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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _________
COMMISSION FILE NUMBER: 0-15661
AMCOL INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-0724340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One North Arlington, 1500 West Shure Drive, Suite 500
Arlington Heights, Illinois 60004-7803
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 394-8730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definitions of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the registrant's $.01 par value Common
Stock held by non-affiliates of the registrant (based upon the per share closing
price of $18.79 per share on June 30, 2005, and, for the purpose of this
calculation only, the assumption that all of the registrant's directors and
executive officers are affiliates) was approximately $421.2 million.
Registrant had 29,888,634 shares of $.01 par value Common Stock
outstanding as of February 28, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement, which will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year covered by this Form 10-K, are incorporated by
reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
AMCOL International Corporation was originally incorporated in South
Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was
changed to American Colloid Company in 1927, and in 1959, the Company was
reincorporated in Delaware. In 1995, its name was changed to AMCOL International
Corporation. Except as otherwise noted or indicated by context, the term
"Company" refers to AMCOL International Corporation and its subsidiaries.
We operate in two major industry segments: minerals and environmental.
We also operate 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, such as oilfield services. The
transportation segment includes both a long-haul trucking business and a freight
brokerage business that service our plants and third-party customers.
The following table sets forth the percentage contributions to our net
sales from the minerals, environmental and transportation segments as well as
intersegment shipping for the last three years.
PERCENTAGE OF SALES
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Minerals 55% 57% 58%
Environmental 39% 37% 36%
Transportation 9% 9% 10%
Intersegment Shipping -3% -3% -4%
---------- ---------- ----------
100% 100% 100%
========== ========== ==========
Net revenues, operating profit, assets, depreciation, depletion and
amortization, capital expenditures and research and development expenditures
attributable to each of our business segments are set forth in Note 3 of our
Notes to Consolidated Financial Statements included elsewhere herein.
MINERALS
Our minerals business is principally conducted through wholly-owned
subsidiaries and investments in affiliates and joint ventures throughout the
world. Our principal bentonite products are marketed under various
internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R),
PREMIUM GEL(R) and ADDITROL(R). Our cat litter is sold under various trade names
and private labels. Trade names include NATURAL SELECT(R), CAREFREE KITTY(R),
PREMIUM CHOICE(R) and CAT TAILS(R).
Commercially produced bentonite is a type of montmorillonite clay found
in beds ranging in thickness from two to 50 feet beneath overburden of up to 60
feet. There are two basic types of bentonite, each having different chemical and
physical properties. These are commonly known as sodium bentonite and calcium
bentonite. Sodium bentonite is generally referred to as Western bentonite
because it predominately exists in the Western United States. Sodium bentonites
of lesser purity exist outside the United States. Calcium bentonite is sometimes
referred to as Southern bentonite in the United States and as fuller's earth
outside the United States. Calcium bentonites mined outside the United States
are sometimes activated with sodium carbonate or similar compounds to produce
properties similar to natural sodium bentonite.
2
PRINCIPAL PRODUCTS AND MARKETS
Metalcasting. In the formation of sand molds for metalcastings, sand is
bonded with bentonite and various other additives to yield desired casting form
and surface finish. We serve the foundry and casting industry throughout the
North America and Asia Pacific regions with custom-blended bentonite and allied
non-bentonite products to strengthen sand molds for cast auto parts, farm
implements, railcars, home appliances and metallurgical products. The blended
mineral binders containing sodium bentonite, calcium bentonite, seacoal and
other ingredients are sold under the trade name ADDITROL(R). We also have a line
of formulated additives that are used to introduce silicon and carbon in the
melt phase of the casting process.
Pet Products. We produce and market sodium bentonite-based scoopable
(clumping), traditional and alternative cat litters as well as specialty pet
products to grocery and drug stores, mass merchandisers, wholesale clubs and pet
specialty stores throughout the U.S. Our scoopable products' clump-forming
capability traps urine, allowing for easy removal of the odor-producing elements
from the litter box. Our products are marketed under various trade names.
Specialty Minerals. Our products are sold in markets with generally
lower volume applications where our material acts as a performance additive. The
following are the major markets for such mineral applications:
o Detergents. We supply high-grade agglomerated bentonite to the
detergent industry. Bentonite performs as a softening agent in
certain powdered-detergent formulations. It can also act as a
carrier for colorants and fragrances.
o Health and Beauty. We manufacture adsorbent polymers and
purified grades of bentonite ingredients for sale to
manufacturers of personal care products. The adsorbent
polymers are used to deliver high-value actives in skin-care
products. Bentonite-based materials act as thickening,
suspension and dispersion agent emollients.
o Petroleum Products. Sodium bentonite and leonardite, a form of
oxidized lignite mined and processed by us in North Dakota,
are components of drilling fluids used in oil and gas well
drilling. Bentonite imparts thickening and suspension
properties, which facilitate the transport of rock cuttings to
the surface during the drilling process. Drilling fluids
lubricate the drilling bit and coat the underground formations
to prevent hole collapse and drill bit seizing. Our primary
trademark for this application is sold under the trade name
PREMIUM GEL(R).
o Other Industrial. We produce bentonite and bentonite blends
for the construction industry, which are used as a
plasticizing agent in cement, plaster and bricks, and as an
emulsifier in asphalt. We also supply grades of bentonite used
for pellitizing other materials for ease of use. Examples of
this application are iron ore and livestock feed.
3
SALES AND DISTRIBUTION
In 2005, the top five customers of the minerals segment accounted for
approximately 27% of the segment sales worldwide. Approximately 70% of our sales
in this segment are to customers in North and South America. Metalcasting is our
largest market in the Americas and all of our pet products sales are in this
region. Our sales in Europe represent approximately 17% of sales and are
principally to detergent producers. The Asia-Pacific region represents
approximately 13% of sales with metalcasting being our largest market.
A large majority of our sales and distribution is conducted by our own
personnel and facilities. We have established industry-specialized sales groups
staffed with technically oriented salespersons serving each of our major
markets. Certain businesses will have networks of distributors and
representatives, including companies that warehouse products at strategic
locations.
Our strong global market position in the metalcasting market is largely
due to our technical service capabilities and our distribution network. We
provide training courses and laboratory testing for customers who use our
products in the metalcasting process. Our technical sales personnel provide
expertise to not only educate our customers on the bentonite blend properties
but also aid them in producing castings efficiently and productively.
For cat litter, we are primarily a private-label producer, and have
three principal sites from where we package and distribute finished goods. Our
transportation segment provides logistics services for the cat litter business,
and is a key component of our capability in supplying customers on a national
basis.
Certain specialty mineral markets require considerable technical
expertise. Our detergent additives market position requires an ability to not
only supply cost-effective products but also provide product development
capabilities to adapt to our customers' product requirements. We experience a
similar requirement for our health and beauty business, which makes use of
several patents with various durations that we believe are collectively
important to that business.
Petroleum products are sold under our own and private label trade
names. Because bentonite is a major component of drilling fluids, two service
companies have captive bentonite operations. Our potential market, therefore, is
generally limited to those service organizations that are not vertically
integrated or do not have long-term supply arrangements with other bentonite
producers.
COMPETITION
We are one of the largest producers of bentonite products globally.
There is substantial domestic and international competition, which is
essentially a matter of product quality, price, logistics, service and technical
support. There are at least 15 other major sodium bentonite or sodium activated
calcium bentonite producers throughout the world including several importers
into the U.S. market. There are also numerous major producers of calcium
bentonite and various regional suppliers in the areas we serve. Some of the
producers are companies primarily in other lines of business with substantially
greater financial resources than ours.
SEASONALITY
We do not consider our minerals segment to be seasonal in nature.
4
ENVIRONMENTAL
PRINCIPAL PRODUCTS AND MARKETS
We sell products, including those containing sodium bentonite, services
and equipment for use in environmental and construction applications through the
following wholly-owned subsidiaries: Colloid Environmental Technologies Company
(CETCO), CETCO Oilfield Services, Inc. and Lafayette Well Testing, Inc. in the
United States and Canada, CETCO Korea Ltd. in South Korea, CETCO Poland Sp. z
o.o. in Poland, CETCO Technologies(Suzhou) Co. Ltd. in China, Commercializadora
y Exportadora Cetco Latino America Limitada in Chile, and Linteco Iberia S.L. in
Spain, and CETCO (Europe) Ltd. in the United Kingdom. The following are our
three principal markets and a description of the products we produce for them:
Lining Technologies. CETCO sells geosynthetic clay liner products
containing bentonite under the BENTOMAT(R) and CLAYMAX(R) trade names for lining
and capping landfills and for containment in tank farms, storm water containment
systems, waste stabilization lagoons, sewage lagoons and mine site and wetlands
reclamation applications.
Building Materials. Our VOLCLAY(R) Waterproofing System is sold to the
non-residential construction industry. This line includes VOLTEX(R), a
waterproofing composite comprised of two polypropylene geotextiles filled with
sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground
foundation walls and slabs. The following products round out the principal
components of the product line: VOLCLAY PANELS(R), also used for below-grade
waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and
VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and
plaza areas. We also manufacture and sell asphalt emulsion based waterproofing
systems for residential and non-residential waterproofing applications. In
addition, our STRONGSEAL(TM) and DUCKSBACK(TM) roofing underlayment systems are
sold to the residential and non-residential roofing industry.
Waste-Water Treatment. Bentonite can be used to extract contaminants
within effluents generated by various processes. Following are market
applications for bentonite and, in some cases equipment used to house bentonite,
for the treatment of waste waster.
o Oilfield Services. CETCO's oilfield services group employs
filtration technology used primarily on offshore oil
production platforms and pipelines. CETCO employs several
technologies allowing platform operators to maintain
compliance with regulatory requirements governing the
discharge of waste water generated during oil production. We
also provide well testing services. We provide equipment and
personnel for production well control, clean-up, unload,
separation, measure of component flow and disposal of fluids
from oil and gas wells.
o Industrial. Bentonite-based flocculants and customized
equipment are used to remove emulsified oils and heavy metals
from wastewater. Bentonite-based products are formulated to
solidify liquid waste for proper disposal in landfills. These
products are sold primarily under the SYSTEM-ACTM, RM-10(R)
and SORBOND(R) trade names.
o Drilling Products. CETCO's drilling products are used in
environmental and geotechnical drilling applications,
horizontal directional drilling, mineral exploration and
foundation construction. The products are used to install
monitoring wells, facilitate horizontal and water well
drilling, rehabilitate existing water wells and seal abandoned
exploration drill holes. VOLCLAY(R) GROUT, HYDRAUL-EZ(R),
BENTOGROUT(R) and VOLCLAY(R) TABLETS are among the trade names
for products used in these applications. Geothermal grouting
applications utilizing GEOTHERMAL GROUT(TM) represent a
developing area for CETCO drilling products. VOLCLAY(R) SHORE
PAC is used in special foundation drilling applications.
5
COMPETITION
CETCO principally competes with at least seven regional geosynthetic
clay liner manufacturers worldwide and several suppliers of alternative
technologies. The construction and wastewater treatment product lines are
specialized businesses that compete primarily with alternative technologies. The
groundwater monitoring, well drilling and sealants products compete with our
traditional rivals in the bentonite business. The oilfield services group
competes with several larger oil services companies using different technology.
Competition is based on product quality, service, price, technical support and
product availability. Historically, competition has been vigorous.
SALES AND DISTRIBUTION
The top five customers in our environmental segment accounted for less
than 10% of the segment sales worldwide. Approximately 57% of sales are in North
and South America. The United States is our largest geographical market for all
product lines. Approximately, 37% of sales are in Europe and the remaining 6% in
the Asia-Pacific region.
Sales and distribution of the lining technologies are primarily
performed through our own personnel and facilities. Our staff includes engineers
who assist with specifying products for topographical conditions that liners
will endure.
The building materials products are primarily sold through distribution
and dealer networks. The end customers are generally building sub-contractors
who are responsible for installing the products.
The filtration business of Oilfield Services primarily sells and
distributes products and services on a direct basis. Our principal customers are
oil companies who maintain substantial offshore drilling and production
platforms. The well testing business of Oilfield Services also sells and
distributes services to customers on a direct basis. Our customer base is
comprised of onshore and offshore oil and gas production firms.
For the industrial and drilling product lines, we generally sell
through distribution networks. The end customers for the industrial product
lines include metal plating and finishing plants and corrugated cardboard
operations. Drilling products are also sold through distributors who are
overseen by our regional managers.
SEASONALITY
Much of the business in the environmental sector is impacted by weather
and soil conditions. Many of the products cannot be applied in harsh weather
conditions and, as such, sales and profits tend to be stronger during the period
from April through October. As a result, we consider the business of this
segment to be seasonal.
MINERALS/ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS
MINERAL RESERVES
We have reserves of sodium and calcium bentonite at various locations
in North America, including Wyoming, South Dakota, Montana and Alabama, and in
China. Through our investments in affiliates and joint ventures, we also have
access to bentonite deposits in Egypt, India and Mexico. At 2005 consumption
rates and product mix, we estimate the proven, assigned reserves of commercially
usable sodium bentonite at approximately 17 years. We estimate the proven,
assigned reserves of calcium bentonite at approximately 22 years in North
America. While we believe, based upon our experience, that our reserve estimates
are reasonable and our title and mining rights to our reserves are valid, we
have not obtained any independent verification of such reserve estimates or such
title or mining rights. We own or control the properties on which reserves are
located through long-term leases, royalty agreements and patented and unpatented
mining claims. A majority of our bentonite reserves are owned. All of the
properties on which our reserves are located are either physically accessible
for the purposes of mining and hauling or the cost of obtaining physical access
would not be material.
6
To retain possessory rights in unpatented mining claims in North
America, a fee of $100 per year for each unpatented mining claim is required.
The validity of title to unpatented mining claims is dependent upon numerous
factual matters. We believe that the unpatented mining claims that we own are in
compliance with all applicable federal, state and local mining laws, rules and
regulations. We are not aware of any material conflicts with other parties
concerning our claims. From time to time, members of Congress and members of the
executive branch of the federal government have proposed amendments to existing
federal mining laws. The various amendments would have had a prospective effect
on mining operations on federal lands and include, among other things, the
imposition of royalty fees on the mining of unpatented claims, the elimination
or restructuring of the patent system and an increase in fees for the
maintenance of unpatented claims. To the extent that future proposals may result
in the imposition of royalty fees on unpatented lands, the mining of our
unpatented claims may become uneconomic and royalty rates for privately leased
lands may be affected. We cannot predict the effect of any potential amendments
may have or whether or when any such amendments might be adopted.
We maintain a continuous program of worldwide exploration for
additional reserves and attempt to acquire reserves sufficient to replenish our
consumption each year, but we cannot assure that additional reserves will
continue to become available.
We oversee all of our mining operations, including our exploration
activity and securing the necessary state and federal mining permits.
The following table shows a summary of minerals sold by the Company
from active mining areas for the last 3 years in short tons, as well as mineral
reserves by major mineral category.
TONS SOLD MINING CLAIMS
----------------------- ------------------------------
ALL AMOUNTS ARE IN WET TONS ASSIGNED UNASSIGNED CONVERSION UNPATENTED
THOUSANDS OF TONS 2005 2004 2003 OF RESERVES RESERVES RESERVES FACTOR OWNED ** LEASED
- -------------------------- ------- ------- ------- ----------- -------- ---------- ---------- -------- ---------- --------
SODIUM BENTONITE
ASSIGNED
Belle/Colony, WY/SD 1,295 1,227 1,088 19,829 19,829 - 77.61% 885 380 18,564
Lovell, WY 609 564 477 22,729 22,729 - 77.61% 12,781 9,625 323
TOTAL ASSIGNED 1,904 1,791 1,565 42,558 42,558 - 13,666 10,005 18,887
OTHER / UNASSIGNED
(SD, WY, MT, NV) 2 2 1 65,517 40 65,477 77.61% 55,453 4,001 6,063
TOTAL OTHER / UNASSIGNED 2 2 1 65,517 40 65,477 55,453 4,001 6,063
TOTAL SODIUM BENTONITE 1,906 1,793 1,566 108,075 42,598 65,477 - 69,119 14,006 24,950
39% 61% 64% 13% 23%
CALCIUM BENTONITE
ASSIGNED
Sandy Ridge, AL 120 132 132 3,920 3,920 - 73.75% 1,789 - 2,131
Chao Yang, Liaoning, China 89 88 57 2,282 2,282 - 78.00% - - 2,282
TOTAL ASSIGNED 209 220 189 6,202 6,202 - 1,789 - 4,413
Other / Unassigned - - 2,646 - 2,646 77.31% - - 2,646
TOTAL OTHER / UNASSIGNED - - - 2,646 - 2,646 - - 2,646
TOTAL CALCIUM BENTONITE 209 220 189 8,848 6,202 2,646 1,789 - 7,059
70% 30% 20% 80%
LEONARDITE
Gascoyne, ND 50 41 34 486 486 - 66.55% - - 486
TOTAL LEONARDITE 50 41 34 486 486 - - - 486
100% 100%
GRAND TOTALS 2,165 2,054 1,789 117,409 49,286 68,123 70,908 14,006 32,495
42% 58% 60% 12% 28%
** Quantity of reserves that would be owned if patent was granted.
7
Assigned reserves are reserves which could be reasonably expected to be
processed in existing plants. Unassigned reserves are reserves which will
require additional expenditures for processing facilities. Conversion factor is
the percentage of reserves that will be available for sale after processing.
We estimate that available supplies of other materials utilized in our
minerals business are sufficient to meet our production requirements for the
foreseeable future.
MINING AND PROCESSING
Bentonite is surface mined, generally with large earthmoving scrapers,
and then loaded into trucks and off-highway-haul wagons for movement to
processing plants. The mining and hauling of our clay is done by us and by
independent contractors.
At the processing plants, bentonite is dried, crushed and sent through
grinding mills, where it is sized to customer requirements, then chemically
modified where needed and transferred to silos for automatic bagging or bulk
shipment. Virtually all production is shipped as processed rather than stored
for inventory.
PRODUCT DEVELOPMENT AND PATENTS
We work actively with customers in each of our major markets to develop
commercial applications of specialized grades of bentonite. We maintain a
research center and laboratory testing facilities in Arlington Heights,
Illinois, and Birkenhead, England. When we perceive a need for a product that
will accomplish a particular goal, we work to develop the product, research its
marketability and study the feasibility of its production. We also co-develop
products with customers, or others, as needs arise. Our development efforts
emphasize markets with which we are familiar and products for which we believe
there is a viable market.
We hold a number of U.S. and international patents covering the use of
bentonite and products containing bentonite. We follow the practice of obtaining
patents on new developments whenever feasible. However, we do not consider that
any one or any combination of such patents is material to our minerals and
environmental businesses as a whole.
