UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ________________________________
Commission file number 0-15661
AMCOL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 36-0724340 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1500 West Shure Drive, Suite 500, Arlington Heights, Illinois 60004-7803 | |
(Address of principal executive offices) | (Zip Code) |
(847) 394-8730
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at October 31, 2008 | |
(Common stock, $.01 par value) | 30,414,787 Shares |
AMCOL INTERNATIONAL CORPORATION
INDEX
Page No. | ||
Part I - Financial Information | ||
Item 1 | Financial Statements | |
Condensed Consolidated Balance Sheets – | ||
September 30, 2008 and December 31, 2007 | 3 | |
Condensed Consolidated Statements of Operations – | ||
three and nine months ended September 30, 2008 and 2007 | 5 | |
Condensed Consolidated Statements of Comprehensive Income – | ||
three and nine months ended September 30, 2008 and 2007 | 6 | |
Condensed Consolidated Statements of Cash Flows – | ||
nine months ended September 30, 2008 and 2007 | 7 | |
Notes to Condensed Consolidated Financial Statements | 8 | |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 |
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 35 |
Item 4 | Controls and Procedures | 35 |
Part II - Other Information | ||
Item 1A | Risk Factors | 35 |
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 35 |
Item 6 | Exhibits | 36 |
2
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Item 1. Financial Statements
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
(unaudited) | * | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 33,646 | $ | 25,282 | |||
Accounts receivable, net | 224,854 | 166,835 | |||||
Inventories | 116,898 | 91,367 | |||||
Prepaid expenses | 15,088 | 13,529 | |||||
Deferred income taxes | 5,589 | 4,374 | |||||
Income tax receivable | - | 2,768 | |||||
Other | 7,345 | 475 | |||||
Total current assets | 403,420 | 304,630 | |||||
Investment in and advances to affiliates and joint ventures | 63,668 | 49,309 | |||||
Property, plant, equipment, and mineral rights and reserves: | |||||||
Land and mineral rights | 20,807 | 21,394 | |||||
Depreciable assets | 406,707 | 352,100 | |||||
427,514 | 373,494 | ||||||
Less: accumulated depreciation and depletion | 212,436 | 196,904 | |||||
215,078 | 176,590 | ||||||
Other assets: | |||||||
Goodwill | 73,700 | 59,840 | |||||
Intangible assets, net | 53,456 | 41,257 | |||||
Deferred income taxes | 4,527 | 5,513 | |||||
Other assets | 15,093 | 15,007 | |||||
146,776 | 121,617 | ||||||
$ | 828,942 | $ | 652,146 |
Continued…
3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
(unaudited) | * | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 55,779 | $ | 44,274 | |||
Accrued liabilities | 67,537 | 57,833 | |||||
Total current liabilities | 123,316 | 102,107 | |||||
Long-term debt | 266,926 | 164,232 | |||||
Long-term debt - corporate building | 20,692 | - | |||||
Total long-term debt | 287,618 | 164,232 | |||||
Minority interests in subsidiaries | 1,513 | 327 | |||||
Pension liabilities | 9,649 | 9,576 | |||||
Deferred compensation | 7,640 | 7,559 | |||||
Other liabilities | 17,087 | 16,022 | |||||
35,889 | 33,484 | ||||||
Stockholders’ equity: | |||||||
Common stock | 320 | 320 | |||||
Additional paid in capital | 85,672 | 81,599 | |||||
Retained earnings | 288,084 | 258,164 | |||||
Accumulated other comprehensive income | 26,518 | 33,248 | |||||
400,594 | 373,331 | ||||||
Less: | |||||||
Treasury stock | 18,475 | 21,008 | |||||
382,119 | 352,323 | ||||||
$ | 828,942 | $ | 652,146 |
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Net sales | $ | 678,304 | $ | 549,780 | $ | 253,048 | $ | 203,598 | |||||
Cost of sales | 505,727 | 402,190 | 189,481 | 149,298 | |||||||||
Gross profit | 172,577 | 147,590 | 63,567 | 54,300 | |||||||||
General, selling and administrative expenses | 109,061 | 87,756 | 36,214 | 28,297 | |||||||||
Operating profit | 63,516 | 59,834 | 27,353 | 26,003 | |||||||||
Other income (expense): | |||||||||||||
Interest expense, net | (8,642 | ) | (6,506 | ) | (3,404 | ) | (2,409 | ) | |||||
Other, net | (1,475 | ) | (1,000 | ) | (1,763 | ) | (830 | ) | |||||
(10,117 | ) | (7,506 | ) | (5,167 | ) | (3,239 | ) | ||||||
Income before income taxes and income from affiliates and joint ventures | 53,399 | 52,328 | 22,186 | 22,764 | |||||||||
Income tax expense | 13,950 | 12,205 | 5,567 | 4,704 | |||||||||
Income before income from affiliates and joint ventures | 39,449 | 40,123 | 16,619 | 18,060 | |||||||||
Income from affiliates and joint ventures | 5,614 | 6,118 | 1,971 | 2,086 | |||||||||
Income from continuing operations | 45,063 | 46,241 | 18,590 | 20,146 | |||||||||
Income (Loss) from discontinued operations, net of tax | - | (286 | ) | - | - | ||||||||
Net income | $ | 45,063 | $ | 45,955 | $ | 18,590 | $ | 20,146 | |||||
Weighted average common shares outstanding | 30,405 | 30,146 | 30,540 | 30,130 | |||||||||
Weighted average common and common equivalent shares outstanding | 30,993 | 30,934 | 31,129 | 30,887 | |||||||||
Basic earnings per share: | |||||||||||||
Continuing operations | $ | 1.48 | $ | 1.53 | $ | 0.61 | $ | 0.67 | |||||
Discontinued operations | - | (0.01 | ) | - | - | ||||||||
Basic earnings per share | $ | 1.48 | $ | 1.52 | $ | 0.61 | $ | 0.67 | |||||
Diluted earnings per share: | |||||||||||||
Continuing operations | $ | 1.45 | $ | 1.49 | $ | 0.60 | $ | 0.65 | |||||
Discontinued operations | - | (0.01 | ) | - | - | ||||||||
Diluted earnings per share | $ | 1.45 | $ | 1.48 | $ | 0.60 | $ | 0.65 | |||||
Dividends declared per share | $ | 0.50 | $ | 0.44 | $ | 0.18 | $ | 0.16 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Net income | $ | 45,063 | $ | 45,955 | $ | 18,590 | $ | 20,146 | |||||
Other comprehensive income (loss): | |||||||||||||
Foreign currency translation adjustment | (6,439 | ) | 9,737 | (13,084 | ) | 5,170 | |||||||
Unrealized gain (loss) on interest rate swap agreement | (278 | ) | - | (275 | ) | - | |||||||
Other | (13 | ) | 172 | 57 | 32 | ||||||||
Comprehensive income | $ | 38,333 | $ | 55,864 | $ | 5,288 | $ | 25,348 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30, | |||||||
2008 | 2007 | ||||||
Cash flow from operating activities: | |||||||
Net income | $ | 45,063 | $ | 45,955 | |||
Adjustments to reconcile from net income to net cash provided by (used in) operating activities: | |||||||
Depreciation, depletion, and amortization | 24,872 | 21,688 | |||||
Other non-cash charges | (2,469 | ) | (9,102 | ) | |||
Changes in assets and liabilities, net of effects of acquisitions: | |||||||
Decrease (increase) in current assets | (86,237 | ) | (44,716 | ) | |||
Decrease (increase) in noncurrent assets | 496 | (1,620 | ) | ||||
Increase (decrease) in current liabilities | 20,116 | 23,435 | |||||
Increase (decrease) in noncurrent liabilities | 788 | 6,382 | |||||
Net cash provided by (used in) operating activities | 2,629 | 42,022 | |||||
Cash flow from investing activities: | |||||||
Capital expenditures | (29,686 | ) | (36,319 | ) | |||
Capital expenditures - corporate building | (14,273 | ) | (1,258 | ) | |||
Acquisitions, net of cash | (42,549 | ) | (38,783 | ) | |||
Investments in and advances to affiliates and joint ventures | (10,993 | ) | (7,369 | ) | |||
Advances to non-affiliates | (6,000 | ) | - | ||||
Proceeds from sale of land and depreciable assets | 772 | 6,636 | |||||
Investments in restricted cash | (1,796 | ) | (856 | ) | |||
Other | (1,169 | ) | (173 | ) | |||
Net cash used in investing activities | (105,694 | ) | (78,122 | ) | |||
Cash flow from financing activities: | |||||||
Net change in outstanding debt | 105,495 | 50,368 | |||||
Net change in outstanding debt - corporate building | 20,692 | - | |||||
Proceeds from sales of treasury stock | 1,550 | 2,574 | |||||
Purchases of treasury stock | (2,062 | ) | (6,115 | ) | |||
Dividends | (15,143 | ) | (13,194 | ) | |||
Excess tax benefits from stock-based compensation | 1,087 | 1,463 | |||||
Net cash provided by financing activities | 111,619 | 35,096 | |||||
Effect of foreign currency rate changes on cash | (190 | ) | 3,972 | ||||
Net increase (decrease) in cash and cash equivalents | 8,364 | 2,968 | |||||
Cash and cash equivalents at beginning of period | 25,282 | 17,805 | |||||
Cash and cash equivalents at end of period | $ | 33,646 | $ | 20,773 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Operations
AMCOL International Corporation (the Company) operates in five segments: minerals, environmental, oilfield services, transportation and corporate. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The oilfield services segment provides onshore and offshore water treatment filtration, pipeline separation, waste fluid treatment, rental tools, coil tubing and well testing data services for the oil and gas industry. The transportation segment includes a long-haul trucking business and a freight brokerage business, which provide services to our other segments as well as third-party customers. Intersegment sales are insignificant, other than intersegment shipping, which is eliminated in the corporate segment. The composition of our revenues by segment is as follows:
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Minerals | 48 | % | 48 | % | 46 | % | 45 | % | |||||
Environmental | 33 | % | 35 | % | 34 | % | 37 | % | |||||
Oilfield services | 15 | % | 13 | % | 15 | % | 13 | % | |||||
Transportation | 7 | % | 7 | % | 7 | % | 7 | % | |||||
Intersegment shipping | -3 | % | -3 | % | -2 | % | -2 | % | |||||
100 | % | 100 | % | 100 | % | 100 | % |
Further discussion of segment information is included in Note 4, “Business Segment Information.”
