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 March 31, 2009
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 & #160;
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.) |
2870 Forbs Avenue, Hoffman Estates, IL | 60192 |
(Address of principal executive offices) | (Zip Code) |
(847) 851-1500 |
(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 April 30, 2009 | |
(Common stock, $.01 par value) | 30,591,488 Shares |
AMCOL INTERNATIONAL CORPORATION
INDEX
Page No. | ||
Part I - Financial Information | ||
Item 1: | Financial Statements | |
Condensed Consolidated Balance Sheets – | ||
March 31, 2009 and December 31, 2008 | 3 | |
Condensed Consolidated Statements of Operations – | ||
three months ended March 31, 2009 and 2008 | 5 | |
Condensed Consolidated Statements of Comprehensive Income – | ||
three months ended March 31, 2009 and 2008 | 6 | |
Condensed Consolidated Statements of Changes in Equity – | ||
three months ended March 31, 2009 and 2008 | 7 | |
Condensed Consolidated Statements of Cash Flows – | ||
three months ended March 31, 2009 and 2008 | 8 | |
Notes to Condensed Consolidated Financial Statements | 9 | |
Item 2: | Management’s Discussion and Analysis of Financial | |
Condition and Results of Operations | 18 | |
Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 28 |
Item 4: | Controls and Procedures | 29 |
Part II - Other Information | ||
Item 1A: | Risk Factors | 30 |
Item 6: | Exhibits | 30 |
2
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Item 1: Financial Statements
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS | (unaudited) | * | ||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 32,561 | $ | 19,441 | ||||
Accounts receivable, net | 157,432 | 197,611 | ||||||
Inventories | 115,699 | 125,066 | ||||||
Prepaid expenses | 12,160 | 12,812 | ||||||
Deferred income taxes | 5,294 | 5,358 | ||||||
Income tax receivable | 3,760 | 3,490 | ||||||
Other | 163 | 7,409 | ||||||
Total current assets | 327,069 | 371,187 | ||||||
Investment in and advances to affiliates and joint ventures | 28,904 | 30,025 | ||||||
Property, plant, equipment, and mineral rights and reserves: | ||||||||
Land and mineral rights | 46,073 | 17,186 | ||||||
Depreciable assets | 384,686 | 380,555 | ||||||
430,759 | 397,741 | |||||||
Less: accumulated depreciation and depletion | 210,462 | 206,398 | ||||||
220,297 | 191,343 | |||||||
Other assets: | ||||||||
Goodwill | 69,097 | 68,482 | ||||||
Intangible assets, net | 51,782 | 53,974 | ||||||
Deferred income taxes | 14,793 | 15,867 | ||||||
Other assets | 13,042 | 13,702 | ||||||
148,714 | 152,025 | |||||||
$ | 724,984 | $ | 744,580 |
Continued…
3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | (unaudited) | * | ||||||
Current liabilities: | ||||||||
Accounts payable | $ | 37,502 | $ | 45,297 | ||||
Accrued liabilities | 50,505 | 63,197 | ||||||
Total current liabilities | 88,007 | 108,494 | ||||||
Long-term debt | 252,972 | 256,821 | ||||||
Pension liabilities | 23,589 | 22,939 | ||||||
Other liabilities | 40,847 | 27,971 | ||||||
64,436 | 50,910 | |||||||
Equity: | ||||||||
Common stock | 320 | 320 | ||||||
Additional paid in capital | 86,225 | 86,350 | ||||||
Retained earnings | 261,124 | 262,453 | ||||||
Accumulated other comprehensive income | (13,536 | ) | (4,721 | ) | ||||
334,133 | 344,402 | |||||||
Treasury stock | (16,463 | ) | (18,196 | ) | ||||
Total AMCOL shareholders' equity | 317,670 | 326,206 | ||||||
Noncontrolling interest | 1,899 | 2,149 | ||||||
Total equity | 319,569 | 328,355 | ||||||
$ | 724,984 | $ | 744,580 |
*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)
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Net sales | $ | 164,419 | $ | 191,409 | ||||
Cost of sales | 121,199 | 145,059 | ||||||
Gross profit | 43,220 | 46,350 | ||||||
General, selling and administrative expenses | 33,053 | 33,638 | ||||||
Operating profit | 10,167 | 12,712 | ||||||
Other income (expense): | ||||||||
Interest expense, net | (3,407 | ) | (2,401 | ) | ||||
Other, net | (1,212 | ) | (235 | ) | ||||
(4,619 | ) | (2,636 | ) | |||||
Income before income taxes and income (loss) from affiliates and joint ventures | 5,548 | 10,076 | ||||||
Income tax expense | 1,571 | 2,717 | ||||||
Income before income (loss) from affiliates and joint ventures | 3,977 | 7,359 | ||||||
Income (loss) from affiliates and joint ventures | (8 | ) | 1,295 | |||||
Net income | 3,969 | 8,654 | ||||||
Net income (loss) attributable to noncontrolling interests | (207 | ) | 33 | |||||
Net income (loss) attributable to AMCOL shareholders | $ | 4,176 | $ | 8,621 | ||||
Weighted average common shares outstanding | 30,694 | 30,260 | ||||||
Weighted average common and common equivalent shares outstanding | 30,909 | 30,889 | ||||||
Basic earnings per share attributable to AMCOL shareholders | $ | 0.14 | $ | 0.28 | ||||
Diluted earnings per share attributable to AMCOL shareholders | $ | 0.14 | $ | 0.28 | ||||
Dividends declared per share | $ | 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)
Total | AMCOL Shareholders | Noncontrolling Interest | ||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
March 31, | March 31, | March 31, | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Net income (loss) | $ | 3,969 | $ | 8,654 | $ | 4,176 | $ | 8,621 | $ | (207 | ) | $ | 33 | |||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Foreign currency translation adjustment | (8,966 | ) | 5,239 | (8,923 | ) | 5,239 | (43 | ) | - | |||||||||||||||
