.40 936.71 1030.57 1133.83 1247.44 1372.43
Restructuring charges 12.1 1.8
Gross profit 353 166 285 241 244 258 238 177.97 176.42 177.43 189.30 212.43 232.08 255.34 280.92 309.07 340.04 374.11
Selling, general and admininistrative expense 155.3 124.1 150 195 219 191 181.9
Research & Development 10.8 9.2 11.8 24.4 32.2 26.3 26 21.51 16.68 13.58 14.99 16.95 18.96 20.86 23.61 25.25 28.57 31.44
Goodwill impairment, net 8.8 37.5 195.4
Restructuring charges 0.654 0.24
Gain on termination of retiree medical plan -4.7
Gain on sale of property 9.7 2.9
Total Operating Costs 175 167 162 229 254 217 403 248.37 208.85 139.41 142.45 155.38 157.32 173.08 190.43 209.51 230.50 253.60
Operating profit (loss) 178 -1 123 31.2 -4.7 41.1 -165 -70.40 -32.43 38.02 46.86 57.05 74.76 82.25 90.49 99.56 109.54 120.51
Interest expense -5.3 -22.1 -43.2 -11.3 -2.6
Accelerated amortization of deferred financing fees -6.5 -1
Foreign exchange gain (loss) 11.1 -0.8 8 -6.5
Loss on divestiture of Advance Materials business -112 1.7
Other 6.4 6.6 12 -0.3
Other income, net -5.3 -0.07 -15.3 -4.6 -43.9 -104 -7.7
Income (loss) from continuing operations 172 -1.1 107 26.6 -49 -63 -173 -141.79 -79.69 -9.51 23.43 27.92 37.38 41.13 45.25 49.78 54.77 60.26
Income tax expense (benefit) -16.1 -20.9 -29.7 17.9 3.2 -10.7 -0.5
Income (loss) from continuing operations, net of tax 156.2 -22 77.66 44.5 -45.4 -73.5 -172
Income (loss) from discontinued operations, net of tax 0.1 1.5 0.73 2.2 -0.4 -12.3 -0.3
Consolidated net income (loss) 156.3 -20.5 78.39 46.7 -45.8 -85.8 -173
Net (income) loss attributable to noncontrolling interests -21.3 2.6 5 -4.7 7.1 1.8
Net income (loss) attributable to OM Group, 135 -18 83.4 42 -39 -84 -173 -132.01 -80.61 -21.73 21.55 31.91 42.26 52.45 51.15 63.49 69.85 76.85
Shares issued and outstanding 30.3 30.4 30.7 32.1 32.1 32.3 32.4 32.5 32.7 32.8 32.9 33.1 33.2 33.4 33.5 33.6 33.8 33.9
Stock Price at Year End 21.11 31.39 38.51 22.39 22.2 36.41 29.8
DPS 0 0 0 0 0 0 3.48 3.18 2.91 2.67 2.51 2.40 2.32 2.26 2.22 2.19 2.16 #DIV/0!
Div/NI 0 0 0 0 0 0 0.05
Actual Financial Statements Forecast Financial Statements
91
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Annual Sales Growth -49.81% 37.27% 18.64% 8.79% -25.05% -7.78% -8.40% -5.24% -2.30% 3.52% 6.42% 8.64% 10.02% 10.02% 10.02% 10.02% 10.02%
Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of goods sold 79.70% 79.59% 76.06% 83.03% 84.23% 77.68% 77.69%
Restructuring charges 0.00% 1.39% 0.15% 0.00% 0.00% 0.00% 0.00%
Gross profit 20.30% 19.02% 23.79% 16.97% 15.77% 22.32% 22.31% 18.20% 19.04% 19.60% 20.20% 21.30% 21.42% 21.42% 21.42% 21.42% 21.42% 21.42%
Selling, general and administrative expenses 8.94% 14.24% 12.54% 13.74% 14.18% 16.50% 17.04%
Research & Development 0.62% 1.06% 0.99% 1.72% 2.08% 2.27% 2.44%
Goodwill impairment, net 0.51% 4.30% 0.00% 0.00% 0.00% 0.00% 18.30%
Restructuring charges 0.00% 0.08% 0.02% 0.00% 0.00% 0.00% 0.00%
Gain on termination of retiree medical plan 0.00% -0.54% 0.00% 0.00% 0.00% 0.00% 0.00%
Gain on sale of property 0.00% 0.00% 0.00% 0.68% 0.19% #VALUE! #VALUE!
Total Operating Costs 10.07% 19.13% 13.54% 16.14% 16.45% 18.77% 37.78%
Operating profit (loss) 10.23% -0.11% 10.25% 2.20% -0.30% 3.55% -15.47% -7.20% -3.50% 4.20% 5.00% 5.72% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90%
Interest expense -0.31% 0.00% 0.00% -1.56% -2.80% -0.98% -0.24%
Accelerated amortization of deferred financing fees0.00% 0.00% 0.00% #VALUE! -0.42% -0.09% 0.00%
Foreign exchange gain (loss) 0.00% 0.00% 0.00% 0.78% -0.05% 0.69% -0.61%
Loss on divestiture of Advance Materials business 0.00% 0.00% 0.00% #VALUE! #VALUE! -9.64% 0.16%
Other 0.00% 0.00% 0.00% 0.45% 0.43% 1.04% -0.03%
Other income, net -0.31% -0.01% -1.28% -0.32% -2.84% -8.98% -0.72%
Income (loss) from continuing operations 9.92% -0.12% 8.97% 1.87% -3.15% -5.43% -16.19% -14.50% -8.60% -1.05% 2.50% 2.80% 3.45% 3.45% 3.45% 3.45% 3.45% 3.45%
Income tax expense (benefit) -0.93% -2.40% -2.48% 1.26% 0.21% -0.92% -0.05%
Income (loss) from continuing operations, net of tax8.99% -2.52% 6.49% 3.13% -2.94% -6.35% -16.14%
Income (loss) from discontinued operations, net of tax0.01% 0.17% 0.06% 0.15% -0.03% -1.06% -0.03%
Consolidated net income (loss) 9.00% -2.35% 6.55% 3.29% -2.97% -7.41% -16.17%
Net (income) loss attributable to noncontrolling interests-1.23% 0.30% 0.42% -0.33% 0.46% 0.16% #VALUE!
Net income (loss) attributable to OM Group,7.77% -2.05% 6.97% 2.96% -2.51% -7.26% -16.17% -13.50% -8.70% -2.40% 2.30% 3.20% 3.90% 4.40% 3.90% 4.40% 4.40% 4.40%
R&D/Total Sales 0.62% 1.06% 0.99% 1.72% 2.08% 2.27% 2.44% 2.20% 1.80% 1.50% 1.60% 1.70% 1.75% 1.75% 1.80% 1.75% 1.80% 1.80%
ROE -16% -12% -4% 4% 6% 7% 8% 8% 9% 9% 10%
Actual Financial Statements Forecast Financial Statements
92
Restated Income Statement
We went one step further to restate OM Group’s restated income statement as
well because it had some elements that were affected by the adjustments made in the
restatement. The main components from the income statement that were affected by
the impairment of goodwill and adjusted R&D expense were total operating expenses,
total operating profit, and total net profit. This is because the goodwill impairment ends
up decreasing net income, while adjusted R&D expenses increased net income.
However, the outcome that occurred with OM Group was different because of the $195
million goodwill impairment in 2014. This offset the goodwill expense for the years
following 2014. For example, on the as stated income statement, goodwill expense was
$195 million, but on the restated the new impairment expense was $32 million. This
continues, and because of that impairment in 2014, OM Group ends up with higher net
income for years 2017 through 2019, when goodwill is still running out. The adjusted
R&D expense effects were minor compared to the goodwill impairment effects. The
forecasted R&D for years 2015 through 2019 was adjusted using the R&D restatement
information from our restated financials. After 2019, the forecasted R&D expense is the
same as the as stated because the adjusted R&D expense runs out by 2019. After
2019, everything else is also the same in the restated income statement as the as
stated, because there is no more goodwill or adjusted R&D expenses to take into
account.
