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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 June 30, 2005
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
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(Exact name of registrant as specified in its charter)
Delaware 36-0724340
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1500 West Shure Drive, Suite 500, Arlington Heights, Illinois 60004-7803
- ------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(847) 394-8730
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(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 an accelerated filer
(as defined in Rule 12(b)-2 of the Exchange Act).
Yes [X] No [ ]
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 July 21, 2005
------------------------------ ----------------------------
(Common stock, $.01 par value) 29,716,753 Shares
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AMCOL INTERNATIONAL CORPORATION
INDEX
Page No.
--------
Part I - Financial Information
- --------------------------------------------------------------------------------
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Operations -
three and six months ended June 30, 2005 and 2004 5
Condensed Consolidated Statements of Comprehensive Income -
three and six months ended June 30, 2005 and 2004 6
Condensed Consolidated Statements of Cash Flows -
three and six months ended June 30, 2005 and 2004 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 30
Item 4 Controls and Procedures 30
Part II - Other Information
- --------------------------------------------------------------------------------
Item 2e Company Repurchases of Company Stock 31
Item 6 Exhibits and Reports on Form 8-K 31
2
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2005 2004
ASSETS (unaudited) *
- ------------------------------------------------------------ ------------ ------------
Current assets:
Cash $ 14,438 $ 17,594
Accounts receivable, net 100,039 88,342
Inventories 67,073 63,882
Prepaid expenses 8,701 7,111
Income taxes receivable 12,447 9,126
Current deferred tax assets 4,366 4,293
Assets held for sale 381 752
------------ ------------
Total current assets 207,445 191,100
------------ ------------
Investment in and advances to joint ventures 18,302 15,023
------------ ------------
Property, plant, equipment, and mineral rights and reserves:
Land and mineral rights 12,539 12,019
Depreciable assets 241,651 247,280
------------ ------------
254,190 259,299
Less: accumulated depreciation 161,174 165,658
------------ ------------
93,016 93,641
------------ ------------
Other assets:
Goodwill 18,498 19,225
Intangible assets, net 3,249 3,802
Deferred tax assets 5,285 6,444
Other assets 9,008 7,207
------------ ------------
36,040 36,678
------------ ------------
$ 354,803 $ 336,442
============ ============
Continued...
3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2005 2004
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) *
- ------------------------------------------------------------ ------------ ------------
Current liabilities:
Accounts payable 25,653 25,474
Accrued liabilities 29,519 36,207
------------ ------------
Total current liabilities 55,172 61,681
------------ ------------
Long-term debt 44,550 34,295
------------ ------------
Minority interests in subsidiaries 131 5
Deferred compensation 6,371 5,872
Other liabilities 12,477 12,655
------------ ------------
18,979 18,532
------------ ------------
Stockholders' equity:
Common stock 320 320
Additional paid in capital 71,285 69,763
Retained earnings 170,267 154,366
Accumulated other comprehensive income 9,754 14,905
------------ ------------
251,626 239,354
Less:
Treasury stock 15,524 17,420
------------ ------------
236,102 221,934
------------ ------------
$ 354,803 $ 336,442
============ ============
*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 share and per share amounts)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
CONTINUING OPERATIONS
Net sales $ 258,394 $ 223,924 $ 136,344 $ 119,770
Cost of sales 192,146 165,511 99,776 88,080
------------ ------------ ------------ ------------
Gross profit 66,248 58,413 36,568 31,690
General, selling and administrative expenses 44,552 40,017 23,107 20,534
------------ ------------ ------------ ------------
Operating profit 21,696 18,396 13,461 11,156
------------ ------------ ------------ ------------
Other income (expense):
Interest expense, net (805) (390) (444) (311)
Other, net (991) 27 (886) (16)
------------ ------------ ------------ ------------
(1,796) (363) (1,330) (327)
------------ ------------ ------------ ------------
Income before income taxes and equity
in income of joint ventures 19,900 18,033 12,131 10,829
Income tax expense 4,457 5,679 2,973 3,410
------------ ------------ ------------ ------------
Income before equity in income of joint ventures 15,443 12,354 9,158 7,419
Income from joint ventures 1,027 469 360 321
------------ ------------ ------------ ------------
Income from continuing operations 16,470 12,823 9,518 7,740
DISCONTINUED OPERATIONS
Gain on 2000 disposal (including income
tax benefits of $5,255 in 2005) 4,755 - 4,755 -
------------ ------------ ------------ ------------
Income from discontinued operations 4,755 - 4,755 -
------------ ------------ ------------ ------------
Net income $ 21,225 $ 12,823 $ 14,273 $ 7,740
============ ============ ============ ============
Weighted average common shares outstanding 29,407,401 29,091,621 29,480,365 29,090,587
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 30,772,428 30,859,545 30,773,198 30,835,691
============ ============ ============ ============
Basic earnings per share:
Continuing operations $ 0.56 $ 0.44 $ 0.32 $ 0.27
------------ ------------ ------------ ------------
Discontinued operations:
Gain on disposal 0.16 - 0.16 -
------------ ------------ ------------ ------------
0.16 - 0.16 -
------------ ------------ ------------ ------------
Net income $ 0.72 $ 0.44 $ 0.48 $ 0.27
============ ============ ============ ============
Diluted earnings per share:
Continuing operations $ 0.54 $ 0.42 $ 0.31 $ 0.25
------------ ------------ ------------ ------------
Discontinued operations:
Gain on disposal 0.15 - 0.15 -
------------ ------------ ------------ ------------
0.15 - 0.15 -
------------ ------------ ------------ ------------
Net income $ 0.69 $ 0.42 $ 0.46 $ 0.25
============ ============ ============ ============
Dividends declared per share $ 0.18 $ 0.14 $ 0.09 $ 0.07
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income $ 21,225 $ 12,823 $ 14,273 $ 7,740
Income (loss) recognized relating to:
Minimum pension liability 169 (410) 55 (410)
Foreign currency translation (5,320) (204) (3,822) (1,545)
------------ ------------ ------------ ------------
Total other comprehensive income $ 16,074 $ 12,209 $ 10,506 $ 5,785
============ ============ ============ ============
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)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2005 2004
------------ ------------
Cash flow from operating activities:
Income from continuing operations $ 16,470 $ 12,823
Adjustments to reconcile income from continuing operations to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 9,828 9,586
Changes in assets and liabilities, net of effects of acquisitions:
Increase in current assets (13,703) (29,193)
Increase in noncurrent assets (759) (1,511)
Increase (decrease) in current liabilities (4,962) 8,371
Increase (decrease) in noncurrent liabilities 321 1,135
Other (157) 1,515
------------ ------------
Net cash provided by (used in) operating activities 7,038 2,726
------------ ------------
Net cash provided by discontinued operations - 8,625
------------ ------------
Cash flow from investing activities:
Acquisition of land, mineral rights, and depreciable assets (11,733) (7,446)
Acquisitions, net of cash (1,632) (13,335)
Other 75 1,441
------------ ------------
Net cash provided by (used in) investing activities (13,290) (19,340)
------------ ------------
Cash flow from financing activities:
Net change in outstanding debt 10,255 17,651
Proceeds from sales of treasury stock 944 746
Purchases of treasury stock - (2,879)
Dividends paid (5,324) (4,091)
------------ ------------
Net cash provided by (used in) financing activities 5,875 11,427
------------ ------------
Effect of foreign currency rate changes on cash (2,779) (970)
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,156) 2,468
------------ ------------
Cash and cash equivalents at beginning of period 17,594 13,525
------------ ------------
Cash and cash equivalents at end of period $ 14,438 $ 15,993
============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 775 $ 186
============ ============
Income taxes $ 2,648 $ 3,022
============ ============
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 two principal
segments: minerals and environmental. The Company also operates a transportation
business which includes delivery of its own products. Intersegment revenues are
eliminated in the corporate segment. For the interim periods ended June 30, 2005
and 2004, the composition of the Company's revenues by segment is as follows:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue generating segment:
Minerals 57% 59% 55% 56%
Environmental 37% 36% 39% 39%
Transportation 9% 9% 9% 8%
Corporate - elimination of intersegment revenues -3% -4% -3% -3%
------------ ------------ ------------ ------------
Total 100% 100% 100% 100%
============ ============ ============ ============
Further descriptions of the Company's products, its principal markets
and the relative significance of its operations are included in Note 5,
"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, 2004, is unaudited. The condensed consolidated balance sheet as of
December 31, 2004 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, 2004. The information furnished herein includes all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of operations and cash flows for the interim periods
ended June 30, 2005 and 2004, and the financial position of the Company as of
June 30, 2005, and all such adjustments are of a normal recurring nature.