Unrealized gain (loss) on interest rate swap agreement | 168 | (2,112 | ) | 168 | (2,112 | ) | - | - | ||||||||||||||||
Other | (60 | ) | 593 | (60 | ) | 593 | - | - | ||||||||||||||||
Comprehensive income (loss) | $ | (4,889 | ) | $ | 12,374 | $ | (4,639 | ) | $ | 12,341 | $ | (250 | ) | $ | 33 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(In thousands)
AMCOL Shareholders | ||||||||||||||||||||||||||||
Total Equity | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Stock | Treasury Stock | Paid-in Capital | Noncontrolling Interest | ||||||||||||||||||||||
Balance at December 31, 2007 | $ | 352,650 | $ | 258,164 | $ | 33,248 | $ | 320 | $ | (21,008 | ) | $ | 81,599 | $ | 327 | |||||||||||||
Net income | 8,654 | 8,621 | 33 | |||||||||||||||||||||||||
Cash dividends | (4,816 | ) | (4,816 | ) | ||||||||||||||||||||||||
Purchase of treasury stock | (2,062 | ) | (2,062 | ) | ||||||||||||||||||||||||
Sales of treasury shares pursuant to options | 753 | 1,633 | (880 | ) | ||||||||||||||||||||||||
Tax benefit from employee stock plans | 690 | 690 | ||||||||||||||||||||||||||
Vesting of common stock in connection with employee stock plans | 751 | 751 | ||||||||||||||||||||||||||
Comprehensive income (loss) | 3,720 | 3,720 | ||||||||||||||||||||||||||
Other | 183 | 183 | ||||||||||||||||||||||||||
Balance at March 31, 2008 | 360,523 | 261,969 | 36,968 | 320 | (21,437 | ) | 82,160 | 543 | ||||||||||||||||||||
Balance at December 31, 2008 | $ | 328,355 | $ | 262,453 | $ | (4,721 | ) | $ | 320 | $ | (18,196 | ) | $ | 86,350 | $ | 2,149 | ||||||||||||
Net income (loss) | 3,969 | 4,176 | (207 | ) | ||||||||||||||||||||||||
Cash dividends | (5,505 | ) | (5,505 | ) | ||||||||||||||||||||||||
Purchase of treasury stock | (175 | ) | (175 | ) | ||||||||||||||||||||||||
Sales of treasury shares pursuant to options | 753 | 1,908 | (1,155 | ) | ||||||||||||||||||||||||
Tax benefit from employee stock plans | 315 | 315 | ||||||||||||||||||||||||||
Vesting of common stock in connection with employee stock plans | 715 | 715 | ||||||||||||||||||||||||||
Comprehensive income (loss) | (8,858 | ) | (8,815 | ) | (43 | ) | ||||||||||||||||||||||
Balance at March 31, 2009 | 319,569 | 261,124 | (13,536 | ) | 320 | (16,463 | ) | 86,225 | 1,899 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Cash flow from operating activities: | ||||||||
Net income | $ | 3,969 | $ | 8,654 | ||||
Adjustments to reconcile from net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation, depletion, and amortization | 8,958 | 7,435 | ||||||
Other non-cash charges | 2,349 | (103 | ) | |||||
Changes in assets and liabilities, net of effects of acquisitions: | ||||||||
Decrease (increase) in current assets | 38,898 | (5,671 | ) | |||||
Decrease (increase) in noncurrent assets | 446 | (301 | ) | |||||
Increase (decrease) in current liabilities | (14,677 | ) | (5,624 | ) | ||||
Increase (decrease) in noncurrent liabilities | 710 | (112 | ) | |||||
Net cash provided by (used in) operating activities | 40,653 | 4,278 | ||||||
Cash flow from investing activities: | ||||||||
Capital expenditures | (23,597 | ) | (12,932 | ) | ||||
Capital expenditures - corporate building | (6,400 | ) | (2,831 | ) | ||||
Proceeds fron sale of depreciable assets - corporate building | 6,400 | - | ||||||
Acquisitions, net of cash | (70 | ) | (1,148 | ) | ||||
Investments in and advances to affiliates and joint ventures | (575 | ) | (2,107 | ) | ||||
Receipts from (advances to) Chrome Corp | 6,000 | (6,000 | ) | |||||
Other | 549 | 33 | ||||||
Net cash used in investing activities | (17,693 | ) | (24,985 | ) | ||||
Cash flow from financing activities: | ||||||||
Net change in outstanding debt | (3,227 | ) | 23,404 | |||||
Net change in outstanding debt - corporate building | - | 9,463 | ||||||
Proceeds from sales of treasury stock | 743 | 753 | ||||||
Purchases of treasury stock | (165 | ) | (2,062 | ) | ||||
Dividends | (5,505 | ) | (4,816 | ) | ||||
Excess tax benefits from stock-based compensation | 612 | 669 | ||||||
Net cash provided by (used in) financing activities | (7,542 | ) | 27,411 | |||||
Effect of foreign currency rate changes on cash | (2,298 | ) | 1,177 | |||||
Net increase (decrease) in cash and cash equivalents | 13,120 | 7,881 | ||||||
Cash and cash equivalents at beginning of period | 19,441 | 25,282 | ||||||
Cash and cash equivalents at end of period | $ | 32,561 | $ | 33,163 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Note 1: | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Company Operations
We, AMCOL International Corporation (the Company), operate 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:
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Minerals | 49 | % | 52 | % | ||||
Environmental | 27 | % | 30 | % | ||||
Oilfield services | 19 | % | 13 | % | ||||
Transportation | 7 | % | 7 | % | ||||
Intersegment shipping | -2 | % | -2 | % | ||||
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, 2008, is unaudited. The condensed consolidated balance sheet as of December 31, 2008 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, 2008. 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 March 31, 2009 and 2008, and our financial position as of March 31, 2009, 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, 2008.