93
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Net sales 1737 872 1197 1420 1544 1158 1068 977.83 926.59 905.28 937.15 997.31 1083.48 1192.04 1311.49 1442.90 1587.47 1746.54
Cost of goods sold 1384 694 910 1179 1301 899 829 799.86 750.17 727.85 747.84 784.88 851.40 936.71 1030.57 1133.83 1247.44 1372.43
Restructuring charges 12.1 1.8
Gross profit 353 166 285 241 244 258 238 177.97 176.42 177.43 189.30 212.43 232.08 255.34 280.92 309.07 340.04 374.11
Selling, general and administrative expenses155.3 124.1 150 195 219 191 181.9
Research & Development 1.1 3.1 5.2 8.8 14.5 19.2 22.5 22.96 19.34 13.68 7.83 2.60
Goodwill impairment, net 0 53.7 46.8 61.4 109 109 32.8 3.68 -10.86 -58.38 -58.12 -36.02
Restructuring charges 0.654 0.24
Gain on termination of retiree medical plan-4.7
Gain on sale of property 9.7 2.9
Total Operating Costs 156 177 202 275 345 319 237 248.37 208.85 139.41 142.45 155.38 157.32 173.08 190.43 209.51 230.50 253.60
Total OP exp RESTATED 275.01 217.33 94.71 92.16 121.96 157.32 173.08 190.43 209.51 230.50 253.60
Operating profit (loss) 196 -11 82.5 -15 -96 -60 1.04 -70.40 -32.43 38.02 46.86 57.05 74.76 82.25 90.49 99.56 109.54 120.51
Total OP profit RESTATED -97.04 -40.91 82.72 97.15 90.47 74.76 82.25 90.49 99.56 109.54 120.51
Interest expense -5.3 -22.1 -43.2 -11.3 -2.6
Accelerated amortization of deferred financing fees -6.5 -1
Foreign exchange gain (loss) 11.1 -0.8 8 -6.5
Loss on divestiture of Advance Materials business -112 1.7
Other 6.4 6.6 12 -0.3
Other income, net -5.3 -0.07 -15.3 -4.6 -43.9 -104 -7.7
Income (loss) from continuing operations191 -11 67.2 -19 -140 -164 -6.7 -141.79 -79.69 -9.51 23.43 27.92 37.38 41.13 45.25 49.78 54.77 60.26
Income tax expense (benefit) -16.1 -20.9 -29.7 17.9 3.2 -10.7 -0.5
Income (loss) from continuing operations, net of tax174.7 -32.1 37.46 -1.3 -137 -175 -6.16
Income (loss) from discontinued operations, net of tax0.1 1.5 0.73 2.2 -0.4 -12.3 -0.3
Consolidated net income (loss) 174.8 -30.6 38.19 0.9 -137 -187 -6.46
Net (income) loss attributable to noncontrolling interests-21.3 2.6 5 -4.7 7.1 1.8
Net income (loss) attributable to OM Group,154 -28 43.2 -3.8 -130 -186 -6.5 -132.01 -80.61 -21.73 21.55 31.91 42.26 52.45 51.15 63.49 69.85 76.85
Net Income RESTATED -158.65 -89.09 22.97 71.84 65.33 42.26 52.45 51.15 63.49 69.85 76.85
Actual Financial Statements Forecast Financial Statements
94
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Annual Sales Growth -49.81% 37.27% 18.64% 8.79% -25.05% -7.78% -8.40% -5.24% -2.30% 3.52% 6.42% 8.64% 10.02% 10.02% 10.02% 10.02% 10.02%
Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of goods sold 79.70% 79.59% 76.06% 83.03% 84.23% 77.68% 77.69%
Restructuring charges 0.00% 1.39% 0.15% 0.00% 0.00% 0.00% 0.00%
Gross profit 20.30% 19.02% 23.79% 16.97% 15.77% 22.32% 22.31% 18.20% 19.04% 19.60% 20.20% 21.30% 21.42% 21.42% 21.42% 21.42% 21.42% 21.42%
Selling, general and administrative expenses8.94% 14.24% 12.54% 13.74% 14.18% 16.50% 17.04%
Research & Development 0.06% 0.36% 0.43% 0.62% 0.94% 1.66% 2.10%
Goodwill impairment, net 0.00% 6.16% 3.91% 4.33% 7.05% 9.38% 3.07%
Restructuring charges 0.00% 0.08% 0.02% 0.00% 0.00% 0.00% 0.00%
Gain on termination of retiree medical plan0.00% -0.54% 0.00% 0.00% 0.00% 0.00% 0.00%
Gain on sale of property 0.00% 0.00% 0.00% 0.68% 0.19% #VALUE! #VALUE!
Total Operating Costs 9.01% 20.29% 16.90% 19.36% 22.36% 27.54% 22.22%
Operating profit (loss) 11.29% -1.27% 6.89% -1.03% -6.21% -5.22% 0.10% -7.20% -3.50% 4.20% 5.00% 5.72% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90%
Interest expense -0.31% 0.00% 0.00% -1.56% -2.80% -0.98% -0.24%
Accelerated amortization of deferred financing fees0.00% 0.00% 0.00% #VALUE! -0.42% -0.09% 0.00%
Foreign exchange gain (loss) 0.00% 0.00% 0.00% 0.78% -0.05% 0.69% -0.61%
Loss on divestiture of Advance Materials business0.00% 0.00% 0.00% #VALUE! #VALUE! -9.64% 0.16%
Other 0.00% 0.00% 0.00% 0.45% 0.43% 1.04% -0.03%
Other income, net -0.31% -0.01% -1.28% -0.32% -2.84% -8.98% -0.72%
Income (loss) from continuing operations10.99% -1.28% 5.61% -1.35% -9.05% -14.19% -0.62% -14.50% -8.60% -1.05% 2.50% 2.80% 3.45% 3.45% 3.45% 3.45% 3.45% 3.45%
Income tax expense (benefit) -0.93% -2.40% -2.48% 1.26% 0.21% -0.92% -0.05%
Income (loss) from continuing operations, net of tax10.06% -3.68% 3.13% -0.09% -8.84% -15.12% -0.58%
Income (loss) from discontinued operations, net of tax0.01% 0.17% 0.06% 0.15% -0.03% -1.06% -0.03%
Consolidated net income (loss) 10.06% -3.51% 3.19% 0.06% -8.87% -16.18% -0.61%
Net (income) loss attributable to noncontrolling interests-1.23% 0.30% 0.42% -0.33% 0.46% 0.16% #VALUE!
Net income (loss) attributable to OM Group,8.84% -3.21% 3.61% -0.27% -8.41% -16.03% -0.61% -13.50% -8.70% -2.40% 2.30% 3.20% 3.90% 4.40% 3.90% 4.40% 4.40% 4.40%
Actual Financial Statements Forecast Financial Statements
95
Dividends
After finishing the income statement we forecasted dividends. Forecasting
dividends is important because it helps us forecast retained earnings, which is a balance
sheet component. The last time OM Group paid a dividend before 2014 was in 2002.
This was somewhat a problem, except that they started paying dividends again in 2014.
We decided to look at the historical values of the dividends they have paid so far up
until April 1, 2014. From here we saw that OM Group’s dividends have been growing at
approximately a 10% rate. From this trend we made the assumption that OM Group’s
dividends were going to grow by 10% for the next 10 years. This, however, proved to
not be realistic, especially towards the last five years when total dividends paid started
looking too high, so we decided to decrease the dividend growth rate towards the last
five years.
Balance Sheet
The first component of the balance sheet that we forecasted was OM Group’s
total assets. When forecasting the balance sheet, we used four very important ratios.
The current ratio, inventory turnover ratio (ITO), asset turnover ratio (ATO), and
accounts receivable turnover ratio (ARTO). We were able to forecast total assets by
using the asset turnover ratio. By taking an average of the asset turnover ratio for the
last 6 years, which says that OM Group turns their inventory around 3.2 times a year,
we were able to use this number, keeping it relatively stable for the next 10 years. We
then used the common size balance sheet to forecast total non-current assets. The
growth in total assets is explained by OM Group’s higher sales through time. Two very
important elements from the balance sheet that are also forecasted using ratios are
inventory and accounts receivable. We spotted trends in the ITO and the ARTO ratios in
the same manner that we did with the ATO ratio to forecast inventory and accounts
receivable. Inventory decreases at first for the first three years, and then slowly starts
to grow ending up at $462.01 million in 2025.
After finishing assets, we moved on to retained earnings (RE). We used the
following formula to estimate retained earnings: Beginning balance of RE + Net Income
96
– Dividends = Ending balance of RE. This was quite simple since at this point we
already forecasted all of the components necessary to use with this formula. OM
Group’s retained earnings show a decreasing trend at first, starting at $263.03 million in
2015, while later slowly increasing to $350.99 million in 2025. We then were able to
forecast total equity and total liabilities using the amounts from total assets. Finally, to
forecast current liabilities we used the current ratio, which equals current assets divided
by current liabilities. Our balance sheet forecast is stable and the growth in the forecast
is explained through the next ten years when OM Group’s sales are projected to grow at
a steady rate. This shows that the balance sheet’s components correlate with the
components in the income statement.