Basis of Presentation
The financial information included herein has been prepared by management and, other than the condensed consolidated balance sheet as of December 31, 2007, is unaudited. The condensed consolidated balance sheet as of December 31, 2007 has been derived from, but does not include all of the disclosures contained in, the audited consolidated financial statements for the year ended December 31, 2007. The information furnished herein includes all adjustments that are, in our opinion, necessary for a fair presentation of our results of operations and cash flows for the interim periods ended September 30, 2008 and 2007, and our financial position as of September 30, 2008, and all such adjustments are of a normal recurring nature. The accompanying condensed consolidated financial information should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007.
8
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year for a variety of reasons, including the seasonality of our environmental segment, which varies due to the seasonal nature of the construction industry, and our oilfield services segment, which varies due to seasonality of weather in its various markets.
New Accounting Standards
In September 2006, Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“FAS 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position FAS157-2, Effective Date of FASB Statement No. 157, which delays our effective date of FAS 157 to January 1, 2009, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore, FAS 157 applies to financial instruments, and items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis. The adoption of FAS 157 on January 1, 2008 did not have a material impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133 (“FAS 161”). This standard requires enhanced disclosures about an entity’s derivative and hedging activities and is intended to improve the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. We do not believe this standard will have a material impact on our financial statements when we adopt it on January 1, 2009.
In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). This FSP intends to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles. We do not believe this standard will have a material impact on our financial statements when we adopt it on January 1, 2009.
9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement will be effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not believe this standard will have a material impact on our financial statements when we adopt it.
In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective for prior periods whose financial statements have not yet been issued. Accordingly, our adoption of FSP FAS 157-3 on September 30, 2008 did not materially impact our financial statements.
Note 2: EARNINGS PER SHARE
The table below provides further share information used in computing our earnings per share for the periods presented herein. Basic earnings per share was computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share was computed by dividing net income by the weighted average common shares outstanding after consideration of the dilutive effect of stock options outstanding during each period.
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Weighted average number of common shares outstanding | 30,404,745 | 30,145,918 | 30,540,122 | 30,129,934 | |||||||||
Dilutive impact of stock options | 588,567 | 788,234 | 589,167 | 757,540 | |||||||||
Weighted average number of common and common equivalent shares outstanding for the period | 30,993,312 | 30,934,152 | 31,129,289 | 30,887,474 | |||||||||
Number of common shares outstanding at the end of the period | 30,413,787 | 30,031,014 | 30,413,787 | 30,031,014 | |||||||||
Weighted average number of anti-dilutive shares excluded from the computation of diluted earnings per share | 307,958 | 300,730 | - | 375,675 |
10
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
Note 3: ADDITIONAL BALANCE SHEET INFORMATION
Our inventories at September 30, 2008 and December 31, 2007 are comprised of the following components:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Crude stockpile inventories | $ | 35,854 | $ | 25,601 | |||
In-process and finished goods inventories | 44,730 | 39,473 | |||||
Other raw material, container, and supplies inventories | 36,314 | 26,293 | |||||
$ | 116,898 | $ | 91,367 |
We mine various minerals using a surface mining process that requires the removal of overburden. Under various governmental regulations, we are obligated to restore the land comprising each mining site to its original condition at the completion of mining activity. The obligation is adjusted to reflect the passage of time and changes in estimated future cash outflows. A reconciliation of the activity within our reclamation obligation is as follows:
Nine Months Ended | |||||||
September 30, | |||||||
2008 | 2007 | ||||||
Balance at beginning of period | $ | 5,699 | $ | 5,715 | |||
Settlement of obligations | (1,191 | ) | (1,531 | ) | |||
Liabilities incurred and accretion expense | 1,799 | 1,396 | |||||
Balance at end of period | $ | 6,307 | $ | 5,580 |
Note 4: BUSINESS SEGMENT INFORMATION
As previously mentioned, we operate in five business segments. We measure segment performance based on operating profit, which is defined as net sales less cost of sales and general, selling and administrative expenses related to a segment’s operations. The costs deducted to arrive at operating profit do not include interest or income taxes. Segment assets are those assets used in the operations of that segment. Corporate assets include cash and cash equivalents, corporate leasehold improvements, and other miscellaneous equipment.
11
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
The following summaries set forth certain financial information by business segment:
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Net sales: | |||||||||||||
Minerals | $ | 323,228 | $ | 262,432 | $ | 116,881 | $ | 90,906 | |||||
Environmental | 222,393 | 189,927 | 86,133 | 76,121 | |||||||||
Oilfield services | 100,177 | 72,137 | 38,379 | 27,143 | |||||||||
Transportation | 49,216 | 38,654 | 17,983 | 14,381 | |||||||||
Intersegment shipping | (16,710 | ) | (13,370 | ) | (6,328 | ) | (4,953 | ) | |||||
Total | $ | 678,304 | $ | 549,780 | $ | 253,048 | $ | 203,598 | |||||
Operating profit (loss): | |||||||||||||
Minerals | $ | 27,317 | $ | 26,706 | $ | 11,110 | $ | 9,135 | |||||
Environmental | 32,945 | 31,016 | 14,719 | 14,838 | |||||||||
Oilfield services | 18,891 | 13,843 | 6,194 | 5,753 | |||||||||
Transportation | 2,571 | 2,002 | 958 | 730 | |||||||||
Corporate | (18,208 | ) | (13,733 | ) | (5,628 | ) | (4,453 | ) | |||||
Total | $ | 63,516 | $ | 59,834 | $ | 27,353 | $ | 26,003 | |||||
As of Sep. 30, 2008 | As of Dec. 31, 2007 | ||||||||||||
Assets: | |||||||||||||
Minerals | $ | 376,613 | $ | 319,921 | |||||||||
Environmental | 211,816 | 184,992 | |||||||||||
Oilfield services | 168,527 | 95,866 | |||||||||||
Transportation | 4,871 | 3,807 | |||||||||||
Corporate | 67,115 | 47,560 | |||||||||||
Total | $ | 828,942 | $ | 652,146 |
12
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Depreciation, depletion and amortization: | |||||||||||||
Minerals | $ | 11,564 | $ | 11,301 | $ | 3,897 | $ | 4,156 | |||||
Environmental | 4,857 | 4,605 | 1,677 | 1,628 | |||||||||
Oilfield services | 7,286 | 4,900 | 3,263 | 1,734 | |||||||||
Transportation | 25 | 42 | 9 | 11 | |||||||||
Corporate | 1,140 | 840 | 279 | 354 | |||||||||
Total | $ | 24,872 | $ | 21,688 | $ | 9,125 | $ | 7,883 | |||||
Capital expenditures: | |||||||||||||
Minerals | $ | 15,743 | $ | 14,960 | $ | 3,832 | $ | 5,818 | |||||
Environmental | 3,318 | 6,918 | 1,007 | 2,531 | |||||||||
Oilfield services | 7,593 | 7,235 | 1,384 | 3,155 | |||||||||
Transportation | 48 | 61 | 31 | 45 | |||||||||
Corporate | 17,257 | 8,403 | 8,119 | 4,122 | |||||||||
Total | $ | 43,959 | $ | 37,577 | $ | 14,373 | $ | 15,671 | |||||
Research and development expense: | |||||||||||||
Minerals | $ | 3,732 | $ | 3,107 | $ | 1,159 | $ | 1,253 | |||||
Environmental | 1,652 | 1,673 | 522 | 585 | |||||||||
Oilfield services | 401 | 133 | 145 | 45 | |||||||||
Corporate | 645 | 758 | 69 | 323 | |||||||||
Total | $ | 6,430 | $ | 5,671 | $ | 1,895 | $ | 2,206 |
Note 5: EMPLOYEE BENEFIT PLANS
Our net periodic benefit cost for our defined benefit pension plan was as follows:
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Service cost | $ | 1,253 | $ | 1,245 | $ | 418 | $ | 415 | |||||
Interest cost | 1,780 | 1,656 | 593 | 552 | |||||||||
Expected return on plan assets | (2,342 | ) | (2,021 | ) | (781 | ) | (674 | ) | |||||
Amortization of prior service cost | 3 | 50 | 1 | 17 | |||||||||
Net periodic benefit cost | $ | 694 | $ | 930 | $ | 231 | $ | 310 |
We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007 that we expected to contribute $1,000 to our pension plan in 2008. That full contribution was made in the first quarter of 2008.