RESEARCH AND DEVELOPMENT
Our business segments share research and laboratory facilities adjacent
to our corporate headquarters. Technological developments are shared among our
subsidiaries, subject to license agreements where appropriate. Notes 1 and 3 of
the Notes to Consolidated Financial Statements include further information on
research and development activities.
REGULATION AND ENVIRONMENTAL
We believe we are in material compliance with current, applicable
regulations for surface mining. Since reclamation of exhausted mining sites has
been a regular part of our surface mining operations for the past 35 years,
maintaining compliance with current regulations has not had a material effect on
mining costs. Reclamation costs are reflected in the prices of the bentonite
sold.
The grinding and handling of dried clay is part of the production
process, and, because these processes generate dust, our mineral processing
plants are subject to applicable clean air standards (including Title V of the
Clean Air Act). All of our plants are equipped with dust collection systems. We
have not had, and do not presently anticipate, any significant regulatory
problems in connection with our dust emission, though we expect ongoing
expenditures for the maintenance of our dust collection systems and required
annual fees.
8
Our operations are also subject to other federal, state, local and
foreign laws and regulations relating to the environment and to health and
safety matters. Certain of these laws and regulations provide for the imposition
of substantial penalties for noncompliance. While the costs of compliance with,
and penalties imposed under, these laws and regulations have historically not
had a material adverse effect on us, future events, such as changes in or
modified interpretations of existing laws and regulations, enforcement policies,
or further investigation or evaluation of potential health hazards of certain
products, may give rise to additional compliance and other costs that could have
a material adverse effect on us.
TRANSPORTATION
We operate a long-haul trucking business and a freight brokerage
business primarily for delivery of finished products throughout the continental
United States. These services are provided to our subsidiaries as well as third
party customers. Through our transportation business, we are better able to
control costs, maintain delivery schedules and assure equipment availability in
the delivery of our products. In 2005, approximately 41% of the revenues of this
operation involved services provided to our domestic minerals and environmental
segments.
CORPORATE ACTIVITIES - NANOCOMPOSITE PRODUCT DEVELOPMENT
We continue to research and attempt to develop broader-based
technologies that may use bentonite for new, value-added applications. As a
result of our efforts, we established a subsidiary to develop surface-modified
bentonites, which we refer to as nanoclays, which would be suitable for the
emerging nanocomposite market. We determined that our nanoclays could improve
physical properties of certain polymers. Over the last ten years we have been
granted over forty U.S. and international patents involving our nanoclays and
related technology.
The primary raw material in the nanoclay is bentonite, which is either
sourced from our own mineral reserves or purchased from third-party suppliers,
depending upon the product requirements. Surface-treatment chemicals are added
in the production process to enable the bentonite to properly function within
the polymer. The surface-treatment compounds are readily available on the
merchant market. Our production facility is located in Aberdeen, Mississippi.
All costs, in excess of sales, associated with the development, production and
sales of nanoclays are included in corporate costs.
Sales and distribution of our product lines have been executed through
alliance relationships and on a direct basis. As disclosed in prior reports, we
have had alliance agreements with two companies to market and distribute
nanocomposites that incorporate our nanoclays for certain applications. On
January 13, 2006, we announced a number of changes in the marketing and
management of this business including the termination of both alliance
agreements. We further noted that an agreement was reached with ColorMatrix
Corporation and its affiliates, whereby they are now the exclusive, world-wide
distributor of our nanocomposite product line, Imperm(R), which will be marketed
to the food and beverage container market. Additionally, PolyOne Corporation,
one of the former alliance partners, will continue to market certain
nanocomposite materials utilizing our nanoclays under a non-exclusive
relationship for applications involving polyolefin compounds. We are also
marketing our products on a direct basis for certain engineered nylon
applications.
Through 2005, sales have been minimal. We continue to expend funds
necessary to market and manufacture the nanoclay product lines. We also continue
to invest in technical development activities in order to support market
development of the technology. Our executive management will continue to
evaluate the prospects for this business on a periodic basis to determine its
future value to the Company as a whole.
9
FOREIGN OPERATIONS AND EXPORT SALES
Approximately 33% of our 2005 net sales were to customers in countries
outside North America. To enhance our overseas market presence, we maintain
mineral processing plants in the United Kingdom, China, Australia, South Korea,
Poland and Thailand, as well as a blending plant in Canada. Chartered vessels
deliver large quantities of our bulk, dried sodium bentonite to the plants in
the United Kingdom, Poland, Australia, Thailand and South Korea where it is
processed and mixed with other clays and distributed throughout Europe and the
Asia-Pacific region. In addition, we maintain a worldwide network of independent
dealers, distributors and representatives to support sales and distribution.
We manufacture geosynthetic clay liners in the United Kingdom, Poland,
China and South Korea, primarily for the European and Asia-Pacific markets.
Our international operations are subject to the usual risks of doing
business abroad, such as currency fluctuations and devaluation, restrictions on
the transfer of funds, and import and export duties.
Note 3 of the Notes to Consolidated Financial Statements included in
Item 8 of this report presents further details on our sales by geographic
region. This Note is incorporated by reference for sales attributed to foreign
operations and export sales from the United States.
EMPLOYEES
As of December 31, 2005, we employed 1,542 people in our global
organization, 624 of whom were employed outside of the United States. Operating
plants are adequately staffed, and no significant labor shortages are presently
foreseen. Labor relations have been satisfactory.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any reports, statements and other information filed by the Company
at the SEC's Public Reference Room at 100 F. Street N.E., Washington, D.C.,
20549. Please call (800) SEC-0330 for further information on the Public
Reference Room. The SEC maintains a website that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC. Our filings are also available to the public at the
website maintained by the SEC, www.sec.gov.
Our principal Internet address is www.amcol.com. Our annual, quarterly
and current reports, and amendments to those reports are available free of
charge on www.amcol.com, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
CERTIFICATIONS
As required by the rules and regulations of the New York Stock Exchange
(the "NYSE"), we delivered to the NYSE a certification executed by our Chief
Executive Officer, Lawrence E. Washow, certifying that Mr. Washow was not aware
of any violation by the Company of the NYSE's corporate governance listing
standards as of June 1, 2005.
As required by the rules and regulations of the SEC, the Sarbanes-Oxley
Act Section 302 certifications regarding the quality of our public disclosures
are filed as exhibits to this Annual Report on Form 10-K.
10
ITEM 1A. RISK FACTORS
Certain statements we make from time to time, including statements in
the Management's Discussion and Analysis of Financial Condition and Results of
Operation section above, 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, levels of capital expenditures,
future dividends, expansion into global markets and the development of new
products. 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:
COMPETITION
Our businesses are very competitive. We believe competition is
essentially a matter of product quality, price, delivery, service and technical
support. Several of our competitors in the U.S. market are larger and have
substantially greater financial resources. If we fail to compete successfully
based on these or other factors, we may lose customers or fail to recruit new
customers and our business and future financial results could be materially and
adversely affected.
RELIANCE ON METALCASTING AND CONSTRUCTION INDUSTRIES
Approximately 47% of our minerals segment's sales and 26% of our
environmental segment's sales in 2005 were to the metalcasting and construction
markets, respectively. The metalcasting and construction markets depend heavily
upon the strength of the domestic and international economies. If these
economies weaken, demand for products by the metalcasting and construction
markets may decline and our business or future financial results may be
adversely affected.
REGULATORY AND LEGAL MATTERS
Our operations are subject to various federal, state, local and foreign
laws and regulations relating to the environmental and to health and safety
matters. Substantial penalties may be imposed if we violate certain of these
laws and regulations even if the violation was inadvertent or unintentional. If
these laws or regulations are changed or interpreted differently in the future,
it may become more difficult or expensive for us to comply. In addition,
investigations or evaluations of our products by government agencies may require
us to adopt additional safety measures or precautions. If our costs to comply
with such laws and regulations in the future materially increase, our business
and future financial results could be materially and adversely affected. We may
also be subject to adverse litigation results in addition to increased
compliance costs arising from future changes in laws and regulations that may
negatively impact our operations and profits.
RISKS OF INTERNATIONAL EXPANSION
An important part of our business strategy is to expand
internationally. We intend to seek acquisitions, joint ventures and strategic
alliances globally. Sales and earnings from our overseas operations have
increased considerably in recent years. In 2005, approximately 24% and 9% of
consolidated net sales were from Europe and the Asia-Pacific regions,
respectively. Approximately 52% of operating profit in 2005 was earned by our
overseas businesses. We also recorded approximately $0.09 per diluted share for
earnings, under the equity method of accounting, from investments in affiliate
businesses. As we expand internationally, we will be subject to increased risks,
which may include the following:
11
o currency exchange or price control laws;
o currency translation adjustments;
o political and economic instability;
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers;
o longer accounts receivable collection cycles; and
o adverse tax consequences.
The above listed events could result in sudden, and potentially
prolonged, changes in demand for our products. Also, we may have difficulty
enforcing agreements and collecting accounts receivable through a foreign
country's legal system.
OCEAN SHIPPING AND LOGISTICS
Bulk cargo shipping costs have been rising significantly due to greater
demand from China. We rely on shipping bulk cargos of bentonite from the United
States and China to customers, as well as our own subsidiaries. We may need to
offset additional shipping costs with price increases to customers in order to
maintain our profitability. Other factors in the United States that will
potentially impact us are escalating costs of purchased raw materials derived
from petrochemical stocks and increases in rail and long-haul freight rates.
While we have been successful in attaining price increases in certain markets to
offset some of these rising costs, there can be no assurance that we will be
successful in continuing to achieve these price increases.
VOLATILITY OF STOCK PRICE
The stock market has been extremely volatile in recent years. These
broad market fluctuations may adversely affect the market price of our common
stock. In addition, factors such as the following may have a significant effect
on the market price of our common stock:
o fluctuations in our financial results;
o our introduction of new services or products;
o announcements of acquisitions, strategic alliances or joint
ventures by us, our customers or our competitors;
o changes in analysts' recommendations regarding our common stock;
and
o general economic conditions.
There can be no assurance that the price of our common stock will
increase in the future or be maintained at its recent levels.
12
ITEM 2. PROPERTIES
We operate the following principal plants, mines and other facilities,
all of which are owned, except as noted below. We also have numerous other
facilities which blend Additrol (R), package cat litter and chromite sand,
warehouse products and serve as sales offices.
LOCATION PRINCIPAL FUNCTION
- ------------------------------ ----------------------------------------------
MINERALS
Belle Fourche, SD Mine and process sodium bentonite
Colony, WY (two plants) Mine and process sodium bentonite, package
cat litter
Gascoyne, ND Mine and process leonardite
Lovell, WY (1) Mine and process sodium bentonite
Sandy Ridge, AL Mine and process calcium bentonite; blend
ADDITROL(R)
Chao Yang, Liaoning, China Mine and process calcium bentonite
Geelong, Victoria, Australia Process sodium and calcium bentonite; blend
(1)(2) ADDITROL(R)
Rayong, Thailand Process sodium and calcium bentonite
Winsford, Cheshire, U.K. Process bentonite and other minerals
Kyungju Kyung-Buk, South Korea Process sodium and calcium bentonite
ENVIRONMENTAL
Broussard, LA Environmental Offshore operations and
distribution
Cartersville, GA Manufacture components for geosynthetic clay
liners; manufacture
Bentomat(R) and Claymax(R) geosynthetic clay
liners
Fairmount, GA Manufacture Bentomat(R) and Claymax(R)
geosynthetic clay liners
Lovell, WY (1) Manufacture Bentomat(R) and Claymax(R)
geosynthetic clay liners
Philadelphia, PA Provider of services for the design and
installation of geosynthetic systems
Birkenhead, Merseyside, U.K. Manufacture Bentomat(R) geosynthetic
(1)(2) clay liner; research laboratory;
headquarters for CETCO (Europe) Ltd.
Pyeongtaek, South Korea Manufacture Bentomat(R) geosynthetic
clay liners
Suzhou, Jiangsu, China Manufacture Bentomat(R) geosynthetic
clay liners
Szczytno, Poland Manufacture Bentomat(R) and Claymax(R)
geosynthetic clay liners
TRANSPORTATION
Scottsbluff, NE Transportation headquarters and terminal
CORPORATE
Arlington Heights, IL (2) Corporate headquarters; CETCO headquarters;
American Colloid Company headquarters;
Nanocor, Inc. headquarters; research
laboratory
Aberdeen, MS Process purified bentonite (Nanocor, Inc.)
(1) Shared facilities between minerals and environmental segments.
(2) Certain offices and facilities are leased.
ITEM 3. LEGAL PROCEEDINGS
We are party to a number of lawsuits arising in the normal course of
our business. We do not believe that any pending litigation will have a material
adverse effect on our consolidated financial position or results of operations.
Our processing operations require permits from various governmental
authorities. From time to time, we have been contacted by government agencies
with respect to required permits or compliance with existing permits. While we
have been notified of certain situations of non-compliance, management does not
expect the fines or the cost of becoming compliant, if any, to be significant.
We have neither been nor expect to be assessed any tax shelter
penalties by the United States Internal Revenue Service for tax shelter
transactions that either the IRS deems abusive or have significant tax avoidance
penalties.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF REGISTRANT
NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
- ------------------- ------ -------------------------------------------------
Gary L. Castagna 44 Senior Vice President, Chief Financial Officer
and Treasurer of the Company since February 2001;
prior thereto, a consultant to AMCOL since
June 2000; prior thereto, Vice President of the
Company and President of Chemdal International
Corporation (this business is a former subsidiary
of AMCOL, and consisted of the absorbent polymers
business that was sold to BASF AG in June 2000)
since August 1997; since January 2000, Director
of M~Wave Incorporated, a manufacturer and
distributor of printed circuit boards.
Peter L. Maul 56 Vice President of the Company since 1993 and
President of Nanocor, Inc. since 1995. Mr. Maul
is retiring from the Company effective
March 31, 2006.
Ryan F. McKendrick 54 Vice President of the Company and President of
Colloid Environmental Technologies Company since
November 1998; President of Volclay International
Corporation since 2002; prior thereto, Vice
President of Colloid Environmental Technologies
Company since 1994.
Gary Morrison 50 Vice President of the Company and President of
American Colloid Company since February 2000;
prior thereto, Executive Vice President of
American Colloid Company since 1998.
Clarence O. Redman 63 Secretary of the Company since 1982. Clarence
O. Redman is of counsel to the law firm of Lord,
Bissell & Brook LLP, the law firm that serves as
Corporate Counsel to the Company, since
October 1997.
Lawrence E. Washow 52 Chief Executive Officer since May 2000; President
of the Company since May 1998; Chief Operating
Officer of the Company since 1997; a Director
since February, 1998.
All executive officers of the Company are elected annually by the Board
of Directors for a term expiring at the annual meeting of directors following
their election or when their respective successors are elected and shall have
qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the New York Stock Exchange under the symbol
"ACO." The following table sets forth, for the periods indicated, the high and
low closing sale prices of the common stock, as reported by the New York Stock
Exchange, and cash dividends declared per share.
CASH
STOCK PRICE DIVIDENDS
------------------------- DECLARED PER
HIGH LOW SHARE
----------- -------- ------------
Fiscal Year Ended December 31, 2005: 1st Quarter $ 23.09 $ 18.11 $ 0.09
2nd Quarter 21.27 16.90 0.09
3rd Quarter 20.75 18.20 0.10
4th Quarter 21.65 16.35 0.10
Fiscal Year Ended December 31, 2004: 1st Quarter $ 24.36 $ 16.12 $ 0.07
2nd Quarter 20.11 15.25 0.07
3rd Quarter 20.10 16.99 0.09
4th Quarter 20.30 17.15 0.09
We have paid cash dividends every year for 68 years. As of March 3,
2006, there were 1,423 holders of record of the common stock, excluding shares
held in street name.
14
PURCHASES OF EQUITY SECURITIES
On May 13, 2004, we announced a share repurchase program for the
repurchase of $10 million of our common stock in the open market. We have not
set an expiration date for this program. The following table summarizes the
repurchases made under this program and the remaining amount of repurchases
authorized:
MAXIMUM VALUE
TOTAL NUMBER OF OF SHARES
SHARES REPURCHASED AVERAGE THAT MAY YET BE
AS PART OF THE STOCK PRICE PAID REPURCHASED UNDER
REPURCHASE PROGRAM PER SHARE THE PROGRAM
-------------------- ------------ ------------------
Amount of authorization
outstanding at
December 31, 2004 $ 10,000,000
Activity in 2005:
January 1 - January 31
Shares repurchased - $ - $ 10,000,000
February 1 - February 28
Shares repurchased - $ - $ 10,000,000
March 1 - March 31
Shares repurchased - $ - $ 10,000,000
April 1 - April 30
Shares repurchased - $ - $ 10,000,000
May 1 - May 31
Shares repurchased - $ - $ 10,000,000
June 1 - June 30
Shares repurchased - $ - $ 10,000,000
July 1 - July 31
Shares repurchased - $ - $ 10,000,000
August 1 - August 31
Shares repurchased - $ - $ 10,000,000
September 1 -September 30
Shares repurchased 104,100 $ 18.70 $ 8,053,330
October 1 - October 31
Shares repurchased - $ - $ 8,053,330
November 1 - November 30
Shares repurchased - $ - $ 8,053,330
December 1 - December 31 900 $ 20.05 $ 8,035,285
Shares repurchased
-------------------- ------------
Total 105,000 $ 18.71 $ 8,035,285
==================== ============
15
ITEM 6. SELECTED FINANCIAL DATA
The following is selected financial data for the Company as of and for
the five years ended December 31, 2005.
SUMMARY OF OPERATIONS
(In thousands, except ratios and share and per share amounts)
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
OPERATIONS DATA
Net sales (1) $ 535,924 461,778 $ 374,483 $ 307,422 $ 285,322
Gross profit (1) 138,023 118,568 100,068 80,417 76,339
General, selling and administrative
expenses (1) 90,947 82,584 71,053 60,764 57,448
Business realignment and other charges - - - - -
Operating profit 47,076 35,984 29,015 19,653 18,891
Investment income - - - - 3,015
Change in value of interest rate swap - - - - (401)
Net interest expense (1,660) (826) (280) (512) (2,196)
Net other income (expense) (393) (86) 526 48 (103)
Pretax income 45,023 35,072 29,261 19,189 19,206
Income taxes (benefit) 11,645 4,687 9,946 6,916 5,149
Income from affiliates and joint
ventures 2,912 1,180 600 531 28
Minority interest in net loss of
subsidiary - - - 164 59
Income from continuing operations 36,290 31,565 19,915 12,968 14,144
Income (loss) from discontinued
operations - - - - (879)
Gain on disposal of discontinued
operations 4,755 - 8,950 - 1,154
Cumulative effect of change in
accounting principle (net of tax) - - - - (182)
Net income 41,045 31,565 28,865 12,968 14,237
PER SHARE DATA
Basic earnings (loss) per share
Continuing operations 1.23 1.08 0.70 0.46 0.50
Discontinued operations 0.16 - 0.32 - 0.01
Cumulative effect of change in
accounting principle (net of tax) - - - - (0.01)
Net income 1.39 1.08 1.02 0.46 0.50
Diluted earnings (loss) per share
Continuing operations 1.18 1.03 0.67 0.43 0.46
Discontinued operations 0.15 - 0.30 - 0.01
Cumulative effect of change in
accounting principle (net of tax) - - - - (0.01)
Net income 1.33 1.03 0.97 0.43 0.46
Stockholders' equity (2) 8.36 7.55 6.58 5.66 5.21
Dividends 0.38 0.32 0.16 0.10 0.06
Continued...
