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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 of (IRS Employer Identification No.)
incorporation or organization)
1500 West Shure Drive, Suite 500, Arlington Heights, Illinois 60004-7803
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(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 by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 14, 2005
------------------------------ -------------------------------
(Common stock, $.01 par value) 29,768,362 Shares
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AMCOL INTERNATIONAL CORPORATION
INDEX
Page No.
--------
Part I - Financial Information
- ------------------------------
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Operations -
three and nine months ended September 30, 2005 and 2004 5
Condensed Consolidated Statements of Comprehensive Income -
three and nine months ended September 30, 2005 and 2004 6
Condensed Consolidated Statements of Cash Flows -
nine months ended September 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 29
Item 4 Controls and Procedures 29
Part II - Other Information
- ---------------------------
Item 2(c) 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)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2005 2004
- ----------------------------------------------------------------- ------------- -------------
(unaudited) *
Current assets:
Cash $ 15,143 $ 17,594
Accounts receivable, net 111,372 88,342
Inventories 73,157 63,882
Prepaid expenses 7,045 7,111
Income taxes receivable 1,983 9,126
Current deferred tax assets 3,768 4,293
Assets held for sale 381 752
------------- -------------
Total current assets 212,849 191,100
------------- -------------
Investment in and advances to joint ventures 19,301 15,023
------------- -------------
Property, plant, equipment, and mineral rights and reserves:
Land and mineral rights 12,248 12,019
Depreciable assets 249,089 247,280
------------- -------------
261,337 259,299
Less: accumulated depreciation 164,660 165,658
------------- -------------
96,677 93,641
------------- -------------
Other assets:
Goodwill 19,446 19,225
Intangible assets, net 2,975 3,802
Deferred tax assets 4,942 6,444
Other assets 9,177 7,207
------------- -------------
36,540 36,678
------------- -------------
$ 365,367 $ 336,442
============= =============
Continued...
3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
- ----------------------------------------------------------------- ------------- -------------
(unaudited) *
Current liabilities:
Accounts payable 26,225 25,474
Accrued liabilities 34,789 36,207
------------- -------------
Total current liabilities 61,014 61,681
------------- -------------
Long-term debt 41,015 34,295
------------- -------------
Minority interests in subsidiaries 135 5
Deferred compensation 6,710 5,872
Other liabilities 13,006 12,655
------------- -------------
19,851 18,532
------------- -------------
Stockholders' equity:
Common stock 320 320
Additional paid in capital 71,590 69,763
Retained earnings 178,725 154,366
Accumulated other comprehensive income 9,517 14,905
------------- -------------
260,152 239,354
Less:
Treasury stock 16,665 17,420
------------- -------------
243,487 221,934
------------- -------------
$ 365,367 $ 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)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
CONTINUING OPERATIONS
Net sales $ 401,322 $ 348,570 $ 142,928 $ 124,646
Cost of sales 296,977 257,155 104,831 91,644
------------ ------------ ------------ ------------
Gross profit 104,345 91,415 38,097 33,002
General, selling and administrative expenses 66,690 62,713 22,138 22,696
------------ ------------ ------------ ------------
Operating profit 37,655 28,702 15,959 10,306
------------ ------------ ------------ ------------
Other income (expense):
Interest expense, net (1,195) (587) (390) (197)
Other, net (831) (155) 160 (182)
------------ ------------ ------------ ------------
(2,026) (742) (230) (379)
------------ ------------ ------------ ------------
Income before income taxes and equity
in income of joint ventures 35,629 27,960 15,729 9,927
Income tax expense (benefit) 9,659 3,473 5,202 (2,206)
------------ ------------ ------------ ------------
Income before equity in income of
joint ventures 25,970 24,487 10,527 12,133
Income from joint ventures 1,942 805 915 336
------------ ------------ ------------ ------------
Income from continuing operations 27,912 25,292 11,442 12,469
DISCONTINUED OPERATIONS
Gain on 2000 disposal (including income tax benefits of $5,255 in
2005) 4,755 - - -
------------ ------------ ------------ ------------
Income from discontinued operations 4,755 - - -
------------ ------------ ------------ ------------
Net income $ 32,667 $ 25,292 $ 11,442 $ 12,469
============ ============ ============ ============
Weighted average common shares outstanding 29,488,746 29,110,751 29,648,783 29,148,594
============ ============ ============ ============
Weighted average common and common equivalent shares outstanding 30,798,488 30,774,503 30,831,929 30,778,272
============ ============ ============ ============
Basic earnings per share:
Continuing operations $ 0.95 $ 0.87 $ 0.39 $ 0.43
------------ ------------ ------------ ------------
Discontinued operations:
Gain on disposal 0.16 - - -
------------ ------------ ------------ ------------
0.16 - - -
------------ ------------ ------------ ------------
Net income $ 1.11 $ 0.87 $ 0.39 $ 0.43
============ ============ ============ ============
Diluted earnings per share:
Continuing operations $ 0.91 $ 0.82 $ 0.37 $ 0.41
------------ ------------ ------------ ------------