Certain items in the prior year’s condensed consolidated financial statements contained herein and notes thereto have been reclassified to conform with the condensed consolidated financial statement presentation for the three months ended March 31, 2009. These reclassifications did not have a material impact on our financial statements.
9
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 December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” (“SFAS 160”). A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not directly or indirectly attributable to a parent company. SFAS 160 establishes standards of reporting for noncontrolling interests as well as deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be clearly identified and reported within equity in the consolidated statement of financial position, albeit separate from the parent company’s equity. It also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and noncontrolling interests rather than reporting the noncontrolling interest as a deduction in arriving at net income. The adoption of SFAS 160 on January 1, 2009 did not have a material impact on our financial statements. The presentation and disclosure requirements of this standard were applied retrospectively.
In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS157-2, “Effective Date of FASB Statement No. 157,” (“FSP FAS157-2”), which delayed our effective date of SFAS No. 157, “Fair Value Measurements,” (“SFAS 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 (at least annually). The adoption of FSP FAS 157-2 on January 1, 2009 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,” (“SFAS 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 FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The adoption of this Standard on January 1, 2009 did not have a material impact on our financial statements. See Note 7 for additional disclosures required by this standard.
10
In April 2009, FASB issued FSP No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” (“FSP FAS 141(R)-1”). This FSP amends and clarifies the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations,” (“SFAS No. 141 (R)”) for initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP requires contingent assets acquired and liabilities assumed in a business combination to be recognized at acquisition date fair value during the measurement period. If the fair value cannot be determined during the measurement period, and if the information available before the end of the measurement period indicates that it is probable that an asset existed or a liability incurred at the acquisition date and such amount can reasonably be estimated, then the provisions of SFAS No. 5, “Accounting for Contingencies,” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss,” shall be applied. Contingent consideration arrangements assumed in a business combination shall still be measured subsequently per the provisions of SFAS No. 141(R). FSP FAS 141(R)-1 has been effective for us since January 1, 2009. The effect of this standard on our financial statements will depend on the nature and terms of acquisitions completed after January 1, 2009.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP FAS 107-1 and APB 28-1”). This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim periods. We do not believe this standard will have a material impact on our financial statements when we adopt it on June 30, 2009.
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 attributable to AMCOL shareholders by the weighted average number of common shares outstanding during each period. Diluted earnings per share was computed by dividing net income attributable to AMCOL shareholders by the weighted average common shares outstanding after consideration of the dilutive effect of stock based compensation outstanding during each period.
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Weighted average number of common shares outstanding | 30,694,053 | 30,259,799 | ||||||
Dilutive impact of stock based compensation | 215,126 | 629,113 | ||||||
Weighted average number of common and common equivalent shares outstanding for the period | 30,909,179 | 30,888,912 | ||||||
Number of common shares outstanding at the end of the period | 30,591,488 | 30,156,968 | ||||||
Weighted average number of anti-dilutive shares excluded from the computation of diluted earnings per share | 1,530,997 | 553,334 |
11
Note 3: | ADDITIONAL BALANCE SHEET INFORMATION |
Our inventories at March 31, 2009 and December 31, 2008 are comprised of the following components:
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
Crude stockpile inventories | $ | 39,496 | $ | 40,056 | ||||
In-process and finished goods inventories | 43,833 | 51,653 | ||||||
Other raw material, container, and supplies inventories | 32,370 | 33,357 | ||||||
$ | 115,699 | $ | 125,066 |
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:
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Balance at beginning of period | $ | 5,649 | $ | 5,699 | ||||
Settlement of obligations | (590 | ) | (384 | ) | ||||
Liabilities incurred and accretion expense | 1,073 | 532 | ||||||
Balance at end of period | $ | 6,132 | $ | 5,847 |
Note 4: | BUSINESS SEGMENT INFORMATION |
As previously mentioned, we operate in five 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 several items, such as net interest expense 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.