13
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
Note 6: INCOME TAXES
Our effective tax rate from continuing operations for the nine months ended September 30, 2008 was 26.1%, which differs from the U.S. federal statutory rate of 35.0% largely due to depletion deductions and differences in local tax rates on the income from our foreign subsidiaries. Additionally, the 26.1% includes a decrease to income tax expense of $1,221 primarily due to the release of liabilities for uncertain tax positions for which the statute of limitations has expired. Excluding the $1,221, the effective tax rate would have been 28.4%.
Our effective tax rate from continuing operations for the nine months ended September 30, 2007 was 23.3%, which varies from the U.S. federal statutory rate of 35.0% for the same depletion and foreign tax rates mentioned above. Additionally, the 23.3% includes a decrease to income tax expense of $590 primarily due to release of liabilities for uncertain tax positions for which the statute of limitations had expired. Excluding the $590, the effective tax rate would have been 24.5%.
In the normal course of business, we are subject to examination by taxing authorities throughout the world. With few exceptions, we are no longer subject to U.S. federal, state, local, or non-US income tax examinations by tax authorities for years prior to 2001. The Internal Revenue Service (“IRS”) has examined or the statute of limitations is closed for our U.S. federal income tax returns for all years through 2004. The IRS has recently begun auditing the 2005 and 2006 tax years.
Note 7: ACQUISITIONS
In May 2008, our oilfield services segment acquired the business assets of Premium Reeled Tubing, L.L.C. (PRT). PRT provides coiled tubing services commonly used in workovers and completions of oil and gas production wells. We paid approximately $40,967 in cash and $3,648 in our common stock and recorded $14,143 of goodwill and $16,156 of intangible assets for this acquisition as of September 30, 2008. The allocation of this purchase price has not been finalized as we are in the process of determining the fair values of the assets acquired and liabilities assumed.
Note 8: DEBT
On May 20, 2008, we amended our revolving credit agreement to increase the borrowing capacity from $150,000 to $225,000, extend the maturity to April 1, 2013 and change certain terms affecting the amount of interest we pay; all other substantive terms and conditions remained the same.
14
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
Note 9: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES
Foreign Exchange Collars
We have entered into a series of foreign exchange collars to mitigate the risk of currency fluctuations on our potential purchase of a chrome mine in South Africa, the purchase price of which is payable in Australian dollars as well as on exposures we have to various foreign currencies. See Note 12 for further information. We are currently recording all gains and losses on foreign currency derivatives within Other income, net within our Condensed Consolidated Statement of Operations. We have recorded a net gain of $1,463 for the nine months ended September 30, 2008 in Other income, net.
Interest Rate Swap
At September 30, 2008, we had an interest rate swap agreement outstanding which effectively hedges the variable interest rate of our senior notes to a fixed rate of 5.6% per annum. We have designated this hedge as a cash flow hedge, and the aggregate fair value of the interest rate swap as of September 30, 2008, $1,732, is recorded within Other liabilities on our Condensed Consolidated Balance Sheet. Net of tax, we have recorded a loss of $275 for the three months ended September 30, 2008, in other comprehensive income.
Note 10: SALE-LEASEBACK TRANSACTION
On March 10, 2008, we entered into a sale-leaseback transaction involving a new corporate facility which will be completed in late 2008. During construction, we have and will continue to record the expenditures for land and building on our balance sheet as land and construction in progress assets, respectively. The total carrying value of the property was approximately $23,144 as of September 30, 2008. Upon completion of construction, we will sell and leaseback the facility under an operating lease commitment with rental payments occurring January 2009 through December 2028. Lease payments in fiscal 2009 approximate $2,532 and increase 2% annually thereafter.
Note 11: CONTINGENCIES
We are party to a number of lawsuits arising in the normal course of business. We do not believe that any pending litigation will have a material adverse effect on our consolidated financial statements.
Note 12: SUBSEQUENT EVENTS
Australian Dollar Derivatives
As previously announced in March 2008, we entered into a transaction to acquire a 74% interest in chrome sand deposits in South Africa for 41,000 Australian dollars (AUD). At the time we entered into the transaction, the purchase price approximated $38,032 given the then existing exchange rate between the AUD and the United States dollar (USD). In the nine month period ending September 30, 2008, we recorded a $1,806 gain on a derivative that established a fixed cash outflow for the purchase of these deposits. We entered into this derivative in March 2008 and settled it in July 2008.
15
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
On October 1, 2008, we entered into another derivative to again fix the cash outflow. However, global credit markets and economies have led to unprecedented fluctuations in the exchange rates between the AUD and the USD since October 1, 2008, and when we settled this derivative on November 7, 2008, we recorded a loss of $4,305. We will include this loss in our financial statements for the quarter ending December 31, 2008. As of November 7, 2008, we do not have any derivatives in place to hedge the purchase price. After considering the net after tax effect of all our derivative activities associated with this future investment and assuming the investment is made at an exchange rate of .69 AUD to one US$, the rate that existed at the time we settled our last derivative, our net cash outflow for the purchase of the chrome sand deposit will be $29,854. This $29,854 is $8,178 less than the $38,032 that existed in March 2008 when we signed the agreement to acquire the deposit.
Results of Ashapura Minechem Limited (“Ashapura”)
As reported in our Annual Report on Form 10-K for the year ended December 31, 2007, we use the equity method to incorporate the results of our investments in companies in which we have significant influence, which is generally represented by ownership interests of between 20% and 50% of the investee. We use this method of accounting to incorporate the results of Ashapura, the largest contributor to the income recorded in Income from affiliates and joint ventures in our Condensed Consolidated Statement of Operations. For example, in the three months ended September 30, 2008, approximately $1,543 of the $1,971 Income from affiliates and joint ventures was derived from Ashapura. As allowed under the equity method, we incorporate the results of Ashapura on a one quarter lag basis as Ashapura’s financial statements are not available on a timely basis.
In October 2008, we communicated with Ashapura and understand that they have experienced a material loss in their third quarter results due to fluctuations in foreign currency exchange rates as well as decreased bauxite shipments resulting from changes in government regulation. We will include this loss in our results for the three months ending December 31, 2008, and believe this loss could approximate $943, which is a $2,486 decrease from the income we recorded for Ashapura in our financial statements for the three months ending September 30, 2008.
16
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
From time to time, certain statements we make, including statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations section, constitute "forward-looking statements" made in reliance upon the safe harbor contained in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements relating to our Company or our operations that are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions, and statements relating to anticipated growth and levels of capital expenditures. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our actual results, performance or achievements could differ materially from the results, performance or achievements expressed in, or implied by, these forward-looking statements as a result of various factors, including without limitation the following: actual performance in our various markets; conditions in the metalcasting and construction industries; operating costs; competition; currency exchange rates and devaluations; delays in development, production and marketing of new products; integration of acquired businesses; and other factors set forth from time to time in our reports filed with the Securities and Exchange Commission. We undertake no duty to update any forward looking statements to actual results or changes in our expectations.