97
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
ASSETS
Current assets
Cash and cash equivalents 244.8 355.4 400.6 292.1 227.6 118.4 91.7
Restricted cash on deposit 0 0 68.1 92.8 22.8 0
Accounts receivable, less allowance130 124 156 212 175 151 135 135.81 142.55 139.27 144.18 153.43 166.69 183.39 201.77 221.98 244.23
Inventories 306 287 294 615 463 241 228 258.02 277.84 269.57 276.98 290.70 315.33 346.93 381.69 419.94 462.01
Refundable and prepaid income taxes55.1 44.5 40.7 42.5 3.2 0
Other current assets 59.2 32.4 44.6 54.8 48.3 32.3 21.5
Total current assets 795 843 1003 1309 940 542 476 570.21 612.80 692.05 797.85 800.11 935.30 1029.01 1132.12 1245.56 1370.36
Non-current Assets
Property, plant and equipment, net245.2 227.1 256.1 482.3 496.8 345.6 308.3
Capitalized R&D Benefit 0 0 0 0 0
Goodwill 268.7 234.2 306.9 544.5 543.2 432.7 252.6
Intangible assets 84.8 79.2 153.4 433.3 429.7 403 324.8
Notes receivable from joint venture partner, less allowance13.9 13.9 13.9 16 16 0
Other non-current assets 26.4 46.7 39.3 84.2 74.1 59.5 57.7
Total Non-current Assets 639 601 770 1560 1560 1241 943 855.32 779.93 749.72 736.48 866.78 898.62 988.66 1087.72 1196.71 1316.62
TOTAL ASSETS 1434 1444 1773 2870 2499 1783 1420 1425.53 1392.74 1441.76 1534.32 1666.89 1833.91 2017.67 2219.84 2442.27 2686.98
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Short-term debt 0 0 0 0 0 0
Current portion of long-term debt 0.1 0 30 13.3 13.3 0
Revolving Credit Facility 12.5
Accounts payable 89.5 139.2 105.9 170.5 128.4 93.6 74.7
Liability related to joint venture partner injuntion0 0 68.1 92.8 22.8
Accrued income taxes 17.7 7.5 8.3 19.8 23.9 4.2 5.6
Accrued employee costs 31.2 18.2 37.9 49.7 41.8 36.2 34.9
Deferred income taxes 0 0 0 23.4 4.7 74.8
Purchase price of VAC payable to seller 0 0 0 0 75.4 52.5 46.2
Deferred revenue 0 0 9.4
Other current liabilities 21.1 24.1 24.7 79 69 59.2 51.8
Total current liabilities 160 189 284 449 379 246 226 259.19 266.44 276.82 346.89 320.04 374.12 447.40 452.85 498.22 548.14
Non-current Liabilities
Long-term debt 26.1 0 90 663.2 454.1
Deferred income taxes 26.8 27.5 23.5 129.9 121.5 102.5 74.8
Minority interests 47.4 15.7 14.8
Pension liabilities 0 0 58.1 204.2 233.8 220.5 244.4
Purchase price of VAC payable to seller 0 0 0 86.5 11.3 11.3
Other non-current liabilities 44.1 35.9 25.4 62 55.4 43.3 37.7
Total Non-Current Liabilities 144 79.1 212 1146 876 378 282 471.68 523.51 596.25 610.80 753.14 839.87 915.05 1078.80 1211.45 1356.25
TOTAL LIABILITIES 304 268 496 1594 1255 623 508 730.86 789.94 873.07 957.69 1073.19 1213.98 1362.44 1531.65 1709.67 1904.39
Stockholders equity:
Common stock, $.01 par value: 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Capital in excess of par value 563.5 569.5 578.9 625.5 631.1 639.8 647.3
Retained earnings 602 585 668 706 671 587 405 263.06 171.20 137.09 145.03 162.10 188.33 223.63 256.60 300.99 350.99
Treasury stock -5.8 -6 -7.2 -7.4 -7.7 -22.3 -58.2
Accumulated other comprehensive income-30 -17 -3.1 -93.4 -88 -45.2 -158
Total OM Group, Inc. stockholders equity1130 1131 1237 1231 1207 1160 836.9
Noncontrolling interests 0 44.7 39.8 44.6 37.3 0
TOTAL STOCKHOLDER'S EQUITY1130 1176 1277 1275 1244 1160 837 694.66 602.80 568.69 576.63 593.70 619.93 655.23 688.20 732.59 782.59
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY1434 1444 1773 2870 2499 1783 1420 1425.53 1392.74 1441.76 1534.32 1666.89 1833.91 2017.67 2219.84 2442.27 2686.98
Actual Financial Statements Forecast Financial Statements
98
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
ASSETS
Current assets
Cash and cash equivalents 17.07% 24.61% 22.60% 10.18% 9.11% 6.64% 6.46%
Restricted cash on deposit 0.00% 0.00% 3.84% 3.23% 0.91% 0.00% 0.00%
Accounts receivable, less allowance 9.08% 8.56% 8.77% 7.39% 6.99% 8.45% 9.48%
Inventories 21.34% 19.88% 16.56% 21.43% 18.53% 13.51% 16.09%
Refundable and prepaid income taxes3.84% 3.08% 2.30% 1.48% 0.13% 0.00% 0.00%
Other current assets 4.13% 2.24% 2.52% 1.91% 1.93% 1.81% 1.51%
Total current assets 55.45% 58.38% 56.59% 45.63% 37.59% 30.41% 33.54%
Non-current Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Property, plant and equipment, net 17.09% 15.73% 14.45% 16.81% 19.88% 19.38% 21.72%
Capitalized R&D Benefit 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Goodwill 18.73% 16.22% 17.31% 18.97% 21.73% 24.27% 17.79%
Intangible assets 5.91% 5.48% 8.65% 15.10% 17.19% 22.60% 22.88%
Notes receivable from joint venture partner, less allowance0.97% 0.96% 0.78% 0.56% 0.64% 0.00% 0.00%
Other non-current assets 1.84% 3.23% 2.22% 2.93% 2.96% 3.34% 4.06%
Total Non-current Assets 44.55% 41.62% 43.41% 54.37% 62.41% 69.59% 66.46% 60.00% 56.00% 52.00% 48.00% 52.00% 49.00% 49.00% 49.00% 49.00% 49.00%
TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Short-term debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Current portion of long-term debt 0.01% 0.00% 1.69% 0.46% 0.53% 0.00% 0.00%
Revolving Credit Facility 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.88%
Accounts payable 6.24% 9.64% 5.97% 5.94% 5.14% 5.25% 5.26%
Liability related to joint venture partner injuntion0.00% 0.00% 3.84% 3.23% 0.91% 0.00% 0.00%
Accrued income taxes 1.23% 0.52% 0.47% 0.69% 0.96% 0.24% 0.39%
Accrued employee costs 2.18% 1.26% 2.14% 1.73% 1.67% 2.03% 2.46%
Deferred income taxes 0.00% 0.00% 0.00% 0.82% 0.19% 0.00% 5.27%
Purchase price of VAC payable to seller0.00% 0.00% 0.00% 0.00% 3.02% 2.94% 3.25%
Deferred revenue 0.00% 0.00% 0.53% 0.00% 0.00% 0.00% 0.00%
Other current liabilities 1.47% 1.67% 1.39% 2.75% 2.76% 3.32% 3.65%
Total current liabilities 11.13% 13.09% 16.04% 15.63% 15.18% 13.78% 15.90%
Non-current Liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Long-term debt 1.82% 0.00% 5.08% 23.11% 18.17% 0.00% 0.00%
Deferred income taxes 1.87% 1.90% 1.33% 4.53% 4.86% 5.75% 5.27%
Minority interests 3.30% 1.09% 0.83% 0.00% 0.00% 0.00% 0.00%
Pension liabilities 0.00% 0.00% 3.28% 7.12% 9.35% 12.37% 17.22%
Purchase price of VAC payable to seller0.00% 0.00% 0.00% 3.01% 0.45% 0.63% #VALUE!
Other non-current liabilities 3.07% 2.49% 1.43% 2.16% 2.22% 2.43% 2.66%
Total Non-Current Liabilities 10.07% 5.48% 11.95% 39.93% 35.05% 21.18% 19.87%
TOTAL LIABILITIES 21.19% 18.57% 27.99% 55.56% 50.23% 34.96% 35.77%
Stockholders equity: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% #VALUE!
Common stock, $.01 par value: 0.02% 0.02% 0.02% 0.01% 0.01% 0.02% 0.02%
Capital in excess of par value 39.28% 39.44% 32.66% 21.80% 25.25% 35.88% 45.60%
Retained earnings 42.00% 40.48% 37.68% 24.59% 26.85% 32.93% 28.55%
Treasury stock -0.40% -0.42% -0.41% -0.26% -0.31% -1.25% -4.10%
Accumulated other comprehensive income-2.09% -1.18% -0.17% -3.25% -3.52% -2.53% -11.12%
Total OM Group, Inc. stockholders equity78.81% 78.34% 69.77% 42.89% 48.28% 65.04% 58.96%
Noncontrolling interests 0.00% 3.10% 2.25% 1.55% 1.49% 0.00% 0.00%
TOTAL STOCKHOLDER'S EQUITY 78.81% 81.43% 72.01% 44.44% 49.77% 65.04% 58.96%
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Current Ratio 4.98 4.46 3.53 2.92 2.48 2.21 2.11 2.2 2.3 2.5 2.3 2.5 2.5 2.3 2.5 2.5 2.5
Inventory Turnover 4.52 2.42 3.10 1.92 2.81 3.73 3.63 3.1 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7
Asset Turnover 0.61 0.83 0.80 0.54 0.46 0.60 0.6 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65
Accounts Receivable Turnover 13.34 7.05 7.70 6.69 8.85 7.68 7.94 7.2 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
Actual Financial Statements Forecast Financial Statements
99
Restated Balance Sheet
We included a forecast of the restated balance sheet because there are some
balances that are affected by the adjusted R&D expenses. Goodwill in the forecasted
restated balance sheet is irrelevant because we cannot forecast goodwill for OM Group.
There is, however, an account called capitalized R&D benefit. This account is where
R&D’s capitalized benefit is measured. This affects both total non current assets and
total assets. It also ends up changing a firm’s retained earnings and total stockholder
equity and liabilities. OM Group’s total assets are larger on the restated because of the
capitalized R&D account. Their retained earnings are less and is explained because the
retained earnings account on the restated balance takes into account the effects of the
goodwill impairment. Overall, OM Group’s total assets are larger from 2015 to 2019, or
the point when the effects of goodwill impairment and adjusted R&D expense are no
longer relevant.
Statement of Cash Flows
There are three main components of the statement of cash flows that have to be
forecasted: cash flows from operating activities (CFFO), cash flows from investing
activities (CFFI), and dividends. Dividends were already forecasted as stated earlier,
since dividends are needed in order to fully forecast the balance sheet. Forecasting cash
flows from operating activities starts with figuring out CFFO/Net Income,
CFFO/Operating Income, and CFFO/Sales. From here we had to look at these three
ratios and see if we could spot any trends. CFFO/Sales was the most steady out of the
three as far as patterns in the numbers throughout the years. We got an average of our
results for the CFFO/Sales, and from this assumed that CFFO were going to stay
relatively steady at around 11% of sales. We used this to forecast out CFFO, keeping it
in a steady trend through the next six years and leveling it out for the last four years at
12% of total sales.