Discontinued operations:
Gain on disposal 0.15 - - -
------------ ------------ ------------ ------------
0.15 - - -
------------ ------------ ------------ ------------
Net income $ 1.06 $ 0.82 $ 0.37 $ 0.41
============ ============ ============ ============
Dividends declared per share $ 0.28 $ 0.23 $ 0.10 $ 0.09
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income $ 32,667 $ 25,292 $ 11,442 $ 12,469
Income (loss) recognized relating to:
Minimum pension liability 169 (410) - -
Foreign currency translation (5,557) 832 (237) 1,035
------------ ------------ ------------ ------------
Total other comprehensive income $ 27,279 $ 25,714 $ 11,205 $ 13,504
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2005 2004
---------- ----------
Cash flow from operating activities:
Income from continuing operations $ 27,912 $ 25,292
Adjustments to reconcile income from continuing operations to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 14,629 15,049
Changes in assets and liabilities, net of effects of acquisitions:
Increase in current assets (25,223) (37,050)
Increase in noncurrent assets (688) (2,085)
Increase (decrease) in current liabilities 210 9,344
Increase (decrease) in noncurrent liabilities 1,358 1,737
Other (751) 914
---------- ----------
Net cash provided by (used in) operating activities 17,447 13,201
---------- ----------
Net cash provided by discontinued operations 7,300 8,625
---------- ----------
Cash flow from investing activities:
Acquisition of land, mineral rights, and depreciable assets (19,988) (12,077)
Acquisitions, net of cash (1,997) (13,335)
Other 582 316
---------- ----------
Net cash provided by (used in) investing activities (21,403) (25,096)
---------- ----------
Cash flow from financing activities:
Net change in outstanding debt 6,151 16,024
Proceeds from sales of treasury stock 1,247 1,222
Purchases of treasury stock (1,946) (2,879)
Dividends paid (8,308) (6,731)
---------- ----------
Net cash provided by (used in) financing activities (2,856) 7,636
---------- ----------
Effect of foreign currency rate changes on cash (2,939) 5
---------- ----------
Net increase (decrease) in cash and cash equivalents (2,451) 4,371
---------- ----------
Cash and cash equivalents at beginning of period 17,594 13,525
---------- ----------
Cash and cash equivalents at end of period $ 15,143 $ 17,896
========== ==========
Supplemental disclosures of cash flow information:
Cash paid (received) for:
Interest, net $ 1,209 $ 355
========== ==========
Income taxes, net $ (3,831) $ (2,593)
========== ==========
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 September 30,
2005 and 2004, the composition of the Company's revenues by segment is as
follows:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Revenue generating segment:
Minerals 55% 57% 52% 54%
Environmental 39% 38% 43% 41%
Transportation 9% 9% 9% 9%
Corporate - elimination of intersegment revenues -3% -4% -4% -4%
-------- -------- -------- --------
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 September 30, 2005 and 2004, and the financial position of the Company as
of September 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 these notes 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
9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
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.
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, and such adoption is not anticipated to have a
material effect on the Company's financial statements.
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; adoption of this EITF 05-6 in the third quarter of 2005 did not
have a material impact on the Company's consolidated financial statements.
NOTE 2: INVENTORIES
Inventories at September 30, 2005 have been valued using the same
methods as at December 31, 2004. The composition of inventories at September 30,
2005 and December 31, 2004 was as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- -------------
Advance mining $ 3,516 $ 2,277
Crude stockpile inventories 23,438 25,159
In-process inventories 23,720 18,123
Other raw material, container, and supplies inventories 22,483 18,323
------------- -------------
$ 73,157 $ 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 current quarterly and year-to-date activity
within the Company's reclamation obligation for the period ended September 30,
2005 is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2005
------------------ --------------------
Balance at beginning of period $ 4,850 $ 4,835
Settlement of obligations (917) (132)
Liabilities incurred and accretion expense 926 156
------------------ --------------------
Balance at end of period $ 4,859 $ 4,859
================== ====================
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.
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted average of common shares outstanding 29,488,746 29,110,751 29,648,783 29,148,594
Dilutive impact of stock options 1,309,742 1,663,752 1,183,146 1,629,678
------------ ------------ ------------ ------------
Weighted average of common and common equivalent
shares for the period 30,798,488 30,774,503 30,831,929 30,778,272
============ ============ ============ ============
Common shares outstanding 29,746,037 29,203,355 29,746,037 29,203,355
============ ============ ============ ============
Weighted average anti-dilutive shares excluded from the
computation of diluted earnings per share 235,120 - 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 next 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 nine and three months ended September 30, 2005 and 2004
and as of September 30, 2005 and December 31, 2004.