Management recommends that the accompanying condensed consolidated financial
information be read in conjunction with the consolidated financial statements
and related notes included in the Company's 2004 Annual Report on Form 10-K, as
amended.
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.
8
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
RECLASSIFICATIONS
Certain items in the condensed consolidated financial statements
contained herein and notes thereto have been reclassified to conform with the
consolidated financial statement presentation followed by the Company when it
prepared the consolidated financial statements included in its annual report on
Form 10-K, as amended, for the year ended December 31, 2004; these
reclassifications relate to commissions earned by independent sales
representatives and amortization of certain intangible assets.
In addition beginning in the quarter ended March 31, 2005 and for all
periods thereafter, the Company began reporting certain expenses related to
product liability, warranty and royalty expenses in general, selling, and
administrative expenses rather than as deductions within net sales. For the 2004
periods reported herein, these deductions have been reclassified to conform to
the current year financial statement presentation. This change in financial
statement presentation did not impact reported net income or earnings per share.
NEW ACCOUNTING STANDARDS
In 2003, the Company adopted FASB Statement No. 143, Accounting for
Asset Retirement Obligations, which addresses financial accounting and reporting
for legal obligations associated with the retirement of tangible long-lived
assets and the related asset retirement costs. In March 2005, the FASB issued
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement No. 143 ("FIN 47"). FIN 47
clarifies both the definition of the term "conditional asset retirement
obligation" as that term is used in FASB Statement No. 143 and when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The Company's adoption of FIN 47 in March 2005 did
not have a material impact on the Company's condensed consolidated financial
statements.
In May 2005, the FASB issued Statement No. 154 ("SFAS 154"),
"Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20
and FASB Statement No. 3." SFAS 154 changes the requirements for the accounting
for and reporting of a change in accounting principle. SFAS 154 requires that a
voluntary change in accounting principle be applied retrospectively with all
prior period financial statements presented on the new accounting principle,
unless it is impracticable to determine either the period-specific effects or
the cumulative effect of changing to the new accounting principle. SFAS 154 also
requires that a change in method of depreciating, amortizing or depleting a
long-lived nonfinancial asset be accounted for prospectively as a change in
estimate, and correction of errors in previously issued financial statements
should be termed a restatement. SFAS 154 is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005; as
such, the Company's adoption of this standard in fiscal 2006 is not expected to
have a material impact on the Company's consolidated financial statements.
9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
As discussed in the Company's 2004 Annual Report on Form 10-K, as
amended, the FASB amended FAS 123 ("SFAS 123(R)") in December 2004, and the
guidance contained therein was to become effective for the first interim or
annual reporting period beginning after June 15, 2005. In April 2005, the
Securities and Exchange Commission delayed mandatory compliance with this
standard starting with the first interim or annual reporting period of the first
fiscal year that begins after December 15, 2005. Since the Company's next fiscal
year will begin January 1, 2006, the Company intends to adopt SFAS 123 (R) in
the first quarter of 2006.
In June 2005, the FASB's Emerging Issues Task Force reached a consensus
on Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements" ("EITF 05-6"). The guidance requires that leasehold improvements
acquired in a business combination or purchased subsequent to the inception of a
lease be amortized over the lesser of the useful life of the assets or a term
that includes renewals that are reasonably assured at the date of the business
combination or purchase. The guidance is effective for periods beginning after
June 29, 2005; the Company does not believe its adoption of EITF 05-6 in the
third quarter of 2005 will have a material effect on its consolidated financial
statements.
NOTE 2: INVENTORIES
Inventories at June 30, 2005 have been valued using the same methods as
at December 31, 2004. The composition of inventories at June 30, 2005 and
December 31, 2004 was as follows:
JUNE 30, DECEMBER 31,
2005 2004
------------ ------------
Advance mining $ 2,692 $ 2,277
Crude stockpile inventories 22,440 25,159
In-process inventories 23,271 18,123
Other raw material, container, and supplies inventories 18,670 18,323
------------ ------------
$ 67,073 $ 63,882
============ ============
10
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NOTE 3: LAND RECLAMATION
The Company mines various minerals using a surface mining process that
requires the removal of overburden. Under various governmental regulations, the
Company is 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 three and six month activity within the
Company's reclamation obligation for the period ended June 30, 2005 is as
follows:
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2005 2005
------------ ------------
Balance at beginning of period $ 4,850 $ 4,825
Settlement of obligations (785) (215)
Liabilities incurred and accretion expense 770 225
------------ ------------
Balance at end of period $ 4,835 $ 4,835
============ ============
NOTE 4: EARNINGS PER SHARE
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.
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted average of common shares outstanding 29,407,401 29,091,621 29,480,365 29,090,587
Dilutive impact of stock options 1,365,027 1,767,924 1,292,833 1,745,104
------------ ------------ ------------ ------------
Weighted average of common and common equivalent
shares for the period 30,772,428 30,859,545 30,773,198 30,835,691
============ ============ ============ ============
Common shares outstanding 29,707,649 29,203,355 29,707,649 29,203,355
============ ============ ============ ============
Weighted average anti-dilutive shares excluded from the
computation of diluted earnings per share 195,933 - 293,900 -
============ ============ ============ ============
11
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NOTE 5: BUSINESS SEGMENT INFORMATION
The Company operates in two major industry segments: minerals and
environmental. The Company also operates a transportation business. 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 transportation
segment includes a long-haul trucking business and a freight brokerage business,
which provide services both to the Company's plants and outside customers.