Forecasting cash flows from investing activities was a bit trickier because our
results from the ratios that we used bounced around a lot. We ended up seeing a trend
in CFFI as a percentage of OM Group’s total sales. We used these results to forecast
100
CFFI. The reason why OM Group’s CFFI were so unstable is most likely due to the
acquisitions and divestitures that they have been a part of in the last five years. It is
very difficult and almost impossible to predict what OM Group is going to acquire or sell
off in the future which is why we believe CFFI as a percentage of sales makes the most
sense. Since they are relatively active in buying companies, maybe they will be more
inclined to make an acquisition in years where sales are better.
101
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
ASSETS
Current assets
Cash and cash equivalents 244.8 355.4 400.6 292.1 227.6 118.4 91.7
Restricted cash on deposit 0 0 68.1 92.8 22.8 0
Accounts receivable, less allowance130 124 156 212 175 151 135 135.81 142.55 139.27 144.18 153.43 166.69 183.39 201.77 221.98 244.23
Inventories 306 287 294 615 463 241 228 258.02 277.84 269.57 276.98 290.70 315.33 346.93 381.69 419.94 462.01
Refundable and prepaid income taxes55.1 44.5 40.7 42.5 3.2 0
Other current assets 59.2 32.4 44.6 54.8 48.3 32.3 21.5
Total current assets 795 843 1003 1309 940 542 476 570.21 612.80 692.05 797.85 800.11 935.30 1029.01 1132.12 1245.56 1370.36
Non-current Assets
Property, plant and equipment, net245.2 227.1 256.1 482.3 496.8 345.6 308.3
Capitalized R&D Benefit 9.7 15.8 22.4 38 55.7 62.8 66.3 70.2 74.1 78.3 81.4 84.30
Goodwill 277.5 226.8 252.7 428.9 318.7 99.6 82.1
Intangible assets 84.8 79.2 153.4 433.3 429.7 403 324.8
Notes receivable from joint venture partner, less allowance13.9 13.9 13.9 16 16 0
Other non-current assets 26.4 46.7 39.3 84.2 74.1 59.5 57.7
Total Non-current Assets 658 610 738 1483 1391 971 839 855.32 779.93 749.72 736.48 866.78 898.62 988.66 1087.72 1196.71 1316.62
TOTAL ASSETS 1453 1453 1741 2792 2331 1513 1315 1425.53 1392.74 1441.76 1534.32 1666.89 1833.91 2017.67 2219.84 2442.27 2686.98
Total Assets Restated 1495.73 1466.84 1520.06 1615.72 1751.19 1833.91 2017.67 2219.84 2442.27 2686.98
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Short-term debt 0 0 0 0 0 0
Current portion of long-term debt 0.1 0 30 13.3 13.3 0
Revolving Credit Facility 12.5
Accounts payable 89.5 139.2 105.9 170.5 128.4 93.6 74.7
Liability related to joint venture partner injuntion0 0 68.1 92.8 22.8
Accrued income taxes 17.7 7.5 8.3 19.8 23.9 4.2 5.6
Accrued employee costs 31.2 18.2 37.9 49.7 41.8 36.2 34.9
Deferred income taxes 0 0 0 23.4 4.7 74.8
Purchase price of VAC payable to seller 0 0 0 0 75.4 52.5 46.2
Deferred revenue 0 0 9.4
Other current liabilities 21.1 24.1 24.7 79 69 59.2 51.8
Total current liabilities 160 189 284 449 379 246 226 259.19 266.44 276.82 346.89 320.04 374.12 447.40 452.85 498.22 548.14
Non-current Liabilities
Long-term debt 26.1 0 90 663.2 454.1
Deferred income taxes 26.8 27.5 23.5 129.9 121.5 102.5 74.8
Minority interests 47.4 15.7 14.8
Pension liabilities 0 0 58.1 204.2 233.8 220.5 244.4
Purchase price of VAC payable to seller 0 0 0 86.5 11.3 11.3
Other non-current liabilities 44.1 35.9 25.4 62 55.4 43.3 37.7
Total Non-Current Liabilities 144 79.1 212 1146 876 378 357 575.84 627.67 700.41 714.96 857.30 944.03 1019.21 1182.96 1315.61 1460.41
TOTAL LIABILITIES 304 268 496 1594 1255 623 583 835.02 894.10 977.23 1061.85 1177.35 1318.14 1466.60 1635.81 1813.83 2008.55
Stockholders equity:
Common stock, $.01 par value: 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Capital in excess of par value 563.5 569.5 578.9 625.5 631.1 639.8 647.3
Retained earnings 621 593 636 628 502 317 301 158.90 67.04 32.93 40.87 57.94 84.17 119.47 152.44 196.83 246.83
Treasury stock -5.7 -6 -7.2 -7.4 -7.7 -22.3 -58.2
Accumulated other comprehensive income-30 -17 -3.1 -93.4 -88 -45.2 -158
Total OM Group, Inc. stockholders equity1149 1140 1205 1153 1038 889.5 732.7
Noncontrolling interests 0 44.7 39.8 44.6 37.3 0
TOTAL STOCKHOLDER'S EQUITY1149 1184 1245 1198 1075 890 733 590.50 498.64 464.53 472.47 489.54 515.77 551.07 584.04 628.43 678.43
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY1453 1453 1741 2792 2331 1513 1315 1425.53 1392.74 1441.76 1534.32 1666.89 1833.91 2017.67 2219.84 2442.27 2686.98
Total Liabilities and stock holder's equity restated 1495.73 1466.84 1520.06 1615.72 1751.19 1833.91 2017.67 2219.84 2442.27 2686.98
Actual Financial Statements Forecast Financial Statements
102
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
ASSETS
Current assets
Cash and cash equivalents 16.85% 24.47% 23.01% 10.46% 9.77% 7.83% 6.97%
Restricted cash on deposit 0.00% 0.00% 3.91% 3.32% 0.98% 0.00% 0.00%
Accounts receivable, less allowance 8.96% 8.51% 8.93% 7.60% 7.49% 9.96% 10.23%
Inventories 21.07% 19.77% 16.86% 22.03% 19.87% 15.92% 17.36%
Refundable and prepaid income taxes3.79% 3.06% 2.34% 1.52% 0.14% 0.00% 0.00%
Other current assets 4.07% 2.23% 2.56% 1.96% 2.07% 2.14% 1.63%
Total current assets 54.75% 58.04% 57.62% 46.90% 40.32% 35.85% 36.20%
Non-current Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Property, plant and equipment, net 16.88% 15.64% 14.71% 17.27% 21.32% 22.85% 23.44%
Capitalized R&D Benefit 0.67% 1.09% 1.29% 1.36% 2.39% 4.15% 5.04%
Goodwill 19.10% 15.61% 14.52% 15.36% 13.67% 6.58% 6.24%
Intangible assets 5.84% 5.45% 8.81% 15.52% 18.44% 26.64% 24.69%
Notes receivable from joint venture partner, less allowance0.96% 0.96% 0.80% 0.57% 0.69% 0.00% 0.00%
Other non-current assets 1.82% 3.22% 2.26% 3.02% 3.18% 3.93% 4.39%
Total Non-current Assets 45.25% 41.96% 42.38% 53.10% 59.68% 64.15% 63.80% 60.00% 56.00% 52.00% 48.00% 52.00% 49.00% 49.00% 49.00% 49.00% 49.00%
TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Short-term debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% #VALUE!
Current portion of long-term debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Revolving Credit Facility 0.01% 0.00% 1.72% 0.48% 0.57% 0.00% 0.95%
Accounts payable 6.16% 9.58% 6.08% 6.11% 5.51% 6.19% 5.68%
Liability related to joint venture partner injuntion0.00% 0.00% 3.91% 3.32% 0.98% 0.00% 0.00%
Accrued income taxes 1.22% 0.52% 0.48% 0.71% 1.03% 0.28% 0.43%
Accrued employee costs 2.15% 1.25% 2.18% 1.78% 1.79% 2.39% 2.65%
Deferred income taxes 0.00% 0.00% 0.00% 0.84% 0.20% 0.00% 5.69%
Purchase price of VAC payable to seller0.00% 0.00% 0.00% 0.00% 3.24% 3.47% 3.51%
Deferred revenue 0.00% 0.00% 0.54% 0.00% 0.00% 0.00% 0.00%
Other current liabilities 1.45% 1.66% 1.42% 2.83% 2.96% 3.91% 3.94%
Total current liabilities 10.98% 13.01% 16.33% 16.06% 16.27% 16.24% 17.16%
Non-current Liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Long-term debt 1.80% 0.00% 5.17% 23.75% 19.48% 0.00% 0.00%
Deferred income taxes 1.84% 1.89% 1.35% 4.65% 5.21% 6.78% 5.69%
Minority interests 3.26% 1.08% 0.85% 0.00% 0.00% 0.00% 0.00%
Pension liabilities 0.00% 0.00% 3.34% 7.31% 10.03% 14.58% 18.58%
Purchase price of VAC payable to seller0.00% 0.00% 0.00% 3.10% 0.48% 0.75% #VALUE!
Other non-current liabilities 3.04% 2.47% 1.46% 2.22% 2.38% 2.86% 2.87%
Total Non-Current Liabilities 9.94% 5.45% 12.17% 41.04% 37.59% 24.96% 27.13%
TOTAL LIABILITIES 20.92% 18.46% 28.50% 57.10% 53.87% 41.20% 44.29%
Stockholders equity: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% #VALUE!