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Business Segment:
Revenues:
Minerals $ 222,643 $ 198,501 $ 74,318 $ 67,454
Environmental 157,215 131,410 61,077 50,539
Transportation 36,804 30,369 13,224 10,979
Intersegment shipping (15,340) (11,710) (5,691) (4,326)
------------ ------------ ------------ ------------
Total $ 401,322 $ 348,570 $ 142,928 $ 124,646
============ ============ ============ ============
Operating profit (loss):
Minerals $ 28,259 $ 23,860 $ 9,799 $ 8,172
Environmental 22,762 16,022 10,118 6,767
Transportation 2,044 1,360 751 523
Corporate (15,410) (12,540) (4,709) (5,156)
------------ ------------ ------------ ------------
Total $ 37,655 $ 28,702 $ 15,959 $ 10,306
============ ============ ============ ============
SEPT. 30, DEC. 31,
2005 2004
------------ ------------
Assets:
Minerals $ 186,033 $ 172,972
Environmental 149,000 128,154
Transportation 1,592 3,122
Corporate 28,742 32,194
------------ ------------
Total $ 365,367 $ 336,442
============ ============
Goodwill:
Minerals $ 5,583 $ 5,773
Environmental 13,863 13,452
------------ ------------
Total $ 19,446 $ 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:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income, as reported $ 32,667 $ 25,292 $ 11,442 $ 12,469
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 1,102 936 367 299
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (1,209) (1,161) (403) (374)
------------ ------------ ------------ ------------
Pro forma net income $ 32,560 $ 25,067 $ 11,406 $ 12,394
============ ============ ============ ============
Earnings per share:
Basic - as reported $ 1.11 $ 0.87 $ 0.39 $ 0.43
Basic - pro forma $ 1.10 $ 0.86 $ 0.38 $ 0.43
Diluted - as reported $ 1.06 $ 0.82 $ 0.37 $ 0.41
Diluted - pro forma $ 1.06 $ 0.81 $ 0.37 $ 0.40
NOTE 7: COMPONENTS OF PENSION AND OTHER RETIREMENT BENEFIT COST
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Service cost $ 1,387 $ 1,086 $ 462 $ 362
Interest cost 1,480 1,371 493 457
Expected return on plan assets (1,704) (1,452) (568) (484)
Amortization of transition (asset) / obligation (65) (102) (22) (34)
Amortization of prior service cost 23 21 8 7
Amortization of net (gain) loss - - - -
------------ ------------ ------------ ------------
Net periodic benefit cost $ 1,121 $ 924 $ 373 $ 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 the 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 $30,700. 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 nine month period ending September 30, 2005, the Company
increased its provision for taxes owed by $727 largely due to the net effect of
changes in estimates related to domestic and UK tax returns and the
establishment of valuation allowances against certain deferred tax assets.
NOTE 9: ACQUISITIONS
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.
In August 2005, the Company acquired all of the membership interests of
an individually insignificant acquisition within the Environmental segment. Net
cash paid and notes payable assumed were $934, and goodwill was $591. This
acquisition did not materially affect the Company's operating results or
financial position in the periods presented. The allocation of this purchase
price has not been finalized as management is determining the fair values of the
assets and liabilities assumed. The acquisition does contain contingent
consideration based on future performance of the acquired entity which, if the
consideration is recognized, may result in additional goodwill or compensation
expense.
15
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
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 were reflected in the Company's
financial statements prior to the quarter ended March 31, 2005. In June 2005,
the Company successfully settled its claim with the state for $7,800 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.
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 nine months ended September 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 nine
month periods ended September 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 SEPTEMBER 30, 2005 VS. SEPTEMBER 30, 2004:
RESULTS OF OPERATIONS (in millions):
NET SALES:
2005 2004 % Change
---------- ---------- ----------
$ 142.9 $ 124.6 15%
Net sales from base businesses (those operations owned for greater than
one year) accounted for approximately 93% of the growth, or 13.7 percentage
points, over the prior year period, while favorable foreign currency and
acquisitions accounted for the remainder of the increase. On an operating
segment basis, minerals accounted for approximately 38% of the increase in net
sales while environmental contributed approximately 58% of the growth. Including
the elimination of intersegment shipping revenues, our transportation segment
accounted for approximately 4% of the sales growth over the third quarter of
2004.
GROSS PROFIT:
2005 2004 % Change
---------- ---------- ----------
$ 38.1 $ 33.0 15%
Margin 26.7% 26.5% N/A
Gross profit improved in the third quarter of 2005 in conjunction with
the increase in net sales. Gross margin increased by 20 basis points due to
improved profitability from the environmental segment.
GENERAL, SELLING & ADMINISTRATION EXPENSES:
2005 2004 % Change
---------- ---------- ----------
$ 22.1 $ 22.7 (2)%
In the 2004 quarter, we recorded approximately $1.2 million of tax
consulting fees in connection with the filing of amended federal income tax
returns which are claiming refunds for increased deductions and credits for the
1999 through 2002 tax years. Further background on this matter is described in
Note 2 to the Consolidated Financial Statements of the Company's 2004 Form 10-K,
as amended.