Overview
We are a global, specialty minerals company and earn our revenues and profits from a diverse group of industrial and consumer product lines. Our principal operations are located in North America, Europe and the Asia-Pacific region.
We operate in five segments: minerals, environmental, oilfield services, transportation and corporate. Our minerals segment operates in three principal markets: metalcasting, pet products and specialty minerals. The environmental segment’s principal markets include lining technologies, building materials and water treatment. Our oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, waste fluid treatment, rental tools, coil tubing and well testing data services for the oil and gas industries. Our transportation segment provides trucking services for our domestic businesses as well as third parties. Intersegment shipping revenues are eliminated in our corporate segment.
The principal mineral that we utilize to generate revenues is bentonite. We own or lease bentonite reserves in the United States, China, Turkey and Australia. Additionally, through our affiliates and joint ventures, we have access to bentonite reserves in Egypt, India, Mexico, Russia and Azerbaijan. Bentonite deposits have varying physical properties which require us to identify which markets our reserves can serve. We believe that our understanding of bentonite properties, mining methods, processing and application to markets are the core components of our longevity and future prospects.
Our customers are engaged in various end-markets and geographies. Customers in the minerals segment range from foundries that produce castings for automotive, industrial, and transportation equipment, including heavy-duty trucks and railroad cars, to producers of consumer goods, including cat box filler, cosmetics and detergents. The customers for our environmental segment’s lining technologies and building materials products are predominantly engineering contractors. The oilfield services customer base is primarily comprised of oil service or exploration companies. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year.
17
The majority of our revenues are generated in North America; our fastest growing markets are in the Asia-Pacific and Central European regions, which have continued to outpace the United States in economic growth in recent years. Consequently, the state of the US and international economies impacts our revenues.
Sustainable, long-term profit growth is our primary objective. We employ a number of strategic initiatives to achieve this goal:
· | Organic growth: The central component of our growth strategy is expansion of our product lines and market presence. We have a history of commitment to research and development and using this resource to bring innovative products to market. We believe this approach to growth offers the best probability of achieving our long-term goals at the lowest risk. |
· | Globalization: We have expanded our manufacturing and marketing organizations into European and Asia-Pacific regions over the last 40 years. This operating experience enables us to expand further into emerging markets. We see significant opportunities in the Asia-Pacific and Eastern European regions for expanding our revenues and earnings over the long-term as a number of markets we serve, such as metalcasting and lining technologies, are expected to grow. We expect to take advantage of these growth areas either through our wholly owned subsidiaries or investments in affiliates and joint ventures. |
· | Mineral development: Bentonite is a component in a majority of the products we produce. Since it is a natural material, we must continually expand our reserve base to maintain a long-term business. Our goal is to add new reserves to replace the bentonite mined each year. Furthermore, we need to assure new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization is committed to developing its global reserve base to meet these requirements. |
· | Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products. Over the last four years, we have acquired a number of businesses. A strong financial position will enable us to continue to acquire businesses which, in our assessment, are fairly valued and fit with our growth strategy. |
18
A number of risks will challenge us in meeting these long-term objectives, and there can be no assurance that we will achieve success in implementing any one or more of them. We describe certain risks under “Item 1A. Risk Factors” and “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” within our Annual Report on Form 10-K for the year ended December 31, 2007. In general, the significance of these risks has not materially changed over the past year except as they are affected by the recent credit crisis occurring in the United States and throughout many of the economies in which we operate. The ongoing credit crisis is characterized by increased volatility, and lack of available capital for short and long term financing. The credit crisis may increase the risks outlined in our latest Annual Report on Form 10-K, especially in the areas of our reliance on key industries (which could be more adversely affected due to the credit crisis), volatility of our stock price, and increased exchange rate sensitivity. In addition, the credit crisis may affect our ability to obtain additional financing to fund acquisitions or other activities on terms substantially similar to our current debt facilities should that need arise in the future. Any of these factors could adversely affect our business opportunities and results.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. We evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis. We consider the accounting policies used in preparing our financial statements to be critical accounting policies when they are both important to the portrayal of our financial condition and results of operations, and require us to make estimates, complex judgments, and assumptions, including with respect to events which are inherently uncertain. As a result, actual results could differ from these estimates. For more information on our critical accounting policies, please read our Annual Report on Form 10-K for the year ended December 31, 2007.
Analysis of Results of Operations
Following is a discussion and analysis that describes certain factors that have affected, and may continue to affect, our financial position and operating results. This discussion should be read with the accompanying condensed consolidated financial statements.
Three months ended September 30, 2008 vs. September 30, 2007
Consolidated Review
The following table compares our operating results for the quarters ended September 30, 2008 and September 30, 2007:
19
Three Months Ended September 30, | ||||||||||
Consolidated | 2008 | 2007 | 2008 vs. 2007 | |||||||
(Dollars in Thousands) | ||||||||||
Net sales | $ | 253,048 | $ | 203,598 | 24.3 | % | ||||
Cost of sales | 189,481 | 149,298 | ||||||||
Gross profit | 63,567 | 54,300 | 17.1 | % | ||||||
margin % | 25.1 | % | 26.7 | % | ||||||
General, selling and | ||||||||||
administrative expenses | 36,214 | 28,297 | 28.0 | % | ||||||
Operating profit | 27,353 | 26,003 | 5.2 | % | ||||||
margin % | 10.8 | % | 12.8 | % | ||||||
Other income (expense): | ||||||||||
Interest expense, net | (3,404 | ) | (2,409 | ) | 41.3 | % | ||||
Other, net | (1,763 | ) | (830 | ) | * | |||||
(5,167 | ) | (3,239 | ) | |||||||
Income before income taxes and income from affiliates and joint ventures | 22,186 | 22,764 | ||||||||
Income tax expense | 5,567 | 4,704 | 18.3 | % | ||||||
effective tax rate | 25.1 | % | 20.7 | % | ||||||
Income before income from affiliates and joint ventures | 16,619 | 18,060 | ||||||||
Income from affiliates and joint ventures | 1,971 | 2,086 | -5.5 | % | ||||||
Net income | $ | 18,590 | $ | 20,146 | -7.7 | % |
* Not meaningful
We measure sales growth by the relevant components: organic, acquisitions, and foreign currency exchange. Growth due to foreign currency exchange is measured as the change in revenues resulting from differences in currency exchange rates between periods. Acquisition growth is measured as the growth resulting from businesses within the first year (twelve consecutive months) we own them. Any remaining growth is organic growth. The table details the consolidated sales growth components over the prior year’s comparable period:
Organic | Acquisitions | Foreign Exchange | Total | ||||||||||
Minerals | 11.8 | % | 0.9 | % | 0.1 | % | 12.8 | % | |||||
Environmental | 2.5 | % | 0.8 | % | 1.6 | % | 4.9 | % | |||||
Oilfield services | 2.9 | % | 2.7 | % | -0.1 | % | 5.5 | % | |||||
Transportation & intersegment shipping | 1.1 | % | 0.0 | % | 0.0 | % | 1.1 | % | |||||
Total | 18.3 | % | 4.4 | % | 1.6 | % | 24.3 | % | |||||
% of growth | 75.2 | % | 18.4 | % | 6.4 | % | 100.0 | % |
In addition, the following table shows the distribution of sales across our three principal geographic regions (Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific) and the comparable total from the prior year’s period:
20
Americas | EMEA | Asia Pacific | Total | ||||||||||
Minerals | 31.1 | % | 8.4 | % | 6.7 | % | 46.2 | % | |||||
Environmental | 17.9 | % | 14.0 | % | 2.2 | % | 34.1 | % | |||||
Oilfield services | 13.3 | % | 1.0 | % | 0.8 | % | 15.1 | % | |||||
Transportation | 4.6 | % | 0.0 | % | 0.0 | % | 4.6 | % | |||||
Total - current year's period | 66.9 | % | 23.4 | % | 9.7 | % | 100.0 | % | |||||
Total from prior year's comparable period | 67.8 | % | 25.4 | % | 6.9 | % | 100.0 | % |
Net sales:
Our overall increase in net sales was driven by organic growth predominantly within our minerals segment. Our oilfield services and environmental segments also experienced growth not only organically but also through fluctuations in foreign currencies within our environmental segment and acquisitions within our oilfield services segment.