The Company identifies segments based on management responsibility and
the nature of the business activities of each component of the Company.
Intersegment sales are insignificant, other than intersegment shipping, which is
disclosed in the following table. The Company measures segment performance based
on operating profit. Operating profit is defined as 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 Company's operations in
that segment. Corporate assets include cash and cash equivalents, corporate
leasehold improvements, the nanocomposite plant investment and other
miscellaneous equipment.
12
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
The following summaries set forth certain financial information by
business segment for the six and three months ended June 30, 2005 and 2004 and
as of June 30, 2005 and December 31, 2004.
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Business Segment:
Revenues:
Minerals $ 148,325 $ 131,047 $ 74,877 $ 66,710
Environmental 96,138 80,871 53,834 47,199
Transportation 23,580 19,390 12,595 10,058
Intersegment shipping (9,649) (7,384) (4,962) (4,197)
------------ ------------ ------------ ------------
Total $ 258,394 $ 223,924 $ 136,344 $ 119,770
============ ============ ============ ============
Operating profit (loss):
Minerals $ 18,460 $ 15,688 $ 10,665 $ 8,253
Environmental 12,644 9,255 7,507 6,176
Transportation 1,293 837 720 451
Corporate (10,701) (7,384) (5,431) (3,724)
------------ ------------ ------------ ------------
Total $ 21,696 $ 18,396 $ 13,461 $ 11,156
============ ============ ============ ============
JUNE 30, DEC. 31,
2005 2004
============ ============
Assets:
Minerals $ 176,800 $ 172,972
Environmental 134,778 128,154
Transportation 2,450 3,122
Corporate 40,775 32,194
------------ ------------
Total $ 354,803 $ 336,442
============ ============
Goodwill:
Minerals $ 5,638 $ 5,773
Environmental 12,860 13,452
------------ ------------
Total $ 18,498 $ 19,225
============ ============
NOTE 6: STOCK OPTION PLANS
Prior to 2003, the Company accounted for its fixed plan stock options
under the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost was reflected in net
income prior to 2003, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and has
elected to apply those provisions prospectively, in accordance with SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure, an
Amendment of FASB Statement No. 123,, to all employee awards granted, modified,
or settled after January 1, 2003. Beginning in 2003, awards under the Company's
plans vest over three years. Therefore, the cost related to stock-based employee
compensation included in the determination of net income for 2004 and 2005 is
less than that which would have been recognized if the fair value based method
had been applied to all awards since the original effective date of Statement
No. 123.
13
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
Results for prior years have not been adjusted to reflect the use of
the fair value based method of accounting for employee awards. The following
table illustrates the effect on net income and earnings per share if the fair
value based method had been applied to all outstanding and unvested awards in
each period:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income, as reported $ 21,225 $ 12,823 $ 14,273 $ 7,740
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 735 635 367 303
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (806) (784) (403) (378)
------------ ------------ ------------ ------------
Pro forma net income $ 21,154 $ 12,674 $ 14,237 $ 7,665
============ ============ ============ ============
Earnings per share:
Basic - as reported $ 0.72 $ 0.44 $ 0.48 $ 0.27
Basic - pro forma $ 0.72 $ 0.44 $ 0.48 $ 0.26
Diluted - as reported $ 0.69 $ 0.42 $ 0.46 $ 0.25
Diluted - pro forma $ 0.69 $ 0.41 $ 0.46 $ 0.25
NOTE 7: COMPONENTS OF PENSION AND OTHER RETIREMENT BENEFIT COST
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Service cost $ 925 $ 724 $ 463 $ 362
Interest cost 987 914 493 457
Expected return on plan assets (1,136) (968) (568) (484)
Amortization of transition (asset) / obligation (44) (68) (22) (34)
Amortization of prior service cost 15 14 8 7
Amortization of net (gain) loss - - - -
------------ ------------ ------------ ------------
Net periodic benefit cost $ 747 $ 616 $ 374 $ 308
============ ============ ============ ============
EMPLOYER CONTRIBUTIONS
The Company previously disclosed in its financial statements for the
year ended December 31, 2004, that it expected to contribute $862 to its pension
plan in 2005. That full contribution was made in the first quarter of 2005.
14
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NOTE 8: TAXES
In October 2004, the American Jobs Creation Act (the "Act") was enacted
which allowed for a temporary 85% dividends received deduction on certain
foreign earnings repatriated into the U.S. The portion of the dividend that
qualifies for the 85% deduction is that amount which exceeds an average of past
years' foreign dividends. Additionally, certain criteria must be met when the
funds are repatriated and may ultimately qualify for an effective tax rate as
low as 5.25%.
The Company is in process of evaluating whether it will repatriate
foreign earnings under the Act. The range of amounts that are reasonably under
consideration for repatriation are from $0 to $30.7 million. The Company will
evaluate the merits of repatriating foreign earnings in 2005 and report the tax
impact, if any, of an envisioned repatriation upon the finalization of a
repatriation plan. The Company has not recognized any income tax effect relating
to the Act as we are currently not in a position to reasonably estimate the tax
impact of any repatriation.
In the six month period ending June 30, 2005, the Company decreased its
provision for taxes owed by $845 largely as a result of changes in estimates
related to both its UK and domestic tax returns for 2004 and the effective tax
rate used to calculate deferred taxes.
NOTE 9: ACQUISITIONS
The Company did not make any acquisitions in the first six months of
2005. As of December 31, 2004, the Company provided for $1,632 of payments to be
made to former owners of acquired businesses because the operating performance
of the acquired businesses met profit targets included in earn-out provisions of
the related purchase agreements. Those amounts were paid in the first quarter of
2005.
Note 10: DISCONTINUED OPERATIONS
In 2004, the Company filed an amended tax return seeking a refund of
state taxes paid on the sale of the Company's absorbent polymers segment that
occurred in 2000. No amounts for this refund was reflected in the Company's
financial statements prior to the quarter ended June 30, 2005. In June 2005, the
Company successfully settled its claim with the state for $7.8 million and
recorded a net income tax receivable of $5,255, accrued professional fees of
$500 and a gain on the sale of discontinued operations of $4,755. The Company
received payment from the state in July 2005, and the receipt of this payment is
not reflected in the financial results contained herein.
15
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NOTE 11: GAIN ON ASSETS HELD FOR SALE
In April 2005, the Company's environmental segment sold one of its
manufacturing facilities for $808 of cash proceeds, resulting in a pre-tax gain
of $627 on the sale of assets that was recorded within general, selling and
administrative expenses in the six and three months ended June 30, 2005.
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
Operation 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; and other factors set
forth from time to time in our reports filed with the Securities and Exchange
Commission.
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
operation, 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, one should also read our Annual Report on Form
10-K, as amended, for the year ended December 31, 2004.