Common stock, $.01 par value: 0.02% 0.02% 0.02% 0.01% 0.01% 0.02% 0.02%
Capital in excess of par value 38.78% 39.21% 33.25% 22.40% 27.08% 42.29% 49.21%
Retained earnings 42.73% 40.82% 36.54% 22.50% 21.55% 20.95% 22.89%
Treasury stock -0.39% -0.41% -0.41% -0.27% -0.33% -1.47% -4.42%
Accumulated other comprehensive income-2.06% -1.17% -0.18% -3.35% -3.78% -2.99% -12.00%
Total OM Group, Inc. stockholders equity79.08% 78.46% 69.22% 41.30% 44.53% 58.80% 55.71%
Noncontrolling interests 0.00% 3.08% 2.29% 1.60% 1.60% 0.00% 0.00%
TOTAL STOCKHOLDER'S EQUITY 79.08% 81.54% 71.50% 42.90% 46.13% 58.80% 55.71%
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Current Ratio 4.98 4.46 3.53 2.92 2.48 2.21 2.11 2.2 2.3 2.5 2.3 2.5 2.5 2.3 2.5 2.5 2.5
Inventory Turnover 4.52 2.42 3.10 1.92 2.81 3.73 3.63 3.1 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7
Asset Turnover 0.61 0.83 0.80 0.54 0.46 0.60 0.6 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65
Accounts Receivable Turnover 13.34 7.05 7.70 6.69 8.85 7.68 7.94 7.2 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
Actual Financial Statements Forecast Financial Statements
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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
(In thousands)
Operating activities
Consolidated net income (loss) 156304 -20461 78385 46.7 -45.8 -85.8 -173
Adjustments to reconcile consolidated
net income (loss) to net cash provided by
operating activities:
Income from discontinued operations -92 -1496 -726 -2.2 0.4 12.3 0.3
Depreciation and amortization 56116 53765 54097 65 84.3 73.9 67.5
Goodwill and intangible asset impairment 195.4
Share-based compensation expense 7621 6026 5342 6.6 5.8 6.2 7.6
Excess tax benefit on exercise/vesting -28
of share awards
Foreign exchange loss 3744 21 10679 -11.1 0.8 -8 6.5
Gain on cobalt forward purchase contracts-4002
Interest income receivable from joint 3776
venture partner
Deferred income tax provision (benefit)-894 -7471 -5131 -31.2 -30.2 -7.3 -17.2
Amortization of deferred financing fees 2.3 5.4 2
Accelerated amortization of deferred financing fees 6.5 1
VAC lower of cost or market ("LCM") charges 14.5 78.4
Loss on divestiture of Advanced Materials business 111.6 -1.7
Adjustment to contingent consideration -13
Gain on sale of property -9.7 -2.9
Other non-cash items 4536 801 779 -8.6 -8.9 2.5 9
Changes in operating assets and liabilities,
excluding the effect of business acquisitions
Accounts receivable 48641 6739 -21668 19.7 39.4 -22.3 11.5
Inventories (includes $18.4 million and76985 17142 20931 -1.3 75.7 25 3.8
$92.1 million of step-up amortization
in 2012 and 2011, respectively)
Advances to suppliers -12131 21507 -7136
Accounts payable -124712 49703 -39558 25 -43 12.5 -15.5
Refundable, prepaid and accrued income taxes-64455 -7675 1763 -0.9 41.2 -21.1 1.8
Other, net -15813 1326 13309 5.8 2.4 -26.6 -11
Lower of cost or market inventory charge27728
Goodwill impairment charges, net 8800 37504
Restructuring charge 12708 2100
Allowance on GTL prepaid tax asset 11465
Impairment of cost-method investment 2000
Gain on termination of retiree medical plan -4693
Net cash provided by operating activities172.1 165.4 126.6 121 209.5 62.9 85.4 97.78 101.93 90.53 103.09 99.73 119.18 143.05 157.38 173.15 190.50
Investing activities
Expenditures for property, plant and equipment-30.7 -25.7 -26.4 -50.3 -67.6 -53.1 -34.5
Proceeds from sale of property 9.7 5.1
Proceeds from divestiture of Advanced Materials Business 328.7
Proceeds from divestiture of UPC business 63.3
Proceeds from settlement of cobalt forward10736
Cash (paid) for acquisitions or received -24.6
Proceeds from loans to consolidated joint venture partners10264
Acquisitions -5799 -171979 -729.4 6 -23
Other, net -2423 -4797 -1418 -3 -5 1
Net cash provided by (used for) investing activities-17.9 -30.5 -199.8 -773 -56.5 311 -58 -39.11 -46.33 -81.48 -93.71 -129.65 -162.52 -178.81 -196.72 -216.43 -238.12
Financing activities
Dividends paid 0 0 0 0 0 0 -9.3 -10.23 -11.25 -12.38 -13.62 -14.84 -16.03 -17.15 -18.18 -19.09 -19.85
Payments of long-term debt and revolving-45513 -26141 -125000 -213.5 -466.5
Proceeds from the revolving line of credit70000 245000 -120 14.5
Debt issuance costs -2596 -30.2 -2.3 -0.1
Payment of loan from consolidated joint-2657
Payments on revolving line of credit -2
Payments related to VAC purchase price -16.2
Proceeds from long-term debt 698
Payment related to surrendered shares-3251 -535 -1209 -0.2 -0.3 -0.6 -0.7
Share repurchases -14.1 -35.2
Distribution to joint venture partners-26184
Proceeds from exercise of stock options874 11 4122 0.4 2.8 0.5
Excess tax benefit on exercise of share 28
Net cash provided by (used for) financing activities-6703 -26665 120317 548 -213.8 -480.7 -48.5
Effect of exchange rate changes on cash-2889 2697 -1854 -2 1.4 0.6 -4.7
Cash and cash equivalents
Increase (decrease) from continuing operations144598 110995 45267 -106.4 -59.4 -106.3 -25.9
Discontinued operations net cash used -397 -53 4.3 -1 -0.5 -0.8
Discontinued operations net cash used -6.2 -4.1 -2.4
Balance at the beginning of the year100187 2E+05 355383 400 292.1 228 118
Balance at the end of the year 244785 4E+05 400597 292 227.6 118 91.7
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
CFFO/NI 1.27 -9.26 1.52 2.87 -5.41 -0.75 -0.49
CFFO/OP INCOME 0.97 #### 1.03 3.87 -44.57 1.53 -0.52
CFFO/SALES 0.10 0.19 0.11 0.08 0.14 0.05 0.08 0.1 0.11 0.1 0.11 0.1 0.11 0.12 0.12 0.12 0.12
change in NC assets -37.9 168.5 791 -0.5 -319 -297
change in capex ish types of assets -58.2 175.9 746 9.6 -304 -296
change in nc assets/cffi 1.24 -0.84 -1.02 0.01 -1.03 5.12
ppe trnover 3.84 4.67 2.94 3.11 3.35 3.46 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
ppe 305.57 289.56 282.90 292.86 311.66 338.59 372.51 409.84 450.91 496.09
dividend growth 10% 10% 10% 10% 9% 8% 7% 6% 5% 4%
cffi/pp&e exp 0.58 1.19 7.57 15.37 0.84 -5.85 1.68
cffi/sales -0.01 -0.03 -0.17 -0.54 -0.04 0.27 -0.05 -0.04 -0.05 -0.09 -0.1 -0.13 -0.15 -0.15 -0.15 -0.15 -0.15
cffi/operating exp. -0.10 -0.18 -1.23 -3.37 -0.22 1.43 -0.14
-0.30 -1.88
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Cost of Capital Estimation
There are three basic types of Cost of Capital: Cost of Equity (Ke), Cost of Debt
(kd), and Weighted Average Cost of Capital (WACC). Each type of cost of capital uses
different valuation models which use different capital inputs. In order to determine the
value of a firm, we need to calculate the Weighted Average Cost of Capital. WACC is
used to discount the forecasts of asset performance and value its assets. WACC is the
average cost to a firm of obtaining capital from both debt and equity sources (BOOK).
If the cost of capital is high or low this helps determine if the firm is understated or
overstated. WACC is calculated from finding the firms Cost of Equity and Cost of Debt.
Cost of Debt
The cost of debt is shown as a weighted average of interest rates a firm pays on
debt. When the Cost of Debt is higher, usually the firm is more risky. In OM Group’s
10K, interest’s rate is 2.0%. To find Weighted Average Cost of Debt we have to take all
current and non current interest bearing liabilities. We found the interest bearing Cost
of Debt to be revolving credit facility and pension liabilities. For revolving credit facility,
we found the interest rate plus LIBOR to be 2.10%. For pension liabilities, we found the
weighted average discount rate to be 3.5%-3.7%. Shown below is OM Group’s Cost of
Debt calculations.
Cost of Debt Amount Weight Rate Weighted Rate
Revolving Credit Facility 12.5 4.87% 2.10% 0.102%
Pension Liabilities 244.4 95.13% 3.60% 3.42%
Total 256.9
5.70% 3.527% Cost of Debt
As a result, we can see that the Weighted Average Cost of Debt is 3.527%.