16
SUMMARY OF OPERATIONS
(In thousands, except ratios and share and per share amounts)
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
SHARES OUTSTANDING DATA
End of period 29,783,639 29,395,755 29,107,746 27,881,903 28,256,389
Weighted average for the period-basic 29,525,033 29,140,892 28,357,009 28,133,795 28,193,234
Incremental impact of stock options 1,278,105 1,561,969 1,492,569 2,014,725 2,412,826
Weighted average for the period-diluted 30,803,138 30,702,861 29,849,578 30,148,520 30,606,060
BALANCE SHEET DATA (AT END OF PERIOD)
Current assets $ 211,209 $ 192,724 $ 143,574 $ 116,935 $ 106,979
Cash equivalents included in current - - - - -
assets
Net current assets of discontinued
operations included in current assets - - - - 798
Net property and equipment 100,064 93,641 86,996 81,847 72,348
Other long-term assets 57,256 50,077 34,759 29,598 23,555
Net long-term assets of discontinued
operations included in long-term assets - - - - 311
Total assets 368,529 336,442 265,329 228,380 202,882
Current liabilities 63,269 61,681 47,708 52,639 31,083
Long-term debt 34,838 34,295 9,006 5,573 13,245
Other long-term liabilities 21,566 18,532 17,165 12,233 11,275
Stockholders' equity 248,856 221,934 191,450 157,935 147,279
OTHER STATISTICS FOR CONTINUING OPERATIONS
Depreciation, depletion and amortization $ 19,558 $ 20,124 $ 18,910 $ 20,759 $ 18,552
Capital expenditures 28,626 21,627 15,795 16,223 14,730
Gross profit margin (1) 25.8% 25.7% 26.7% 26.2% 26.8%
Operating profit margin (1) 8.8% 7.8% 7.7% 6.4% 6.6%
Pretax profit margin (1) 8.4% 7.6% 7.8% 6.2% 6.7%
Effective tax rate 25.9% 13.4% 34.0% 36.0% 26.8%
Net profit from continuing operations 6.8% 6.8% 5.3% 4.2% 5.0%
margin (1)
Return on average equity 15.4% 15.3% 11.4% 8.5% 9.8%
(1) Amounts for 2001 through 2004 include reclassifications for product
liability and warranty expenses. See Note 1 of Notes to Consolidated
Financial Statements for further information.
(2) Based on the number of common shares outstanding at the end of each year
rather than a weighted average.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a global, specialty minerals company and earn our revenues and
profits from a diverse group of industrial and consumer product lines. Our
minerals segment operates manufacturing facilities in North America, Europe, and
Asia-Pacific regions and has three principal market applications: metalcasting,
pet products and specialty minerals. Our environmental segment also operates
manufacturing facilities in those same regions. The environmental segment's
principal markets are lining technologies, building materials and water
treatment. Additionally, we have a transportation segment that performs trucking
services for our domestic minerals and environmental businesses as well as third
parties.
The principal mineral that we utilize to generate revenues is
bentonite. We own or lease bentonite reserves in the United States and China.
Additionally, through our affiliates and joint ventures, we have access to
bentonite reserves in Egypt, India and Mexico. Bentonite deposits have varying
physical properties which requires us to identify which markets our reserves can
serve. We believe that our understanding of bentonite properties, mining
methods, processing and application to markets are the core components of our
longevity and future prospects.
Our customers are engaged in varied end-markets and geographies.
Customers in the minerals segment range from foundries that produce castings for
automotive, industrial, and transportation equipment , including heavy-duty
trucks and railroad cars, to producers of consumer goods, including cat box
filler, cosmetics and detergents. The customers for our lining technologies and
building materials products are predominantly engineering contractors. The
oilfield services customer base is primarily comprised of oil service or
exploration companies. A significant portion of our products have been used in
the same applications for decades and have experienced minimal technological
obsolescence. A majority of our business is performed under short-term
agreements; therefore, terms of sale, such as pricing and volume, can change
within our fiscal year.
Approximately 67% of our revenue is generated in North America;
consequently, the state of the U.S. economy impacts our revenues. Our fastest
growing markets are in the Asia-Pacific and Central European regions, which have
continued to outpace the United States in economic growth.
Sustainable, long-term profit growth is our primary objective. We
employ number of strategic initiatives to achieve this goal:
o Organic growth: The central component of our growth strategy is
expansion of our product lines and market presence. We have a history
of commitment to research and development and using this resource to
bring innovative products to market. We believe this approach to growth
offers the best probability of achieving our long-term goals at the
lowest risk.
o Globalization: We have expanded our manufacturing and marketing
organizations into Europe and Asia-Pacific over the last 40 years. This
operating experience enables us to expand further into emerging
markets. We see the significant opportunities in the Asia-Pacific
region for expanding our revenues and earnings over the long-term as a
number of markets we serve, such as metalcasting and lining
technologies, are expected to grow. We expect to take advantage of
these growth areas either through our wholly owned subsidiaries or
investments in affiliates and joint ventures.
o Mineral development: Bentonite is a component in a majority of the
products we produce. Since it is a natural material, we must
continually expand our reserve base to maintain a long-term business.
Our goal is to add new reserves to replace the bentonite mined each
year. Furthermore, we need to assure new reserves meet the physical
property requirements for our diverse product lines and are economical
to mine. Our organization is committed to developing its global reserve
base to meet these requirements.
o Acquisitions: We continually seek opportunities to add complementary
businesses to our portfolio of products. Over the last four years, we
have acquired a number of businesses for a total cost of approximately
$39 million. A strong financial position will enable us to continue to
acquire businesses which, in our assessment, are valued fairly and fit
with our growth strategy.
18
There can be no assurance that we will achieve success in implementing
any one or more of the strategic initiatives described above.
A number of risks will challenge us in meeting our long-term
objectives. We describe certain risks, such as competition and our reliance on
economically sensitive markets, under "Item 1A. Risk Factors" and "Item 7A.
Quantitive and Qualitative Disclosures About Market Risk". In general, the
significance of these risks has not changed over the past year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations describes relevant aspects of our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to select accounting policies that are
appropriate for our business, and to make certain estimates, judgments and
assumptions about matters that are inherently uncertain in applying those
policies. On an ongoing basis, we re-evaluate these estimates, judgments and
assumptions for reasonableness because of the critical impact that these factors
have on the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. Actual results may differ from these estimates.
Our management has identified the most critical accounting policies
upon which the financial statements are based and that involve the most complex
and subjective decisions and assessments. These policies are discussed below and
also in Note 1 of the Notes to Consolidated Financial Statements. Our senior
management has discussed the development, selection and disclosure of these
policies with the members of the Audit Committee of our Board of Directors. We
believe these critical accounting policies have resulted in past actual results
approximating the estimated amounts in each respective area. These accounting
policies are disclosed in the notes to the consolidated financial statements.
The discussion which follows should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K.
VALUATION OF ACCOUNTS RECEIVABLE
We provide credit to customers in the ordinary course of business and
perform ongoing credit evaluations. Our customer base is diverse and includes
customers located throughout the world. Payment terms in certain of the foreign
countries in which we do business are longer than those that are customary in
the United States, and as a result, may give rise to additional credit risk
related to outstanding accounts receivable from these non-U.S. customers.
Likewise, a change in the financial position, liquidity or prospects of any of
our customers could have an impact on our ability to collect amounts due. While
concentrations of credit risk related to trade receivables are somewhat limited
by our large customer base, we do extend significant credit to some of our
customers.
We make estimates of the amounts of our gross accounts receivable that
will not be collectible, and record an allowance for doubtful accounts to reduce
the carrying value of accounts receivable to the amount that is expected to be
realized. The allowance for doubtful accounts is established based upon the
Company's historical bad debt experience, a review of the overall aging of the
accounts, and an analysis of specific customer accounts, particularly those with
past-due balances. The recorded allowance for doubtful accounts is intended to
cover specific customer collection issues identified by management at the
balance sheet date, and to provide for potential losses from other accounts
based on our historical experience. Increases in the allowance for doubtful
accounts are recorded as an expense and included in general, selling and
administrative expenses in the period identified. Our estimate of the required
allowance for doubtful accounts is a critical accounting estimate because it is
susceptible to change from period to period. In addition, it requires management
to make judgments about the future collectibility of customer accounts.
19
INVENTORY VALUATION
Inventories are recorded at the lower of actual manufactured or
purchased cost, or estimated net realizable value. In order to determine net
realizable value, management regularly reviews inventory quantities on hand and
evaluates significant items to determine whether they are excess or obsolete. We
record the value of estimated excess or obsolete inventory as a reduction of
inventory and as an expense which is included in cost of sales in the period it
is identified. Our estimate of excess and obsolete inventory is a critical
accounting estimate because it is susceptible to change from period to period.
In addition, it requires management to make judgments about the future demand
for inventory.
In order to quantify excess or obsolete inventory, management prepares
lists of inventory quantities on hand and determines the amount of such
inventories that, based on projected demand, are not anticipated to be sold
within the next 12 to 24 months or, based on our current product offerings, are
excess or obsolete. This list is then reviewed with sales and production
management personnel to determine whether this list of potential excess or
obsolete inventory is complete. Factors which impact this evaluation include,
for example, whether there has been a change in the market or packaging for
particular products, and whether there are components of inventory that
incorporate obsolete formulations or technology. In certain businesses in which
we are engaged, such as the domestic cat litter business, product and packaging
changes can occur rapidly and expose us to excess and obsolete inventories.
GOODWILL AND LONG-LIVED ASSETS
We have made substantial investments in property, plant and equipment
and have a moderate investment in goodwill. For property, plant and equipment,
we evaluate the recoverability of these assets whenever events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. For goodwill, we perform an annual impairment assessment at
year-end at the reporting unit level (or more frequently if impairment
indicators arise).
In analyzing the fair value of goodwill and assessing the
recoverability of the carrying value of property, plant and equipment,
management uses models which are based on estimates of future operating
performance and related cash flows. In preparing these models, management must
make estimates in projecting future cash flows attributable to the reporting
unit or assets being tested, in selecting a discount rate that reflects the
related business risks, and in determining the appropriate perpetuity or
disposal value. In developing these projections of future cash flows, we make a
variety of important assumptions and estimates that have a significant impact on
management's assessments of whether the carrying values of goodwill and
property, plant and equipment should be adjusted to reflect impairment. Among
these are assumptions and estimates about the future growth and profitability of
the related business unit or asset, and assumptions about anticipated future
economic, regulatory and political conditions in the relevant market.
Our estimates related to the carrying values of goodwill and property,
plant and equipment are considered to be critical accounting estimates because
they are susceptible to change from period to period based on our judgments
about a variety of factors. For example, judgment is required to determine
whether events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. In addition, in performing assessments of the
carrying values of these assets, we must make judgments about the future
business, economic, regulatory, and political conditions affecting these assets,
as well as to select the appropriate risk-related rates for discounting
estimated future cash flows, and to develop reasonable estimates of disposal
values.
RETIREMENT BENEFITS
We sponsor a defined-benefit pension plan for substantially all of our
United States employees hired on or before December 31, 2003. In order to
measure the expense and obligations associated with these retirement benefits,
we must make a variety of estimates including discount rates used to value
certain liabilities, expected return on plan assets set aside to fund these
liabilities, rate of compensation increase, employee turnover rates, retirement
rates, mortality rates and other factors. Our benefit plan committee determines
the key assumptions related to the discount rate, expected investment rate of
return and compensation increases after consulting with the actuarial firm that
performs the calculations. Other assumptions are also set based on consultation
with our actuaries.
20
To determine our net accrued benefit and net periodic benefit cost, we
form judgments about the best estimate for each assumption used in the actuarial
computation. The most important assumptions that affect the computations are the
discount rate and the expected long-term rate of return on plan assets.
Our discount rate assumption is intended to reflect the rate at which
the retirement benefits could be effectively settled based upon the assumed
timing of the benefit payments. In determining the discount rate, we utilize the
yield of a standardized benchmark, the Moody's Aa Corporate Bond Index, which
consists of high quality fixed income investments, and round it to the nearest
25 basis points. The discount rate used to determine our retirement pension
benefit obligation at September 30, 2005, was 5.25%. In 2005, a 50 basis point
decrease in this discount rate would have increased the benefit obligation by
$3.5 million and increased the net cost by 29%, or $364 thousand. Likewise in
2005, a 50 basis point increase in the discount rate would have decreased the
benefit obligation by $3.08 million and decreased the net cost by 13%, or $168
thousand.
The expected long-term rate of return on plan assets was based on our
current asset allocations and the historical long-term performance, as adjusted
for existing market conditions. Information regarding our asset allocations is
included in the Notes to Consolidated Financial Statements in "Item 8 Financial
Statements and Supplementary Data." We assumed a weighted-average expected
long-term rate of return on pension plan assets of 8.50% to determine our net
benefit cost in 2005. A 50 basis point decrease in the expected return would
have increased the net cost by approximately 12%, or $148 thousand, in 2005.
Likewise, a 50 basis point increase in the expected return would have decreased
the net cost by $148 thousand.
INCOME TAXES
Our effective tax rate is based on the expected income, statutory tax
rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. Significant judgment is required in
determining our effective tax rate and in evaluating our tax positions. We
establish reserves when, despite our belief that our tax return positions are
fully supportable, we believe our positions may be overturned. We adjust these
reserves in light of changing facts and circumstances, such as the progress of a
tax audit. Our effective tax rate includes the impact of changes to reserves
that we consider appropriate. The rate is then applied to pre-tax income
reported in our consolidated statements of operations. Our estimates of income
tax items, expense and reserves are considered to be critical accounting
estimates because they are susceptible to change from period to period based on
our judgments about a variety of factors.
Valuation allowances are recorded, if necessary, to measure a deferred
tax asset at an estimated realizable value. Both positive and negative evidence
are considered in forming our judgment as to whether a valuation allowance is
appropriate. Changes in a valuation allowance are recorded in the period when we
determine events have occurred that will impact the realizable value of the
asset.
A number of years may elapse before a particular matter, for which we
have established a reserve or valuation allowance, is audited and finally
resolved. Audits of our United States federal income tax returns have been
completed through 2001. State income tax returns are audited more infrequently.
Unfavorable settlement of any particular issue would require use of our cash and
could result in the recording of additional tax expense. Favorable resolution
would be recognized as a reduction to our tax provision in the year of
resolution.
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 consolidated financial statements.
21
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.
In December 2004, the FASB amended FAS 123 ("SFAS 123(R)"), 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 as the majority of our
options issued prior to January 1, 2003, the date we adopted SFAS No. 123, have
already vested.
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.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2005
The discussion below references the consolidated statement of
operations included in "Item 8 - Financial Statements and Supplementary Data."
Net sales for the year ended December 31, 2005 were $535.9 million,
compared with $461.8 million for 2004 and $374.5 million for 2003, which were
increases of 16% and 23% in 2005 and 2004, respectively. Minerals contributed
approximately 43% of the increase in net sales over 2004. The environmental and
transportation segments contributed 51% and 12%, respectively, to the increase
in net sales; intersegment shipping revenue increased by 6% over 2004.
Approximately 4% of the growth in net sales for 2005 was attributed to
acquisitions and fluctuations in foreign currency translation combined.
In comparing 2004 with 2003, minerals accounted for approximately 54%
of the increase, while environmental and transportation contributed 45% and 1%,
respectively. Acquisitions and fluctuations in foreign currency translation
accounted for approximately 32% and 14%, respectively, of the 2004 over 2003
increase.
Gross profit was $138.0 million for the year ended December 31, 2005,
compared with $118.6 million for 2004 and $100.1 million in 2003. The 16%
increase in gross profit in 2005 over 2004 was generated by the growth in net
sales. On a segment basis, minerals contributed approximately 30% of the
increase over 2004, while environmental and transportation accounted for 63% and
7%, respectively. Relative to the comparison of 2004 with 2003, the 19% increase
in gross profit followed sales growth. Minerals contributed approximately 53% of
the growth in gross profit, while environmental and transportation accounted for
45% and 2%, respectively.
22
Gross margin was 25.8% in 2005, 25.7% in 2004 and 26.7% in 2003. We did
not realize an improvement in gross margin in 2005 over 2004 due to higher raw
material, transportation and energy-related costs. These higher costs depressed
gross margins in both the minerals and environmental segments in 2005. The 100
basis point decline in 2004 from 2003 was also primarily influenced by higher
production and transportation costs. Additionally, the environmental segment
gross margins declined in 2004, due to a greater proportion of lower-margin
product sales in that year.
General, selling and administrative expenses were $90.9 million for the
year ended December 31, 2005, compared with $82.6 million in 2004 and $71.1
million in 2003. The increase in 2005 over 2004 was primarily attributable to
greater employee benefit and compensation costs, Sarbanes-Oxley
compliance-related costs, and audit fees. The increase in 2004 over 2003 was
attributed to a number of expenses including higher compensation, employee
benefits and professional and consulting fees associated with Section 404 of the
Sarbanes-Oxley Act. Included in the 2004 professional fees was $1.2 million for
assistance in filing amended U.S. income tax returns.
Operating profit was $47.1 million for the year ended December 31,
2005, compared with $36.0 million in 2004 and $29.0 million in 2003. The
improvement in operating profit 2005 and 2004 resulted from the increase in
sales and gross profit. Operating margin for 2005 was 8.8%, compared with 7.8%
in 2004 and 7.7% in 2003. On a segment basis, minerals, environmental and
transportation operating margins improved in 2005 over 2004 due to the
relatively modest increases in general, selling and administrative expenses as
compared with the increase in gross profit. In comparing 2004 with 2003, the
minerals segment's operating margin increased; however, a decline in the
environmental segment's margin offset the improvement.