12
The following summaries set forth certain financial information by business segment:
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Net sales: | ||||||||
Minerals | $ | 80,157 | $ | 99,344 | ||||
Environmental | 44,233 | 58,219 | ||||||
Oilfield services | 31,898 | 24,143 | ||||||
Transportation | 11,291 | 14,350 | ||||||
Intersegment shipping | (3,160 | ) | (4,647 | ) | ||||
Total | $ | 164,419 | $ | 191,409 | ||||
Operating profit (loss): | ||||||||
Minerals | $ | 7,608 | $ | 7,687 | ||||
Environmental | 3,694 | 5,971 | ||||||
Oilfield services | 4,917 | 3,949 | ||||||
Transportation | 481 | 780 | ||||||
Corporate | (6,533 | ) | (5,675 | ) | ||||
Total | $ | 10,167 | $ | 12,712 |
As of Mar. 31, 2009 | As of Dec. 31, 2008 | |||||||
Assets: | ||||||||
Minerals | $ | 352,786 | $ | 341,111 | ||||
Environmental | 149,910 | 177,898 | ||||||
Oilfield services | 163,626 | 160,691 | ||||||
Transportation | 4,277 | 4,761 | ||||||
Corporate | 54,385 | 60,119 | ||||||
Total | $ | 724,984 | $ | 744,580 |
13
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Depreciation, depletion and amortization: | ||||||||
Minerals | $ | 4,113 | $ | 3,674 | ||||
Environmental | 1,484 | 1,575 | ||||||
Oilfield services | 2,950 | 1,774 | ||||||
Transportation | 11 | 9 | ||||||
Corporate | 400 | 403 | ||||||
Total | $ | 8,958 | $ | 7,435 | ||||
Capital expenditures: | ||||||||
Minerals | $ | 19,815 | $ | 7,687 | ||||
Environmental | 536 | 858 | ||||||
Oilfield services | 2,465 | 3,284 | ||||||
Transportation | - | 12 | ||||||
Corporate | 7,181 | 3,922 | ||||||
Total | $ | 29,997 | $ | 15,763 | ||||
Research and development expense: | ||||||||
Minerals | $ | 1,335 | $ | 1,276 | ||||
Environmental | 527 | 644 | ||||||
Oilfield services | 167 | 119 | ||||||
Corporate | 86 | 148 | ||||||
Total | $ | 2,115 | $ | 2,187 |
Note 5: | EMPLOYEE BENEFIT PLANS |
Our net periodic benefit cost for our defined benefit pension plan was as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Service cost | $ | 412 | $ | 418 | ||||
Interest cost | 651 | 593 | ||||||
Expected return on plan assets | (554 | ) | (781 | ) | ||||
Amortization of acturial (gain) / loss | 107 | (16 | ) | |||||
Amortization of prior service cost | 16 | 17 | ||||||
Net periodic benefit cost | $ | 632 | $ | 231 |
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008, we expect to contribute up to $1,000 to our pension plan in 2009.
Note 6: | INCOME TAXES |
Our effective tax rate for the three months ended March 31, 2009 and 2008 was 28.3% and 27.0%, respectively. For both periods, the rate 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.
14
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, 2006 and 2007 tax years.
Note 7: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES |
As a multinational corporation with operations throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and not for trading or speculative purposes.
The following table sets forth the fair values of our derivative instruments:
Balance Sheet | Fair Value as of | |||||||||
Liability Derivatives | Location | March 31, 2009 | December 31, 2008 | |||||||
Derivatives designated as hedging instruments under Statement 133: | ||||||||||
Interest rate swap | Other liabilities | $ | 5,606 | $ | 5,997 | |||||
Derivatives not designated as hedging instruments under Statement 133: | ||||||||||
Foreign currency exchange contracts | Accrued liabilities | $ | 238 | N/A |
SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use several inputs in the valuation technique used to calculate the fair value of each derivative instrument. The fair value hierarchy under SFAS 157 prioritizes these inputs in the following three broad levels:
Level 1 – Valuation is based on quoted prices (unadjusted) in active markets for identical assets or liabilities we have the ability to access at the measurement date.
Level 2 – Valuation is based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and model based valuations for which all significant inputs are observable in the market.
Level 3 – Valuation is based on model based techniques that use unobservable inputs for the asset or liability. These inputs reflect our own assumption about the assumption market participants would use in pricing the asset or liability.
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The interest rate swap and foreign currency exchange contracts are valued using discounted cash flows. The key inputs include foreign exchange rate, forward points and interest rate which are readily observable at commonly quoted intervals for the term of the contract and the valuation does not involve significant management judgment.
The following table illustrates how the fair value of our derivative instruments is dependent upon different levels of input assumptions for our derivatives outstanding as of March 31, 2009:
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
Balance at | ||||||||||||||||
Description | 3/31/2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest rate swap | $ | 5,606 | N/A | $ | 5,606 | N/A | ||||||||||
Foreign currency exchange contracts | 238 | N/A | 238 | N/A | ||||||||||||
$ | 5,844 | $ | 5,844 |
The following table illustrates how the fair value of our derivative instruments is dependent upon different levels of input assumptions for our derivatives outstanding as of December 31, 2008:
Fair Value Measurements Using | |||||||||||||||
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
Balance at | |||||||||||||||
Description | 12/31/2008 | (Level 1) | (Level 2) | (Level 3) | |||||||||||
Interest rate swap | $ | 5,997 | N/A | $ | 5,997 | N/A |
Cash flow hedges
Amount of Gain or (Loss) Recognized in OCI on Derivatives | |||||||
(Effective Portion) | |||||||
Three Months Ended March 31, | |||||||
Derivatives in Statement 133 Cash Flow Hedging Relationships | 2009 | 2008 | |||||
Interest rate swap | $ | 168 | $ | (2,112 | ) |
We use interest rate swaps to manage floating interest rate risk on debt securities. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of March 31, 2009 and 2008, we had an interest rate swap outstanding which effectively hedges the variable interest rate of our senior notes to a fixed rate of 5.6% per annum.
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Other
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to fluctuations in exchange rates between the U.S. dollar and the Euro, British pound and Polish zloty. We also have significant exposure to fluctuations in exchange rates between the British pound and the Euro as well as between the Polish zloty and the Euro. We have entered into a series of foreign exchange forward contracts to mitigate the risk of currency fluctuations on these exposures. We also entered into a series of foreign exchange collars to mitigate the risk of currency fluctuations on our February 2009 purchase of a chrome mine in South Africa, the purchase price of which was paid in Australian dollars.