After excluding the effect of the tax consulting fees, G,S & A would
have increased by approximately $0.6 million, or 3%. The primary expense
accounting for the increase was Sarbanes-Oxley compliance-related costs and
audit fees. Research and development expenses were approximately $1.5 million in
the third quarter of 2005 compared with $1.4 million in last year's period.
OPERATING PROFIT:
2005 2004 % Change
---------- ---------- ----------
$ 16.0 $ 10.3 55%
Margin 11.2% 8.3% N/A
Operating profit growth was generated largely from improved
profitability in our environmental segment. Prior-period operating profit was
depressed by the charge for tax consulting fees described above. Excluding the
effect of those fees, operating profit would have been $11.5 million for the
2004 reporting period and operating profit growth would have been 39%. Foreign
exchange and acquisitions had an immaterial impact on operating profit growth.
After eliminating the tax consulting fees in 2004, operating margin in the 2004
period would have been 9.2%.
18
INTEREST EXPENSE, NET:
2005 2004 % Change
---------- ---------- ----------
$ 0.4 $ 0.2 98%
Interest expense in the third quarter increased due to higher average
long-term debt compared with the prior year period. The increase in long-term
debt was attributed to higher working capital funding in the third quarter of
this year.
OTHER INCOME (expense), NET
2005 2004 % Change
---------- ---------- ----------
$ 0.2 $ (0.2) N/A
The current quarter was favorably impacted by approximately $0.2 million
due to the recognition of foreign exchange gains. Our foreign subsidiaries
recorded a reduction in their U.S. dollar-based intercompany debts with a
corresponding benefit to Other income upon revaluation of those debts.
INCOME TAX EXPENSE (benefit):
2005 2004 % Change
---------- ---------- ----------
$ 5.2 $ (2.2) N/A
Effective tax rate 33.1% N/A N/A
As described in Note 2 to Consolidated Financial Statements of the
Company's 2004 Form 10-K, as amended, we reported an income tax benefit in the
2004 period due to the filing of amended federal income tax returns and
recording adjustments to deferred income tax assets and income taxes payable at
a U.K. subsidiary. After factoring out the $5.5 million benefit recorded to
income tax expense associated with these events, our effective income tax rate
would have been 30%.
In the third quarter of 2005, the Company increased its provision for
taxes owed by $1.6 million largely due to the net effect of changes in estimates
related to the 2004 domestic and UK tax returns and the establishment of
valuation allowances against certain deferred tax assets. After excluding the
effect of these items, the effective rate would have been approximately 23.1%.
Businesses with lower statutory income tax rates represented a greater
proportion of pre-tax earnings in the current year period compared with the
third quarter of 2004. Additionally, the tax rate in the current year period
benefited from a higher estimated depletion deduction.
INCOME FROM JOINT VENTURES AND MINORITY INTERESTS:
2005 2004 % Change
---------- ---------- ----------
$ 0.9 $ 0.3 172%
The increase in the current year period was largely due to higher profit
earned by investments we own in businesses based in India. One business has
substantial bauxite and bentonite operations. Bauxite is used to produce
alumina, which is then used to produce aluminum. The bauxite business had a
particularly strong quarter of earnings in the current year period.
Additionally, the current year period included income earned by a Japanese joint
venture in which we increased our ownership in August 2004 to 50% from 19%. The
current year period reflects accounting for the income from that venture under
the equity method.
19
INCOME FROM CONTINUING OPERATIONS
2005 2004 % Change
---------- ---------- ----------
$ 11.4 $ 12.5 (8)%
Margin 8.0% 10.0% N/A
The tax benefit adjustments described earlier, less the net effect of
the tax consulting fees associated with the filing of amended income tax
returns, accounted for $4.3 million of income from continuing operations in the
2004 period. Thus, income from continuing operations would have increased by
approximately 39% over the 2004 period. Net margin would have been 6.6% for the
2004 period after factoring out the tax benefit adjustments. The resulting
improvement in income from continuing operations and the margin was commensurate
with operating profit growth.
DILUTED EARNINGS PER SHARE:
2005 2004 % Change
---------- ---------- ----------
$ 0.37 $ 0.41 (10)%
The net effect of the tax benefit adjustments and tax consulting fees
accounted for $0.13 per diluted share in the 2004 period. Diluted earnings per
share increased by approximately 32%, after factoring out the income tax related
benefit in 2004 period. Base business operating profit growth accounted for the
increase in earnings. Weighted average common and common equivalent shares
outstanding increased 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 SEPTEMBER 30,
------------------------------------------------------------------------------
MINERALS 2005 2004 2005 VS. 2004
- ------------------------------ ----------------------- ----------------------- ------------------------
(Dollars in Thousands)
Net sales $ 74,318 100.0% $ 67,454 100.0% $ 6,864 10.2%
Cost of sales 59,275 79.8% 53,207 78.9%
---------- ---------- ---------- ----------
Gross profit 15,043 20.2% 14,247 21.1% 796 5.6%
General, selling and
administrative expenses 5,244 7.1% 6,075 9.0% (831) -13.7%
---------- ---------- ---------- ---------- ----------
Operating profit 9,799 13.1% 8,172 12.1% 1,627 19.9%
Base businesses accounted for all of the growth over the prior-year
period. Net sales for the quarter improved primarily from growth in metalcasting
and pet products business revenues. A majority of metalcasting revenue growth
was due to higher prices passed on to domestic customers to cover rising energy
related and raw material costs. Metalcasting revenue was also positively
impacted by strong volume growth in the Asia/Pacific markets. Pet products
revenue growth was split between higher prices and volume growth. Specialty
minerals revenue declined over the prior year period due to lower detergent
additives volume in Europe.