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. In addition, as discussed in Note 1 of the
Notes to Condensed Consolidated Financial Statements in Item 1, the Company has
reclassified certain financial data as of and for the three and six month period
ended June 30, 2005. The following discussion and analysis of results of
operations and financial condition are based upon such reclassified financial
data.
17
THREE MONTHS ENDED JUNE 30, 2005 VS. JUNE 30, 2004:
RESULTS OF OPERATIONS (in millions):
NET SALES:
2005 2004 % Change
---------- ---------- ----------
$ 136.3 $ 119.8 14%
Favorable foreign currency changes accounted for approximately 8% of
the $16.6 million increase in net sales over the 2004 period. On an operating
segment basis, minerals accounted for approximately 49% of the increase in net
sales while environmental contributed approximately 40% of the growth. Our
transportation segment, including the elimination of intersegment revenues,
accounted for approximately 11% of the sales growth over the second quarter of
2004.
GROSS PROFIT:
2005 2004 % Change
---------- ---------- ----------
$ 36.6 $ 31.7 15%
Margin 26.8% 26.5% N/A
Gross profit increased in the second quarter of 2005 in conjunction
with the increase in net sales. The minerals segment accounted for the majority
of the 30 basis point improvement in gross margin. This segment benefited from a
law, passed by the State of Montana in April, 2005, that exempted bentonite and
other minerals mined in the state in 2004 from severance tax. Consequently, we
recorded an adjustment of $1.9 million to our severance tax accruals and a
corresponding reduction in cost of goods sold. After factoring out this
adjustment, gross margin would have been 25.5%
Environmental segment margins declined over the prior-year period
primarily due to higher purchased raw material costs and greater unabsorbed
manufacturing costs associated with prolonged production downtime at its
Fairmount, GA site. Transportation segment gross margins improved due to
increased pricing and traffic levels.
GENERAL, SELLING &
ADMINISTRATION EXPENSES:
2005 2004 % Change
---------- ---------- ----------
$ 23.1 $ 20.5 13%
Greater corporate segment expenses accounted for approximately 72% of
the increase over the second quarter of 2004. Within the corporate segment,
professional fees associated with the audit of the consolidated financial
statements and report on internal controls over financial reporting for 2004
represented $1 million of the increase. We do not expect these levels of costs
to recur in the future. Greater operating expenses within the minerals segment,
primarily associated with international sales and marketing expenses, accounted
for 23% of the increase. Within the environmental segment, administrative
expenses were reduced by approximately $0.6 million from the gain on the sale of
the Villa Rica production facility. Research and development expenses were
approximately $1.9 million in the second quarter of 2005 compared with $1.4
million in the prior-year period.
OPERATING PROFIT:
2005 2004 % Change
---------- ---------- ----------
$ 13.5 $ 11.2 21%
Margin 9.9% 9.3% N/A
18
Organic gross profit growth contributed a majority of the increase in
operating profit. The effect of the severance tax benefit offset by the higher
professional fees contributed approximately 37% of the increase over the 2004
period. Foreign currency exchange rates did not account for a significant
portion of the growth. The 60 basis point operating margin increase is
attributable to the increase in gross margin described above.
INTEREST EXPENSE, NET:
2005 2004 % Change
---------- ---------- ----------
$ 0.4 $ 0.3 33%
Interest expense in the second quarter of 2005 increased primarily due
to higher average long-term debt compared with the prior year period. The
increase in long-term debt was attributed to an increase in working capital
funding.
OTHER EXPENSE, NET
2005 2004 % Change
---------- ---------- ----------
$ 0.9 $ - N/A
The current quarter was negatively impacted by approximately $0.9
million due to the recognition of foreign exchange losses. Our foreign
subsidiaries recorded an increase in their U.S. dollar-based intercompany debts
with a corresponding charge to Other expense upon revaluation of those debts.
INCOME TAXES:
2005 2004 % Change
---------- ---------- ----------
$ 3.0 $ 3.4 (12)%
Effective tax
rate 24.5% 31.5% N/A
The effective tax rate was favorably impacted by a greater portion of
earnings generated in foreign countries in the second quarter of 2005, which
usually have lower statutory income tax rates than the U.S. Additionally, we
estimated higher depletion deductions in comparison with the 2004 period.
INCOME FROM JOINT VENTURES
AND MINORITY INTERESTS:
2005 2004 % Change
---------- ---------- ----------
$ 0.4 $ 0.3 33%
The current year period included the earnings from a 50% interest in a
Japanese joint venture company. We increased our ownership in the entity from
19% in August 2004, which allowed us to account for the earnings from the
investment under the equity method instead of recording income when dividends
were received as required under the cost method of accounting.
INCOME FROM
CONTINUING OPERATIONS
2005 2004 % Change
---------- ---------- ----------
$ 9.5 $ 7.7 23%
Margin 7.0% 6.5% N/A
Net margin in the 2005 period increased primarily due to the increase
in operating margin, the lower effective tax rate and the improvement in income
from joint ventures and minority interests.
19
DISCONTINUED OPERATIONS:
2005 2004 % Change
---------- ---------- ----------
$ 4.8 $ - N/A
In September 2004, we filed an amended income tax return in the State
of Mississippi requesting a refund of approximately $12.5 million of taxes paid
relating to the gain on the sale of the absorbent polymer segment. The sale of
the segment was originally reported as a discontinued operation in the second
quarter of 2000. With the assistance of a professional accounting firm, we
concluded that a gain on the sale of a business under these circumstances was
not taxable in Mississippi according to its laws. After negotiations and
hearings with officials, the Board of Review of the Mississippi State Tax
Commission accepted our settlement offer of $7.8 million in June 2005, and we
received payment of the refund in July 2005.
DILUTED EARNINGS PER SHARE:
2005 2004 % Change
---------- ---------- ----------
Income from
Continuing
operations $ 0.31 $ 0.25 24%
Discontinued
operations $ 0.15 $ 0.00 N/A
---------- ----------
Net income $ 0.46 $ 0.25 N/A
Excluding the Montana tax relief and the excessive corporate segment
expenses, growth in base-business sales and operating profit contributed
approximately $0.03 per share of the increase in income from continuing
operations over the prior-year period. A lower effective income tax rate
accounted for $0.03 per share of the increase over the prior-year period.
Weighted average common and common equivalent shares outstanding decreased by
less than 1% over the 2004 quarter.
SEGMENT ANALYSIS:
Following is a review of operating results for each of our four
reporting segments:
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
MINERALS 2005 2004 2005 vs. 2004
- ------------------------------ --------------------------- --------------------------- ---------------------------
(Dollars in Thousands)
Net sales $ 74,877 100.0% $ 66,710 100.0% $ 8,167 12.2%
Cost of sales 58,094 77.6% 52,930 79.3%
------------ ------------ ------------ ------------
Gross profit 16,783 22.4% 13,780 20.7% 3,003 21.8%
General, selling and
administrative expenses 6,118 8.2% 5,527 8.3% 591 10.7%
------------ ------------ ------------ ------------ ------------
Operating profit 10,665 14.2% 8,253 12.4% 2,412 29.2%
Domestic metalcasting sales were positively impacted by higher demand
and price increases that were implemented to offset rising transportation, raw
materials and energy-related costs. The metalcasting markets in the Asia/Pacific
region also continued to benefit from strong demand from automotive and
transportation equipment component manufacturers. Pet products sales increased
due to higher pricing in comparison with the prior-year period. Price increases
were implemented to offset higher costs similar to those impacting the domestic
metalcasting business. Specialty minerals revenues declined due to lower volume
in the detergent additives business.