We have not designated these contracts for hedge accounting treatment and therefore, changes in fair value of these contracts are recorded in earnings as follows:
Location of Gain or (Loss) | Amount of Gain or (Loss) Recognized in Income on Derivatives | |||||||
Recognized in Income on | Three Months Ended March 31, | |||||||
Derivatives Not Designated as Hedging Instruments Under Statement 133 | Derivatives | 2009 | 2008 | |||||
Foreign currency exchange contracts | Other, net | $ | (882) | $ | 291 |
Note 8: | 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.
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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; oil and gas prices and conditions in those 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 our mineral based 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.
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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 segment’s customer base is primarily comprised of oil and gas 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.
The majority of our revenues are generated in North America; our fastest growing markets are in the Asia-Pacific and Eastern 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, as appropriate, when we believe those businesses are fairly valued and fit with our overall growth strategy. However, the global economic and credit crisis that existed in the beginning of 2009 will make it more challenging for us to do this than it has in recent years. Over the last several years, we have acquired a number of businesses. |
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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, 2008. 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, 2008.
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.
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Three months ended March 31, 2009 vs. March 31, 2008
Consolidated Review
The following table compares our operating results for the quarters ended March 31, 2009 and March 31, 2008:
Three Months Ended March 31, | ||||||||||||
Consolidated | 2009 | 2008 | 2009 vs. 2008 | |||||||||
(Dollars in Thousands, Except Per Share Amounts) | ||||||||||||
Net sales | $ | 164,419 | $ | 191,409 | -14.1 | % | ||||||
Cost of sales | 121,199 | 145,059 | ||||||||||
Gross profit | 43,220 | 46,350 | -6.8 | % | ||||||||
margin % | 26.3 | % | 24.2 | % | ||||||||
General, selling and administrative expenses | 33,053 | 33,638 | -1.7 | % | ||||||||
Operating profit | 10,167 | 12,712 | -20.0 | % | ||||||||
margin % | 6.2 | % | 6.6 | % | ||||||||
Other income (expense): | ||||||||||||
Interest expense, net | (3,407 | ) | (2,401 | ) | 41.9 | % | ||||||
Other, net | (1,212 | ) | (235 | ) | 415.7 | % | ||||||
(4,619 | ) | (2,636 | ) | |||||||||
Income before income taxes and income (loss) from affiliates and joint ventures | 5,548 | 10,076 | ||||||||||
Income tax expense | 1,571 | 2,717 | -42.2 | % | ||||||||
effective tax rate | 28.3 | % | 27.0 | % | ||||||||
Income before income (loss) from affiliates and joint ventures | 3,977 | 7,359 | ||||||||||
Income (loss) from affiliates and joint ventures | (8 | ) | 1,295 | -100.6 | % | |||||||
Net income | 3,969 | 8,654 | ||||||||||
Net income (loss) attributable to noncontrolling interests | (207 | ) | 33 | -727.3 | % | |||||||
Net income (loss) attributable to AMCOL shareholders | $ | 4,176 | $ | 8,621 | -51.6 | % | ||||||
Basic earnings per share attributable to AMCOL shareholders | $ | 0.14 | $ | 0.28 | ||||||||
Diluted earnings per share attributable to AMCOL shareholders | $ | 0.14 | $ | 0.28 |
We measure sales fluctuations by the relevant components: organic, acquisitions, and foreign currency exchange. Fluctuation due to foreign currency exchange is measured as the change in revenues resulting from differences in currency exchange rates between periods. Fluctuation due to acquisitions is measured as the changes in revenues resulting from businesses within the first year (twelve consecutive months) we own them. Any remaining fluctuation is due to organic component. The table details the consolidated sales fluctuations by components over the prior year’s comparable period:
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Organic | Acquisitions | Foreign Exchange | Total | |||||||||||||
Minerals | -6.6 | % | 0.0 | % | -3.5 | % | -10.1 | % | ||||||||
Environmental | -3.1 | % | 0.0 | % | -4.2 | % | -7.3 | % | ||||||||
Oilfield services | 2.2 | % | 2.0 | % | -0.1 | % | 4.1 | % | ||||||||
Transportation & intersegment shipping | -0.8 | % | 0.0 | % | 0.0 | % | -0.8 | % | ||||||||
Total | -8.3 | % | 2.0 | % | -7.8 | % | -14.1 | % | ||||||||
% of change | 59.4 | % | -13.9 | % | 54.5 | % | 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:
Americas | EMEA | Asia Pacific | Total | |||||||||||||
Minerals | 33.6 | % | 8.7 | % | 6.6 | % | 48.9 | % | ||||||||
Environmental | 13.7 | % | 11.0 | % | 2.2 | % | 26.9 | % | ||||||||
Oilfield services | 18.1 | % | 0.3 | % | 0.9 | % | 19.3 | % | ||||||||
Transportation | 4.9 | % | 0.0 | % | 0.0 | % | 4.9 | % | ||||||||
Total - current year's period | 70.3 | % | 20.0 | % | 9.7 | % | 100.0 | % | ||||||||
Total from prior year's comparable period | 68.0 | % | 22.5 | % | 9.5 | % | 100.0 | % |
Net sales:
The decrease in net sales is driven almost equally between an overall decrease in our organic revenues as well as adverse currency movements on sales in our overseas businesses. Our oilfield services segment revenues increased, however, over the comparable prior year’s quarter due to the acquisition in May 2008 of our coil tubing business.
Gross profit:
Overall gross profit decreased due to the decrease in net sales mentioned above. However, gross margin increased due to price increases in our minerals segment implemented in 2008 which were not in full effect during the prior year’s quarter.