20
Gross profit improved in conjunction with sales, however, the margin
declined by 90 basis points. Rising energy related and raw material costs
impacted margins in domestic businesses. Margins improved in Asia/Pacific
metalcasting business commensurate with volume growth and lower transportation
related costs in China as compared with the 2004 period.
G, S & A expenses declined mainly due to approximately $0.9 million
recorded in the 2004 period related to bad debt reserves for certain domestic
metalcasting accounts receivable. Additionally, the current period benefited
from approximately $0.3 million of gains on disposal of certain assets.
Operating profit and margin improved commensurate with the gross profit
growth and lower G, S&A spending.
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
ENVIRONMENTAL 2005 2004 2005 VS. 2004
- ------------------------ ------------------------ ------------------------ -----------------------
(Dollars in Thousands)
Net sales $ 61,077 100.0% $ 50,539 100.0% $ 10,538 20.9%
Cost of sales 39,604 64.8% 32,998 65.3%
---------- ---------- ---------- ----------
Gross profit 21,473 35.2% 17,541 34.7% 3,932 22.4%
General, selling and
administrative expenses 11,355 18.6% 10,774 21.3% 581 5.4%
---------- ---------- ---------- ---------- ----------
Operating profit 10,118 16.6% 6,767 13.4% 3,351 49.5%
Base businesses accounted for approximately 89% of the growth over the
prior-year period, while favorable foreign currency and acquisitions represented
the remainder. All three businesses (Lining Technologies, Building Materials and
Water Treatment) reported volume growth over the prior-year period. Water
treatment revenues contributed the largest growth as the oilfield service
business was particularly strong in the U.S. The business also started an
operation in Nigeria that contributed to growth. Lining technologies growth was
primarily generated in the U.S. Building materials revenues grew fastest in
Europe over the prior-year period. Asia/Pacific revenues for the building
materials business also contributed to the growth.
Gross profit improved in conjunction with sales. Gross margin was
favorably impacted by the strong growth in the water treatment business. Also
contributing to the margin improvement were higher volumes in China.
G, S & A grew modestly over the 2004 period as employee headcount levels
were fairly static.
Operating profit and margin improved with the gross profit increase and
modest G, S, & A spending growth.
21
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
TRANSPORTATION 2005 2004 2005 VS. 2004
- ------------------------ ------------------------ ------------------------ -----------------------
(Dollars in Thousands)
Net sales $ 13,224 100.0% $ 10,979 100.0% $ 2,245 20.4%
Cost of sales 11,643 88.0% 9,765 88.9%
---------- ---------- ---------- ----------
Gross profit 1,581 12.0% 1,214 11.1% 367 30.2%
General, selling and
administrative expenses 830 6.3% 691 6.3% 139 20.1%
---------- ---------- ---------- ---------- ----------
Operating profit 751 5.7% 523 4.8% 228 43.6%
Higher traffic and pricing led to the increase in revenues over the
prior-year period. Gross profit and margins were positively impacted by the
improvement in revenues. G, S & A spending rose modestly due to higher
compensation costs.
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
CORPORATE 2005 2004 2005 VS. 2004
- ----------------------------- ---------- ---------- ------------------------
(Dollars in Thousands)
Intersegment shipping sales $ (5,691) $ (4,326)
Intersegment shipping costs (5,691) (4,326)
---------- ----------
Gross profit - -
Corporate general, selling
and administrative expenses 3,786 4,240 (454) -10.7%
Nanocomposite business
development expenses 923 916 7 0.8%
---------- ---------- ----------
Operating loss (4,709) (5,156) 447 -8.7%
The decline in G, S & A spending was attributed to the $1.2 million
accrual in the 2004 period related to professional fees associated with the
filing of amended income tax returns. After factoring out those fees, G, S & A
would have increased over the prior-year quarter by approximately $0.7 million.
Higher consulting and professional fees related to Sarbanes-Oxley compliance and
audit fees accounted for the increase.