20
Gross profit rose in conjunction with the increase in sales and the
aforementioned benefit from a state law which exempted us from paying
mining-related taxes. Excluding the $1.9 million benefit to cost of sales from
the Montana tax refund, gross profit would have improved by $1.1, or 8.3%, and
gross margin would have been 19.9%. Adjusted for the benefit, gross margin
declined by 80 basis points in comparison with the prior-year period due to the
rising costs of the metalcasting and pet products business mentioned above.
Transportation-related price increases generate minimal gross profit and,
consequently, negatively impact our margin.
General, selling and administrative costs increased primarily due to
expenses associated with international sales and marketing activities. Also, we
incurred greater marketing and product development costs in health and beauty
business in the current-year period.
Operating profit improved due to the increase in sales and gross
profit. Excluding the Montana benefit described above, operating profit in the
2005 period would have grown by approximately $0.5 million, or 6.7%; and
operating margin would have been 11.8%. Adjusted for the benefit, operating
margin declined by 60 basis points in comparison with the prior-year period due
to the decline in gross margin. The domestic metalcasting and pet products
businesses continue to see rising manufacturing costs. Our ability to obtain
price increases is necessary to restore margins to historical levels.
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
ENVIRONMENTAL 2005 2004 2005 vs. 2004
- ------------------------------ --------------------------- --------------------------- ---------------------------
(Dollars in Thousands)
Net sales $ 53,834 100.0% $ 47,199 100.0% $ 6,635 14.1%
Cost of sales 35,585 66.1% 30,401 64.4%
------------ ------------ ------------ ------------
Gross profit 18,249 33.9% 16,798 35.6% 1,451 8.6%
General, selling and
administrative expenses 10,742 20.0% 10,622 22.5% 120 1.1%
------------ ------------ ------------ ------------ ------------
Operating profit 7,507 13.9% 6,176 13.1% 1,331 21.6%
Strong demand in the domestic lining technologies, building materials
and water treatment businesses led to the increase in sales over the 2004
period. Growth in lining technologies product demand in Europe and Asia also
contributed to the increase. The water treatment increase arose from higher
demand for products and services from our oilfield services businesses. Price
increases had a minimal impact on revenue growth in the quarter.
Gross profit grew in conjunction with the increase in net sales;
however, gross margin declined by 170 basis points from the second quarter of
2004. Gross margins on lining technologies sales declined due to the mix of
product sales to lower profit items. This was especially evident in Europe.
Also, higher transportation, raw materials and energy-related costs negatively
impacted manufacturing costs in comparison with the prior-year period. We also
incurred higher than expected production downtime at our Fairmount, GA and
Clinton, SC facilities which resulted in higher charges for unabsorbed
manufacturing costs.
As described in the Notes to the Condensed Consolidated Financial
Statements, general, selling and administrative expenses benefited from a $0.6
million gain on the sale of the Villa Rica, GA facility in the current-year
period. Operating expenses would have increased by approximately 7.0% excluding
this benefit.
21
Operating profit improved due to the increase in sales and gross profit
and the flat general, selling and administrative expenses. Excluding the gain on
the sale of the Villa Rica facility, operating profit would have grown by
approximately 11.4% and operating margin would have been 12.8% in the 2005
period. The decline in operating margin follows the reduction in gross margin
albeit at a lower rate due to the modest growth in general, selling and
administrative expenses. The outlook for the segment appears favorable as it
enters the period in which the lining technologies and building materials
businesses generate more of their revenue and profits. Water treatment prospects
continue to appear positive due to the demand for oilfield services and
products.
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
TRANSPORTATION 2005 2004 2005 vs. 2004
- ------------------------------ --------------------------- --------------------------- ---------------------------
(Dollars in Thousands)
Net sales $ 12,595 100.0% $ 10,058 100.0% $ 2,537 25.2%
Cost of sales 11,059 87.8% 8,946 88.9%
------------ ------------ ------------ ------------
Gross profit 1,536 12.2% 1,112 11.1% 424 38.1%
General, selling and
administrative expenses 816 6.5% 661 6.6% 155 23.4%
------------ ------------ ------------ ------------ ------------
Operating profit 720 5.7% 451 4.5% 269 59.6%
Net sales improved due to higher traffic levels and increased pricing.
Gross margin improved by 110 basis points over the second quarter of 2004 due to
the increase in sales. General, selling and administrative expenses increased
due to higher personnel costs.
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------
CORPORATE 2005 2004 2005 vs. 2004
- ------------------------------ ------------ ------------ ---------------------------
(Dollars in Thousands)
Intersegment shipping sales $ (4,962) $ (4,197)
Intersegment shipping costs (4,962) (4,197)
------------ ------------
Gross profit - -
Corporate general, selling
and administrative expenses 4,672 2,832 1,840 65.0%
Nanocomposite business
development expenses 759 892 (133) -14.9%
------------ ------------ ------------
Operating loss (5,431) (3,724) (1,707) 45.8%
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 general, selling and administrative expenses increased over
the 2004 period primarily due to professional service fees relating to the audit
of the financial statements and report on internal controls over financial
reporting for the year ended December 31, 2004. Those fees accounted for
approximately 54% of the increase. We expect these expenses to total
approximately $0.4 million per quarter for the remainder of the year.
22
Net nanocomposite expenses declined in comparison with the prior-year
period due to higher sales which reduced unabsorbed manufacturing expenses. We
continue to see active interest in our nanocomposite technologies through the
market development activities undertaken by our alliance partners.
SIX MONTHS ENDED JUNE 30, 2005 VS. JUNE 30, 2004:
RESULTS OF OPERATIONS (in millions):
NET SALES:
2005 2004 % Change
---------- ---------- ----------
$ 258.4 $ 223.9 15%
Favorable foreign currency changes accounted for approximately 8% of
the $34.5 million increase in net sales over the 2004 period. On an operating
segment basis, minerals accounted for approximately 50% of the increase in net
sales while environmental contributed approximately 44% of the growth. Our
transportation segment, including the elimination of intersegment revenues,
accounted for approximately 6% of the sales growth over the 2004 period.