General, selling & administrative expenses (GS&A):
GS&A expenses decreased slightly with large increases in our oilfield services and corporate segments offset by a large decrease in our environmental segment. The increases are largely due to the acquisition of our coil tubing business in May 2008, commissions resulting from increased sales in our oilfield services segment, and increased professional fees in our corporate segment associated with restating our quarterly results for the second and third quarter of 2008 for items associated with our Indian investment in Ashapura Minechem Limited (“Ashapura”). The decrease is primarily due to fluctuations in foreign currency exchange rates and lower personnel related cost in our environmental segment.
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Operating profit:
Operating profit decreased due to the decrease in gross profit as mentioned earlier. On a segment basis, our environmental segment experienced the largest decrease while our oilfield services segment experienced an increase in operating profits. Operating profit margin decreased across all segments except our minerals segment.
Interest expense, net:
Net interest expense increased due to increased average debt levels - we began 2009 with debt levels significantly greater than those that existed at the beginning of 2008 due to increased capital spending, an acquisition, and increased working capital levels generated in 2008. 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 expense includes foreign currency transaction gains and losses for third party and intercompany related activity as well as gains and losses on foreign currency derivatives. Other expense increased in 2009 largely due to losses on derivatives associated with our purchase of a chrome mine in South Africa, the purchase price for which was denominated in Australian Dollars (AUD).
Income tax expense:
Our effective tax rate increased in 2009 to 28.3% compared with 27.0% in the prior year’s period. This difference equates to an approximate $70 thousand difference in income taxes, which is insignificant. Our effective tax rate in both reporting periods continues to differ from the U.S. federal statutory 35.0% rate largely 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 (loss) from affiliates & joint ventures:
As reported in our Form 10-K for 2008, income from our investment in Ashapura has historically comprised the majority of income from affiliates and joint-ventures. As also reported therein, we have written off our investment in this entity as of December 31, 2008, and have suspended recognition of further losses on this investment in accordance with the equity method of accounting. As such, the lack of income from Ashapura in 2009 caused the decrease as compared to the 2008 period.
Net income (loss) attributable to AMCOL shareholders:
The decrease in net income from the prior year period results largely from the decrease in operating profit, increased expenses for interest and derivative losses, and the lack of income from Ashapura.
Diluted earnings per share:
Diluted EPS decreased commensurate with the decrease in net income as previously outlined.
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Segment analysis:
Following is a review of operating results for each of our five reporting segments:
Minerals Segment
Three Months Ended March 31, | ||||||||||||||||||||||||
Minerals | 2009 | 2008 | 2009 vs. 2008 | |||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Net sales | $ | 80,157 | 100.0 | % | $ | 99,344 | 100.0 | % | $ | (19,187 | ) | -19.3 | % | |||||||||||
Cost of sales | 63,975 | 79.8 | % | 82,667 | 83.2 | % | ||||||||||||||||||
Gross profit | 16,182 | 20.2 | % | 16,677 | 16.8 | % | (495 | ) | -3.0 | % | ||||||||||||||
General, selling and administrative expenses | 8,574 | 10.7 | % | 8,990 | 9.0 | % | (416 | ) | -4.6 | % | ||||||||||||||
Operating profit | 7,608 | 9.5 | % | 7,687 | 7.8 | % | (79 | ) | -1.0 | % |
Three Months Ended March 31, | ||||||||||||
Minerals Product Line Sales | 2009 | 2008 | % change | |||||||||
(Dollars in Thousands) | ||||||||||||
Metalcasting | $ | 31,541 | $ | 40,678 | -22.5 | % | ||||||
Specialty materials | 22,662 | 25,663 | -11.7 | % | ||||||||
Pet products | 17,415 | 19,523 | -10.8 | % | ||||||||
Basic minerals | 7,850 | 12,041 | -34.8 | % | ||||||||
Other product lines | 689 | 1,439 | * | |||||||||
Total | 80,157 | 99,344 |
* Not meaningful.
Decreased sales volumes accounted for the decrease in revenues over the prior year quarter, primarily in metalcasting and drilling products (part of basic minerals) due to the global recession. The segment also experienced decreased revenues due to adverse movements in foreign currency exchange rates, primarily the British pound and Turkish Lira to the US dollar, which was almost entirely offset by the effect of a full period of selling price increases that were instituted in the prior year but were not in effect in the prior year’s quarter. The increased selling prices also accounted for the increase in gross profit margins.
GS&A expenses decreased marginally due to foreign exchange rate movements and decreases in employee related expenses due to greater cost controls. This decrease, along with the increase in gross profit margin, contributed to the increase in operating profit margins.
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Environmental Segment
Three Months Ended March 31, | ||||||||||||||||||||||||
Environmental | 2009 | 2008 | 2009 vs. 2008 | |||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Net sales | $ | 44,233 | 100.0 | % | $ | 58,219 | 100.0 | % | $ | (13,986 | ) | -24.0 | % | |||||||||||
Cost of sales | 30,134 | 68.1 | % | 38,798 | 66.6 | % | ||||||||||||||||||
Gross profit | 14,099 | 31.9 | % | 19,421 | 33.4 | % | (5,322 | ) | -27.4 | % | ||||||||||||||
General, selling and administrative expenses | 10,405 | 23.5 | % | 13,450 | 23.1 | % | (3,045 | ) | -22.6 | % | ||||||||||||||
Operating profit | 3,694 | 8.4 | % | 5,971 | 10.3 | % | (2,277 | ) | -38.1 | % |
Three Months Ended March 31, | ||||||||||||
Environmental Product Line Sales | 2009 | 2008 | % change | |||||||||
(Dollars in Thousands) | ||||||||||||
Lining technologies | $ | 26,753 | $ | 32,495 | -17.7 | % | ||||||
Building materials | 12,378 | 19,995 | -38.1 | % | ||||||||
Other product lines | 5,102 | 5,729 | * | |||||||||
Total | 44,233 | 58,219 |
* Not meaningful.