A review of sales, gross profit, general, selling and administrative
expenses and operating profit by segment follows.
MINERALS SEGMENT
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
MINERALS 2005 2004 2003 2005 vs. 2004 2004 vs. 2003
- ------------------------ ------------------- ------------------- ------------------- -------------------- -------------------
(Dollars in Thousands)
Net sales $ 295,686 100.0% $ 264,167 100.0% $ 217,203 100.0% 31,519 11.9% 46,964 21.6%
Cost of sales 236,916 80.1% 211,228 80.0% 174,048 80.1%
--------- --------- --------- --------- --------- ---------
Gross profit 58,770 19.9% 52,939 20.0% 43,155 19.9% 5,831 11.0% 9,784 22.7%
General, selling and
administrative expenses 22,268 7.5% 22,307 8.4% 19,693 9.1% (39) -0.2% 2,614 13.3%
--------- --------- --------- --------- --------- ---------
Operating profit 36,502 12.4% 30,632 11.6% 23,462 10.8% 5,870 19.2% 7,170 30.6%
2005 vs. 2004
Base businesses (those businesses owned for greater than one year)
accounted for all of the growth over the prior year. Metalcasting and pet
products revenues accounted for a large majority of the increase. Domestic
metalcasting revenue growth was primarily attributed to selling price increases
that were implemented to offset increases in raw materials, transportation and
energy-related costs. Metalcasting revenue also improved due to higher sales
volumes in China and Thailand. Higher volumes and selling price increases led to
the improvement in pet products revenues. Specialty minerals revenues were
relatively flat in comparison with the prior year. Detergent additives volumes
declined in 2005 but were offset by increases in volumes and selling prices in
the oil and gas drilling fluids product lines.
Gross profit improved with the increase in net sales; however, gross
margin declined by 10 basis points. Additionally, gross profit in 2005 benefited
from a $2.1 million one-time reduction in mining-related taxes owed to the State
of Montana. Excluding this benefit, gross profit would have improved over 2004
by approximately 7% and gross margin would have been 19.2%. Selling price
increases were not large enough to offset the actual increase in raw materials,
transportation and energy-related costs.
23
General, selling and administrative expenses declined slightly in 2005
partly because 2004 included a charge for $0.9 million related to increased bad
debt reserves. Also, 2005 included a benefit of $0.6 million related to a $0.5
million greater benefit from gains on the disposals of certain assets.
Operating margin improved by 80 basis points due to flat general,
selling and administrative expenses.
2004 vs. 2003
The increase in sales resulted from strong volume growth in the
metalcasting and specialty minerals businesses. Metalcasting sales were also
aided by price increases implemented as result of rising raw material and
transportation costs. The detergent additives business led the increase in
specialty minerals sales. Pet products sales were relatively stable.
Acquisitions and fluctuations in foreign currency translation accounted for
approximately 11% and 13%, respectively, of the increase in sales.
Gross profit increased commensurate with higher sales. Gross margin
improved by 10 basis points due to higher volumes which contributed to lower
production costs for certain businesses.
General, selling and administrative expenses increased due to higher
compensation and benefit costs. Acquisitions and foreign exchange also
contributed to the increase.
Operating profit improved due to the greater sales and gross profit as
explained above. Operating margin improved by 80 basis points as a result of
greater volume in the metalcasting and specialty minerals businesses.
ENVIRONMENTAL SEGMENT
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
ENVIRONMENTAL 2005 2004 2003 2005 vs. 2004 2004 vs. 2003
- ------------------------ ------------------- ------------------- ------------------- -------------------- -------------------
(Dollars in Thousands)
Net sales $ 210,846 100.0% $ 172,723 100.0% $ 133,769 100.0% 38,123 22.1% 38,954 29.1%
Cost of sales 137,526 65.2% 111,565 64.6% 80,897 60.5%
--------- --------- --------- --------- --------- ---------
Gross profit 73,320 34.8% 61,158 35.4% 52,872 39.5% 12,162 19.9% 8,286 15.7%
General, selling and
administrative expenses 44,652 21.2% 40,636 23.5% 34,993 26.2% 4,016 9.9% 5,643 16.1%
--------- --------- --------- --------- --------- ---------
Operating profit 28,668 13.6% 20,522 11.9% 17,879 13.3% 8,146 39.7% 2,643 14.8%
2005 vs. 2004
Base businesses accounted for approximately 94% of the growth in net
sales, while favorable foreign currency translation and acquisitions represented
the remainder. Lining technologies and water treatment product line revenues
accounted for a large majority of the increase. Higher volumes in all three
regions, Americas, Europe/Middle East and Asia-Pacific, led to the increase in
lining technologies revenues. We also benefited from higher average selling
prices in the United States Water treatment revenues improved principally due to
higher volumes and service activity in the oilfield services business.
Gross profit increased in conjunction with sales. Gross margin
decreased by 60 basis points due to a greater proportion of revenues generated
from lower profit product lines. Certain lining technologies and oilfield
service product/service lines have lower gross margins.
General, selling and administrative expenses grew at more modest rates
as employee headcount levels remained fairly stable compared with 2004.
24
Operating profit improved inconjunction with the increase in gross
profit. Operating margin improved by 170 basis points which largely resulted
from the increase in general, selling and administrative expenses.
2004 vs. 2003
The $39.0 million increase in sales was primarily attributed to the
impact of acquisitions. The two acquisitions, which were completed as of January
1, 2004, contributed approximately 58% of the growth in sales. See Note 11 of
the accompanying consolidated financial statements for further details on the
acquisitions. Fluctuations in foreign currency translation accounted for
approximately 17% of the increase. Strong volume increases in the European
lining technologies and building materials businesses also contributed to the
increase.
Gross profit increased due to the increase in sales; however, gross
margins declined by 410 basis points. Lower relative profitability on sales
generated by the acquired businesses was the primary reason for the gross margin
decline. The domestic businesses also experienced gross margin pressure due to
increased raw materials and logistics costs.
General, selling and administrative expenses increased due to higher
compensation and benefit costs. Acquisitions and foreign exchange also accounted
for the increase.
Operating profit improved with the increase in sales and gross profit;
however, operating margin declined by 140 basis points. As referenced in the
explanation for the gross margin decline, acquisitions had the primary
detrimental impact on operating margin.
TRANSPORTATION SEGMENT
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
TRANSPORTATION 2005 2004 2003 2005 vs. 2004 2004 vs. 2003
- ------------------------ ------------------- ------------------- ------------------- -------------------- -------------------
(Dollars in Thousands)
Net sales $ 49,708 100.0% $ 40,650 100.0% $ 37,549 100.0% 9,058 22.3% 3,101 8.3%
Cost of sales 43,775 88.1% 36,179 89.0% 33,508 89.2%
--------- --------- --------- --------- --------- ---------
Gross profit 5,933 11.9% 4,471 11.0% 4,041 10.8% 1,462 32.7% 430 10.6%
General, selling and
administrative expenses 3,216 6.5% 2,751 6.8% 2,494 6.6% 465 16.9% 257 10.3%
--------- --------- --------- --------- --------- ---------
Operating profit 2,717 5.4% 1,720 4.2% 1,547 4.2% 997 58.0% 173 11.2%
2005 vs. 2004
Revenues grew due to higher business levels, equipment utilization
rates, and average rates charged to customers. Approximately 41% of the
segment's revenues were generated from services provided to certain domestic
subsidiaries within our minerals and environmental segments. Gross profit
improved commensurate with the increase in revenues. Gross margin benefited from
improved equipment utilization and higher revenue rates. Diesel fuel surcharges
negatively impacted gross margin; however, the segment was able to offset a
majority of the cost by passing-through those charges to customers.
2004 vs. 2003
A majority of the increase in sales was attributed to greater
intersegment business. Both the domestic minerals and environmental segments
experienced higher volumes that led to the increase in transportation services.
Intersegment sales accounted for approximately 39% of the segment total. Higher
freight rates also contributed to the increase.
25
CORPORATE SEGMENT
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
CORPORATE 2005 2004 2003 2005 VS. 2004 2004 VS. 2003
- -------------------------------------- ---------- ---------- ---------- ----------------------- ------------------------
(Dollars in Thousands)
Intersegment shipping sales $ (20,316) $ (15,762) $ (14,038)
Intersegment shipping costs (20,316) (15,762) (14,038)
---------- ---------- ----------
Gross profit - - -
Corporate general, selling and
administrative expenses 17,190 13,244 10,077 $ 3,946 29.8% $ 3,167 31.4%
Nanocomposite business development
expenses 3,621 3,646 3,796 (25) -0.7% (150) -4.0%
---------- ---------- ----------
Operating loss $ (20,811) $ (16,890) $ (13,873) $ (3,921) 23.2% $ (3,017) 21.7%
2005 vs. 2004
Intersegment shipping sales 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 costs include management information systems, human
resources, investor relations, corporate communications and finance.
Additionally, marketing, research and development and operating costs related to
the development of the nanocomposite business are included in this segment.
As described in the comparison of 2004 with 2003 expenses, 2004
included $1.2 million of professional service fees, which are considered
non-recurring in nature. Excluding these fees from our results in 2004, segment
expenses in 2005 would have increased by approximately $5.1 million, or 39%.
Contributing to the increase were greater expensese associated with stock-based
compensation, corporate development activities, professional service fees
related to Sarbanes-Oxley compliance, independent registered accountant services
and tax services.
Nanocomposite business development expenses were comparable to the
prior-year. No material changes occurred in 2005 related to new customers or
product introductions.
2004 vs. 2003
We recorded approximately $1.2 million of tax consulting fees in 2004
in connection with the filing of amended federal income tax returns to claim
refunds for increased deductions and credits for the 1999 through 2002 periods.
Further background on the amended returns is described below in the income taxes
narrative. Other operating expenses that impacted the segment were increased
stock compensation costs and higher professional and consulting fees associated
with Section 404 of the Sarbanes-Oxley Act compliance.
Nanocomposite expenses declined slightly due lower net spending on
business development expenses.
NET INTEREST EXPENSE
Net interest expense was $1.7 million, $0.8 million, and $0.3 million
in 2005, 2004, and 2003, respectively. Average debt levels were $34.6 million
and $21.7 million in 2005 and 2004, respectively. Debt increased in 2005
principally due to higher average working capital and greater capital
expenditures. In 2004, debt increased due to acquisitions and higher average
working capital. Average interest rates on our funded debt were 4.7%, 2.8% and
2.0% in 2005, 2004 and 2003, respectively. A majority of the interest on our
debt is based upon LIBOR rates.
26
OTHER INCOME (EXPENSE), NET
Net other expense in 2005 was approximately $0.4 million and $0.1
million in 2005 and 2004, respectively. In 2003, we recognized net other income
of $0.6 million. Other income is composed of a number of miscellaneous
transactions, primarily foreign currency transaction gains and losses.
INCOME TAXES
The effective income tax rate for 2005 was 25.9%, compared with 13.4%
in 2004 and 34.0% in 2003. A schedule is included in Note 9, Income Taxes, as
part of the Notes to Consolidated Financial Statements which reconciles the
federal statutory income tax rate to our effective rate. The largest benefit to
the tax rate in 2005 was higher depletions deductions, lower average foreign tax
rates and reductions in estimates of 2004 taxes payable which were determined in
conjunction with preparation of the income tax returns in 2005.
In 2004, we recorded a reduction to income tax expense of $4.8 million
associated with depletion deductions and research and development credits
available in computing income tax expense. Approximately $0.8 million of this
amount relates to changes in estimates resulting from the finalization, in 2004,
of the tax return for the 2003 tax year. The remaining $4.0 million relates to
the filing of amended federal income tax returns dating from 1999 through 2002.
Regarding the amended income tax returns, after consultation with tax
advisors, we recomputed our federal income tax liability for these periods after
determining that we could increase certain deductions and credits as allowed
under the Internal Revenue Code. The total refund claimed on the returns was
$5.2 million; however, we determined that a contingency reserve was necessary to
reflect potential reduction of the refund after examination of the returns by
the IRS. No adjustments were recorded in 2005 to the contingency reserve
established for these refund claims.
We also recorded, in 2004, a $1.1 million credit to income tax expense
for the adjustment of deferred income tax assets and income taxes payable at a
U.K. subsidiary. A portion of this adjustment related to prior reporting
periods, but was considered immaterial to those periods; therefore, the entire
amount was reflected in 2004. If the $1.1 million and $4.8 million reductions
had not been recorded, the effective income tax rate for 2004 would have been
approximately 30%. No adjustments were recorded in 2005 to reflect a change in
the estimates for these items.
INCOME FROM AFFILIATES AND JOINT VENTURES
We reported income from affiliates and joint ventures of $2.9 million,
$1.2 million and $0.6 million for 2005, 2004 and 2003, respectively. The major
component of the increase for each of the last two years was largely related to
our investments in two 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. The second business in India is engaged in
manufacturing, marketing and distributing a specialized bentonite application
involving clarification of edible oils. That business, in which we own 50% of
the equity, has increased its revenues substantially over the last two years and
is now a leading supplier in the Indian market.
Additionally, we increased our ownership percentage in our Japanese
joint venture in August 2004 to 50% from 19%, and we began accounting for the
income from that venture under the equity method.
27
DISCONTINUED OPERATIONS
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 our absorbent polymer segment. The sale of
the segment was 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
this refund in July 2005.
Discontinued operations reported in 2003 reflected the recording of a
tax benefit associated with the disposal of our U.K.-based metalcasting and cat
litter businesses. The disposal transactions were completed in 2001.
On February 18, 2004, the Internal Revenue Service notified us that
audits of certain federal income tax returns, including 2001, had been completed
and approved by the Committee on Joint Taxation. The 2001 return included
deductions for losses associated with the disposal of the aforementioned
businesses. Upon receiving this notification, effective as of December 31, 2003,
we revised our estimate of income taxes payable previously recorded to recognize
an income tax receivable of $8.9 million, including interest on the forthcoming
refund. The tax refunds were received in 2004.
NET INCOME
Net income for 2005 was $41.0 million compared with $31.6 million and
$28.9 million 2004 and 2003, respectively. In 2005 and 2003, net income included
$4.8 million and $9.0 million, respectively, of a benefit from discontinued
operations as previously discussed. The increase in income from continuing
operations in both comparison periods (2005 vs. 2004 and 2004 vs. 2003) was
attributed to the increase in operating profit for the reasons described earlier
in this report. Net income in 2004 was also positively impacted by the
adjustments to income tax expense which reduced the overall effective tax rate
as previously discussed.
EARNINGS PER SHARE
Diluted earnings per share were calculated using the weighted average
number of shares of common stock, including common share equivalents,
outstanding during the year. Stock options issued to key employees and directors
are considered common share equivalents. The weighted average number of shares
of common stock and common stock equivalent shares outstanding was approximately
30.8 million in 2005, 30.7 million in 2004 and 29.8 million in 2003.
There were 29.5 million shares outstanding, excluding common share
equivalents, at December 31, 2005, compared with 29.1 million and 28.4 million
at December 31, 2004 and December 31, 2003, respectively. The increase in shares
in 2004 was due to exercise of stock options which was partially offset by stock
repurchases. The 0.4 million share increase in 2005 was related to the issuance
of shares of treasury stock to employees in connection with the exercise of
stock options. This increase was partially offset by the repurchase of 105,000
shares of common stock on the open market.
Diluted earnings per share from continuing operations in 2005 were
$1.18 compared with $1.03 and $0.67 in 2004 and 2003, respectively. The
improvement for both 2005 and 2004 was commensurate with the increase in net
income from continuing operations previously described. Also benefiting 2004,
was a reduction of income tax expense, described above, which contributed
approximately $0.14 per share. Net income per diluted share was $1.33, $1.03,
and $0.97 in 2005, 2004 and 2003, respectively. Both 2005 and 2003 were
positively impacted by discontinued operations.
28
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations, borrowings from a revolving credit facility
and proceeds from the exercise of stock options by employees have been our
sources of funds to purchase property, plant and equipment; acquire businesses;
repurchase common stock; and pay dividends to shareholders. We believe cash
flows from operations and borrowings from an unused and committed revolving
credit facility will be adequate to support our operating plans for the
foreseeable future. Following is a discussion and analysis of our cash flow
activities as presented in the Consolidated Statements of Cash Flows within Item
8 of this report.
Cash provided by operating activities of continuing operations was
$36.3 million, compared with $17.4 million in 2004 and $28.6 million in 2003. In
2005, our cash flows benefited from higher income from continuing operations and
slower growth in working capital. The decline in 2004 was primarily attributed
to cash used for working capital. Accounts receivable and inventories in 2005
increased by $24.6 million over 2004; they increased in 2004 by $38.9 million
over 2003. The increases were commensurate with our sales growth.
Net cash used in investing activities in 2004 was $22.3 million,
compared with $26.1 million and $22.8 million in 2004 and 2003, respectively.
Capital expenditures totaled $28.6 million in 2005, compared with $21.7 and
$15.8 million in 2004 and 2003, respectively. Tax refunds provided by
discontinued operations were $4.8 million and $8.6 million in 2005 and 2004,
respectively.
The increase in capital expenditures in 2005 over 2004 was due to a
number of new investment sites including a metalcasting products plant in the
United States and a lining technologies manufacturing plant in Spain. Capital
expenditures increased in 2004 over 2003 primarily due to an acquisition of a
vacant facility in the United States for $4.4 million that we plan to use for
consolidating certain manufacturing operations for our environmental segment.
The remaining portion of the increase in 2004 was due to further expansion of
operations in Asia.
Acquisitions were $2.1 million, $13.3 million and $7.1 million in 2005,
2004 and 2003, respectively. In 2004, we acquired two businesses related to our
environmental segment.
Cash used in financing activities was $11.8 million in 2005 and $11.6
million in 2003. Financing activities provided cash totaling $9.3 million in
2004. Financing cash flows are primarily affected by borrowings from our
revolving credit facility. We had net borrowings of debt from the revolving
credit facility totaling $20.5 million in 2004 and net repayments of $8.3
million in 2003. Net borrowings were negligible in 2005. The increase in
borrowings in 2004 was attributed to acquisitions and funding working capital
growth. Net debt repayments in 2003 were the result of higher cash flow from
operations and relatively lower spending on acquisitions. Acquisitions completed
in 2002 were the primary reason for the net borrowings in that year.
As noted in Item 5 of this Form 10-K, we repurchased approximately $2.0
million of our common stock in 2005 compared with $2.9 million in 2004 and $1.6
million in 2003. Approximately $8.0 million remains in funds authorized by our
Board of Directors for stock repurchases. We elect to repurchase our common
stock in the open market from time to time when we believe utilizing funds in
this manner will provide a good return to our shareholders.