GROSS PROFIT:
2005 2004 % Change
---------- ---------- ----------
$ 66.2 $ 58.4 13%
Margin 25.6% 26.1% N/A
Gross profit improved in the 2005 period in conjunction with the
increase in net sales. Gross margin declined by 50 basis points. As previously
described, a non-recurring benefit of $1.9 million was recorded to the minerals
segment cost of sales in the second quarter of 2005. Without this benefit, gross
profit would have grown by approximately $6.0, or 10%; and gross margin would
have been 24.9% for the 2005 period. Higher transportation, raw materials and
energy-related costs were the primary causes for the decline in gross margins in
both segments.
GENERAL, SELLING &
ADMINISTRATION EXPENSES:
2005 2004 % Change
---------- ---------- ----------
$ 44.6 $ 40.0 11%
Greater corporate segment expenses accounted for approximately 76% of
the increase over the first half of 2004; we incurred approximately $1.6 million
more in audit and other professional services related to compliance with the
Sarbanes-Oxley Act. We also incurred higher sales and marketing costs in our
international minerals businesses in the first half of 2005. Research and
development expenses increased to approximately $3.3 million in the 2005 period
compared with $2.8 million in prior-year period.
OPERATING PROFIT:
2005 2004 % Change
---------- ---------- ----------
$ 21.7 $ 18.4 18%
Margin 8.4% 8.2% N/A
23
Favorable foreign currency exchange rates accounted for approximately
12% of the increase in operating profit over the 2004 period, or 2.2 percentage
points of growth. The $1.9 million benefit of the non-recurring reduction to
cost of sales less the impact of $1.0 million of excessive audit and
Sarbanes-Oxley compliance expenses contributed approximately 26% of the growth
in the 2005 period. The 20 basis point improvement in operating margin was
attributed to the net benefit of non-recurring items and increased environmental
segment margins.
INTEREST EXPENSE, NET:
2005 2004 % Change
---------- ---------- ----------
$ 0.8 $ 0.4 106%
Interest expense in the first half of 2005 increased primarily due to
higher average long-term debt compared with the prior year period. The increase
in long-term debt was attributed to an increase in working capital funding.
OTHER EXPENSE, NET:
2005 2004 % Change
---------- ---------- ----------
$ 1.0 $ 0.0 N/A
Results for the first half of 2005 were negatively impacted by
approximately $0.9 million due to the recognition of foreign exchange losses.
Our foreign subsidiaries recorded an increase in their U.S. dollar-based
intercompany debts with a corresponding charge to Other expense upon revaluation
of those debts.
INCOME TAXES:
2005 2004 % Change
---------- ---------- ----------
$ 4.5 $ 5.7 (22)%
Effective tax
rate 22.4% 31.5% N/A
The effective tax rate was favorably impacted by lower foreign tax
rates in comparison with the 2004 period. Additionally, the 2005 period was
positively impacted by a change in estimate of 2004 income taxes payable in our
U.S. and U.K. businesses of approximately $0.8 million. After factoring out
these adjustments, the effective tax rate would have been 26.6%, and management
believes this rate is indicative of the expected rate for the fiscal year ending
December 31, 2005.
INCOME FROM JOINT VENTURES
AND MINORITY INTERESTS:
2005 2004 % Change
---------- ---------- ----------
$ 1.0 $ 0.5 119%
The primary reason for the increase in income recorded in this category
was improved profitability of two investments in Indian entities: one comprised
of a 20% interest in a bentonite company and the other being a 50% interest in a
joint venture that manufactures and distributes treated clays used for
clarifying edible oils. We also recorded income from our 50% interest in a
Japanese bentonite company. In the third quarter of 2004, we increased our
interest from 19% in this venture and, therefore, began to account for it under
the equity method instead of recording income when dividends were received as
required under the cost method of accounting.
24
INCOME FROM
CONTINUING OPERATIONS
2005 2004 % Change
---------- ---------- ----------
$ 16.5 $ 12.8 28%
Margin 6.4% 5.7% N/A
Income from operations increased and net margin in the 2005 period
increased primarily due to the increase in operating profit, the lower effective
tax rate and the improvement in income from joint ventures and minority
interests. Additionally, the net impact of non-recurring items, described
previously, benefited the 2005 period.
DISCONTINUED OPERATIONS:
2005 2004 % Change
---------- ---------- ----------
$ 4.8 $ - N/A
In September 2004, we filed an amended income tax return in the State
of Mississippi requesting a refund of approximately $12.5 million of taxes paid
relating to the gain on the sale of the absorbent polymer segment. The sale of
the segment was originally reported as a discontinued operation in the second
quarter of 2000. With the assistance of a professional accounting firm, we
concluded that a gain on the sale of a business under these circumstances was
not taxable in Mississippi according to its laws. After negotiations and
hearings with officials, the Board of Review of the Mississippi State Tax
Commission accepted our settlement offer of $7.8 million in June 2005, and we
received payment of the refund in July 2005.
DILUTED EARNINGS PER SHARE:
2005 2004 % Change
---------- ---------- ----------
Income from
Continuing
operations $ 0.54 $ 0.42 29%
Discontinued
operations $ 0.15 $ 0.00 N/A
---------- ----------
Net income $ 0.69 $ 0.42 64%
Excluding the Montana refund and the excessive corporate segment
expenses, organic growth in sales and operating profit contributed approximately
$0.06 per share of the increase in income from continuing operations over the
prior-year period. A lower effective income tax rate accounted for $0.06 per
share of the increase over the prior-year period. Minority interests contributed
approximately $0.02 per share. Weighted average common and common equivalent
shares outstanding decreased by less than 1% over the 2004 quarter.
SEGMENT ANALYSIS:
Following is a review of operating results for each of our four
reporting segments:
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
MINERALS 2005 2004 2005 vs. 2004
- ------------------------------ --------------------------- --------------------------- ---------------------------
(Dollars in Thousands)
Net sales $ 148,325 100.0% $ 131,047 100.0% $ 17,278 13.2%
Cost of sales 118,068 79.6% 104,382 79.7%
------------ ------------ ------------ ------------
Gross profit 30,257 20.4% 26,665 20.3% 3,592 13.5%
General, selling and
administrative expenses 11,797 8.0% 10,977 8.4% 820 7.5%
------------ ------------ ------------ ------------ ------------
Operating profit 18,460 12.4% 15,688 11.9% 2,772 17.7%
25
Favorable foreign currency translation rates accounted for
approximately 5.7% of the sales growth over the 2004 period. Domestic
metalcasting sales were positively impacted by higher demand and price increases
that were implemented to offset rising transportation, raw materials and
energy-related costs. The metalcasting markets in the Asia/Pacific region also
continued to benefit from strong demand from automotive and transportation
equipment component manufacturers. Pet products sales increased in comparison
with the prior-year period largely due to price increases. Specialty minerals
revenues declined from the first half of 2004 primarily due to lower volume in
the detergent additives business.
Gross profit was positively impacted by the benefit received through a
law enacted in Montana as described earlier in the comparison of the second
quarter reporting periods. Eliminating this non-recurring benefit, gross profit
would have risen by approximately $1.7 million, or 6.5% over the prior-year
period, and gross margin would have been 19.1%. The relatively lower growth in
gross profit in comparison to sales in the period reflects higher cost increases
than the rise in selling prices. Gross margin, excluding the benefit, declined
by 120 basis points in comparison with the prior-year period due to the rising
costs of the metalcasting and pet products business mentioned above.