Revenues in the environmental segment decreased due to adverse movements in foreign currency exchange rates, primarily the British pound and Polish zloty to the US dollar, and organic decreases across all product lines due to the recession and credit crisis. These decreases also led to the decrease in gross profit margins.
GS&A expenses decreased in part due to the currency movements as mentioned above as well as due to decreased employee incentives and third party commissions stemming from decreased sales levels. Operating profit margin decreased due to the decrease in sales and gross profit margin.
Oilfield Services Segment
Three Months Ended March 31, | ||||||||||||||||||||||||
Oilfield Services | 2009 | 2008 | 2009 vs. 2008 | |||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Net sales | $ | 31,898 | 100.0 | % | $ | 24,143 | 100.0 | % | $ | 7,755 | 32.1 | % | ||||||||||||
Cost of sales | 20,293 | 63.6 | % | 15,441 | 64.0 | % | ||||||||||||||||||
Gross profit | 11,605 | 36.4 | % | 8,702 | 36.0 | % | 2,903 | 33.4 | % | |||||||||||||||
General, selling and administrative expenses | 6,688 | 21.0 | % | 4,753 | 19.7 | % | 1,935 | 40.7 | % | |||||||||||||||
Operating profit | 4,917 | 15.4 | % | 3,949 | 16.3 | % | 968 | 24.5 | % |
Strong increased demand for offshore, deep water filtration services was the primary driver of the increased sales over the prior year quarter. Sales levels were also helped by the inclusion of our coil tubing business, which we acquired in May 2008 and thus is not present in the prior year quarterly results.
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GS&A expenses increased due to the acquisition of our coil tubing business and increases in employee related expenses due to greater sales levels. Operating profits increased due to the increased gross profits mentioned above. Operating margin, however, decreased as the profitability of our coil tubing business was lower than other parts of the business, thereby decreasing the overall profitability. Our coil tubing business has experienced significant competitive pressures as customers reduce their use of these services given the drop in oil prices.
Transportation Segment
Three Months Ended March 31, | ||||||||||||||||||||||||
Transportation | 2009 | 2008 | 2009 vs. 2008 | |||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Net sales | $ | 11,291 | 100.0 | % | $ | 14,350 | 100.0 | % | $ | (3,059 | ) | -21.3 | % | |||||||||||
Cost of sales | 9,957 | 88.2 | % | 12,800 | 89.2 | % | ||||||||||||||||||
Gross profit | 1,334 | 11.8 | % | 1,550 | 10.8 | % | (216 | ) | -13.9 | % | ||||||||||||||
General, selling and administrative expenses | 853 | 7.6 | % | 770 | 5.4 | % | 83 | 10.8 | % | |||||||||||||||
Operating profit | 481 | 4.2 | % | 780 | 5.4 | % | (299 | ) | -38.3 | % |
Traffic levels decreased as compared to the prior year period due to the recession in the United States. In addition, prices for gasoline have decreased, leading to decreased fuel surcharges. Both of these factors contributed to the decrease in this segment’s performance.
Corporate Segment
Three Months Ended March 31, | ||||||||||||||||
Corporate | 2009 | 2008 | 2009 vs. 2008 | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Intersegment shipping sales | $ | (3,160 | ) | $ | (4,647 | ) | 1,487 | |||||||||
Intersegment shipping costs | (3,160 | ) | (4,647 | ) | ||||||||||||
Gross profit | - | - | - | |||||||||||||
General, selling and administrative expenses | 6,533 | 5,675 | 858 | 15.1 | % | |||||||||||
Operating loss | 6,533 | 5,675 | 858 | 15.1 | % |
Intersegment shipping revenues and costs are related to billings from our transportation segment to its domestic minerals and environmental segment sister companies for services. These services are invoiced 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 both non-recurring professional fees incurred to restate our second and third quarter results for 2008 (related to our investment in Ashapura as previously discussed) and greater employee and employee benefit related expenses.
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Liquidity and Capital Resources
Cash flows from operations, an ability to issue new debt instruments, and borrowings from our revolving credit facility have been our sources of funds to provide working capital, make capital expenditures, acquire businesses, repurchase common stock, and pay dividends to shareholders. We believe cash flows from operations and borrowings from an unused and committed credit facility will be adequate to support our current business needs for the foreseeable future. Given the current economic climate and credit crisis, it is unlikely that we would pursue a substantial acquisition in 2009. However, we may need additional debt or equity facilities in order to pursue acquisitions, when and if these opportunities become available, and we may or may not be able to obtain such facilities on terms substantially similar to our current facilities as discussed in Item 1A – Risk Factors in our Form 10-K for 2008. See our additional comments 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.
Three Months Ended | ||||||||
Cash Flows | March 31, | |||||||
($ in millions) | 2009 | 2008 | ||||||
Net cash provided by operating activities | $ | 40.7 | $ | 4.3 | ||||
Net cash used in investing activities | $ | (17.7 | ) | $ | (25.0 | ) | ||
Net cash provided by (used in) financing activities | $ | (7.5 | ) | $ | 27.4 |
Cash flows from operating activities increased substantially as compared to the prior year period due to decreased working capital levels, which we were able to reduce through concerted efforts and decreased business activity resulting from the current recession. Historically, cash flows from operations have increased over the course of the year and we anticipate this pattern will continue for the remainder of this year.