Dividends on our common stock were $11.3 million in 2005, compared with
$9.4 million in 2004 and $4.6 million in 2003. Declared dividends were $0.38 per
share in 2005, compared with $0.32 per share in 2004 to $0.16 per share in 2003.
The increases reflected the improvement in our earnings and cash flows from 2003
through 2005.
As of December 31, 2005, we had outstanding debt of $34.8 million and
cash of $16.0 million, compared with $34.3 million of outstanding debt and $17.6
million of cash at December 31, 2004. Total funded debt represented 12% of total
capitalization at December 31, 2005, compared with 13% at December 31, 2004.
29
We had a current ratio of 3.3-to-1 and working capital of approximately
$148.2 million as of December 31, 2005, compared with 3.1-to-1 and $131.0
million, respectively, as of December 31, 2004. The current ratio and working
capital increased due to the growth in sales we experienced in 2005.
Since the mid-1980s, we and/or our subsidiaries have been named as one
of a number of defendants in product liability lawsuits relating to the minor
free-silica content of our bentonite products used in the metalcasting industry.
The plaintiffs in these lawsuits are primarily employees of our foundry
customers. To date, we have not incurred significant costs in defending these
matters. We believe we have adequate insurance coverage and do not believe the
litigation will have a material adverse impact on our financial condition,
liquidity or results of the operations.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following schedule sets forth details of our long-term contractual
obligations at December 31, 2005:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
LESS
THAN 1 2-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
---------- ---------- ---------- ---------- ----------
(in millions)
Bank debt 34.8 $ - $ 1.8 $ 28.3 $ 4.8
Lease obligations 13.9 4.8 6.7 1.6 0.8
Capital expenditures 1.3 1.3 - - -
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 48.7 $ 4.8 $ 8.5 $ 29.9 $ 5.6
========== ========== ========== ========== ==========
Bank debt includes approximately $25.8 million due under a revolving
credit agreement, which provides for a commitment of $120 million in borrowing
capacity and matures on October 31, 2010. The agreement is a multi-currency
arrangement that allows us to borrow certain foreign currencies at rates that
can range from 0.50% to 1.125% above the London Inter Bank Offered Rate (LIBOR),
depending upon the amount of the credit line used and certain capitalization
ratios. The facility requires us to meet certain covenants, such as specific
amounts of net worth, and limits our ability to make additional borrowings and
guarantees. We were in compliance with these covenants at December 31, 2005.
Operating leases relate to non-cancelable obligations for railroad
cars, truck trailers, computer software, office equipment, certain automobiles,
and office and plant facilities. Additional information regarding operating
leases is disclosed in Note 14 of Notes to the Consolidated Financial Statements
included in Part IV of this report.
The Company occasionally enters into unconditional purchase obligations
which contemplate future, irrevocable payments under enforceable contracts which
can not be cancelled without penalty. Such payments are excluded from the above
table as they are entered into in the ordinary course of business, and we
believe the anticipated expenditures associated with them are not material.
We have recorded $5 million of liabilities to satisfy the land
reclamation obligations discussed in Note 1 of our Notes to Consolidated
Financial Statements. Expenditures to satisfy these liabilities are excluded
from the above table of contractual obligations as the timing of these payments
are not contractually due until the expiration of individual mining permits,
which are frequently renewed.
We anticipate our funding obligation for our defined benefit pension
plan will approximate $1 million in 2006. That amount principally represents
contributions required by regulations or laws. We have not presented this
obligation or the obligation for future years in the table above as the funding
can vary from year to year based on changes in fair value of pension plan assets
and actuarial assumptions.
30
At December 31, 2005 and 2004, we had outstanding standby letters of
credit of $14.2 million and $13.9 million, respectively, which are not included
in the obligations in the table above. These letters of credit typically serve
to guarantee the Company's performance of its obligations related to land
reclamation and workers' compensation claims. We have recognized the estimated
costs of our obligations related to land reclamation and workers' compensation
claims in our consolidated balance sheets as of December 31, 2005 and 2004.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational corporation that manufactures and markets products
in countries throughout the world, we are subject to certain market risks,
including those related to foreign currency, interest rates and government
actions. We use a variety of practices to manage these market risks, including,
when considered appropriate, derivative financial instruments. We use derivative
financial instruments only for risk management and do not use them for trading
or speculative purposes.
EXCHANGE RATE SENSITIVITY
We are exposed to potential gains or losses from foreign currency
fluctuations affecting net investments and earnings denominated in foreign
currencies. Our primary exposures are to changes in exchange rates for the U.S.
dollar versus the euro, the British pound, and the Polish zloty. We also have
significant exposure to changes in exchange rates between the British pound and
the euro and the Polish zloty and the euro.
Our various currency exposures often offset each other, providing a
natural hedge against currency risk. Periodically, specific foreign currency
transactions (e.g. inventory purchases) are hedged with forward contracts to
reduce the foreign currency risk. As of December 31, 2005, we did not have any
material foreign currency contracts outstanding.
INTEREST RATE SENSITIVITY
The following table provides information about our financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted average interest rates by expected
maturity dates for debt obligations. Weighted average variable rates are based
on implied forward rates in the yield curve at the reporting date. The
instruments' actual cash flows are denominated in U.S. dollars.
EXPECTED MATURITY DATE
------------------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 THEREAFTER TOTAL FAIR VALUE
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(US$ equivalent in thousands)
Short-term debt:
Fixed rate $ - $ - $ - $ - $ - $ - $ - $ -
Interest rate - - - - - -
Long-term debt:
Variable rate (US$) - 1,768 - - 9,000 4,800 15,568 15,568
Average interest rate - 5.02% - - 5.15% 3.60%
Fixed rate (THB) - - - - 2,511 - 2,511 2,511
Interest rate - - - - 6.69% -
Variable rate (UK(pound)) - - - - 10,839 - 10,839 10,839
Average interest rate - - - - 5.14% -
Variable rate ((euro)) - - - - 5,920 - 5,920 5,920
Average interest rate - - - - 2.94% -
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ - $ 1,768 $ - $ - $ 28,270 $ 4,800 $ 34,838 $ 34,838
========= ========== ========== ========== ========== ========== ========== ==========
31
We periodically use interest rate swaps to manage interest rate risk on
debt securities. These instruments allow us to change the characteristics of
variable rate debt into fixed rate or fixed rate debt into variable rate.
Interest rate differentials are paid or received on these arrangements over the
life of the agreements. At the end of 2005 and 2004, there were no interest rate
swaps outstanding.
CREDIT RISK
We are exposed to credit risk on certain assets, primarily accounts
receivable. We provide credit to customers in the ordinary course of business
and perform ongoing credit evaluations. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising our customer base. We currently believe our allowance for doubtful
accounts is sufficient to cover customer credit risks. Our accounts receivable
financial instruments are carried at amounts that approximate fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Financial Statement Schedule
on Page F-1. Such financial statements and schedule are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of such period, our disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information we are required to disclose in the reports we file or submit
under the Exchange Act.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) of the
Exchange Act. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on criteria established in the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, we concluded
that our internal control over financial reporting was effective as of the end
of the period covered by this report.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies or procedures may deteriorate.
Our independent registered public accounting firm has audited our
assessment of the effectiveness of our internal control over financial reporting
as of the end of the period covered by this report as stated in their report,
which appears in Part IV of this Form 10-K.
32
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
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 internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. As described in
our annual report on Form 10-K for the year ended December 31, 2004, as amended,
we identified a material weakness in internal control over financial reporting
relative to our accounting for income taxes. In particular, our design of
internal control 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
and in the fiscal quarter ended March 31, 2005, we began implementing changes in
our internal control over financial reporting that materially affected or were
reasonably likely to materially affect our internal control over financial
reporting.
Specifically, these changes included restructuring the responsibility
for income taxes, formalizing our oversight relating to accounting for income
taxes by developing procedures to both monitor significant income tax events and
determine appropriate accounting treatment for certain deduction and credit
positions taken in income tax returns, both amended and original, and developing
a program to provide increased training to improve our accounting for income
taxes. Additionally, we enhanced our internal control over financial reporting
of our foreign subsidiaries to assure that the consolidated financial statements
are presented in accordance with accounting principles generally accepted in the
United States and that changes in accounting estimates are recorded in the
proper reporting period. We also revised the process of how we calculate and
report our tax expense and related balance sheet accounts, and we retained a
professional accounting firm to assist us in the preparation of these tax
accounts for each financial reporting period. Lastly, the Chief Financial
Officer conducted an annual assessment of our staff's knowledge of accounting
principles generally accepted in the United States and provided additional
training where necessary.
In order to conclude on the effectiveness of our remediation
activities, we were required to test the effectiveness of the changes in our
internal control over financial reporting over successive quarters to prove
their operating effectiveness. Given that our remedial efforts continued through
the year ended December 31, 2005, it is only as of the fourth quarter in 2005
that we are able to conclude on our remediation activities and our changes in
internal control over financial reporting. Accordingly, we have determined that
the material weakness in our internal control over financial reporting as
described in our annual report on Form 10-K, for the year ended December 31,
2004, as amended, was remediated.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is included under
the captions "Election of Directors", "Corporate Governance Matters" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-K, and is incorporated herein by reference.
Information regarding the executive officers of the Company is included
under a separate caption in Part I hereof in accordance with General Instruction
G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
We have adopted a Code of Business Conduct and Ethics (the "Code") that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller and persons performing similar
functions, as well as other employees. The Code, our Corporate Governance
Guidelines and the charters of our Audit Committee, Compensation Committee and
Nominating and Governance Committee are publicly available on our website at
www.amcol.com and are available in print, free of charge, to any shareholder
upon request to the Company's Corporate Secretary at AMCOL International
Corporation, One North Arlington, 1500 West Shure Drive, Suite 500, Arlington
Heights, Illinois 60004-7803. If we make any substantive amendments to the Code
or grant any waiver, including any implicit waiver, from a provision of the Code
to our principal executive officer, principal financial officer, principal
accounting officer or controller or persons performing similar functions, we
will disclose the nature of such amendment or waiver on our website or in a
report on Form 8-K in accordance with applicable rules and regulations.
33
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the above is included under the captions "Named
Officers' Compensation" and "Stock Performance Graph" in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-K, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is included under the caption "Security Ownership" in the
Company's definitive proxy statement, which will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Form 10-K, and is incorporated herein by reference.
Information regarding the Company's securities authorized for issuance
under equity compensation plans is included under the caption "Named Officers'
Compensation" and "Equity Compensation Plan Information" in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-K, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the above is included under the caption "Certain
Relationships and Related Transactions" in the Company's definitive proxy
statement, which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K,
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is
included under the captions "Independent Public Accountants" and "Corporate
Governance Matters - The Audit Committee" in the Company's definitive proxy
statement, which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K,
and is incorporated herein by reference.
34
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) 1. See Index to Financial Statements and Financial Statement
Schedule below.
2. See Financial Statements and Index to Financial Statement
Schedule below.
Such Financial Statements and Schedule are incorporated
herein by reference.
3. See Index to Exhibits immediately following the signature
page.
(b) See Index to Exhibits immediately following the signature page.
(c) See Index to Financial Statements and Financial Statement
Schedule below.
ITEM 15(A) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
------
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets, December 31, 2005 and 2004 F-4
Consolidated Statements of Operations, Years ended
December 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Comprehensive Income,
Years ended December 31, 2005, 2004 and 2003 F-7
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 2005, 2004 and 2003 F-8
Consolidated Statements of Cash Flows, Years ended
December 31, 2005, 2004 and 2003 F-9
Notes to Consolidated Financial Statements F-10
All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required, or because the required
information is not material.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
AMCOL International Corporation:
We have audited the consolidated financial statements of AMCOL International
Corporation and subsidiaries as listed in the accompanying index. We also have
audited management's assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that AMCOL International
Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). AMCOL International
Corporation's management is responsible for these consolidated financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on these consolidated
financial statements, an opinion on management's assessment, and an opinion on
the effectiveness of the Company's internal control over financial reporting
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and signifcant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
refect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
F-2
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AMCOL International
Corporation and subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, management's assessment that AMCOL
International Corporation and subsidiaries maintained effective internal control
over financial reporting as of December 31, 2005, is fairly stated, in all
material respects, based on criteria established in Interal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Furthermore, in our opinion, AMCOL International Corporation
and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
As described in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation effective January
1, 2003.
KPMG LLP
Chicago, Illinois
March 16, 2006
F-3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
DECEMBER 31,
-----------------------
ASSETS 2005 2004
- ---------------------------------------------------------- ---------- ----------
Current assets:
Cash $ 15,997 $ 17,594
Accounts receivable:
Trade, less allowance for doubtful accounts of
$2,350 and $4,637 in 2005 and 2004, respectively 98,824 86,128
Other 2,901 2,214
Inventories 77,928 63,882
Prepaid expenses 6,595 7,111
Current deferred tax assets 3,698 4,293
Income taxes receivable 4,864 10,750
Assets held for sale 402 752
---------- ----------
Total current assets 211,209 192,724
---------- ----------
Investment in and advances to joint ventures 19,730 16,133
---------- ----------
Property, plant, equipment, and mineral
rights and reserves:
Land and mineral rights 12,761 12,019
Depreciable assets 252,430 247,280
---------- ----------
265,191 259,299
Less: accumulated depreciation 165,127 165,658
---------- ----------
100,064 93,641
---------- ----------
Other assets:
Goodwill 20,644 19,225
Intangible assets, less accumulated amortization
of $5,479 and $4,629 in 2005 and 2004, respectively 3,009 3,802
Deferred tax assets 4,579 3,710
Other assets 9,294 7,207
---------- ----------
37,526 33,944
---------- ----------
$ 368,529 $ 336,442
========== ==========
Continued...
F-4
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
DECEMBER 31,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
- ---------------------------------------------------------- ---------- ----------
Current liabilities:
Accounts payable 24,722 $ 25,474
Accrued liabilities 38,547 36,207
---------- ----------
Total current liabilities 63,269 61,681
---------- ----------
Long-term debt 34,838 34,295
---------- ----------
Minority interests in subsidiaries 259 5
Deferred compensation 7,045 5,872
Other liabilities 14,262 12,655
---------- ----------
21,566 18,532
---------- ----------
Stockholders' equity:
Common stock, par value $.01 per share. Authorized
100,000,000 shares; issued 32,015,771 shares
in 2005 and 2004 320 320
Additional paid in capital 72,194 69,763
Retained earnings 184,125 154,366
Accumulated other comprehensive income 8,644 14,905
---------- ----------
265,548 239,354
Less:
Treasury stock (2,232,132 and 2,620,016 shares in 2005
and 2004, respectively) 16,427 17,420
---------- ----------
248,856 221,934
---------- ----------
$ 368,529 $ 336,442
========== ==========
See accompanying notes to consolidated financial statements.
F-5
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
---------- ---------- ----------
CONTINUING OPERATIONS
Net sales $ 535,924 $ 461,778 $ 374,483
Cost of sales 397,901 343,210 274,415
---------- ---------- ----------
Gross profit 138,023 118,568 100,068
General, selling and administrative expenses 90,947 82,584 71,053
---------- ---------- ----------
Operating profit 47,076 35,984 29,015
---------- ---------- ----------
Other income (expense):
Interest expense, net (1,660) (826) (280)
Other, net (393) (86) 526
---------- ---------- ----------
(2,053) (912) 246
---------- ---------- ----------
Income before income taxes, income from affiliates and
joint ventures 45,023 35,072 29,261
Income tax expense 11,645 4,687 9,946
---------- ---------- ----------
Income before income from affiliates and
joint ventures 33,378 30,385 19,315
Income from affiliates and joint ventures 2,912 1,180 600
---------- ---------- ----------
Income from continuing operations 36,290 31,565 19,915
---------- ---------- ----------
DISCONTINUED OPERATIONS
Gain on 2001 disposal (including income tax benefits
of $5,255 and $8,741 in 2005 and 2003, respectively) 4,755 - 8,950
---------- ---------- ----------
Income from discontinued operations 4,755 - 8,950
---------- ---------- ----------
Net income $ 41,045 $ 31,565 $ 28,865
========== ========== ==========
See accompanying notes to consolidated financial statements.
Continued...
F-6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
---------- ---------- ----------
EARNINGS PER SHARE
Basic earnings per share:
Continuing operations $ 1.23 $ 1.08 $ 0.70
---------- ---------- ----------
Discontinued operations:
Gain on disposal 0.16 - 0.32
---------- ---------- ----------
0.16 - 0.32
---------- ---------- ----------
Net income $ 1.39 $ 1.08 $ 1.02
========== ========== ==========
Diluted earnings per share:
Continuing operations $ 1.18 $ 1.03 $ 0.67
---------- ---------- ----------
Discontinued operations:
Gain on disposal 0.15 - 0.30
---------- ---------- ----------
0.15 - 0.30
---------- ---------- ----------
Net income $ 1.33 $ 1.03 $ 0.97
========== ========== ==========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
---------- ---------- ----------
Net income $ 41,045 $ 31,565 $ 28,865
Other comprehensive income (loss) -
Minimum pension liability (net of $169 tax
benefit in 2005 and $0 in 2004) 154 (457) -
Foreign currency translation adjustment (6,415) 6,990 6,367
---------- ---------- ----------
Comprehensive income $ 34,784 $ 38,098 $ 35,232
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-7
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
COMMON STOCK ACCUMULATED
------------------------ OTHER
NUMBER ADDITIONAL COMPREHENSIVE
OF PAID-IN RETAINED INCOME TREASURY
SHARES AMOUNT CAPITAL EARNINGS (LOSS) STOCK TOTAL
------------ ---------- ---------- ---------- ------------- ---------- ----------
Balance at December 31, 2002 32,015,771 $ 320 $ 69,850 $ 107,874 $ 2,005 $ (22,114) $ 157,935
Net income - - - 28,865 - - 28,865
Cash dividends ($0.16 per share) - - - (4,560) - - (4,560)
Currency translation adjustment - - - - 6,367 - 6,367
Purchase of 266,963 treasury shares - - - - - (2,853) (2,853)
Sales of 1,492,806 treasury shares
pursuant to options - - (5,145) - 7,273 2,128
Tax benefit from employee stock plans - - 2,195 - - - 2,195
Vesting of common stock in connection
with employee stock plans - - 613 - - 760 1,373
------------ ---------- ---------- ---------- ------------- ---------- ----------
Balance at December 31, 2003 32,015,771 320 67,513 132,179 8,372 (16,934) 191,450
Net income 31,565 31,565
Cash dividends ($0.32 per share) (9,378) (9,378)
Currency translation adjustment 6,990 6,990
Purchase of 189,800 treasury shares (3,243) (3,243)
Sales of 477,809 treasury shares
pursuant to options (1,551) 2,757 1,206
Tax benefit from employee stock plans 2,027 2,027
Vesting of common stock in connection
with employee stock plans 1,774 1,774
Minimum pension liability (457) (457)
------------ ---------- ---------- ---------- ------------- ---------- ----------
Balance at December 31, 2004 32,015,771 320 69,763 154,366 14,905 (17,420) 221,934
Net income 41,045 41,045
Cash dividends ($0.38 per share) (11,286) (11,286)
Currency translation adjustment (6,415) (6,415)
Purchase of 109,629 treasury shares (2,058) (2,058)
Sales of 497,513 treasury shares
pursuant to options (1,561) 3,051 1,490
Tax benefit from employee stock plans 1,601 1,601
Vesting of common stock in connection
with employee stock plans 2,391 2,391
Minimum pension liability 154 154
------------ ---------- ---------- ---------- ------------- ---------- ----------
Balance at December 31, 2005 32,015,771 320 72,194 184,125 8,644 (16,427) 248,856
============ ========== ========== ========== ============= ========== ==========
See accompanying notes to consolidated financial statements.