Gross profit:
Overall gross profit increased due to the increase in net sales. The decrease in gross profit margin is driven by our oilfield services segment as we discuss later in our discussion of this segment’s results for the quarter.
General, selling & administrative expenses (GS&A):
GS&A expenses increased in all segments with the largest increases coming from our environmental and oilfield services segments. The increase in the environmental segment is somewhat skewed by the comparison to the prior year’s quarter, which included a $2.4 million reduction to GS&A costs resulting from the gain on the sale of vacant land. Overall increases in GS&A are being driven by acquisitions, increased infrastructure to support sales and business growth, and increased employee and related benefit expenses.
Operating profit:
Excluding the $2.4 million gain on the sale of vacant land previously mentioned, operating profit increased across all segments, except corporate, due to increased gross profits. Excluding the $2.4 million gain, our environmental and minerals segments increased the most due to organic growth and the ability to leverage increased sales without commensurate increases in GS&A expenses.
Interest expense, net:
Net interest expense increased due to increased average debt levels required to fund acquisitions, increased capital spending and increased working capital levels. We began 2008 with debt levels significantly greater than those that existed at the beginning of 2007 due to increased capital spending and acquisitions in 2007. The majority of our long-term debt has a variable rate of interest which is primarily influenced by changes in LIBOR.
21
Other income (expense):
Other expense includes foreign currency transaction gains and losses for third party and intercompany related activity. It also includes gains and losses on foreign currency derivatives. Other expense increased in 2008 largely due to foreign currency transaction losses driven by exchange fluctuations in our EMEA based businesses, which are primarily subject to fluctuations in the Euro, British pound and Polish zloty. See Note 12 for further information on derivative activities.
Income tax expense:
Our effective tax rate increased in 2008 to 25.1% due largely to an increase in income being generated from domestic businesses, which are taxed at greater rates. Our effective tax rate in both reporting periods continues to differ from the U.S. federal statutory 35.0% rate due to depletion deductions and differences in local tax rates on the income of our foreign subsidiaries which are generally lower than the U.S. rates.
Income from affiliates & joint ventures:
Our India-based investments contributed the majority of the income from joint ventures and affiliates in both 2008 and 2007; income from these affiliates remained relatively constant over the comparable periods. For a discussion of recent decreases in the results for Ashapura Minchem Limited, the largest contributor to this item, see Note 12 in Notes to Condensed Consolidated Financial Statements.
Net income:
The decrease in current-period net income results largely from increased expenses for interest, foreign exchange losses and income taxes partly ameliorated by the increase in operating profits previously discussed. Excluding the gain on the sale of vacant land in 2007 mentioned previously, net income would have increased.
Diluted earnings per share:
Excluding the $0.06 per share gain on sale of vacant land in the 2007 period, earnings per share remained relatively constant. The weighted average common and common shares outstanding increased by 0.2 million shares.
Segment analysis:
Following is a review of operating results for each of our five reporting segments:
22
Minerals Segment
Three Months Ended September 30, | |||||||||||||||||||
Minerals | 2008 | 2007 | 2008 vs. 2007 | ||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Net sales | $ | 116,881 | 100.0 | % | $ | 90,906 | 100.0 | % | $ | 25,975 | 28.6 | % | |||||||
Cost of sales | 96,206 | 82.3 | % | 73,610 | 81.0 | % | |||||||||||||
Gross profit | 20,675 | 17.7 | % | 17,296 | 19.0 | % | 3,379 | 19.5 | % | ||||||||||
General, selling and | |||||||||||||||||||
administrative expenses | 9,565 | 8.2 | % | 8,161 | 9.0 | % | 1,404 | 17.2 | % | ||||||||||
Operating profit | 11,110 | 9.5 | % | 9,135 | 10.0 | % | 1,975 | 21.6 | % |
Three Months Ended September 30, | ||||||||||
Minerals Product Line Sales | 2008 | 2007 | % change | |||||||
(Dollars in Thousands) | ||||||||||
Metalcasting | $ | 46,392 | $ | 40,232 | 15.3 | % | ||||
Specialty materials | 26,587 | 22,893 | 16.1 | % | ||||||
Pet products | 19,559 | 15,826 | 23.6 | % | ||||||
Basic minerals | 21,917 | 11,140 | 96.7 | % | ||||||
Other product lines | 2,426 | 815 | * | |||||||
Total | 116,881 | 90,906 |
* Not meaningful.
Organic growth comprised the majority of the growth in 2008 due to increased selling prices and volumes, predominantly in the United States, and geographical expansion, especially in our South African chrome sand operations. These South African operations along with bentonite sales for well drilling applications in the United States comprise the growth in basic minerals sales. Specialty materials sales increased due to increased sales from our Turkish operations. Metalcasting sales increased due to increased selling prices, mostly in our domestic markets, and increased volumes primarily in our overseas markets.
Although tempered by sales price increases mentioned above, gross profit margins decreased mainly due to increased energy, production and mining costs in the United States. The decrease was also impacted by a greater concentration of sales being derived from pass through freight revenues, which do not generate profits.
Approximately 22% of the $1,404 increase in GS&A expenses in 2008 is due to acquisitions and increases in newly developed businesses. The remainder is attributable to greater employee related expenses and increased provision for bad debts related to customers within our metalcasting markets.
Operating margin decreased due to decreased gross margins and increased GS&A expenses as previously discussed.
23
Environmental Segment
Three Months Ended September 30, | |||||||||||||||||||
Environmental | 2008 | 2007 | 2008 vs. 2007 | ||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Net sales | $ | 86,133 | 100.0 | % | $ | 76,121 | 100.0 | % | $ | 10,012 | 13.2 | % | |||||||
Cost of sales | 57,731 | 67.0 | % | 50,839 | 66.8 | % | |||||||||||||
Gross profit | 28,402 | 33.0 | % | 25,282 | 33.2 | % | 3,120 | 12.3 | % | ||||||||||
General, selling and | |||||||||||||||||||
administrative expenses | 13,683 | 15.9 | % | 10,444 | 13.7 | % | 3,239 | 31.0 | % | ||||||||||
Operating profit | 14,719 | 17.1 | % | 14,838 | 19.5 | % | (119 | ) | -0.8 | % |
Three Months Ended September 30, | ||||||||||
Environmental Product Line Sales | 2008 | 2007 | % change | |||||||
(Dollars in Thousands) | ||||||||||
Lining technologies | $ | 57,320 | $ | 48,914 | 17.2 | % | ||||
Building materials | 22,237 | 20,638 | 7.7 | % | ||||||
Other product lines | 6,576 | 6,569 | * | |||||||
Total | 86,133 | 76,121 |
* Not meaningful.
Revenues in the environmental segment grew predominantly due to organic growth within our domestic business, a majority of which was driven by increased volumes of lining technologies products and services. Approximately one-third of the growth in sales came from fluctuations in foreign currencies, mainly the Polish zloty.
Gross profit increased due to increased sales whilst gross margins remained relatively constant.
GS&A expenses increased primarily due to a $2.4 million gain on the sale of vacant land that occurred in the 2007 period. Excluding this gain, GS&A expenses increased marginally.
Excluding the $2.4 million gain on sale of vacant land from 2007’s operating profit, operating profits increased in 2008 over the 2007 comparable period due to the increase in gross profits previously mentioned. Again excluding this gain, operating profit margin actually increased due to the ability to leverage increased gross profits with less of an increase in GS&A expenses.
24
Oilfield Services Segment
Three Months Ended September 30, | |||||||||||||||||||
Oilfield Services | 2008 | 2007 | 2008 vs. 2007 | ||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Net sales | $ | 38,379 | 100.0 | % | $ | 27,143 | 100.0 | % | $ | 11,236 | 41.4 | % | |||||||
Cost of sales | 25,785 | 67.2 | % | 16,896 | 62.2 | % | |||||||||||||
Gross profit | 12,594 | 32.8 | % | 10,247 | 37.8 | % | 2,347 | 22.9 | % | ||||||||||
General, selling and | |||||||||||||||||||
administrative expenses | 6,400 | 16.7 | % | 4,494 | 16.6 | % | 1,906 | 42.4 | % | ||||||||||
Operating profit | 6,194 | 16.1 | % | 5,753 | 21.2 | % | 441 | 7.7 | % |
Organic growth comprised 53% of the growth in oilfield services revenues in the 2008 period with another 48% being derived from our coiled tubing acquisition in May 2008. The organic growth occurred in our domestic, land based businesses as well as our foreign operations. Land based business, as opposed to our offshore business in the Gulf of Mexico, increased due to hurricane activity that occurred in the later part of 2008’s third quarter. In May 2008, we acquired PRT, whose operations are based in Louisiana. PRT provides coil tubing services to both on and offshore operations used as a means for customers to deliver liquids or gasses into production wells beneath the earth’s surface. PRT added $5.5 million of revenues in the third quarter of 2008.