Cash flows used in investing activities decreased in the current year period due to the purchase of a chrome mine in South Africa for $15.1 million (included within capital expenditures). Investing activities include the repayment of a $6 million loan from the seller, Chrome Corporation that we made in the prior year period.
Cash flows from financing activities decreased as we paid off debt whereas in the previous year we incurred more debt. Year-to-date dividends increased in 2009 to $0.18 per share from $0.16 per share in the prior year period.
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As at | ||||||||
Financial Position | March 31, | December 31, | ||||||
($ in millions) | 2009 | 2008 | ||||||
Working capital | $ | 239.1 | $ | 262.7 | ||||
Goodwill & intangible assets | $ | 120.9 | $ | 122.5 | ||||
Total assets | $ | 725.0 | $ | 744.6 | ||||
Long-term debt | $ | 253.0 | $ | 256.8 | ||||
Other long-term obligations | $ | 64.4 | $ | 50.9 | ||||
Total equity | $ | 319.6 | $ | 328.4 |
Working capital at March 31, 2009 decreased over the amount at December 31, 2008 due to decreases in accounts receivable and inventories partly commensurate with the decreased sales levels but also due to increased efforts to better manage working capital. Given the seasonality of our environmental segment 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 3.7-to-1 and 3.4-to-1 at March 31, 2009, and December 31, 2008, respectively.
Long-term debt decreased due to our ability to repay debt using cash generated from operating activities as opposed to investing that cash in greater working capital levels and investing activities. Long-term debt relative to total capitalization remained fairly constant at 44.2% at March 31, 2009 versus 43.9% at December 31, 2008. We have approximately $61.0 million of borrowing capacity available from our revolving credit facility at March 31, 2009. We are in compliance with financial covenants related to the revolving credit facility as of the period covered by this report.
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, 2008 discloses our contractual obligations and off-balance sheet arrangements. Other than the decrease in our long-term bank debt as disclosed in our condensed consolidated financial statements herein there were no material changes in our contractual obligations and off-balance sheet arrangements.
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, 2008 other than those discussed in Part 1, Item 2 of this report.
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Item 4: | 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 March 31, 2009. Based on that evaluation, they have concluded that, as a result of the material weakness in our internal control over financial reporting discussed below and the fact that our remedial efforts have not been completed as of March 31, 2009, our disclosure controls and procedures were not effective as of March 31, 2009 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. Notwithstanding the foregoing, we believe that the financial statements included within this report fairly present, in all material respects, our financial position and results of operations in conformity with generally accepted accounting principles in the United States, for the periods presented.
The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include in their annual reports on Form 10-K an assessment by management of the effectiveness of our internal controls over financial reporting. As described in our annual report on Form 10-K filed for the year ended December 31, 2008, we identified a material weakness in internal control over financial reporting relative to incorporating the results of our equity investees in our financial statements pursuant to the equity method of accounting. In particular, our design of internal controls did not address the proper accounting for the value of derivative instruments held by one of our equity investees, Ashapura Minechem Limited. As a result of the foregoing, we began implementing changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934) during the fiscal quarter ended March 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Specifically, these changes include transferring the responsibility of accounting for equity investees from our minerals segment to our corporate segment. We are also enhancing controls over financial reporting of our equity investees to assure the consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles.
Although remedial efforts were initiated in the first quarter of 2009, the implementation of such changes had not been completed as of March 31, 2009. Accordingly, we have determined that the material weakness in our internal control over financial reporting relative to our accounting for equity investments as described in the annual report on Form 10-K filed by the Company for the year ended December 31, 2008 still existed as of March 31, 2009.
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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, 2008. 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 6: | Exhibits |
Exhibit Number | ||
3.2 | AMCOL International Corporation Amended and Restated By-Laws, as amended and restated February 10, 2009 (1) | |
10.1 | Form of Indemnification Agreement between the Company and its directors and executive officers (1) | |
10.2 | Employment Agreement dated February 2, 2009 between AMCOL International Corporation and Lawrence E. Washow (2) | |
10.3 | Employment Agreement dated February 2, 2009 between AMCOL International Corporation and Gary L. Castagna (2) | |
10.4 | Employment Agreement dated February 2, 2009 between AMCOL International Corporation and Ryan F. McKendrick (2) | |
10.5 | Employment Agreement dated February 2, 2009 between AMCOL International Corporation and Donald W. Pearson (2) | |
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.
(1) | Exhibit is incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 13, 2009. |
(2) | Exhibit is incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 5, 2009. |
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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: | May 8, 2009 | /s/ Lawrence E. Washow | |
Lawrence E. Washow | |||
President and Chief Executive Officer | |||
Date: | May 8, 2009 | /s/ Donald W. Pearson | |
Donald W. Pearson | |||
Vice President and Chief Financial Officer |
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INDEX TO EXHIBITS
3.2 | AMCOL International Corporation Amended and Restated By-Laws, as amended and restated February 10, 2009 (1) | |
10.1 | Form of Indemnification Agreement between the Company and its directors and executive officers (1) | |
10.2 | Employment Agreement dated February 2, 2009 between AMCOL International Corporation and Lawrence E. Washow (2) | |
10.3 | Employment Agreement dated February 2, 2009 between AMCOL International Corporation and Gary L. Castagna (2) | |
10.4 | Employment Agreement dated February 2, 2009 between AMCOL International Corporation and Ryan F. McKendrick (2) | |
10.5 | Employment Agreement dated February 2, 2009 between AMCOL International Corporation and Donald W. Pearson (2) | |
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.
(1) | Exhibit is incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 13, 2009. |
(2) | Exhibit is incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 5, 2009. |
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