F-8
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
(revised)* (revised)*
Cash flow from operating activities:
Net income $ 41,045 $ 31,565 $ 28,865
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash items:
Gain on the disposal of discontinued operations (4,755) - (8,950)
Depreciation, depletion, and amortization 19,558 20,124 18,910
Undistributed earnings from affiliates and joint ventures (3,156) (867) (403)
Minority interest in income of subsidiaries 42 7 -
Increase (decrease) in allowance for doubtful accounts (2,381) 1,063 813
Decrease (increase) in deferred income taxes (1,139) (995) (2,663)
Tax benefit from employee stock plans 1,601 2,027 2,195
Gain on sale of depreciable assets (1,433) (311) (73)
Stock compensation expense 2,391 1,772 613
Other non-cash charges (457) -
(Increase) decrease in current assets, net of effects of
acquisitions:
Accounts receivable (10,172) (22,040) (12,615)
Income taxes receivable 5,886 (3,869) 777
Inventories (14,046) (16,817) (6,721)
Prepaid expenses 508 (2,003) (1,588)
Increase (decrease) in current liabilities, net of
effects of acquisitions:
Accounts payable (1,109) 2,897 2,447
Accrued liabilities 2,878 5,975 8,841
Increase in other noncurrent assets (2,362) (1,893) (1,345)
Increase (decrease) in other noncurrent liabilities 2,934 1,209 (457)
---------- ---------- ----------
Net cash provided by operating activities of continuing
operations 36,290 17,387 28,646
---------- ---------- ----------
Cash flow from investing activities:
Proceeds from sale of depreciable assets 3,574 739 195
Capital expenditures for land, mineral reserves,
and depreciable assets (28,626) (21,627) (15,795)
(Increase) decrease in investments in and advances to
affiliates and joint ventures (901) (775) (49)
Acquisitions (2,118) (13,333) (7,144)
Net tax refunds from the sale of discontinued operations 4,755 8,625 -
Receipts from (payments to) minority interest partners 259 (111) (499)
Decrease (increase) in other assets 735 427 505
---------- ---------- ----------
Net cash used in investing activities (22,322) (26,055) (22,787)
---------- ---------- ----------
Cash flow from financing activities:
Proceeds from issuance of debt 55,785 88,208 17,145
Principal payments of debt (55,764) (67,718) (25,469)
Proceeds from sales of treasury stock 1,397 1,090 2,888
Purchases of treasury stock (1,965) (2,879) (1,593)
Dividends paid (11,286) (9,377) (4,560)
---------- ---------- ----------
Net cash provided by (used in) financing activities (11,833) 9,324 (11,589)
---------- ---------- ----------
Effect of foreign currency rate changes on cash (3,732) 3,413 3,658
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (1,597) 4,069 (2,072)
Cash and cash equivalents at beginning of year 17,594 13,525 15,597
---------- ---------- ----------
Cash and cash equivalents at end of year $ 15,997 $ 17,594 $ 13,525
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest, net $ 1,755 $ 537 $ 415
========== ========== ==========
Net income taxes paid (refunded) $ 1,451 $ (706) $ 12,808
========== ========== ==========
*See Note 1 of the notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
F-9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Segments
We operate in two principal areas of activity: minerals and
environmental. We also operate a transportation business which includes delivery
of our own products. The composition of consolidated revenues by segment is as
follows:
PERCENTAGE OF SALES
--------------------------------
2005 2004 2003
-------- -------- --------
Minerals 55% 57% 58%
Environmental 39% 37% 36%
Transportation 9% 9% 10%
Intersegment Shipping -3% -3% -4%
-------- -------- --------
100% 100% 100%
======== ======== ========
Further descriptions of our products, principal markets and the
relative significance of segement operations within AMCOL International
Corporation (the Company) are included in Note 3, "Business Segment and
Geographic Area Information."
Principles of Consolidation
The consolidated financial statements include the accounts of our
domestic and foreign subsidiaries. We consolidate all subsidiaries which are
greater than 50% owned by us. Our ownership interests in the Mexican, Indian,
and Egyptian ventures range between 20% and 50%. Accordingly, these investments
are accounted for using the equity method. Our ownership interest in the
Japanese investment is recorded at cost. All material intercompany balances and
transactions including profits on inventories, have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
Translation of Foreign Currencies
The assets and liabilities of subsidiaries located outside of the
United States are translated into U.S. dollars at the rates of exchange at the
balance sheet dates. The statements of operations are translated at the weighted
average rates during the periods. Foreign exchange translation adjustments are
accumulated as a separate component of stockholders' equity, while foreign
currency transaction gains or losses are included in income.
Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined by the first-in, first-out (FIFO) or moving average methods.
Exploration costs are expensed as incurred. Costs incurred in removing
overburden and mining bentonite are capitalized as advance mining costs until
the bentonite from the mining area is transported to the plant site, at which
point the costs are included in crude bentonite stockpile inventory.
F-10
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Property, Plant, Equipment, and Mineral Rights and Reserves
Property, plant, equipment, and mineral rights and reserves are carried
at cost less accumulated depreciation. Depreciation is computed using the
straight-line method for substantially all of the assets. Certain other assets,
primarily field equipment, are depreciated on the units-of-production method.
Mineral rights and reserves are depleted using the units-of-production method.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair
value of the net assets of acquired businesses. Pursuant to Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets", goodwill is tested annually (or more frequently if impairment
indicators arise) for impairment. Other intangibles, including trademarks and
non-compete agreements, are amortized on the straight-line method over the
expected periods to be benefited, which extend up to 10 years.
Impairment of Long-Lived Assets
We review the carrying values of long-lived assets whenever facts and
circumstances indicate that the assets may be impaired. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be generated by the
asset. If an asset is considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the asset exceeds the
fair value. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs of disposal.
Income Taxes
We file a consolidated tax return for our U.S. based subsidiaries.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be in effect for the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Revenue Recognition
Product revenue is recognized when products are shipped to customers.
Allowances for discounts, rebates, and estimated returns are recorded at the
time of sale and are reported as a reduction in revenue. We generate some sales
through independent, third-party representatives. These sales are recorded in
revenues, and the commission compensation paid to the representatives is
recorded in general, selling and administrative expenses.
Transportation segment revenue for freight delivery services is
recognized when the service is provided. Amounts payable for purchased
transportation, commissions and insurance are accrued when the related revenue
is recognized.
Service revenues, primarily earned by the environmental segment,
represent less than 10% of consolidated net sales. Revenue for services
performed are recognized in the period such services are performed.
F-11
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Shipping Revenues and Costs
We report shipping and handling costs that are passed on to customers
as sales revenue and cost of sales in the consolidated statements of operations.
Product Liability & Warranty Expenses
We report expenses incurred for warranty and product costs in general,
selling and administrative expenses in the consolidated statements of
operations. Our warranty accrual is based on known warranty issues as of the
balance sheet date as well as a reserve for unidentified claims based on
historical experience.
Land Reclamation
We mine various minerals using a surface-mining process that requires
the removal of overburden. We are obligated to restore the land comprising each
mining site upon completion of mining activity. We recognize this liability for
land reclamation based on the estimated fair value of the obligation. The
obligation is adjusted to reflect the passage of time and changes in estimated
future cash outflows. The following table presents our reclamation liability and
changes therein for 2005 and 2004:
2005 2004
---------- ----------
Balance at beginning of the year $ 4,850 $ 5,060
Settlement of obligations (1,403) (1,325)
Liabilities incurred and accretion expense 1,519 1,115
---------- ----------
Balance at the end of the period $ 4,966 $ 4,850
========== ==========
Research and Development
Research and development costs are included in general, selling and
administrative expenses.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income by the weighted average common shares
outstanding after consideration of the dilutive effect of stock options. A
reconciliation between the number of shares used to compute basic and diluted
earnings per share follows:
2005 2004 2003
------------ ------------ ------------
Weighted average of common shares outstanding for the year 29,525,033 29,140,892 28,357,009
Dilutive impact of stock equivalents 1,278,105 1,561,969 1,492,569
------------ ------------ ------------
Weighted average of common and common equivalent
shares for the year 30,803,138 30,702,861 29,849,578
============ ============ ============
Common shares outstanding at December 31 29,783,639 29,395,755 29,107,746
============ ============ ============
Weighted average anti-dilutive shares excluded from
the computation of diluted earnings per share 248,685 234,970 -
============ ============ ============
F-12
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Stock-Based Compensation
Prior to 2003, we accounted for 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 operations prior to
2003, as all options granted had an exercise price equal to the market value of
the underlying common stock on the date of grant. Effective January 1, 2003, we
adopted the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), and elected to apply these 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.
Awards under our plans vest over three years. Therefore, the cost related to
stock-based employee compensation included in the determination of net income in
2003 and each year thereafter 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 SFAS 123.
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:
YEAR ENDED DECEMBER 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Net income, as reported $ 41,045 $ 31,565 $ 28,865
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 1,470 1,090 405
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (1,612) (1,348) (962)
------------ ------------ ------------
Pro forma net income $ 40,903 $ 31,307 $ 28,308
============ ============ ============
Earnings per share:
Basic - as reported $ 1.39 $ 1.08 $ 1.02
Basic - pro forma $ 1.39 $ 1.07 $ 1.00
Diluted - as reported $ 1.33 $ 1.03 $ 0.97
Diluted - pro forma $ 1.33 $ 1.02 $ 0.95
Derivative Instruments and Hedging Activities
Occasionally, we use derivative financial instruments (principally
interest rate swaps or options) to manage exposure to changes in interest rates.
We do not use derivative instruments for trading or other speculative purposes,
and we did not have any derivative financial instruments outstanding at either
December 31, 2005 or 2004.
Reclassifications and Revisions
Certain items in the consolidated financial statements contained herein
and notes thereto have been reclassified to conform with the consolidated
financial statement presentation for 2005. These reclassifications did not have
a material impact on our financial statements.
Beginning in the quarter ended March 31, 2005 and for all periods
thereafter, we 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 and 2003 periods
presented 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.
We have revised the 2004 and 2003 consolidated statement of cash flows
presented herein to include the effect of discontinued operations within the
operating and investing portions of those statements as opposed to showing these
cash flows as a separate category within the consolidated statement of cash
flows. In 2004, this revision has the effect of decreasing cash used in
investing activities by $8,625 to $26,055 versus the $34,680 previously
reported. In 2003, this revision did not affect either the total cash flows
provided from operating activities or the total cash flows used in investing
activities.
F-13
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(2) DISCONTINUED OPERATIONS
In 2004, we filed an amended tax return seeking a refund of state taxes
paid on the sale of our absorbent polymers segment that occurred in 2000. No
amounts for this refund were reflected in the financial statements in 2004. In
June 2005, we successfully settled this claim 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.
In 2003, the Internal Revenue Service concluded audits which resulted
in an actual tax liability that was lower than the amounts previously estimated.
Consequently in 2003, we recorded $8.9 million of income from discontinued
operations related to the sale of the Company's U.K. metalcasting business in
2001 and closure of the U.K. cat litter business in 2000.
(3) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
We operate in two principal business segments: minerals and
environmental. We 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 that provides
services to our subsidiaries as well as third-party customers.
We identify 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 this
Note. We measures segment profit based on operating profit, which 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 operations of that segment.
Corporate assets include cash, corporate leasehold improvements, the
nanocomposite investment and other miscellaneous equipment.
F-14
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following summaries set forth certain financial information by
business segment and geographic area as of and for the years ended December 31,
2005, 2004 and 2003:
2005 2004 2003
------------ ------------ ------------
Business Segment:
Revenues:
Minerals $ 295,686 $ 264,167 $ 217,203
Environmental 210,846 172,723 133,769
Transportation 49,708 40,650 37,549
Intersegment shipping (20,316) (15,762) (14,038)
------------ ------------ ------------
Total $ 535,924 $ 461,778 $ 374,483
============ ============ ============
Operating profit (loss):
Minerals $ 36,502 $ 30,632 $ 23,462
Environmental 28,668 20,522 17,879
Transportation 2,717 1,720 1,547
Corporate (20,811) (16,890) (13,873)
------------ ------------ ------------
Total $ 47,076 $ 35,984 $ 29,015
============ ============ ============
Assets:
Minerals $ 186,718 $ 172,972 $ 144,973
Environmental 146,588 128,154 83,459
Transportation 3,027 3,122 1,891
Corporate 32,196 32,194 35,006
------------ ------------ ------------
Total $ 368,529 $ 336,442 $ 265,329
============ ============ ============
Depreciation, depletion and amortization:
Minerals $ 10,295 $ 10,546 $ 10,334
Environmental 6,316 6,751 6,002
Transportation 97 108 88
Corporate 2,850 2,719 2,486
------------ ------------ ------------
Total $ 19,558 $ 20,124 $ 18,910
============ ============ ============
Capital expenditures:
Minerals $ 13,751 $ 9,860 $ 6,464
Environmental 13,198 10,647 7,660
Transportation 29 101 80
Corporate 1,648 1,019 1,591
------------ ------------ ------------
Total $ 28,626 $ 21,627 $ 15,795
============ ============ ============
Research and development expenses:
Minerals $ 2,715 $ 2,517 $ 2,184
Environmental 1,865 1,921 1,873
Corporate 1,665 911 961
------------ ------------ ------------
Total $ 6,245 $ 5,349 $ 5,018
============ ============ ============
Continued...
F-15
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2005 2004 2003
------------ ------------ ------------
Geographic area:
Sales to unaffiliated customers shipped to:
Americas $ 356,777 $ 296,897 $ 252,797
Europe 127,987 124,260 90,719
Asia Pacific 51,160 40,621 30,967
------------ ------------ ------------
Total $ 535,924 $ 461,778 $ 374,483
============ ============ ============
Operating profit from sales to:
Americas $ 22,443 $ 17,853 $ 16,244
Europe 15,905 12,679 8,658
Asia Pacific 8,728 5,452 4,113
------------ ------------ ------------
Total $ 47,431 $ 35,984 $ 29,015
============ ============ ============
Identifiable assets in:
Americas $ 227,923 $ 202,766 $ 170,797
Europe 94,165 97,777 70,114
Asia Pacific 46,441 35,899 24,418
------------ ------------ ------------
Total $ 368,529 $ 336,442 $ 265,329
============ ============ ============
Revenues by product line for each fiscal year are as follows:
2005 2004 2003
------------ ------------ ------------
Metalcasting $ 139,427 $ 117,755 $ 91,866
Lining technologies 94,942 78,688 56,392
Specialty minerals 91,519 89,863 77,017
Water treatment 62,085 42,664 35,326
Pet products 60,177 53,370 48,319
Building materials 58,382 54,550 42,052
Transportation 49,708 40,650 37,549
Intersegment shipping revenue (20,316) (15,762) (14,038)
------------ ------------ ------------
Total $ 535,924 $ 461,778 $ 374,483
============ ============ ============
(4) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts as of and the activity for the
years ended December 31 was as follows:
2005 2004 2003
------------ ------------ ------------
Balance at the beginning of the year $ 4,637 $ 3,455 $ 2,642
Charged to expense (income) (731) 2,467 1,082
Acquistions 94 - -
Write-offs and currency translation adjustments (1,650) (1,285) (269)
------------ ------------ ------------
Balance at the end of the year 2,350 4,637 3,455
============ ============ ============
As mentioned in Item 7 of this form 10-K, the above allowance is based
on historical bad debt experience, an analysis of aged accounts and a
consideration of specific accounts.
F-16
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(5) INVENTORIES
Inventories at December 31 consisted of:
2005 2004
---------- ----------
Advance mining $ 4,429 $ 2,277
Crude stockpile inventories 18,877 25,159
In-process inventories 25,935 18,123
Other raw material, container, and supplies inventories 28,687 18,323
---------- ----------
$ 77,928 $ 63,882
========== ==========
Included within Other raw material, container and supplies inventories
in the table above is the Company's reserve for slow moving and obsolete
inventory. The balance of this reserve as of and the activity for the years
ended December 31 was as follows:
2005 2004 2003
------------ ------------ ------------
Balance at the beginning of the year $ 1,574 $ 1,747 $ 1,313
Charged to costs and expenses 872 784 1,497
Acquisitions - 277 64
Disposals and currency translation adjustments (461) (1,234) (1,127)
------------ ------------ ------------
Balance at the end of the year 1,985 1,574 1,747
============ ============ ============
(6) PROPERTY, PLANT, EQUIPMENT AND MINERAL RIGHTS AND RESERVES
Property, plant, equipment and mineral rights and reserves consisted of
the following:
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
Mineral rights and reserves $ 3,770 $ 4,169
Other land 8,991 7,850
Buildings and improvements 63,105 61,987
Machinery and equipment 180,181 178,640
Construction in progress 9,144 6,653
---------- ----------
$ 265,191 $ 259,299
========== ==========
The range of useful lives to depreciate plant and equipment is as
follows:
Buildings and improvements 9-45 years
Machinery and equipment 1-20 years
Depreciation and depletion were charged to income as follows:
2005 2004 2003
------------ ------------ ------------
Depreciation expense $ 18,197 $ 18,895 $ 17,759
Depletion expense 108 149 232
------------ ------------ ------------
$ 18,305 $ 19,044 $ 17,991
============ ============ ============
F-17
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(7) GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill by segment at and the activity occurring in the
past two fiscal years is as follows:
MINERALS ENVIRONMENTAL CONSOLIDATED
------------ ------------- ------------
Balance at December 31, 2003 $ 5,394 $ 239 $ 5,633
Change in goodwill relating to:
Acquisitions 72 12,742 12,814
Foreign exchange translation 307 471 778
------------ ------------- ------------
Total changes 379 13,213 13,592
------------ ------------- ------------
Balance at December 31, 2004 5,773 13,452 19,225
Change in goodwill relating to:
Acquisitions 1,024 1,632 2,656
Foreign exchange translation (414) (823) (1,237)
------------ ------------- ------------
Total changes 610 809 1,419
------------ ------------- ------------
Balance at December 31, 2005 6,383 14,261 20,644
============ ============= ============
At each year-end, we evaluate the goodwill attributable to each
reporting unit for impairment. For the years above, we concluded that there was
no indication of goodwill impairment. If indicators of impairment are deemed to
be present, and future cash flows are not expected to be sufficient to recover
the assets and carrying amounts, an impairment loss would be charged to expense
in the period identified.