NINE MONTHS ENDED SEPTEMBER 30, 2005 VS. SEPTEMBER 30, 2004:
RESULTS OF OPERATIONS (in millions):
NET SALES:
2005 2004 % Change
---------- ---------- ----------
$ 401.3 $ 348.6 15%
Net sales from base businesses (those operations owned for greater than
one year) accounted for approximately 92% of the growth, or 14.0 percentage
points, over the prior year period, while favorable foreign currency and
acquisitions accounted for the remainder of the increase. On an operating
segment basis, minerals accounted for approximately 46% of the increase in net
sales while environmental contributed approximately 49% of the growth. Including
the elimination of intersegment shipping revenues, our transportation segment
accounted for approximately 5% of the sales growth over the 2004 period.
22
GROSS PROFIT:
2005 2004 % Change
---------- ---------- ----------
$ 104.3 $ 91.4 14%
Margin 26.0% 26.2% N/A
Gross profit improved over the 2004 nine-month period in conjunction
with the increase in net sales. In the second quarter of 2005, our minerals
segment recognized a $1.9 million non-recurring benefit to cost of sales for
abatement of mining-related taxes owed to the State of Montana. Gross margin
declined due to higher energy-related and raw material costs in the minerals
segment and higher relative sales of less profitable products in the
environmental segment.
GENERAL, SELLING & ADMINISTRATION EXPENSES:
2005 2004 % Change
---------- ---------- ----------
$ 66.7 $ 62.7 6%
In the 2004 period, we recorded approximately $1.2 million of tax
consulting fees in connection with the filing of amended federal income tax
returns which are claiming refunds for increased deductions and credits for the
1999 through 2002 tax years. Further background on this matter is described in
Note 2 to Consolidated Financial Statements of our 2004 Form 10-K, as amended.
After excluding the effect of the tax consulting fees, G, S & A would
have increased by approximately 8%. The primary expense accounting for the
increase was Sarbanes-Oxley compliance-related costs and audit fees. Research
and development expenses were approximately $4.8 million in the 2005 period
compared with $4.2 million in last year's period.
OPERATING PROFIT:
2005 2004 % Change
---------- ---------- ----------
$ 37.7 $ 28.7 31%
Margin 9.4% 8.2% N/A
Operating profit improved with the increase in gross profit and net
sales. Operating profit growth was also positively impacted by the non-recurring
items impacting cost of sales and G, S & A mentioned above. After factoring out
those two items, operating profit growth would have been approximately 20% over
the 2004 period.
INTEREST EXPENSE, NET:
2005 2004 % Change
---------- ---------- ----------
$ 1.2 $ 0.6 104%
Interest expense in the current year period increased due to higher
average long-term debt compared with the prior year period. The increase in
long-term debt was attributed to working capital funding over the course of the
year.
23
OTHER INCOME (expense), NET:
2005 2004 % Change
---------- ---------- ----------
$ (0.8) $ (0.2) 400%
Results for the first half of 2005 were negatively impacted by
approximately $0.8 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
---------- ---------- ----------
$ 9.7 $ 3.5 178%
Effective tax rate 27.1% 12.4% N/A
As described in Note 2 to the Consolidated Financial Statements on our
2004 Form 10-K, as amended, we reported an income tax benefit in the 2004 period
due to the filing of amended federal income tax returns and recording
adjustments to deferred income tax assets and income taxes payable at a U.K.
subsidiary. After factoring out the $5.5 million benefit recorded to income tax
expense associated with these events, our effective income tax rate would have
been 31%.
In the nine month period ending September 30, 2005, the Company
increased its provision for taxes owed by $727 largely due to the net effect of
changes in estimates related to the 2004 domestic and UK tax returns and the
establishment of valuation allowances against certain deferred tax assets.
Businesses with lower statutory income tax rates represented a greater
proportion of pre-tax earnings in the current year period compared with the 2004
nine-month period. Additionally, the tax rate in the current year period
benefited from a higher estimated depletion deduction.
INCOME FROM JOINT VENTURES AND MINORITY INTERESTS:
2005 2004 % Change
---------- ---------- ----------
$ 1.9 $ 0.8 141%
The increase in the current year period was largely due to higher profit
earned by investments we own in businesses based in India. One business has
substantial bauxite and bentonite operations. Bauxite is used to produce
alumina, which is then used to produce aluminum. The bauxite business had
particularly strong earnings in the current year period. Additionally, the
current year period included income earned by a Japanese joint venture in which
we increased our ownership in August 2004 to 50% from 19%. The current year
period reflects accounting for the income from that venture under the equity
method.
INCOME FROM CONTINUING OPERATIONS
2005 2004 % Change
---------- ---------- ----------
$ 27.9 $ 25.3 10%
Margin 7.0% 7.3% N/A
The tax benefit adjustments described above, less the net effect of the
tax consulting fees associated with the filing of amended income tax returns,
accounted for $4.3 million of income from continuing operations in the 2004
period. Excluding this amount, income from continuing operations would have
increased by approximately 33% over the 2004 period, and net margin would have
been 6.0% for the 2004 period. The resulting improvement in income from
continuing operations and the margin was commensurate with operating profit
growth.