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Cost of Equity
The Cost of Equity is used for estimation models that are valuing distributions
solely to shareholders equity. Cost of Equity is the sum of a required return on riskless
assets plus a premium for beta or systematic risk. (textbook) The cost of equity is
calculated through the Capital Asset Pricing Model (CAPM). The formula includes the
risk free rate (Rf), systematic risk (beta), the market risk premium (MRP), and adds a
Size Premium (SP). CAPM can be estimated through a linear regression analysis. The
CAPM formula is:
𝑹𝒋,𝒕 = 𝑹𝒇,𝒕 + 𝜷𝒋(𝑹𝒎,𝒕 − 𝑹𝒇,𝒕)
To find the risk free rate, we found the yields for 3-month, 1-year, 2-year, 7-
year, and 10-year treasury bonds via the St. Louis Federal Reserve website. For this
analysis, the most recent 10-year treasury rate was used, and was found to be 2.00%.
The market risk premium is the amount that investors demand as additional
return for bearing beta risk (textbook). We then subtracted the risk free rate from the
historical S&P 500 returns. In order to get the market risk premium, you take the
monthly difference between the market return and the riskless yield. So in conclusion,
we used a 8.00% long run market risk premium.
Beta risk is a measure of systematic risk. We estimated OM Group’s beta through
several regressions. From the regression table, we got a beta of 1.91 for a 10-year
regression with a 95% confidence interval. OM Group’s market beta according to Yahoo
Finance is 1.76. The beta lower bound is 1.3 and the beta upper bound is 2.52 and the
market beta is 1.76. So the market beta falls within the 95% confidence interval. The
regression tables also show the adjusted R squared, which is the percentage of
systematic risk associated with a company. By finding data of the risk free treasury
bonds for 72 months, 60 months, 48 months, 36 months, 24 months we were able to
calculate 25 betas ranging from 1.189-1.91. We ran the six different sets of months to
test the stability of the beta. These regressions estimate the firm’s beta. Since beta is
higher than 1, OM Group’s is more highly affected by systematic risk. The following
table shows the regression table results.
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The charts above show that the 10 year regression has the largest adjusted R^2
at 72 months. This means that 35.69% of the risk associated with OM Group can be
explained by the risk of the market. The estimated CAPM cost of equity is 17.30%. The
cost of Equity lower bounds and upper bounds are 15.10% and 42.19% with a
confidence interval of 95%. With this range we can expect OM Group’s cost of equity to
fall in-between there.
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Backdoor Cost of Equity
The backdoor cost of equity is an alternative method for obtaining the cost of
equity. The alternative cost of equity method estimates the cost of equity that supports
the currently observed stock price. Where (P/B) is the current market to book ratio,
ROE is the average return on equity you are forecasting over the next 10 years and g is
the forecast average earnings growth rate over the next 10 years. The back door cost
of equity is:
(𝑷
𝑩) − 𝟏 =
𝑹𝑶𝑬 − 𝑲𝒆
𝑲𝒆 − 𝒈
ROE 0.1 ke=10%
g 0.1002
P/B 1.13
We found that Ke is 10%. This is just outside of our estimated 95% confidence interval.
Weighted Average Cost of Capital
WACC is the average cost to a firm of obtaining capital from both debt and
equity sources (textbook). WACC is calculated from finding the firms cost of equity and
cost of debt. The lower the WACC the cheaper it is for a firm to purchase future
projects. Below is the weighted average cost of capital before taxes:
WACCBT = ((MVD/MVF) * Kd) + (MVE/MVF * Ke)
WACC Amount Weight Rate Weighted*Rate
Market Value of Liabilies 256.9 21.58% 3.53% 0.76%
Market Value of Equity 933.51 78.42% 20.00% 15.68%
WACC 16.44%
Firm Value 1190.41
WACC After Tax 16.25%
Tax Rate 25.60%
To get market value of equity we used Yahoo Finance to find OM Group’s market
cap. The market value of liabilities was found when we calculated cost of debt. OM
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Group’s market value of liabilities is 256.9. By adding the market value of liabilities and
the market value of equity we get the value of the firm, which is 1190.41M. The weight
of the market value of liabilities is 21.58% and the weight of market value of equity is
78.42%. We found the MVL rate from the cost of debt section, which is 3.53%. To find
the Market value of equity rate for WACC we use the 10-year 2 factor Ke, which is
20.00%. Then we multiplied the weight for MVL and MVe by the rates for each to get
the weighted rate then added those together to get the Weight Average Cost of Capital
(WACC). The WACC is 16.44% and the WACC after tax is 16.25%. The after tax WACC
is calculated by using OM Group’s effective tax rate from its most recent 10K. Below, we
also found WACC lower bound and upper bound determined from the regressions.
WACC LB Amount Weight Rate Weighted*Rate
Market Value of Liabilities 256.9 21.58% 3.53% 0.76%
Market Value of Equity 933.51 78.42% 15.10% 11.84%
WACC 12.60%
Firm Value 1190.41
WACC After Tax 12.41%
Tax Rate 25.60%
WACC UB Amount Weight Rate Weighted*Rate
Market Value of Liabilities 256.9 21.58% 3.53% 0.76%
Market Value of Equity 933.51 78.42% 42.19% 33.09%
WACC 33.85%
Firm Value 1190.41
WACC After Tax 33.65%
Tax Rate 25.60%
In conclusion, we can assume that the Weighted Cost of Capital will fall between
12.60% and 33.85%.
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Method of Comparables
The method of comparables is used to compare OM Group’s share price to its
competitors to figure out whether the company is overvalued, undervalued or fairly
valued. There are some biases to this method because it only evaluates the firm for
that year which doesn’t indicate the firm as a whole over time. Also OM Group has a
negative earnings per share which in turn you are unable to have a Price to Earnings
ratio or trailing P/E ratio. There is no theory to state which multiple is best.
To value the status of OM Group’s share price, we will use a 10% analyst opinion
at April 1, 2015 with a closing share price of $30.87. Therefore, prices calculated below
$27.78 will be overvalued, and any price calculated above $33.96 will be considered
undervalued. For each ratio, we calculated an average, not including OM Group’s
information, or any outliers to find the adjusted OM Group’s share price. The data we
used for these evaluation multiples is found from Yahoo Finance. OM Group does not
have dividend a payout ratio, trailing P/E or P/E. The industry average benchmarks are
determined by market consensus. We used our benchmark companies of Quaker
Chemical, Huntsman Corp, and Olin Corp to solve for the comparable ratios.
Price to Book Ratio
The price to book ratio compares the stock price and the book value per share. It
is calculated by dividing the stock price by the book value. A low price to book can
indicate a good buy for an investor because it is undervalued. P/B is based on expected
earnings relative to current book value. ROCE is growth in book value. P/B is based on
expected growth in book value. Below is the P/B ratio for OMG and its competitors.
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The average price to book is for OM Group’s industry comparables is 2.87. OM
Group’s P/B ratio is 1.12, which is lower than industry average suggesting that the firm
is undervalued. The adjusted Price to book ratio is 79.34 meaning it’s significantly
undervalued. OM Group has low market to book because it’s just over one. All the value
is what OM Group is currently. The relative present value of growth opportunities is
1.12.
Forward Price Earnings Ratio
The forward price to earnings ratio is calculated similar to the trailing P/E ratio,
but instead utilizes forecasted information for the earnings. Because the ratio is
dependent on forecasted information there could be distorted information. Forward P/E
is used to compare a company’s current earnings to their future earnings. If the
company is expected to grow in the future then the P/E ratio will be lower.
The average forward P/E for OM Group’s competitors is 12.99. OM Group’s
forward P/E is 21.59 which suggest that the firm is overvalued. The adjusted share
price is 18.58 which is undervalued. This model indicates the future growth of the
company. Forward P/E is a limited tool because you cannot always predict the future.
Enterprise Value/EBITDA
The enterprise value to EBITDA is calculated by dividing the firm's enterprise
value by EBITDA. Enterprise value is the company’s total value. Enterprise value equals
the Market Value of Equity plus Value Liabilities minus Cash and Financial Investments.
EV/EBITDA measures the value of a company. The EV/EBITDA ratio is a more accurate
ratio to use than P/E when evaluating a company because it doesn’t take into account
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the capital structure. The ratio compares one company to another in the same industry.
A low ratio suggests that the firm is overvalued. Shown below is OM Group’s and its
competitors EV/EBITDA comparable.
The average EV/EBITDA for competitors is 9.43. OM Group’s ratio is only 8.68
suggesting that the firm is undervalued. OM Group’s adjusted share price is 30.53
which advocates that OM Group is fairly valued. This is a measure on how expensive
the stock is and helps determine of companies takeover value.
Enterprise Value / Revenue
The EV/ revenue multiple is calculated by dividing the enterprise value of the
firm by the firm's revenue per share. This ratio compares the firm’s value to the amount
of sales. The lower the multiple the more undervalued the firm appears. EBITDA is a
non-GAAP measure and thus should not be the only method we use to evaluate the
firm.
The average EV/Revenue for OM Group’s competitors is 1.22. OM Group’s ratio is 1.25
so it’s slightly overvalued. Then to find the firms adjusted share price we multiplied the
average by the revenue added back the cash and divided it by the shares outstanding.
OM Group’s adjusted share price is 46.37. This indicates the firm is slightly
undervalued.
Enterprise Value/EBITDA Values at 04/1/2015- in Billions
Company EV EBITA Comparable Ratio Average OMG Share Price
OLIN 2.81 0.357 7.87 9.43 EBITDA 0.0978 33.53
HUN 10.18 1.27 8.02 Shares 0.03024
KWR 1.18 0.095 12.40 Cash 0.0917
OMG 0.85 0.0978 8.68
Driver
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Price/EBITDA
The price to EBITDA ratio is calculated by taking the firm's current market
capitalization and dividing it by EBITDA. Price to EBITDA is less common than
EV/EBITDA because EV/EBITDA is capital structure neutral and price to EBITDA is only
capital structure neutral in the denominator making it an inconsistent model.