Intangible assets were as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------------------------- -------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
------------ ------------ ------------ ------------ ------------ ------------
Intangtibles subject to amortization:
Trademarks $ 477 $ (108) $ 369 $ 477 $ (43) $ 434
Patents 642 (178) 464 642 (67) 575
License agreements 6,250 (4,750) 1,500 6,250 (4,000) 2,250
Other 914 (443) 471 835 (519) 316
------------ ------------ ------------ ------------ ------------ ------------
Subtotal 8,283 (5,479) 2,804 8,204 (4,629) 3,575
Intangibles not subject to amortization:
Pension related intangibles 205 - 205 227 - 227
------------ ------------ ------------ ------------ ------------ ------------
Total 8,488 (5,479) 3,009 8,431 (4,629) 3,802
============ ============ ============ ============ ============ ============
Intangible assets are being amortized primarily on a straight-line
basis over their estimated useful lives of 3 to 10 years. We reviewed the
intangible assets, net book values and estimated useful lives by class. For the
years above, there was no impairment related to the intangible assets. We will
continue to amortize the remaining net book values of intangible assets over
their remaining useful lives. Amortization expense on intangible assets for each
of the years ending December 31, 2005 and 2004 was $1,253 and $1,081,
respectively. We estimate amortization expense of intangible assets for the
future years ending December 31 will approximate the following amounts:
AMOUNT
---------
2006 $ 1,038
2007 1,007
2008 227
2009 194
2010 177
F-18
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(8) INVESTMENTS IN JOINT VENTURES
Information about our investments in affiliates and joint ventures at
December 31, 2005 is as follows:
AMOUNT OF OUR
INVESTMENT
LESS THE
UNDERLYING
OWNERSHIP ACCOUNTING NET EQUITY OF VALUE AT QUOTED
INTEREST POLICY THE INVESTEE MARKET PRICE
--------------- ----------------- ---------------- ---------------
Ashapura Minechem Limited 22% Equity Method $ 6,274 $ 29,705
Ashapura Volclay Limited 50% Equity Method 37 N/A
Volclay Japan Co., Ltd. 50% Equity Method 454 N/A
Egypt Mining & Drilling Co. and Egypt Bentoninte &
Derivatives Co. 25% Equity Method 1,371 N/A
Egypt -Nano Technology Company 27% Equity Method (21) N/A
Volclay de Mexico, S.A. de C.V. 49% Equity Method (37) N/A
Only our investment in Ashapura Minechem Limited is publicly traded on
the Bombay Stock Exchange Limited. In 2005, we increased our ownership
percentage in this affiliate from 20% to 22%. Significant information regarding
each investee's financial and operating performance for the year ending and at
December 31, 2005 is in the following table.
F-19
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2005 2004
---------- ----------
Ashapura Minechem Limited:
Net Sales $ 175,286 $ 91,243
Operating income 16,903 7,011
Affiliate income as reported 11,379 3,706
Earnings recorded 1,985 623
Current assets 63,906 45,221
Non-current assets 15,332 14,920
Total assets 79,238 60,141
Current liabilities 12,170 11,042
Non-current liabilities 51,534 38,582
Total liabilities 63,704 49,624
Ashapura Volclay Limited:
Net Sales 6,096 4,402
Operating income 1,731 1,204
Affiliate income as reported 1,146 705
Earnings recorded 407 245
Current assets 3,718 2,725
Non-current assets 8,637 8,651
Total assets 12,355 11,376
Current liabilities 1,746 925
Non-current liabilities 5,516 6,344
Total liabilities 7,262 7,269
All other affliates and joint ventures:
Net Sales 30,617 8,376
Operating income 2,729 1,610
Affiliate income as reported 2,081 1,568
Earnings recorded 562 319
Current assets 20,621 7,280
Non-current assets 3,793 2,241
Total assets 24,414 9,521
Current liabilities 11,867 3,147
Non-current liabilities 1,154 213
Total liabilities 13,021 3,360
We record the majority of our equity in the earnings of our investments
in affiliates and joint ventures on a one quarter lag. However, the amounts for
Ashapura Minechem Limited's assets and liabilities in the above table are as at
March 31, 2005 as this is the latest information available.
(9) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31 was
allocated as follows:
2005 2004 2003
------------ ------------- ------------
Income from continuing operations $ 11,645 $ 4,687 $ 9,946
Discontinued operations (5,255) - (8,741)
------------ ------------- ------------
$ 6,390 $ 4,687 $ 1,205
============ ============= ============
For each of the years ended December 31 in the table below, domestic
and foreign components of income from continuing operations before income taxes,
equity in income of joint ventures and minority interest are:
F-20
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2005 2004 2003
------------ ------------- ------------
Income from continuing operations before income taxes,
income from affiliates and joint ventures:
Domestic $ 22,485 $ 20,662 $ 18,972
Foreign 22,538 14,410 10,289
------------ ------------- ------------
$ 45,023 $ 35,072 $ 29,261
============ ============= ============
The components of the provision for income taxes attributable to income
from continuing operations before income taxes, equity in income of joint
ventures and minority interest for the years ended December 31 in the below
table consisted of:
2005 2004 2003
------------ ------------- ------------
Provision (benefit) for income taxes:
Federal:
Current $ 6,257 $ 1,170 $ 8,921
Deferred 210 (95) (2,296)
State:
Current 1,719 1,404 1,265
Deferred 341 (9) (230)
Foreign:
Current 1,192 3,890 2,345
Deferred 1,926 (1,673) (59)
------------ ------------- ------------
$ 11,645 $ 4,687 $ 9,946
============ ============= ============
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2005 and
2004 were as follows:
2005 2004
------------ ------------
Deferred tax assets attributable to:
Accounts receivable, due to allowance for doubtful accounts $ 324 $ 938
Inventories 1,734 1,638
Employee benefit plans 6,584 5,660
Intangible assets 2,733 2,384
Accrued liabilities 1,301 2,024
Other 1,516 583
------------ ------------
Total deferred tax assets 14,192 13,227
Deferred tax liabilities attributable to:
Plant and equipment, due to differences in depreciation (1,793) (2,007)
Land and mineral reserves, due to differences in depletion (1,187) (1,171)
Joint venture deferred tax (1,591) (1,110)
Other (1,344) (936)
------------ ------------
Total deferred tax liabilities (5,915) (5,224)
------------ ------------
Net deferred tax assets $ 8,277 $ 8,003
============ ============
We believe it is more likely than not that the deferred tax assets
above will be realized in the normal course of business.
F-21
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following analysis reconciles the statutory federal income tax rate
to the effective tax rates related to income from continuing operations before
income taxes, equity in income of joint ventures and minority interest:
2005 2004 2003
--------------------------- --------------------------- ----------------------------
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------------ ------------ ------------ ------------ ------------ ------------
Provision for income taxes at
U.S. statutory rates $ 15,791 35.0% $ 12,275 35.0% $ 10,241 35.0%
Increase (decrease) in taxes
resulting from:
Percentage depletion (2,173) -4.8% (1,832) -5.2% (1,040) -3.6%
State taxes, net of federal benefit 1,177 2.6% 913 2.6% 824 2.8%
Foreign tax rates (4,308) -9.5% (1,445) -4.1% (738) -2.5%
Foreign tax adjustments - - (1,119) -3.2% - -
Depletion and research and
experimentation adjustments - - (4,789) -13.7% - -
Dividend pursuant to American Jobs
Creation Act of 2004 665 1.5% - - - -
Tax receivable write-off 1,448 3.1% - - - -
Other (955) -2.0% 684 2.0% 659 2.3%
------------ ------------ ------------ ------------ ------------ ------------
$ 11,645 25.9% $ 4,687 13.4% $ 9,946 34.0%
============ ============ ============ ============ ============ ============
In 2005, we repatriated $16,461 of earnings from various foreign
subsidiaries in accordance with the Jobs Creation Act of 2002, and recorded a
tax expense of $665 on these repatriated earnings. Also in 2005, we determined
it unlikely that we would recover costs incurred for the benefit of our foreign
controlled corporations. As a result, we wrote-off the $1,448 tax receivable
related to these costs.
We have not provided for the United States federal income and foreign
income withholding taxes on approximately $45,000 of undistributed earnings from
international subsidiaries as of December 31, 2005 because such earnings are
intended to be reinvested indefinitely outside of the United States. If these
earnings were distributed, foreign tax credits may become available under
current law to reduce or eliminate the resulting income tax liability in the
United States.
We benefit from tax holidays in both Poland and Thailand as a result of
our locating and investing in special economic zones in each country. In 2005,
these tax holidays resulted in a $1,544 reduction in income tax expense and a
$0.05 benefit to diluted earnings per share.
Our agreement with the Polish tax authorities provides for a tax
holiday exemption for all income tax activities through 2008, and then changes
to a 50% exemption for all tax activities through 2017. Recent changes due to
membership in the European Union could cause the 50% exemption to expire in 2010
rather than 2019. However, as 2010 approaches, we will investigate methods
available to preserve that tax holiday.
Our agreement with the Thai tax authorities provides for a tax holidays
on several investments. The most significant tax exemption is on all income from
manufacturing operations (distributed goods are still subject to taxation)
related to our initial investment. These initial manufacturing activities were
exempt through December 31, 2005 and will be taxable at 50% in years 2006
through 2010. We attempt to modify and obtain tax concessions when applicable.
F-22
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(10) LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
----------------------------
2005 2004
------------ ------------
Borrowings under revolving credit agreement $ 25,759 $ 29,325
Industrial revenue bond 4,800 4,800
Other notes payable 4,279 170
------------ ------------
34,838 34,295
Less: current portion - -
------------ ------------
$ 34,838 $ 34,295
============ ============
In November 2005, we refinanced our previous committed revolving credit
agreement that was to expire on October 31, 2006. The new agreement provides a
committed $120,000 revolving line of credit that matures October 31, 2010. As of
December 31, 2005, there was $94,241 in borrowing capacity available under the
line of credit. The revolving credit agreement is a multi-currency arrangement
that allows us to borrow certain foreign currencies at an adjusted LIBOR rate
plus .50% to 1.125%, depending upon the amount of the credit line used and
certain capitalization ratios. The facility requires certain covenants to be
met, such as specific amounts of net worth, and limits our ability to make
additional borrowings and guarantees. We were in compliance with these covenants
at December 31, 2005. The borrowings under this revolving credit line at
December 31, 2005 carried an average interest rate of 4.64%.
We also refinanced our uncommitted, short-term credit facility as of
September 2005. The new facility allows for maximum borrowings of $12,000, of
which $1,768 was outstanding as of December 31, 2005 at an interest rate of
5.0%.
Maturities of long-term debt outstanding at December 31, 2005, were as
follows:
2006 2007 2008 2009 2010 THEREAFTER
------------ ------------ ------------ ------------ ------------ ------------
Borrowings under
revolving credit agreement - - - - 25,759 -
Industrial revenue bond and other
notes payable - 1,768 - - 2,511 4,800
------------ ------------ ------------ ------------ ------------ ------------
$ - $ 1,768 $ - $ - $ 28,270 $ 4,800
============ ============ ============ ============ ============ ============
The estimated fair value of the above borrowings at December 31, 2005,
was approximately equal to their carrying amounts based on discounting future
cash payments using current market interest rates for loans with similar terms
and maturities.
At December 31, 2005 and 2004, we had outstanding standby letters of
credit of $14.2 million and $13.9 million, respectively. These letters of credit
typically serve to guarantee the Company's performance of its obligations
related to land reclamation and workers' compensation claims. The accompanying
consolidated balance sheets as of December 31, 2005 and 2004 include amounts
accrued for the estimated costs of obligations related to land reclamation and
workers' compensation claims.
F-23
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(11) ACQUISITIONS
We completed several acquisitions during 2005, 2004 and 2003. The
acquisitions in these years, individually and in aggregate, did not materially
affect our operating results or financial position. Summarized information
related to these acquisitions is as follows:
2005 2004 2003
------------ ------------- ------------
Number of acquisitions 1 2 3
Net cash paid $ 527 $ 13,333 $ 7,144
Goodwill and intangible assets recorded 628 12,742 1,118
(12) MARKET RISKS AND FINANCIAL INSTRUMENTS
As a multinational corporation that manufactures and markets products
in countries throughout the world, we are subject to certain market risks,
including those related to foreign currency, interest rates and government
actions. We use a variety of practices to manage these market risks, including,
when considered appropriate, derivative financial instruments. We use derivative
financial instruments only for risk management and not for trading or
speculative purposes.
Exchange Rate Sensitivity
We are exposed to potential gains or losses from foreign currency
fluctuations affecting net investments and earnings denominated in foreign
currencies. Our primary exposures are to changes in exchange rates for the U.S.
dollar versus the euro, the British pound and the Polish zloty. We also have
significant exposure to changes in exchange rates between the British pound and
the euro as well as between the Polish zloty and the euro.
Our various currency exposures often offset each other, providing
natural hedges against currency risk. Periodically, specific foreign currency
transactions (e.g. inventory purchases) are hedged with forward contracts to
reduce the foreign currency risk. As of December 31, 2005, we did not have any
material foreign currency contracts outstanding.
F-24
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Interest Rate Sensitivity
The following table provides information about our financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted average interest rates by expected
maturity dates for debt obligations. Weighted average variable rates are based
on implied forward rates in the yield curve at the reporting date. The
instruments' actual cash flows are denominated in U.S. dollars, Thai baht (THB),
British pounds (UK(pound)), and euro ((euro)).
EXPECTED MATURITY DATE
-----------------------------------------------------------------------------------------------
FAIR
2006 2007 2008 2009 2010 THEREAFTER TOTAL VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(US$ equivalent in thousands)
Short-term debt:
Fixed rate $ - $ - $ - $ - $ - $ - $ - $ -
Interest rate - - - - - -
Long-term debt:
Variable rate (US$) - 1,768 - - 9,000 4,800 15,568 15,568
Average interest rate - 5.02% - - 5.15% 3.60%
Fixed rate (THB) - - - - 2,511 - 2,511 2,511
Interest rate - - - - 6.69% -
Variable rate (UK(pound)) - - - - 10,839 - 10,839 10,839
Average interest rate - - - - 5.14% -
Variable rate ((euro)) - - - - 5,920 - 5,920 5,920
Average interest rate - - - - 2.94% -
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ - $ 1,768 $ - $ - $ 28,270 $ 4,800 $ 34,838 $ 34,838
========== ========== ========== ========== ========== ========== ========== ==========
We periodically use interest rate swaps to manage interest rate risk on
debt securities. These instruments allow us to change variable rate debt into
fixed rate or fixed rate debt into variable rate. Interest rate differentials
are paid or received on these arrangements over the life of the agreements. At
the end of 2005 and 2004, there were no interest rate swaps outstanding.
We are exposed to credit risk on certain assets, primarily cash
equivalents, short-term investments and accounts receivable. The credit risk
associated with cash equivalents and short-term investments is mitigated by our
policy of investing in securities with high credit ratings and investing through
major financial institutions with high credit ratings.
We provide credit to customers in the ordinary course of business and
perform ongoing credit evaluations. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers comprising
our customer base. We believe our allowance for doubtful accounts is sufficient
to cover customer credit risks. Our accounts receivable financial instruments
are carried at amounts that approximate fair value.
(13) ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income at December 31 was comprised of
the following components:
2005 2004
------------ ------------
Cumulative foreign currency translation $ 8,947 $ 15,362
Minimum pension liability, net of $169 tax benefit in
2005 and $0 in 2004 (303) (457)
------------ ------------
$ 8,644 $ 14,905
============ ============
F-25
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(14) LEASES
We have several noncancelable leases for railroad cars, trailers,
computer software, office equipment, certain automobiles, and office and plant
facilities. Total rent expense under operating lease agreements was
approximately $4,540, $3,945, and $4,208 in 2005, 2004 and 2003, respectively.
Additionally, we have three domestic facilities that are subleased.
The following is a schedule of future minimum lease payments for
operating leases (with initial terms in excess of one year) and related sublease
income as of December 31, 2005:
MINIMUM LEASE
PAYMENTS SUBLEASE
------------------------------------ RENTAL
DOMESTIC FOREIGN TOTAL INCOME
---------- ---------- ---------- ----------
Year ending December 31:
2006 $ 4,437 $ 404 $ 4,841 $ 538
2007 3,793 357 4,150 565
2008 2,232 287 2,519 336
2009 789 201 990 -
2010 472 151 623 -
Thereafter 139 707 846 -
---------- ---------- ---------- ----------
Total $ 11,862 $ 2,107 $ 13,969 $ 1,439
========== ========== ========== ==========
(15) EMPLOYEE BENEFIT PLANS
We have a noncontributory pension plan covering substantially all of
our domestic employees. The benefits are based upon years of service and
qualifying compensation. Our funding is calculated using the actuarially
determined unit credit cost method. Contributions are intended to provide not
only for benefits attributed to services to date, but also for those expected to
be earned in the future.
The following tables set forth our pension obligations at December 31:
PENSION BENEFITS
--------------------
2005 2004
-------- --------
Change in benefit obligations:
Beginning benefit obligation $ 34,807 $ 29,732
Service cost 1,850 1,449
Interest cost 1,973 1,827
Actuarial loss 748 2,819
Benefits paid (1,008) (1,020)
-------- --------
Ending benefit obligation $ 38,370 $ 34,807
Change in plan assets:
Beginning fair value $ 26,683 $ 22,682
Actual return 3,004 4,021
Company contribution 862 1,000
Benefits paid (1,008) (1,020)
-------- --------
Ending fair value $ 29,541 $ 26,683
Funded status of the plan $ (8,829) $ (8,124)
Unrecognized actuarial and investment (gain) loss, net 2,636 2,620
Prior service cost 349 379
Transition asset (87)
-------- --------
Accrued pension cost liability includeded in the
consolidated financial statements $ (5,844) $ (5,212)
======== ========
F-26
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Pension cost for each of the following years was comprised of:
2005 2004 2003
-------- -------- --------
Service cost - benefits earned during the year $ 1,850 $ 1,449 $ 1,325
Interest cost on accumulated benefit obligation 1,973 1,827 1,751
Expected return on plan assets (2,272) (1,938) (1,576)
Net amortization and deferral (56) (106) (36)
-------- -------- --------
Net periodic pension cost $ 1,495 $ 1,232 $ 1,464
======== ======== ========
The following table summarizes the assumptions used in determining the
pension obligation at December 31:
2005 2004
-------- --------
Discount rate 5.25% 5.75%
Rate of compensation increase 5.75% 5.75%
Long-term rate of return 8.50% 8.50%
Each year, we conduct our valuation of the pension benefit plan as of
October 1st. We expect to contribute $1,000 to the Plan in 2006. The accumulated
benefit obligation (ABO) was $29,887 and $25,704 at December 31, 2005 and 2004,
respectively.