General, selling and administrative costs increased primarily due to
increased international sales and marketing efforts and higher product
development costs associated with the health and beauty business.
Operating profit improved largely due to the non-recurring benefit
recorded to cost of sales in the second quarter of 2005. Excluding this benefit,
operating profit would have grown by approximately $0.9 million, or 5.8%, and
operating margin would have been 11.2%. Operating margin, after excluding the
benefit, decreased by 70 basis points due to the decline in gross margin. The
domestic metalcasting and pet products businesses continue to see rising
manufacturing costs. Our ability to obtain price increases is necessary to
restore gross margin to historical levels.
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
ENVIRONMENTAL 2005 2004 2005 vs. 2004
- ------------------------------ --------------------------- --------------------------- ---------------------------
(Dollars in Thousands)
Net sales $ 96,138 100.0% $ 80,871 100.0% $ 15,267 18.9%
Cost of sales 63,029 65.6% 51,272 63.4%
------------ ------------ ------------ ------------
Gross profit 33,109 34.4% 29,599 36.6% 3,510 11.9%
General, selling and
administrative expenses 20,465 21.3% 20,344 25.2% 121 0.6%
------------ ------------ ------------ ------------ ------------
Operating profit 12,644 13.1% 9,255 11.4% 3,389 36.6%
Favorable currency exchange rates accounted for approximately 12% of
the increase in sales, or 2.3 percentage points of growth. Strong demand in the
domestic lining technologies, building materials and water treatment businesses
led to the increase in sales over the 2004 period. Growth in lining technologies
product demand in Europe and Asia also contributed to the increase. The water
treatment increase arose from higher demand for products and services from our
oilfield services businesses. Price increases had a minimal impact on revenue
growth in the quarter.
26
Gross profit grew in conjunction with the increase in net sales;
however, gross margin declined by 220 basis points from the 2004 period. Gross
margins on lining technologies sales declined due to the mix of product sales to
lower profit items. Also, higher transportation, raw materials and
energy-related costs negatively impacted manufacturing costs in comparison with
the prior-year period.
As described in the Notes to the Condensed Consolidated Financial
Statements, general, selling and administrative expenses benefited from a $0.6
million gain on the sale of the Villa Rica, GA facility in the current-year
period. After factoring out this benefit, operating expenses would have
increased by approximately 3.7%.
Operating profit improved due to the increase in sales and gross profit
and the flat general, selling and administrative expenses. Consequently,
operating margin improved by 170 basis points. The outlook for the segment
appears favorable based upon the backlog in the lining technologies and building
materials businesses. Water treatment prospects continue to appear positive due
to the demand for oilfield services and products with the increase in drilling
activity.
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
TRANSPORTATION 2005 2004 2005 vs. 2004
- ------------------------------ --------------------------- --------------------------- ---------------------------
(Dollars in Thousands)
Net sales $ 23,580 100.0% $ 19,390 100.0% $ 4,190 21.6%
Cost of sales 20,698 87.8% 17,241 88.9%
------------ ------------ ------------ ------------
Gross profit 2,882 12.2% 2,149 11.1% 733 34.1%
General, selling and
administrative expenses 1,589 6.7% 1,312 6.8% 277 21.1%
------------ ------------ ------------ ------------ ------------
Operating profit 1,293 5.5% 837 4.3% 456 54.5%
Net sales improved due to higher traffic levels and increased pricing.
Gross margin improved by 110 basis points over the 2004 period due to the
increase in sales. General, selling and administrative expenses increased due to
higher personnel costs.
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
CORPORATE 2005 2004 2005 VS. 2004
- ------------------------------ ------------ ------------ ---------------------------
(Dollars in Thousands)
Intersegment shipping sales $ (9,649) $ (7,384)
Intersegment shipping costs (9,649) (7,384)
------------ ------------
Gross profit - -
Corporate general, selling
and administrative expenses 9,033 5,578 3,455 61.9%
Nanocomposite business
development expenses 1,668 1,806 (138) -7.6%
------------ ------------ ------------
Operating loss (10,701) (7,384) (3,317) 44.9%
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.
27
Corporate general, selling and administrative expenses increased over
the 2004 period primarily due to professional service fees relating to the audit
of the consolidated financial statements and report on internal control over
financial reporting for the 2004 fiscal year. Those fees accounted for
approximately 46% of the increase. We expect these expenses to total
approximately $0.4 million per quarter for the remainder of the year. We also
incurred higher corporate development costs in the 2005 period, which accounted
for approximately 11% of the increase.
Net nanocomposite operating expenses declined in comparison with the
2004 period largely due to increased sales in the current year. We continue to
see active interest in our nanocomposite technologies through the market
development activities undertaken by our alliance partners and our direct sales
efforts.
LIQUIDITY AND CAPITAL RESOURCES (IN MILLIONS):
SIX MONTHS ENDED
JUNE 30,
---------------------------
CASH FLOWS 2005 2004
- ------------------------------------------------------------ ------------ ------------
Net cash provided by (used in) operating activities $ 7.0 $ 2.7
Net cash provided by discontinued operations $ - $ 8.6
Net cash provided by (used in) investing activities $ (13.3) $ (19.3)
Net cash provided by (used in) financing activities $ 5.9 $ 11.4
Cash flows provided by operating activities improved over the 2004
period as a result of higher net income and slower growth in working capital.
Historically, cash flows from operations have increased over the course of the
fiscal year and we anticipate this pattern to continue for the remainder of
2005.
Cash flows used in investing activities decreased primarily due to
acquisitions completed in the first quarter of 2004. We acquired the shares of
Lafayette Well Testing, Inc. on January 7, 2004, and Linteco Geotechnische
Systeme GmbH on March 5, 2004. The aggregate purchase price for the two
companies was approximately $13.2 million. Capital expenditures to-date in 2005
totaled $11.7 million compared with $7.5 million in the prior-year period. We
anticipate capital expenditures to increase over the remainder of 2005 due to
investments in capacity expansion and productivity projects. Our investments in
Europe and Asia will focus on adding new production capacity to support growth
in lining technologies and metalcasting businesses, respectively. Our estimate
of 2005 capital expenditures is in the range of $24 million to $26 million.
Cash flows provided by financing activities decreased due to debt
funding for acquisitions completed in the 2004 first quarter. We used our
revolving credit facility to finance the acquisitions. Additionally in 2004, we
assumed approximately $4.1 million of funded debt as part of the consideration
for the Linteco acquisition. Dividends paid to-date in 2005 increased to $5.3
million from $4.1 million in the prior-year period. We purchased 183,400 shares
of our common stock on the open market during the first half of 2004 for a total
value of $2.9 million, or an average price per share of $15.70; however, we have
not purchased any shares on the open market in the first half of 2005. We have
been authorized by our Board of Directors to purchase up to $10 million of our
common stock on the open market over a two-year period ending May 15, 2006, if
we believe such a use of our cash will enhance shareholder value. The entire $10
million remains available to repurchase common stock as of June 30, 2005.
