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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
(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
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(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
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(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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EXPLANATORY NOTE
This Amendment No. 1 (this "Amendment" or "Form 10-K/A") to the Annual Report of
AMCOL International Corporation (the "Company") on Form 10-K for the fiscal year
ended December 31, 2005, which was originally filed on March 16, 2006 (the
"Original Filing"), is being filed to correct errors that appear in "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II and "Item 15: Exhibits and Financial Statement Schedules"
in Part IV.
As required under SEC rules, this Amendment sets forth the complete text of
"Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Item 15: Exhibits and Financial Statement Schedules," as
amended. Except for the specific changes referred to below, no other changes
have been made to the Original Filing. This Amendment continues to speak as of
the date of the Original Filing and the Company has not updated the disclosure
in this Amendment to speak to any later date.
Specifically, the corrections are as follows:
Corrections to "Item 7: Management's Discussion and Analysis of Financial
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Condition and Results of Operations" in Part II:
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(1) In the "Other Income (Expense), net" section in the "Results of
Operations for the Three Years Ended December 31, 2005" section on page 27 of
the Original Filing, reference to the 2003 recognized net other income has been
corrected to read $0.5 million, as opposed to $0.6 million as appeared in the
Original Filing;
(2) In the "Liquidity and Capital Resources" section on page 29 of the Original
Filing, reference to the amount by which accounts receivable and inventories
increased in 2005 over 2004 has been corrected to read $24.2 million, as opposed
to $24.6 million as appeared in the Original Filing; and
(3) In the "Liquidity and Capital Resources" section on page 30 of the Original
Filing, reference to the amount of working capital as of December 31, 2005 has
been corrected to read approximately $147.9 million, as opposed to approximately
$148.2 million as appeared in the Original Filing.
Corrections to "Item 15: Exhibits and Financial Statement Schedules" in Part IV:
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(1) In the "Liabilities and Stockholders' Equity" section in the Consolidated
Balance Sheets on page F-5 of the Original Filing, reference to the total amount
of stockholders' equity has been corrected to read $265,283 (in thousands), as
opposed to $265,548 (in thousands) as appeared in the Original Filing; and
(2) In "Note 3: Business Segment and Geographic Area Information" in the Notes
to Consolidated Financial Statements on page F-16 of the Original Filing,
reference to the total amount of operating profit from sales to the Americas,
Europe and Asia Pacific has been corrected to read $47,076 (in thousands), as
opposed to $47,431 (in thousands) as appeared in the Original Filing.
(3) In the "Index to Exhibits," the reference to Exhibit 10.32 has been
deleted.
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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.
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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.
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.
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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.
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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.
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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.
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.
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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.
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,
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MINERALS 2005 2004 2003 2005 VS. 2004 2004 VS. 2003
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(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%
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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%
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Operating profit 36,502 12.4% 30,632 11.6% 23,462 10.8% 5,870 19.2% 7,170 30.6%
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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.
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,
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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%
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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.
- 9 -
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.
Operating profit improved in conjunction 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.
- 10 -
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.
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 expenses 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.
- 11 -
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 $0.5
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.
- 12 -
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.
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.
- 13 -
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.
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 $24.2 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.
- 14 -
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.
We had a current ratio of 3.3-to-1 and working capital of approximately
$147.9 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.
- 15 -
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.
- 16 -
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
----------------------------------------------------------------------------------
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 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 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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.
- 17 -
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 have also 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 significant 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
reflect 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 Internal
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
============ ============
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
---------- ----------
265,283 239,354
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 SATEMENTS 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 CAPTIAL EARNING (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 SATEMENTS 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 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
SIGNATURE
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: March 21, 2006
AMCOL INTERNATIONAL CORPORATION
By: /s/ Lawrence E. Washow
-------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
- 18 -
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)
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
- 19 -