Gross profits increased due to increased sales and acquisitions. Gross profit margins decreased due to product mix, that is, a greater proportion of lower-margin, land based sales, and the effect of two hurricanes, as mentioned above. This decline was tempered by improved margins in our foreign businesses.
GS&A expenses increased due to acquisitions and increased employee and employee related expenses.
Operating profits increased due to increased gross profits. Operating profit margins decreased due to the decrease in gross profit margins and increases in GS&A expenses.
Transportation Segment
Three Months Ended September 30, | |||||||||||||||||||
Transportation | 2008 | 2007 | 2008 vs. 2007 | ||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Net sales | $ | 17,983 | 100.0 | % | $ | 14,381 | 100.0 | % | $ | 3,602 | 25.0 | % | |||||||
Cost of sales | 16,087 | 89.5 | % | 12,906 | 89.7 | % | |||||||||||||
Gross profit | 1,896 | 10.5 | % | 1,475 | 10.3 | % | 421 | 28.5 | % | ||||||||||
General, selling and | |||||||||||||||||||
administrative expenses | 938 | 5.2 | % | 745 | 5.2 | % | 193 | 25.9 | % | ||||||||||
Operating profit | 958 | 5.3 | % | 730 | 5.1 | % | 228 | 31.2 | % |
Traffic levels increased as compared to the prior year period due to greater demand from consumer products shippers, leading to the increase in net sales. Gross and operating profit margins remained relatively stable.
25
Corporate Segment
Three Months Ended September 30, | |||||||||||||
Corporate | 2008 | 2007 | 2008 vs. 2007 | ||||||||||
(Dollars in Thousands) | |||||||||||||
Intersegment shipping sales | $ | (6,328 | ) | $ | (4,953 | ) | (1,375 | ) | |||||
Intersegment shipping costs | (6,328 | ) | (4,953 | ) | |||||||||
Gross profit | - | - | |||||||||||
General, selling | |||||||||||||
and administrative expenses | 5,628 | 4,453 | 1,175 | 26.4 | % | ||||||||
Operating loss | 5,628 | 4,453 | 1,175 | 26.4 | % |
Intersegment shipping revenues and costs are related to billings from the transportation segment to the domestic minerals and environmental segments for services. These services are invoiced to the minerals and environmental segments at arms-length rates and those costs are subsequently charged to customers. Intersegment sales and costs reported above reflect the elimination of these transactions.
Corporate GS&A expenses increased due to greater employee and employee benefit related expenses, especially losses on assets invested in publicly traded securities used to fund pension related benefits.
Nine months ended September 30, 2008 vs. September 30, 2007
Consolidated Review
The following table compares our year-to-date operating results for the period ended September 30, 2008 and September 30, 2007:
26
Nine Months Ended September 30, | ||||||||||
Consolidated | 2008 | 2007 | 2008 vs. 2007 | |||||||
(Dollars in Thousands) | ||||||||||
Net sales | $ | 678,304 | $ | 549,780 | 23.4 | % | ||||
Cost of sales | 505,727 | 402,190 | ||||||||
Gross profit | 172,577 | 147,590 | 16.9 | % | ||||||
margin % | 25.4 | % | 26.8 | % | ||||||
General, selling and | ||||||||||
administrative expenses | 109,061 | 87,756 | 24.3 | % | ||||||
Operating profit | 63,516 | 59,834 | 6.2 | % | ||||||
margin % | 9.4 | % | 10.9 | % | ||||||
Other income (expense): | ||||||||||
Interest expense, net | (8,642 | ) | (6,506 | ) | 32.8 | % | ||||
Other, net | (1,475 | ) | (1,000 | ) | 47.5 | % | ||||
(10,117 | ) | (7,506 | ) | |||||||
Income before income taxes and income from affiliates and joint ventures | 53,399 | 52,328 | ||||||||
Income tax expense | 13,950 | 12,205 | 14.3 | % | ||||||
effective tax rate | 26.1 | % | 23.3 | % | ||||||
Income before income from affiliates and joint ventures | 39,449 | 40,123 | ||||||||
Income from affiliates and joint ventures | 5,614 | 6,118 | -8.2 | % | ||||||
Income from continuing operations | 45,063 | 46,241 | ||||||||
Gain (Loss) on disposal of discontinued operations | - | (286 | ) | -100.0 | % | |||||
Net income | $ | 45,063 | $ | 45,955 |
The following table details our consolidated net sales growth components over the prior year’s comparable period:
Organic | Acquisitions | Foreign Exchange | Total | ||||||||||
Minerals | 8.8 | % | 1.8 | % | 0.5 | % | 11.1 | % | |||||
Environmental | 3.2 | % | 0.9 | % | 1.8 | % | 5.9 | % | |||||
Oilfield services | 3.5 | % | 1.6 | % | 0.0 | % | 5.1 | % | |||||
Transportation & intersegment shipping | 1.3 | % | 0.0 | % | 0.0 | % | 1.3 | % | |||||
Total | 16.8 | % | 4.3 | % | 2.3 | % | 23.4 | % | |||||
% of growth | 71.6 | % | 18.4 | % | 10.0 | % | 100.0 | % |
The following table shows the distribution of net sales across our three principal geographic regions (Americas, EMEA, and Asia Pacific) and the comparable total from the prior year’s period:
Americas | EMEA | Asia Pacific | Total | ||||||||||
Minerals | 33.2 | % | 7.6 | % | 6.9 | % | 47.7 | % | |||||
Environmental | 16.8 | % | 13.9 | % | 2.1 | % | 32.8 | % | |||||
Oilfield services | 12.5 | % | 1.6 | % | 0.6 | % | 14.7 | % | |||||
Transportation | 4.8 | % | 0.0 | % | 0.0 | % | 4.8 | % | |||||
Total - current year's period | 67.3 | % | 23.1 | % | 9.6 | % | 100.0 | % | |||||
Total from prior year's comparable period | 68.8 | % | 23.7 | % | 7.5 | % | 100.0 | % |
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Net sales:
Our overall increase in net sales was driven by growth, especially organic growth, across all segments. Growth through acquisition occurred in almost all segments as well. Growth due to foreign currency fluctuations predominantly occurred within our European-based environmental business.
Gross profit:
Overall gross profit increased due to the increase in net sales. Gross profit margins decreased, however, across all segments. The decreased gross margins in our minerals segment and a greater proportion of revenues being derived from pass through freight revenues had the largest effect on the overall decrease in margins.
General, selling & administrative expenses (GS&A):
GS&A expenses increased in all segments. Approximately $3.1 million and $2.4 million of the increase relates to acquisitions and the non-recurring gain on the 2007 sale of vacant land, respectively. The remaining increase in our GS&A is predominantly driven by currency fluctuations, expenses in our corporate segment, and increases due to greater revenues, such as increased employee related and sales commissions expenses within our environmental segment.
Operating profit:
Operating profits increased across all segments, except corporate, and results from the increase in gross profits without commensurate increases in GS&A expenses. The increases largely occurred in our oilfield services and environmental segments. Acquisitions, predominantly within our environmental (Poland acquisition in December 2007) and oilfield services businesses, and foreign exchange fluctuations, largely in our environmental segment, increased operating profits in the period. Excluding the $2.4 million gain on sale of vacant land, operating profit increased due to organic growth.
Interest expense, net:
Net interest expense increased due to increased average debt levels required to fund acquisitions, capital expenditures, and increased working capital levels. We began 2008 with debt levels significantly greater than those that existed at the beginning of 2007 due to increased capital spending and acquisitions in 2007. The majority of our long-term debt has a variable rate of interest which is primarily influenced by changes in LIBOR.
Other income (expense):
Other income includes foreign currency transaction gains and losses for third party and intercompany related activity. It also includes the gains and losses on foreign currency derivatives. Other expense increased by $0.5 million in 2008 due to two factors. First, we generated $1.8 million of income on a foreign currency derivative related to our potential purchase of a chrome mine in South Africa, the purchase price of which is payable in Australian dollars. See Note 12 for further information on our derivative activities. Next, we incurred significantly greater foreign currency losses in our Minerals and Environmental segments, largely due to fluctuations in European based currencies and cross currency exchange rates.