The average Price/EBITDA for OM Group’s competitors is 7.51. OM Group’s
Price/EBITDA is 6.41 so this suggests that OM Group is undervalued. The ratio average
is then multiplied by OM Group’s EBITDA divided by shares outstanding to get OM
Group’s share price of $24.30. This concludes that OM Group’s share price is
overvalued.
P.E.G. Ratio
The P.E.G. ratio is calculated by dividing the forward P/E ratio by the 5-year
forecasted growth rate of earnings per share. P.E.G ratio determines the stock's true
value. A lower P.E.G. ratio means that the company is undervalued. The ratio accounts
for growth so it is a better indicator than P/E. A ratio close to one means it’s a fair trade
off between growth and costs.
Price/EBITDA Values at 04/1/2015- In Billions
Company Market Cap EBITDA Comparable Ratio Average OMG Share Price
OLIN 2.29 0.357 6.41 7.51 EBITDA 0.0978 24.30
HUN 5.66 1.27 4.46 Shares 0.03024
KWR 1.11 0.095 11.67
OMG 0.908 0.098 9.29
Driver
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The average PEG ratio for OM Group’s rival companies is 3.40. OM Group’s PEG
ratio is 3.07 so this suggests that OM Group is undervalued. OM Group’s growth rate
over 5 years is 10% and there forward PE Is 21.59. We multiplied the growth rate over
5 years by forward P/E by the average comparable ratio.
Enterprise Value/Free Cash Flows
The enterprise value to free cash flows ratio evaluates the enterprise value of the
firm by the free cash flows. Free cash flows are the sum of a firm’s cash flows from
both operating and investing activities. The lower the EV/FCF ratio the better because it
means the company is able to generate cash flows and pay costs quicker.
The average enterprise value/FCF is 36.32. We eliminated HUN as an outlier
because their free cash flow is negative. OM Group’s comparable ratio is 13.08
suggesting that the firm is undervalued. To calculate OM Group’s adjusted share price
we multiplied the average ratio by free cash flows then added back cash then divided it
by their shares outstanding. OM Group’s share price is 81.00, which implies that the
company is undervalued.
Conclusion
It is hard to come to a conclusion from the information we calculated because it
is only one year of data thus making it skewed. P/B, EV/Revenue, EV/FCF are all
undervalued while forward P/E, P.E.G, and Price/EBITDA are overvalued. EV/EBITDA is
the only comparable fairly valued.
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Due to inconsistencies with the method to comparables model this is will not be
the sole evaluation factor. These models can be used as a benchmark for the following
section. The intrinsic valuation model is a more valuable way to evaluate the firm's true
value.
Intrinsic Valuation Models
The intrinsic valuation models are a more accurate measure of the value of the
firm and are based off of the forecasts that were produced in the financial analysis.
There are five intrinsic valuation models that we used to value OM Group: discounted
dividends, free cash flows, residual income, long run residual income, and abnormal
earnings growth. We used the several components from OM Group’s forecasted
financials. For the discounted dividends model, we used OM Group’s dividends
forecasted out 10 years. For the free cash flows model we used operating and investing
activities from the statement of cash flows. To run the residual income model we used
net income forecasted out 10 years, dividends forecasted out 10 years, and the
stockholder’s equity from 2014. The long run residual income model uses some of the
same components as the residual income model. Finally, the abnormal earnings growth
model is similar to the residual income model, but only uses forecasted net income and
RATIO RESULT
P/B Undervalued
Forward P/E Overvalued
EV/EBITDA Fairly Valued
EV/Revenue Undervalued
PEG Overvalued
EV/FCF Undervalued
Price/EBITDA Overvalued
Comparables Summary
115
forecasted dividends. All of these models are valuing OM Group as of the April 1, 2015
stock price of $30.87.
Discounted Dividends
The discounted dividends approach takes the present value of forecasted future
dividends to express the value of a firm’s equity (textbook). This model holds that the
value of the firm is based solely on its forecasted dividends. Through this idea, if the
discounted dividend model is at a model valued lower than the current stock price of
the firm, the stock is overvalued. Whether this valuation model is an accurate
representation is dependent on the firm itself. The discounted dividends model is the
most conservative model, however, does not represent OM Group accurately because of
the inconsistencies with their dividends paid. The discounted dividends model does not
represent enough of OM Group’s stock value and has a lot of forecast error.
To run this model, ten years of forecasted dividends were required. Before 2014,
OM Group has not paid dividends since 2002 so we decided that this valuation model
would not be an accurate depiction of OM Group because it is based on estimated
dividends. To create a consistent pattern of growth, we examined the growth rate of
the first 3 months of 2014, which was about 10% each month. We used that 10% to
grow it out the following ten years.
In order for this model to work, we used to our previously estimated cost of
equity and multiple growth rates to arrive at a realistic model outcome. Using an upper
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bound of 23% and a lower bound of 11%, along with five different growth rates,
allowed us to effectively test the sensitivity of the dividend growth model. Our upper
and lower bound was derived from taking the position of a 10% analyst and taking the
observed stock price of $30.87 and multiplying it by .9 for the lower bound and 1.1 for
the upper bound. This gave us a lower bound of $27.78, meaning anything below that
price is overvalued and an upper bound of $33.96, meaning anything over this price is
overvalued. Through this model we determined that based on OM Group’s stock price,
the firm is overvalued.
Discounted Free Cash Flows Model
The discounted free cash flows model values the firm based on its cash
generated rather than its forecasted dividends. This provides more explanatory power
and is a less conservative approach, however it creates more possibility of forecasting
error. FCF is calculated by subtracting cash flows from investing activities (CFFI) from
cash flows from operations (CFFO). This value is then discounted using weighted
average cost of capital (WACC). It is important to distinguish that you must use before
tax WACC so that taxes are not accounted for twice.
Discounting the annual free cash flows with before-tax WACC and applying an
incremental growth weight it was estimated that OMG was overvalued.
117
Residual Income Model
The residual income is the third intrinsic valuation model and has the highest
explanatory power because it is less sensitive to estimation errors. Being less sensitive
to estimation errors is important since these models are based off forecasted numbers.
The information necessary to run the residual income model is net income forecasted
out 10 years, dividends forecasted out 10 years, and retained earnings for 2014. This
model connects the income statement, balance sheet, and statement of cash flows
since it uses components from all three statements.
To start this model, we have to get the book value of equity for the next 10
years after 2014. To do this we take book value of equity from the previous year, add
net income from the current year, and subtract out dividends from the current year.
Book value of equity for OM Group in 2014 is 836.9M. Adding a forecasted net income
for 2015 of -132.01M and subtracting forecasted dividends to be paid out in 2015 of
10.23M gives us a book value of equity for 2015 of 694.66M. After getting the book
value of equity for the next 10 years, we have to obtain a normal income benchmark.
We get this figure by multiplying the previous year’s book value of equity by the cost of
equity that we, the analysts, estimated. After this, we have to get the annual residual
income, which is the amount that OM Group missed the net income benchmark by. In
other words, it shows how much value OM Group is destroying. We then have to get a
present value factor to bring all of the residual income totals to the present value of
December 31, 2014.
We then came up with a perpetuity total that represents years 11 and on. To get
an estimated model price for OM Group, we took its book value of equity and
subtracted out the sum of the year-by-year residual income totals, and the terminal
value of the perpetuity. We got the terminal value of the perpetuity by dividing the
perpetuity itself by the cost of equity minus the growth rate. At this point we have a
market value of equity, which is 198.31M for OM Group. We divided this number by the
total shares outstanding in 2014 and got a model price of $6.12 on December 31, 2014.
We however want a price at April 1, 2015, so we multiplied this number by a future
value factor to move it forward 3 months into 2015.
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As stated Residual Income Model
To get a better look at the residual income model, we used the cost of equity
that we estimated and five different growth rates to get an idea of different possible
scenarios. We took on the position of a 10% analyst and got a lower bound price of
$27.78, and an upper bound price of $33.96. We got these totals by multiplying OMG’s
stock price of $30.87 by .9 and 1.1. Anything in the model below $27.78 means that
OMG’s stock price is overvalued. Anything over $33.96 says that OM Group’s stock is
undervalued. Anything in between these two boundaries says that OM Group is fairly
priced. According to this residual income model, we concluded that OM Group is
overvalued. The table shows how at all of the possible growth rates and cost of equity
that we used, OM Group’s price is lower than the observed share price of $30.87.
Restated Residual Income Model
For the restated residual income model there were not many big differences. We
did, however, have to run a restated version of this model because of the fact that one
the components used is net income, and net income was affected by the restating of
goodwill and research and development. Everything overall, did decrease in the
restated version of the residual income model. This is most likely due to the fact that
net income was decreased in the restated financials.