24
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 $ 0.91 $ 0.82 11%
Discontinued operations 0.15 0.00 N/A
Net income $ 1.06 $ 0.82 29%
After factoring out the income tax benefit recorded in the third-quarter
of 2004, earnings would have been $0.68 per diluted share for that nine-month
period. Growth in base-business operating profit was the primary contributor to
the increase over 2004. Weighted average common and common equivalent shares
outstanding changed by less than 1% over the 2004 period.
SEGMENT ANALYSIS:
----------------
Following is a review of operating results for each of our four
reporting segments:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
MINERALS 2005 2004 2005 VS. 2004
- ------------------------ ------------------------ ------------------------ -----------------------
(Dollars in Thousands)
Net sales $ 222,643 100.0% $ 198,501 100.0% $ 24,142 12.2%
Cost of sales 177,343 79.7% 157,589 79.4%
---------- ---------- ---------- ----------
Gross profit 45,300 20.3% 40,912 20.6% 4,388 10.7%
General, selling and
administrative expenses 17,041 7.7% 17,052 8.6% (11) -0.1%
---------- ---------- ---------- ---------- ----------
Operating profit 28,259 12.6% 23,860 12.0% 4,399 18.4%
Base businesses accounted for all of the growth over the prior-year
period. Net sales for the quarter improved primarily from growth in metalcasting
and pet products business revenues. A majority of metalcasting revenue growth
was due to higher prices passed on to domestic customers to cover rising
energy-related and raw material costs. Metalcasting revenue was also positively
impacted by strong volume growth in the Asia/Pacific markets. Pet products
revenue growth was split between higher prices and volume growth. Specialty
minerals revenue declined over the prior-year period due to lower detergent
additives volume in Europe.
25
Gross profit improved in conjunction with sales, however, the margin
declined by 30 basis points. In the second quarter of 2005, we recorded a $1.9
million benefit to cost of sales related to a mining related tax abatement in
the State of Montana. After factoring out that benefit, gross profit would have
grown by approximately 6% over 2004. Rising energy related and raw material
costs impacted margins in domestic businesses. Margins improved in Asia/Pacific
metalcasting business commensurate with volume growth and lower transportation
related costs in China as compared with the 2004 period.
G, S & A expenses declined mainly due to approximately $0.9 million
recorded in the 2004 period related to bad debt reserves for certain domestic
metalcasting accounts receivable. Additionally, the current period benefited
from approximately $0.6 million of gains on disposal of certain assets.
Operating profit and margin improved commensurate with the gross profit
growth and lower G, S&A spending.
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
ENVIRONMENTAL 2005 2004 2005 VS. 2004
- ------------------------ ------------------------ ------------------------ -----------------------
(Dollars in Thousands)
Net sales $ 157,215 100.0% $ 131,410 100.0% $ 25,805 19.6%
Cost of sales 102,633 65.3% 84,270 64.1%
---------- ---------- ---------- ----------
Gross profit 54,582 34.7% 47,140 35.9% 7,442 15.8%
General, selling and
administrative expenses 31,820 20.2% 31,118 23.7% 702 2.3%
---------- ---------- ---------- ---------- ----------
Operating profit 22,762 14.5% 16,022 12.2% 6,740 42.1%
Base businesses accounted for approximately 89% of the growth over the
prior-year period, while favorable foreign currency and acquisitions represented
the remainder. All three businesses (Lining Technologies, Building Materials and
Water Treatment) reported volume growth over the prior-year period. Water
treatment revenues contributed the largest growth as the oilfield service
business was particularly strong in the U.S. Lining technologies growth was
primarily generated in the U.S. Building materials revenues grew fastest in
Europe over the prior-year period. Asia/Pacific revenues for the building
materials business also contributed to the growth.
Gross profit improved in conjunction with sales. Gross margin was
favorably impacted by the strong growth in the water treatment business. Also,
contributing to the margin improvement were higher volumes in China.
G, S & A grew modestly over the 2004 period as employee headcount levels
were fairly static.
Operating profit and margin improved with the gross profit increase and
modest G, S, & A spending growth.
26
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
TRANSPORTATION 2005 2004 2005 VS. 2004
- ------------------------ ------------------------ ------------------------ -----------------------
(Dollars in Thousands)
Net sales $ 36,804 100.0% $ 30,369 100.0% $ 6,435 21.2%
Cost of sales 32,341 87.9% 27,006 88.9%
---------- ---------- ---------- ----------
Gross profit 4,463 12.1% 3,363 11.1% 1,100 32.7%
General, selling and
administrative expenses 2,419 6.6% 2,003 6.6% 416 20.8%
---------- ---------- ---------- ---------- ----------
Operating profit 2,044 5.5% 1,360 4.5% 684 50.3%
Higher traffic and pricing lead to the increase in revenues over the
prior-year period. Gross profit and margins were positively impacted by the
improvement in revenues. G, S & A spending rose modestly due to higher
compensation costs.