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Income tax expense:
The effective tax rate increased to 26.1% in 2008 from 23.3% due to an increase in income being generated in domestic jurisdictions, largely due to growth in our oilfield services business. Our effective tax rate in both reporting periods continues to differ from the U.S. federal statutory 35.0% rate due to depletion deductions and differences in local tax rates on the income of our foreign subsidiaries which are generally lower than the U.S. rates.
Income from affiliates & joint ventures:
Our India-based investments contributed the majority of the income from joint ventures and affiliates in the periods presented. Those investments also accounted for the current period decrease in the income from the prior period and resulted from decreased bauxite shipments. See our related comments in Note 12 in Notes to Condensed Consolidated Financial Statements.
Net income:
The decrease in current-period net income results largely from the increase in operating profits offset by increased interest and tax expenses as well as foreign currency losses.
Diluted earnings per share:
Earnings per share decreased commensurately with the decrease in net income. Weighted average common and common equivalent shares outstanding remained relatively constant compared to the prior year period.
Segment analysis:
Following is a review of operating results for each of our five reporting segments:
Minerals Segment
Nine Months Ended September 30, | |||||||||||||||||||
Minerals | 2008 | 2007 | 2008 vs. 2007 | ||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Net sales | $ | 323,228 | 100.0 | % | $ | 262,432 | 100.0 | % | $ | 60,796 | 23.2 | % | |||||||
Cost of sales | 267,532 | 82.8 | % | 212,005 | 80.8 | % | |||||||||||||
Gross profit | 55,696 | 17.2 | % | 50,427 | 19.2 | % | 5,269 | 10.4 | % | ||||||||||
General, selling and | |||||||||||||||||||
administrative expenses | 28,379 | 8.8 | % | 23,721 | 9.0 | % | 4,658 | 19.6 | % | ||||||||||
Operating profit | 27,317 | 8.4 | % | 26,706 | 10.2 | % | 611 | 2.3 | % |
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Nine Months Ended September 30, | ||||||||||
Minerals Product Line Sales | 2008 | 2007 | % change | |||||||
(Dollars in Thousands) | ||||||||||
Metalcasting | $ | 134,118 | $ | 114,101 | 17.5 | % | ||||
Specialty materials | 77,239 | 62,992 | 22.6 | % | ||||||
Pet products | 58,261 | 47,907 | 21.6 | % | ||||||
Basic minerals | 47,275 | 33,703 | 40.3 | % | ||||||
Other product lines | 6,335 | 3,729 | * | |||||||
Total | 323,228 | 262,432 |
* Not meaningful.
;
Approximately 79% of the minerals segment’s increase in net sales occurred organically due in large part to increased volumes, pass through freight revenues and selling price increases within our domestic businesses, especially the metalcasting and pet products groups. In addition, this segment continued to benefit from acquisitions, adding $9.8 million of revenue from businesses acquired in prior periods, mainly our Mexican joint venture and Turkish bentonite facilities. Greater demand in Asia for metalcasting products and for certain specialty materials products also contributed to the organic increase in sales.
Gross profit margin decreased mainly due to increased energy, production and mining costs in the United States. The decrease was also impacted by unfavorable product mix, as a greater proportion of sales were generated not only in lower priced products but also in freight revenues, which do not generate profits.
Acquisitions contributed to the increase in GS&A expenses, adding approximately $1.5 million. The remainder is attributable to increased personnel costs in our domestic and Asia-Pacific businesses as well as increased research and development activities within our specialty materials division.
Operating margin decreased due to decreased gross margins and increased GS&A expenses as previously discussed.
Environmental Segment
Nine Months Ended September 30, | |||||||||||||||||||
Environmental | 2008 | 2007 | 2008 vs. 2007 | ||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Net sales | $ | 222,393 | 100.0 | % | $ | 189,927 | 100.0 | % | $ | 32,466 | 17.1 | % | |||||||
Cost of sales | 147,694 | 66.4 | % | 124,523 | 65.6 | % | |||||||||||||
Gross profit | 74,699 | 33.6 | % | 65,404 | 34.4 | % | 9,295 | 14.2 | % | ||||||||||
General, selling and | |||||||||||||||||||
administrative expenses | 41,754 | 18.8 | % | 34,388 | 18.1 | % | 7,366 | 21.4 | % | ||||||||||
Operating profit | 32,945 | 14.8 | % | 31,016 | 16.3 | % | 1,929 | 6.2 | % |
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Environmental Product Line Sales | Nine Months Ended September 30, | |||||||||
2008 | 2007 | % change | ||||||||
(Dollars in Thousands) | ||||||||||
Lining technologies | $ | 138,267 | $ | 112,659 | 22.7 | % | ||||
Building materials | 65,090 | 60,083 | 8.3 | % | ||||||
Other product lines | 19,036 | 17,185 | * | |||||||
Total | 222,393 | 189,927 |
* Not meaningful.
Organic growth comprised 54% of the increase in environmental segment revenues, which were largely gained in the lining technologies sectors of the USA as well as Central and Eastern European regions. Some of the growth in the lining technologies product group arises from installation service revenues earned in these same markets. Foreign currency fluctuations, mainly in Poland and Europe, contributed 31% of the growth with the remainder arising from a Polish acquisition in December 2007.
Gross profit increased due to increased sales. However, gross profit margins decreased due to a greater concentration of sales occurring in less profitable product lines, such as installation services within the lining technologies product group. In addition, increased production costs in the United States negatively impacted gross margins.
GS&A expenses increased due to several factors. First, the 2007 period includes a $2.4 million gain on the sale of vacant land which did not recur in the 2008 period. Expenses to support the growth in revenues, such as employee related costs, commissions expenses and wages due to increased headcount, also increased. In addition, approximately $1.3 million of the increase arose from foreign currency fluctuations.
Operating profits increased due to the increase in gross profit mentioned earlier without equally commensurate increases in GS&A expenses. Operating profit margins decreased due to the decrease in gross margin mentioned above and the $2.4 million gain also previously mentioned.
Oilfield Services Segment
Oilfield Services | Nine Months Ended September 30, | ||||||||||||||||||
2008 | 2007 | 2008 vs. 2007 | |||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Net sales | $ | 100,177 | 100.0 | % | $ | 72,137 | 100.0 | % | $ | 28,040 | 38.9 | % | |||||||
Cost of sales | 63,130 | 63.0 | % | 44,633 | 61.9 | % | |||||||||||||
Gross profit | 37,047 | 37.0 | % | 27,504 | 38.1 | % | 9,543 | 34.7 | % | ||||||||||
General, selling and administrative expenses | 18,156 | 18.1 | % | 13,661 | 18.9 | % | 4,495 | 32.9 | % | ||||||||||
Operating profit | 18,891 | 18.9 | % | 13,843 | 19.2 | % | 5,048 | 36.5 | % |
Organic growth comprised 69% of the net sales increase in oilfield services segment with the remainder arising from the acquisition of PRT in May 2008. Our organic growth was achieved due the development of new water filtration technologies, increased demand for services associated with pipelines, growth in our developing businesses in Asia and Africa, and a greater amount of service equipment in the field.
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Gross profits increased with sales but were less profitable as a significant amount of sales, especially in the third quarter, were generated from less profitable, land-based jobs given the hurricanes in the Gulf of Mexico.
Approximately $1.0 million of the increase in GS&A expenses came from acquisitions. Another $1.0 million came from continued expansion into international markets. Of the remaining increase, the majority of it arose from increased benefits expenses incurred to support the revenue growth.
The changes in operating profits and operating margin followed the changes in gross profits and gross margins.
Transportation Segment
Transportation | Nine Months Ended September 30, | ||||||||||||||||||
2008 | 2007 | 2008 vs. 2007 | |||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Net sales | $ | 49,216 | 100.0 | % | $ | 38,654 | 100.0 | % | $ | 10,562 | 27.3 | % | |||||||
Cost of sales | 44,081 | 89.6 | % | 34,399 | 89.0 | % | |||||||||||||
Gross profit | 5,135 | 10.4 | % | 4,255 | 11.0 | % | 880 | 20.7 | % | ||||||||||
General, selling and administrative expenses | 2,564 | 5.2 | % | 2,253 | 5.8 | % | 311 | 13.8 | % | ||||||||||
Operating profit | 2,571 | 5.2 | % | 2,002 | 5.2 | % | 569 | 28.4 | % | ||||||||||
Increases in traffic levels, largely from consumer products shippers, and fuel surcharges led to the increase in net sales over the prior year’s period. Unrecovered fuel surcharges led to the decrease in gross profit margins. Operating profits increased due to the increase in sales and relative stability of GS&A costs.