28
AS AT
---------------------------
JUNE 30, DECEMBER 31,
FINANCIAL POSITION 2005 2004
- ------------------------------ ------------ ------------
Working capital $ 152.3 $ 129.4
Intangible assets $ 21.7 $ 23.0
Total assets $ 354.8 $ 336.4
Long-term debt $ 44.6 $ 34.3
Other long-term obligations $ 19.0 $ 18.5
Stockholder's equity $ 236.1 $ 221.9
Working capital at June 30, 2005 increased from December 31, 2004,
primarily due to growth in inventories and accounts receivable. The growth in
inventories was primarily due to higher stocks at our sites in China and Poland.
Inventory values at June 30, 2005 also reflect the higher cost of raw materials
and transportation costs. The current ratio was 3.8-to-1 and 3.1-to-1 at June
30, 2005, and December 31, 2004, respectively.
Intangible assets primarily represent goodwill associated with
acquisitions.
Long-term debt increased to 16% of total capitalization at June 30,
2005, compared with 13% at December 31, 2004. The increase in debt levels was
principally attributed to funding working capital. We have a $100 million
revolving credit facility with a consortium of U.S. banks that matures on
October 31, 2006. At June 30, 2005, we had approximately $60 million of
borrowing capacity remaining from the credit facility. The credit facility
stipulates that we must comply with a number of financial covenants. We are in
compliance with those covenants at June 30, 2005.
Other long-term obligations primarily represent liabilities associated
with our qualified and supplemental retirement plans and deferred income taxes.
We believe future cash flows from operations combined with borrowing
capacity from our revolving credit facility will be adequate to fund capital
expenditures and other investments approved by the board of directors.
Since the mid 1980's, the Company and/or its subsidiaries have been
named as one of a number of defendants in product liability lawsuits relating to
the minor free-silica content within the Company's bentonite products used in
the metalcasting industry. The plaintiffs in these lawsuits are primarily
employees of the Company's foundry customers. To date, the Company has not
incurred significant costs in defending these matters. The Company believes it
has adequate insurance coverage and does not believe the litigation will have a
material adverse impact on the financial condition, liquidity or results of the
operations of the Company.
29
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk during
the six months ended June 30, 2005. See disclosures as of December 31, 2004 in
the Company's Annual Report on Form 10-K, as amended, Item 7A.
ITEM 4: CONTROLS AND PROCEDURES
An evaluation has been performed under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934) as of June 30, 2005.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as a result of the material weakness in our
internal control over financial reporting discussed below and the fact that the
remedial efforts of the Company had not been completed as of June 30, 2005 as
discussed below, our disclosure controls and procedures were not effective as of
June 30, 2005 to ensure that information required to be disclosed in the reports
we file or submit under the Exchange Act are recorded, processed, summarized and
reported as and when required. Notwithstanding the foregoing, management
believes that the financial statements included within this report fairly
present in all material respects the financial position, results of operations,
and cash flows of the Company, 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 the Company's internal controls over financial reporting. As
described in the annual report on Form 10-K filed by the Company for the year
ended December 31, 2004, as amended, management identified a material weakness
in internal control over financial reporting relative to our accounting for
income taxes as of December 31, 2004. In particular, our design of internal
controls did not address the accounting considerations arising from the filing
of tax returns or the timing of recording of changes in accounting estimates
relating to income taxes of foreign subsidiaries. As a result of the foregoing,
commencing in the fiscal quarter ended March 31, 2005 and continuing through the
fiscal quarter ended June 30, 2005 we have been 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)
that materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
Specifically, these changes include restructuring the responsibility
for accounting for income taxes, formalizing management's oversight relating to
accounting for income taxes by developing procedures to monitor significant
income tax events and the determination of appropriate accounting treatment for
certain deduction and credit positions taken in filing income tax returns, both
amended and original, and developing a program to provide increased training to
improve our accounting for income taxes. Our Tax Manager is now fully
responsible for the financial accounting for income taxes. In addition, the
Controller and Chief Financial Officer receive quarterly updates on tax matters,
including changes in tax positions that may have a material effect on the
financial statements and matters affecting income tax returns. The Controller
and Chief Financial Officer review these matters and document conclusions as to
the accounting treatment. Additionally, we are enhancing controls over financial
reporting of our foreign subsidiaries to assure the consolidated financial
statements are presented in accordance with U.S. generally accepted accounting
principles and changes in accounting estimates are recorded in the appropriate
reporting period. Last, the Chief Financial Officer has the responsibility to
conduct an annual assessment of the accounting staff's knowledge of U.S.
generally accepted accounting principles and provide additional training where
necessary.
30
Remedial efforts were initiated in the first quarter of 2005 and
continued in the second quarter of 2005. The changes in our internal control
over financial reporting require testing over successive quarters to prove their
operating effectiveness, and, therefore, the effectiveness of the remediation.
Thus, the implementation of enhanced control over financial reporting of our
foreign subsidiaries to assure the consolidated financial statements are
presented in accordance with U.S. generally accepted accounting principles and
changes in accounting estimates are recorded in the appropriate reporting period
had not been completed as of June 30, 2005. Accordingly, management has
determined that the material weakness in the Company's internal control over
financial reporting relative to our accounting for income taxes as described in
the annual report on Form 10-K filed by the Company for the year ended December
31, 2004, as amended, still existed as of June 30, 2005.
PART II - OTHER INFORMATION
ITEM 2(c) COMPANY REPURCHASES OF COMPANY STOCK
TOTAL NUMBER OF MAXIMUM VALUE OF
SHARES REPURCHASED AVERAGE SHARES THAT MAY YET BE
AS PART OF THE STOCK PRICE PAID REPURCHASED UNDER THE
REPURCHASE PROGRAM PER SHARE PROGRAM
-------------------- ---------- ----------------------
January 1, 2005 - January 31, 2005 - $ - $ 10,000,000
February 1, 2005 - February 29, 2005 - $ - $ 10,000,000
March 1, 2005 - March 31, 2005 - $ - $ 10,000,000
April 1, 2005 - April 30, 2005 - $ - $ 10,000,000
May 1, 2005 - May 31, 2005 - $ - $ 10,000,000
June 1, 2005 - June 30, 2005 - $ - $ 10,000,000
--------------------
Total - $ -
====================
On May 13, 2004, the Board of Directors authorized a program to
repurchase up to $10 million of the Company's outstanding stock which will
expire September 30, 2006.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
See Index to Exhibits immediately following the signature page.
31
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: August 1, 2005 /s/ Lawrence E. Washow
----------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
Date: August 1, 2005 /s/ Gary L. Castagna
----------------------------------------
Gary L. Castagna
Senior Vice President and
Chief Financial Officer and
Principal Accounting Officer
32
INDEX TO 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
33