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Long Run Residual Income Model
The long run residual income model examines the value of a firm based on the
price and its relationship between three variables. The cost of equity, growth rate and
return on equity are estimated and manipulated to find various prices. This model is not
as reliable as residual income but has more explanatory power than the free cash flow
model. In each chart one variable is held constant at the middle value of its range we
are estimating. The formula for calculating price is:
MVE= BVE [ 1 + ((ROE – Ke)/(Ke – g)) ]
Book value of equity varies on an as stated and restated basis so we included a
restated valuation as well. If it is over-valued then the box is filled in red, if fairly
valued the box is unfilled, and if undervalued the box is filled in green. We chose to
take a 10% analyst view of the company for mispricing.
lb ub
27.78 33.96
AS STATED:
Book Value of Equity = 836.9
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Growth
Rate
-10% -20% -30% -40% -50%
11.0% 26.51 26.51 26.51 26.51 26.51
Ke 14.0% 23.35 24.34 24.87 25.21 25.44
17.3% 20.68 22.34 23.30 23.93 24.37
20.0% 18.92 20.95 22.17 22.98 23.56
23.0% 17.31 19.61 21.04 22.02 22.73
Holding ROE = 11%
ROE
3% 7% 11% 15% 19%
11.0% 21.34 23.93 26.51 29.1 31.69
14.0% 20.02 22.44 24.87 27.3 29.72
Ke
17.3% 18.75 21.03 23.3 25.57 27.85
20.0% 17.84 20.01 22.17 24.33 26.49
23.0% 16.94 18.99 21.04 23.1 25.15
Holding Growth = -30%
Growth
Rate
-10% -20% -30% -40% -50%
3% 12.8 16.58 18.75 20.17 21.17
7% 16.74 19.46 21.03 22.05 22.77
ROE 11% 20.68 22.34 23.3 23.93 24.37
15% 24.62 25.22 25.57 25.8 25.96
19% 28.56 28.11 27.85 27.68 27.56
Holding Cost of Equity = 17.3
RESTATED:
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Book Value of Equity = 732.74
Growth rate
-10% -20% -30% -40% -50%
11.0% 23.21 23.21 23.21 23.21 23.21
14.0% 20.45 21.31 21.78 22.07 22.27
Ke
17.3% 18.10 19.56 20.40 20.95 21.33
20.0% 16.57 18.34 19.41 20.12 20.63
23.0% 15.16 17.17 18.42 19.28 19.9
Holding ROE = 11%
ROE
3% 7% 11% 15% 19%
11% 18.68 20.95 23.21 25.48 27.74
14% 17.53 19.65 21.78 23.9 26.02
Ke
17% 16.42 18.41 20.4 22.39 24.38
20% 15.62 17.52 19.41 21.3 23.2
23% 14.83 16.63 18.42 20.22 22.02
Holding Growth = -30%
Growth Rate
-10% -20% -30% -40% -50%
3% 11.21 14.51 16.42 17.66 18.53
7% 14.66 17.04 18.41 19.31 19.93
ROE
11% 18.1 19.56 20.4 20.95 21.33
15% 21.55 22.08 22.39 22.59 22.73
19% 25 24.61 24.38 24.23 24.13
Holding Cost of Equity (Ke) = 17.3
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There was a decrease in book value of equity on a restated basis, which caused
the few fairly priced examples to disappear from the model. On all estimated values of
cost of equity, return on equity and growth OM Group is overpriced. The firm is
currently showing poor performance in the future and isn’t a growth firm or necessarily
a value firm because it just recently began paying dividends. Historically it paid
dividends with a stair step growth but the dividend stream stopped for eleven years
therefore you cannot assume it will continue to pay consistent dividends. As a 10%
analyst this firm is almost entirely overvalued on a as stated basis and totally
overvalued on a restated basis.
Abnormal Earnings Growth Valuation
The abnormal earnings growth valuation is similar to the residual income
valuation. The main difference, however, is that it does not use the book value of
equity. Since it is so closely related to the residual income model it has a high
explanatory power. The inputs needed for the abnormal earnings growth model are net
income forecasted out 10 years, and dividends forecasted out 10 years.
The abnormal earnings model looks at things a little bit differently compared to
the residual income model. To start, we got net income forecasted out 10 years and
dividends forecasted out 10 years. From there we assumed that the dividends paid
were reinvested at the 17.30% cost of equity that we estimated in the financial analysis
as a return. We then got cumulative dividend earnings total by adding the net income
with the return that we would receive on the reinvested dividends. We then came up
with an earnings benchmark by multiplying the previous years net income with the
17.30% cost of equity. We got the abnormal earnings growth total by subtracting the
cumulative dividend earnings minus the normal earnings benchmark. Finally, we took
the abnormal earnings growth totals and multiplied them by a present value factor to
bring them all forward to time 2015 money.
After obtaining these results, we still had to get an estimated price for OM
Group, so we started with net income of 2015. We had to get perpetuity for the
abnormal earnings growth for 2025, and we got this perpetuity by multiplying -1.3 by
123
the previous years AEG. We multiplied it by a negative number because the AEG in
2024 was -1.96. It did however show a trend of increasing, so we had to use a negative
number to show positive increasing. We got the present value of the terminal value is
the present value of the perpetuity. We got a total present value of AEG by adding the
previous present value of the net income plus the sum of the AEG totals, and the
present value of the perpetuity. We then added the original net income with the final
total present value of AEG. At this point we have total average net income perpetuity of
27.56, which we divided by total shares outstanding to get .85. Finally, to get an
intrinsic value per share we took the .85 and divided it by the capitalization rate, which
is the cost of equity that we estimated. We then just needed a time consistent price, so
we multiplied the price per share that we got by a future value factor that moved it
forward 3 months.
As stated Abnormal Earnings Growth Model
For the abnormal earnings growth model we took on the position of a 10%
analyst and got a lower bound price of $27.78, and an upper bound price of $33.96. We
got these totals by multiplying OMG’s stock price of $30.87 by .9 and 1.1. Anything in
the model below $27.78 means that OM Group’s stock price is overvalued. Anything
over $33.96 says that OM Group’s stock is undervalued. Anything in between these two
boundaries says that OM Group is fairly priced. For this model we focused mainly on our
estimated cost of equity of 17.30% and a -30% growth rate. At this point in the table,
we can see that we get a $5.12 price. We made sure that everything was correct by
going back to our residual income model and making sure that the change in residual
income from year to year matched up with our abnormal earnings of that same year.
From the abnormal earnings growth, we concluded that OMG was overvalued, because
every point on this table is below the lower bound total that we calculated.
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Restated Abnormal Earnings Growth Model
For the restated abnormal earnings growth model, just like with the restated
residual income, the changes were very minor. Overall, the main component that was
affected by the restatement of the financials for OM Group was the net income, due to
the fact that research and development and goodwill made it decrease compared to the
as stated financials. This made everything on the restated abnormal earnings growth
model decrease compared to the as stated.
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Final Recommendation
Our final recommendation was based on our intrinsic value models because of
their high explanatory power and the comparable models to examine the markets
valuation. The residual income and abnormal growth model were the two most
explanatory models. Each of these models projected our company as being overpriced.
The as stated value of the company left it overvalued and once we conducted
restatements we found that it was even more overpriced. The cost of equity is
overstated and we are recommending selling this stock because it is overvalued and
lacking growth.
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Appendix Balance Sheet and Income Statement
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SUMMARY OUTPUT
Regression Statistics
Multiple R 60.48%
R Square 36.58%
Adjusted R Square 35.49%
Standard Error 9.10%
Observations 60
ANOVA
df SS MS F Significance F
Regression 1 0.276879194 0.276879 33.4553 3.08535E-07
Residual 58 0.480013387 0.008276
Total 59 0.756892582
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.012 0.012 -0.975 0.333 -0.036 0.012 -0.036 0.012
X Variable 1 1.832 0.317 5.784 0.000 1.198 2.466 1.198 2.466
Regressions 10-Year Regression
7-Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R 59.7%
R Square 35.7%
Adjusted R Square 34.8%
Standard Error 9.9%
Observations 72
ANOVA
df SS MS F Significance F
Regression 1 0.379551552 0.379552 38.8414 3.0335E-08
Residual 70 0.684028146 0.009772
Total 71 1.063579698
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0%
Intercept -0.01 0.01 -0.78 0.44 -0.03 0.01 -0.03 0.01
X Variable 1 1.91 0.31 6.23 0.00 1.30 2.52 1.30 2.52
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2-Year Regression
1 -Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R 53.75%
R Square 28.89%
Adjusted R Square 27.34%
Standard Error 9.43%
Observations 48
ANOVA
df SS MS F Significance F
Regression 1 0.166173152 0.166173 18.68752 8.17258E-05
Residual 46 0.409041232 0.008892
Total 47 0.575214384
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.016 0.014 -1.110 0.273 -0.044 0.013 -0.044 0.013
X Variable 1 1.781 0.412 4.323 0.000 0.952 2.610 0.952 2.610
SUMMARY OUTPUT
Regression Statistics
Multiple R 46.76%
R Square 21.87%
Adjusted R Square 19.57%
Standard Error 9.60%
Observations 36
ANOVA
df SS MS F Significance F
Regression 1 0.087636843 0.087637 9.516998 0.00402843
Residual 34 0.313087462 0.009208
Total 35 0.400724305
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0%
Intercept -0.013 0.017 -0.729 0.471 -0.048 0.023 -0.048 0.023
X Variable 1 1.828 0.593 3.085 0.004 0.624 3.033 0.624 3.033
136
3-Months Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R 37.35%
R Square 13.95%
Adjusted R Square 10.04%
Standard Error 0.080579571
Observations 24
ANOVA
df SS MS F Significance F
Regression 1 0.023160713 0.023161 3.566991 0.072195059
Residual 22 0.14284748 0.006493
Total 23 0.166008192
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.001 0.018 -0.067 0.947 -0.039 0.037 -0.039 0.037
X Variable 1 1.199 0.635 1.889 0.072 -0.118 2.515 -0.118 2.515