Corporate Segment
Corporate | Nine Months Ended September 30, | ||||||||||||
2008 | 2007 | 2008 vs. 2007 | |||||||||||
(Dollars in Thousands) | |||||||||||||
Intersegment shipping sales | $ | (16,710 | ) | $ | (13,370 | ) | (3,340 | ) | |||||
Intersegment shipping costs | (16,710 | ) | (13,370 | ) | |||||||||
Gross profit | - | - | - | ||||||||||
General, selling and administrative expenses | 18,208 | 13,733 | 4,475 | 32.6 | % | ||||||||
Operating loss | 18,208 | 13,733 | 4,475 | 32.6 | % |
Intersegment shipping revenues and costs are related to billings for services provided by our transportation segment to the domestic minerals and environmental segments for services. These services are invoiced to the minerals and environmental segments at arms-length rates and those costs are subsequently charged to customers. Intersegment sales and costs reported above reflect the elimination of these transactions.
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Corporate GS&A expenses increased due to greater employee benefit related expenses and increased expenses associated with information technology investments.
Liquidity and Capital Resources
Cash flows from operations, an ability to issue new debt instruments, borrowings from our revolving credit facility and proceeds from the exercise of stock options by employees have been our sources of funds to provide working capital; purchase property, plant and equipment; acquire businesses; repurchase common stock; and pay dividends to shareholders. We believe cash flows from operations and borrowings from an unused and committed revolving credit facility will be adequate to support our current businesses for the foreseeable future. However, we may need additional credit facilities in order to pursue additional acquisitions, when and if these opportunities become available. Given general economic conditions within the United States commonly referred to as the “credit crunch”, we may or may not be able to obtain such credit at terms substantially similar to our current facilities. See our additional comments on this in the Overview section of Part 1, Item 2 of this report. Following is a discussion and analysis of our cash flow activities as presented in the Condensed Consolidated Statement of Cash Flows presented within Part 1, Item 1 of this report.
Cash Flows | Nine Months Ended | ||||||
($ in millions) | September 30, | ||||||
2008 | 2007 | ||||||
Net cash provided by (used in) operating activities | $ | 2.6 | $ | 42.0 | |||
Net cash used in investing activities | $ | (105.7 | ) | $ | (78.1 | ) | |
Net cash provided by financing activities | $ | 111.6 | $ | 35.1 |
Cash flows from operating activities decreased from the prior year period due to increased working capital levels. Historically, cash flows from operations have increased over the course of the year and we anticipate this pattern will continue for the remainder of 2008.
Cash flows used in investing activities increased in the 2008 period due to increased capital expenditures, especially related to our corporate building, and the lack of $6.6 million of proceeds from the sale of land and depreciable assets related to the non-recurring sale of vacant land that occurred in 2007. Investing activities this year also increased due a $6 million loan made to a third party related to the agreement to invest in a chrome mine in South Africa and to additional investments in joint-ventures, namely a $6.6 million investment made into a group of Russian bentonite companies. Excluding our potential purchase of a chrome sand mine in South Africa and our corporate building, capital expenditures for 2008 are estimated to be in the range of $45 million to $55 million.
In May 2008, we paid approximately $40.9 million for PRT, a business that provides coiled tubing services to on and offshore oil and gas drilling operations. In 2007, we paid approximately $38.8 million for acquisitions, primarily the Liquid Boot Technologies, Bensan A.S, and Microsponge® operations.
Cash flows provided by financing activities increased in the 2008 period as we required more external debt funding to support our working capital and investing activities. Year-to-date dividends increased in 2008 to $0.50 per share from $0.44 per share in the prior year’s comparable period. We repurchased 80 thousand shares of our common stock in the current year period at an average price of $25.45 per share; as of October 31, 2008, we have $6.6 million of funds available to repurchase shares under a program which expires on November 10, 2008.
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Financial Position | As at | ||||||
($ in millions) | September 30, | December 31, | |||||
2008 | 2007 | ||||||
Working capital | $ | 280.1 | $ | 202.5 | |||
Goodwill & intangible assets | $ | 127.2 | $ | 101.1 | |||
Total assets | $ | 828.9 | $ | 652.1 | |||
Long-term debt | $ | 287.6 | $ | 164.2 | |||
Other long-term obligations | $ | 35.9 | $ | 33.5 | |||
Stockholders' equity | $ | 382.1 | $ | 352.3 |
Working capital at September 30, 2008, increased over the amount at December 31, 2007 due to loans made to a third party as mentioned earlier and an increase in other working capital items, such as inventories and accounts receivable, commensurate with our increase in sales. Given the seasonality of our environmental business and the project nature of some of our services provided in the oilfield services segment, working capital levels typically increase in the second and third quarters of the year. Our current ratio was 3.3-to-1 and 3.0-to-1 at September 30, 2008, and December 31, 2007, respectively.
Long-term debt increased due to increased financing needs for working capital requirements and other investing activities. Consequently, long-term debt relative to total capitalization rose to 42.9% at September 30, 2008, compared with 31.8% at December 31, 2007. Before considering funding needed for our potential purchase of a chrome sand mine in South Africa, we have approximately $45.0 million of borrowing capacity available from our revolving credit facility at September 30, 2008. We are in compliance with financial covenants related to the revolving credit facility as of September 30, 2008.
Since the mid 1980’s, we have been named as one of a number of defendants in product liability lawsuits relating to the minor free-silica content within our bentonite products used in the metalcasting industry. The plaintiffs in these lawsuits are primarily employees of our former and current customers. To date, we have not incurred significant costs in defending these matters. We believe we have adequate insurance coverage and do not believe the litigation will have a material adverse impact on our financial position, liquidity or results of operations.
Contractual Obligations and Off-Balance Sheet Arrangements (in millions)
Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007 discloses our contractual obligations and off-balance sheet arrangements. Other than the increase in our long-term bank debt as disclosed in our condensed consolidated financial statements herein and the contribution to our defined benefit plan as discussed in Note 5 of the Notes to Condensed Consolidated Financial Statements within this Form 10-Q, there were no material changes in our contractual obligations and off-balance sheet arrangements.
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Item 3: Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our market risk from the disclosures made in our Annual Report on Form 10-K for the year ended December 31, 2007 other than those discussed in Part 1, Item 2 of this report.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing, and reporting, on a timely basis, information we are required to disclose in the reports we file or submit under the Exchange Act.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1A: Risk Factors
Information regarding risk factors appears in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2007. Except as discussed previously in our Management’s Discussion and Analysis section of this report, there have been no material changes from the risk factors disclosed therein.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
In 2006, the Board of Directors announced a program to repurchase up to $15 million of our outstanding stock; this authorization expires November 10, 2008. The table below illustrates our stock repurchases in 2008 and the amount remaining under this program:
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Total Number of | Maximum Value of | |||||||||
Shares Repurchased | Average | Shares that May Yet Be | ||||||||
as Part of the Stock | Price Paid | Repurchased Under the | ||||||||
2008 | Repurchase Program | Per Share | Program | |||||||
Balance at the beginning of the year | $ | 8,593,575 | ||||||||
Activity in 2008 calendar month of: | ||||||||||
January | 60,000 | $ | 25.35 | $ | 7,072,792 | |||||
February | 20,000 | $ | 25.77 | $ | 6,557,434 | |||||
March | - | $ | - | $ | 6,557,434 | |||||
April | - | $ | - | $ | 6,557,434 | |||||
May | - | $ | - | $ | 6,557,434 | |||||
June | - | $ | - | $ | 6,557,434 | |||||
July | - | $ | - | $ | 6,557,434 | |||||
August | - | $ | - | $ | 6,557,434 | |||||
September | - | $ | - | $ | 6,557,434 | |||||
80,000 | $ | 25.45 | $ | 6,557,434 | ||||||
Item 6: Exhibits
Exhibit Number | |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)* |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)* |
32 | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350* |
* Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMCOL INTERNATIONAL CORPORATION | ||
Date: | November 10, 2008 | /s/ Lawrence E. Washow |
Lawrence E. Washow | ||
President and Chief Executive Officer | ||
Date: | November 10, 2008 | /s/ Donald W. Pearson |
Donald W. Pearson Vice President and Chief Financial Office r |
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INDEX TO EXHIBITS
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)* |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)* |
32 | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350* |
* Filed herewith. |
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