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
CORPORATE 2005 2004 2005 VS. 2004
- ----------------------------- ---------- ---------- ------------------------
(Dollars in Thousands)
Intersegment shipping sales $ (15,340) $ (11,710)
Intersegment shipping costs (15,340) (11,710)
---------- ----------
Gross profit - -
Corporate general, selling
and administrative expenses 12,819 9,818 3,001 30.6%
Nanocomposite business
development expenses 2,591 2,722 (131) -4.8%
---------- ---------- ----------
Operating loss (15,410) (12,540) (2,870) 22.9%
Included in the corporate expenses in the 2004 period were $1.2 million
of professional fees associated with filing of amended income tax returns that
were previously described in this report. After factoring out the effect of
those fees, corporate expenses would have increased by $4.2 million over the
2004 period, or approximately 49%. Greater professional service fees related to
Sarbanes-Oxley compliance and audit fees were the primary components of the
increase in corporate expenses. We also incurred higher corporate development
costs in the current year period.
Nanocomposite development costs declined in the current-year period due
to lower selling and marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES (in millions):
- ----------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
CASH FLOWS 2005 2004
- --------------------------------------------------- ---------- ----------
Net cash provided by (used in) operating activities $ 17.4 $ 13.2
Net cash provided by discontinued operations $ 7.3 $ 8.6
Net cash provided by (used in) investing activities $ (21.4) $ (25.1)
Net cash provided by (used in) financing activities $ (2.9) $ 7.6
27
Cash flows provided by operating activities improved over the 2004
period as a result of higher income from continuing operations 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 $20.0 million compared with $12.1 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.
The Company's financing activities through September 30, 2005 used cash
as opposed to having provided cash in the previous year's comparable period due
to a decreased need to incur additional debt based on a strong generation of
cash from operating and investing activities discussed above. Dividends paid
to-date in 2005 increased to $8.3 million from $6.7 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; in 2005, we purchased 104,100 shares at an average
price of $18.70 per share. 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. Approximately $8.1 million remains available to
repurchase common stock as of September 30, 2005.
AS AT
-----------------------------
SEPTEMBER 30, DECEMBER 31,
FINANCIAL POSITION 2005 2004
- ---------------------------------------- ------------- -------------
Working capital $ 151.8 $ 129.4
Intangible assets $ 22.4 $ 23.0
Total assets $ 365.4 $ 336.4
Long-term debt $ 41.0 $ 34.3
Other long-term obligations $ 19.9 $ 18.5
Stockholder's equity $ 243.5 $ 221.9
Working capital at September 30, 2005 increased from December 31, 2004,
primarily due to growth in accounts receivable and inventories. The growth in
receivables is due largely to increased sales within the environmental segment,
which has longer payment terms. The growth in inventories is primarily
attributable to the expansion of production capacities and timing of inventory
receipts. Inventory values at September 30, 2005 also reflect the higher cost of
raw materials and transportation costs. The current ratio was 3.5-to-1 and
3.1-to-1 at September 30, 2005, and December 31, 2004, respectively.
Intangible assets primarily represent goodwill associated with
acquisitions.
28
Long-term debt increased to 14% of total capitalization at September 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 September 30, 2005, we had approximately $64 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 September 30, 2005.
Other long-term obligations primarily represent liabilities associated
with our qualified and supplemental retirement plans.
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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk during
the nine months ended September 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 September 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 September 30, 2005
as discussed below, our disclosure controls and procedures were not effective as
of September 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
29
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 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 September
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.
Remedial efforts were initiated in the first quarter of 2005 and
continued in the third 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 September 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 September 30, 2005.
30
PART II - OTHER INFORMATION
ITEM 2(c) COMPANY REPURCHASES OF COMPANY STOCK
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. The table below illustrates the stock repurchases
made in 2005:
TOTAL NUMBER OF MAXIMUM VALUE OF
SHARES REPURCHASED AVERAGE SHARES THAT MAY YET BE
AS PART OF THE STOCK PRICE PAID REPURCHASED UNDER THE
FISCAL 2005 REPURCHASE PROGRAM PER SHARE PROGRAM
- ------------------------------ -------------------- ---------- ----------------------
January 1 - January 31 - $ - $ 10,000,000
February 1 - February 29 - $ - $ 10,000,000
March 1 - March 31 - $ - $ 10,000,000
April 1 - April 30 - $ - $ 10,000,000
May 1 - May 31 - $ - $ 10,000,000
June 1 - June 30 - $ - $ 10,000,000
July 1 - July 31 - $ - $ 10,000,000
August 1 - August 31 - $ - $ 10,000,000
September 1 - September 30 104,100 $ 18.70 $ 8,053,330
--------------------
Total 104,100 $ 18.70
====================
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: November 4, 2005 /s/ Lawrence E. Washow
-------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
Date: November 4, 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