Our Plan assets at December 31 for each year below, by asset category,
are as follows:
2005 2004
-------- --------
U.S. equity securities 54% 56%
AMCOL International common stock 7% 7%
International equity securities 5% 4%
Fixed income securities and bonds 30% 33%
Real estate and other 4% 0%
We employ a total return investment approach whereby a mix of equities
and fixed income investments are used to maximize the long-term return of plan
assets for a prudent level of risk. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status, and corporate
financial condition. The investment portfolio contains a diversified blend of
equity and fixed-income investments. The investment objectives emphasize
maximizing returns consistent with ensuring that sufficient assets are available
to meet liabilities, and minimizing corporate cash contributions. The Plan's
assets are managed so as to include investments that balance income and capital
appreciation.
The Plan has a target range for equity securities of between 60% and
75%. This allocation takes into account factors such as the average age of
employees covered by the Plan (benefit obligations) as well as overall market
conditions. Interim portfolio reviews result in investment allocations being
evaluated at least twice a year by the Pension Committee and rebalancing takes
place as needed. Equity investments are diversified across U.S. and non-U.S.
stocks, as well as growth, value, and small and large capitalizations. Debt
securities include both government and corporate investment vehicles. These
include a series of laddered debt securities as well as bond funds. Although
real estate investments have been employed in the past, none are being used at
the present.
Historical markets are studied and long-term historical relationships
between equities and fixed-income are preserved consistent with the widely
accepted capital market principle that assets with higher volatility generate a
greater return over the long run. Current market factors such as inflation and
interest rates are evaluated before long-term capital market assumptions are
determined. The long-term rate of return for plan assets is established via a
building block approach with proper consideration of diversification and
rebalancing. The average long-term rate of return on our Plan's assets since
1994 has been approximately 10.3%.
F-27
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The estimated future benefit payments from the defined benefit plan,
reflecting expected future service, as appropriate, are presented in the
following table:
PER YEAR
--------
2006 1,081
2007 1,147
2008 1,229
2009 1,305
2010 1,408
2011 through 2015 9,626
--------
Total $ 15,796
========
In addition to the qualified plan outlined above, we sponsor a
supplementary pension plan that provides benefits in excess of qualified plan
limitations for certain employees. The unfunded accrued liability for this plan
was $3,989 and $3,406 at December 31, 2005 and 2004, respectively. Also, we have
invested assets for the benefit of the employees covered by the supplemental
pension plan in the event that there is a change in control. Our minimum pension
liability at December 31, 2005 was $472.
We also have a savings plan for its U.S. personnel. In 2005, we made a
contribution in an amount equal to an employee's contributions up to a maximum
of 4% of the employee's annual earnings. Company contributions are made using
Company stock purchased in the open market. Our contributions under the savings
plan were $1,529 in 2005, $1,440 in 2004 and $1,202 in 2003.
Employees hired after December 31, 2003 do not participate in our
defined benefit plan. Instead, they participate in a defined contribution plan
whereby we make a retirement contribution into the employee's savings plan equal
to 3% of their compensation. Under this defined contribution plan, we made a
total cash contribution of $312 and $148 into employees' savings accounts in
2005 and 2004, respectively.
Also, we have a deferred compensation plan and a 401(k) restoration
plan for our executives.
The foreign pension plans, which are not subject to United States
pension funding laws, are funded using individual annuity contracts and,
therefore, are not included in the information reflected above.
(16) STOCK OPTION PLANS
Prior to 2003, we accounted for our 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.
Effective January 1, 2003, we adopted the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, and have elected to apply
these provisions prospectively, in accordance with SFAS No. 148, to all employee
awards granted, modified, or settled after January 1, 2003. Beginning in 2003,
awards granted under our plans vest over three years. Therefore, the cost
related to stock-based employee compensation included in the determination of
net income for 2003 and each year thereafter 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. Had the compensation
cost for the stock option plans been determined using the fair value method of
accounting described in SFAS 123 for years prior to 2003, our net income would
have been changed to the pro forma amounts indicated in Note 1 of notes to
consolidated financial statements.
F-28
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
For purposes of calculating the compensation cost consistent with SFAS
123, the fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The fair value calculation included the
following weighted average assumptions for grants made in each of the following
years:
2005 2004 2003
-------- -------- --------
Risk-free interest rate 3.5% 3.0% 3.0%
Expected life of option in years 4 5 5
Expected dividend yield of stock 1.7% 1.5% 2.1%
Expected volatility of stock price 52.7% 53.3% 54.9%
Weighted-average fair value of options granted $ 6,143 $ 5,333 $ 1,763
The 1983, 1987 and 1993 Plans
We reserved shares of our common stock for the issuance of incentive
and nonqualified stock options to our directors, officers and key employees
under the 1983 Incentive Stock Option Plan, 1993 Stock Plan and 1987
Nonqualified Stock Option Plan. Options awarded under these plans, which entitle
the optionee to one share of common stock, may be exercised at a price equal to
the fair market value of the underlying common stock at the time of grant.
Options awarded under these plans generally vest 40% after two years and
continue to vest at the rate of 20% per year for each year thereafter, until
they are fully vested. Options are exercisable as they vest and expire 10 years
after the date of grant, except in the event of termination, retirement or death
of the optionee, or a change in control of the Company.
These plans expired as of December 31, 2000, though options that were
granted prior to expiration of the plans continue to be valid until the
individual option grants expire. Changes in options outstanding are summarized
as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
EXPIRED STOCK OPTION PLANS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------------------ ---------- -------- ---------- -------- ---------- --------
Options outstanding at January 1 472,743 $ 2.10 709,279 $ 2.07 1,884,421 $ 2.07
Exercised (250,086) 2.06 (236,536) 2.01 (1,169,816) 2.07
Cancelled - - - - (5,326) 1.97
---------- ---------- ----------
Options outstanding at December 31 222,657 2.14 472,743 2.10 709,279 2.07
========== ========== ==========
Options exercisable at December 31 222,657 472,743 709,279
========== ========== ==========
Shares available for future grant at December 31 - - -
========== ========== ==========
1998 Long-Term Incentive Plan
We reserved 3,900,000 shares of our common stock for issuance to our
officers, directors and key employees. This plan provides for the award of
incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights and phantom stock. Different terms and conditions apply to
each form of award made under the plan. Awards granted since 2003 vest ratably
over a three year period and expire 6 years after the date of grant, except in
the event of termination, retirement or death of the optionee or a change in
control of the Company. Options awarded under these plans prior to 2003
generally vest 40% after two years and continued to vest at the rate of 20% per
year for each year thereafter, until they are fully vested. These options are
exercisable as they vest and expire 10 years after the date of grant, except in
the event of termination, retirement or death of the optionee or a change in
control of the Company. Changes in options outstanding are summarized as
follows:
F-29
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1998 LONG-TERM INCENTIVE PLAN SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------------------ ----------- -------- ----------- -------- ----------- --------
Options outstanding at January 1 1,627,144 $ 6.78 1,611,318 $ 4.11 1,731,194 $ 3.46
Granted 293,900 20.90 294,650 18.10 310,950 5.67
Exercised (247,427) 3.95 (258,491) 2.94 (355,334) 2.46
Cancelled (287) 1.57 (20,333) 7.97 (75,492) 3.32
----------- ----------- -----------
Options outstanding at December 31 1,673,330 9.68 1,627,144 6.78 1,611,318 4.11
=========== =========== ===========
Options exercisable at December 31 924,673 826,121 634,547
=========== =========== ===========
Shares available for future grant at December 31 882,695 1,176,308 1,450,625
=========== =========== ===========
On May 22, 2003, we awarded 141,000 shares of restricted stock to six
officers. These same shares were outstanding at December 31, 2005, but were
subsequently distributed in 2006. Restricted stock awards are independent of
option grants and are subject to restrictions considered appropriate by the
Compensation Committee of the Board of Directors. Restricted stock has the same
cash dividend and voting rights as other common stock and is considered to be
currently issued and outstanding. The cost of the awards, determined to be the
fair market value of the shares at the date of the grant, is expensed ratably
over the period the restrictions lapse. Total compensation expense related to
this grant of $921 will be recorded over the three year period.
All Stock Option Plans
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OF CONTRACTUAL EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YRS). PRICE SHARES PRICE
- ------------------------ --------------- ----------- -------- ----------- --------
$ 1.350 - $ 2.290 483,326 2.43 $ 1.92 483,326 $ 1.92
$ 2.370 - $ 5.670 606,032 4.10 4.78 455,194 4.57
$ 5.98 - $ 6.65 224,452 6.12 6.62 114,452 6.62
$ 18.10 - $ 18.10 288,650 4.11 18.10 94,731 18.10
$ 20.900 - $ 20.900 293,900 5.11 20.90 - -
--------------- -----------
Total 1,896,360 4.07 8.79 1,147,703 4.77
=============== ===========
F-30
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(17) ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of:
2005 2004
---------- ----------
Accrued severance taxes $ 1,419 $ 2,726
Accrued employee costs 2,951 1,972
Accrued vacation pay 2,077 1,650
Accrued bonus 6,976 5,131
Accrued dividends payable 2,978 2,647
Accrued warranties 1,823 2,037
Accrued commissions 2,352 2,092
Accrued reclamation costs 1,004 1,626
Other 16,967 16,326
---------- ----------
$ 38,547 $ 36,207
========== ==========
The changes in accrued warranties during 2005 and 2004 were as follows:
2005 2004
---------- ----------
Balance at the beginning of the year $ 2,037 $ 1,147
Charged to costs and expenses 1,159 1,327
Net settlements (1,299) (534)
Foreign currency translation (74) 97
---------- ----------
Balance at the end of the year 1,823 2,037
========== ==========
(18) CONTINGENCIES
The Company is party to a number of lawsuits arising in the normal
course of its business. The Company does not believe that any pending litigation
will have a material adverse effect on its consolidated financial statements.
F-31
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(19) QUARTERLY RESULTS (UNAUDITED)
Unaudited summarized results for each quarter of the last two years are
as follows:
2005 QUARTER
---------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
Minerals $ 73,448 $ 74,877 $ 74,318 $ 73,043
Environmental 42,304 53,834 61,077 53,631
Transportation 10,985 12,595 13,224 12,904
Intersegment shipping (4,687) (4,962) (5,691) (4,976)
---------- ---------- ---------- ----------
Net sales $ 122,050 $ 136,344 $ 142,928 $ 134,602
========== ========== ========== ==========
Minerals $ 13,474 $ 16,783 $ 15,043 $ 13,470
Environmental 14,860 18,249 21,473 18,738
Transportation 1,346 1,536 1,581 1,470
---------- ---------- ---------- ----------
Gross profit $ 29,680 $ 36,568 $ 38,097 $ 33,678
========== ========== ========== ==========
Minerals $ 7,795 $ 10,665 $ 9,799 $ 8,243
Environmental 5,137 7,507 10,118 5,906
Transportation 573 720 751 673
Corporate (5,270) (5,431) (4,709) (5,401)
---------- ---------- ---------- ----------
Operating profit $ 8,235 $ 13,461 $ 15,959 $ 9,421
========== ========== ========== ==========
Income from continuing operations $ 6,952 $ 9,518 $ 11,442 $ 8,378
========== ========== ========== ==========
Net income $ 6,952 $ 14,273 $ 11,442 $ 8,378
========== ========== ========== ==========
Basic earnings per share (B) $ 0.24 $ 0.48 $ 0.39 $ 0.28
========== ========== ========== ==========
Diluted earnings per share (B) $ 0.23 $ 0.46 $ 0.37 $ 0.27
========== ========== ========== ==========
F-32
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2004 QUARTER
---------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
Minerals (A) $ 64,337 $ 66,710 $ 67,454 $ 65,666
Environmental (A) 33,672 47,199 50,539 41,313
Transportation 9,332 10,058 10,979 10,281
Intersegment shipping (3,187) (4,197) (4,326) (4,052)
---------- ---------- ---------- ----------
Net sales (A) $ 104,154 $ 119,770 $ 124,646 $ 113,208
========== ========== ========== ==========
Minerals (A) $ 12,885 $ 13,780 $ 14,247 $ 12,027
Environmental (A) 12,801 16,798 17,541 14,018
Transportation 1,037 1,112 1,214 1,108
---------- ---------- ---------- ----------
Gross profit (A) $ 26,723 $ 31,690 $ 33,002 $ 27,153
========== ========== ========== ==========
Minerals $ 7,435 $ 8,253 $ 8,172 $ 6,772
Environmental 3,079 6,176 6,767 4,500
Transportation 386 451 523 360
Corporate (3,660) (3,724) (5,156) (4,350)
---------- ---------- ---------- ----------
Operating profit $ 7,240 $ 11,156 $ 10,306 $ 7,282
========== ========== ========== ==========
Income from continuing operations $ 5,083 $ 7,740 $ 12,469 $ 6,273
========== ========== ========== ==========
Net income $ 5,083 $ 7,740 $ 12,469 $ 6,273
========== ========== ========== ==========
Basic earnings per share (B) $ 0.17 $ 0.27 $ 0.43 $ 0.21
========== ========== ========== ==========
Diluted earnings per share (B) $ 0.16 $ 0.25 $ 0.41 $ 0.20
========== ========== ========== ==========
(A) Beginning in the quarter ended March 31, 2005 and for all periods
thereafter, we 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 period presented 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.
(B) Earnings per share (EPS) for each quarter is computed using the
weighted-average number of shares outstanding during the quarter, while
EPS for the year is computed using the weighted-average number of
shares outstanding during the year. Thus, the sum of the EPS for each
of the four quarters may not equal the EPS for the year.
F-33
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2006
AMCOL INTERNATIONAL CORPORATION
By: /s/ Lawrence E. Washow
-------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ John Hughes March 16, 2006
- --------------------------------------------------
John Hughes
Chairman of the Board and Director
/s/ Lawrence E. Washow March 16, 2006
- --------------------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
and Director
/s/ Gary L. Castagna March 16, 2006
- --------------------------------------------------
Gary L. Castagna
Senior Vice President and Chief Financial Officer;
Treasurer and Chief Accounting Officer
/s/ Arthur Brown March 16, 2006
- --------------------------------------------------
Arthur Brown
Director
/s/ Daniel P. Casey March 16, 2006
- --------------------------------------------------
Daniel P. Casey
Director
/s/ Robert E. Driscoll, III March 16, 2006
- --------------------------------------------------
Robert E. Driscoll, III
Director
/s/ Jay D. Proops March 16, 2006
- --------------------------------------------------
Jay D. Proops
Director
/s/ Clarence O. Redman March 16, 2006
- --------------------------------------------------
Clarence O. Redman
Director
/s/ Dale E. Stahl March 16, 2006
- --------------------------------------------------
Dale E. Stahl
Director
/s/ Audrey L. Weaver March 16, 2006
- --------------------------------------------------
Audrey L. Weaver
Director
/s/ Paul C. Weaver March 16, 2006
- --------------------------------------------------
Paul C. Weaver
Director
35
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- -------
3.1 Restated Certificate of Incorporation of the Company (5), as amended
(10), as amended (16)
3.2 Bylaws of the Company (10)
4 Article Four of the Company's Restated Certificate of Incorporation
(5), as amended (16)
10.3 Lease Agreement for office space dated September 29, 1986, between the
Company and American National Bank and Trust Company of Chicago; (1)
First Amendment dated June 2, 1994 (8); Second Amendment dated June 2,
1997 (13)
10.4 AMCOL International Corporation 1987 Non-Qualified Stock Option Plan
(2); as amended (6)
10.9 AMCOL International Corporation Dividend Reinvestment and Stock
Purchase Plan (4); as amended (6)
10.10 AMCOL International Corporation 1993 Stock Plan, as amended and
restated (10)
10.15 AMCOL International Corporation 1998 Long-Term Incentive Plan (15), as
amended (21)
10.26 Employment Agreement dated March 15, 2002 by and between Registrant and
Gary D. Morrison (22)*
10.27 Employment Agreement dated March 15, 2002 by and between Registrant and
Peter M. Maul (22)*
10.28 Employment Agreement dated March 15, 2002 by and between Registrant and
Gary Castagna (22)*
10.29 Employment Agreement dated March 15, 2002 by and between Registrant and
Ryan F. McKendrick (22)*
10.30 Employment Agreement dated March 15, 2002 by and between Registrant and
Lawrence E. Washow (22)*
10.31 Credit Agreement by and among AMCOL International Corporation and
Harris N.A., Wells Fargo Bank, N.A., Bank of America N.A., and the
Northern Trust Company dated November 10, 2005 (23)
10.32 A written description of compensation for the Board of Directors of the
Company is set forth under the caption "Director Compensation" in the
definitive Proxy Statement to be filed with the Securities and Exchange
Commission and delivered to the Company's shareholders in connection
with the Annual Meeting of Shareholders to be held on May 12, 2005, and
is hereby incorporated by reference.*
21 AMCOL International Corporation Subsidiary Listing
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350
- ----------
(1) Exhibit is incorporated by reference to the Registrant's Form 10 filed
with the Securities and Exchange Commission on July 27, 1987.
(2) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1988.
(4) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1992.
(5) Exhibit is incorporated by reference to the Registrant's Form S-3 filed
with the Securities and Exchange Commission on September 15, 1993.
(6) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1993.
(8) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1994.
(10) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1995.
(13) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter ended
June 30, 1997.
(15) Exhibit is incorporated by reference to the Registrant's Form S-8 (File
333-56017) filed with the Securities and Exchange Commission on June 4,
1998.
(16) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter ended
June 30, 1998.
(21) Exhibit is incorporated by reference to the Registrant's Form S-8 (File
333-68664) filed with the Securities and Exchange Commission on August
30, 2001.
(22) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter ended
March 31, 2002.
(23) Exhibit is incorporated by reference to the Registrant's Form 8-K filed
with the Securities and Exchange Commission on November 15, 2005.
*Management compensatory plan or arrangement
36