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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-15661
AMCOL INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-0724340
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1500 West Shure Drive, Suite 500,
Arlington Heights, Illinois 60004-7803
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(847) 394-8730
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined 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 Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 19, 2006
------------------------------ -----------------------------
(Common stock, $.01 par value) 29,940,439 Shares
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AMCOL INTERNATIONAL CORPORATION
INDEX
Page No.
--------
Part I - Financial Information
- ------------------------------
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2006 and December 31, 2005 3
Condensed Consolidated Statements of Operations -
three months ended March 31, 2006 and 2005 5
Condensed Consolidated Statements of Comprehensive Income -
three months ended March 31, 2006 and 2005 6
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 2006 and 2005 7
Notes to Condensed Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
Item 4 Controls and Procedures 22
Part II - Other Information
- ---------------------------
Item 1A Risk Factors 23
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6 Exhibits 23
2
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
2006 2005
-------------- --------------
(unaudited) *
ASSETS
Current assets:
Cash $ 13,449 $ 15,997
Accounts receivable, net 111,529 101,725
Inventories 73,795 75,455
Prepaid expenses 9,277 9,068
Current deferred tax assets 3,478 3,698
Income taxes receivable 4,334 4,864
Assets held for sale 402 402
-------------- --------------
Total current assets 216,264 211,209
-------------- --------------
Investment in and advances to affiliates and joint ventures 21,189 19,730
-------------- --------------
Property, plant, equipment, and mineral rights and reserves:
Land and mineral rights 13,845 12,761
Depreciable assets 260,292 252,430
-------------- --------------
274,137 265,191
Less: accumulated depreciation 169,384 165,127
-------------- --------------
104,753 100,064
-------------- --------------
Other assets:
Goodwill 20,850 20,644
Intangible assets, net 2,759 3,009
Deferred tax assets 5,190 4,579
Other assets 11,155 9,294
-------------- --------------
39,954 37,526
-------------- --------------
$ 382,160 $ 368,529
============== ==============
Continued...
3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
2006 2005
-------------- --------------
(unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,934 $ 24,722
Accrued liabilities 29,214 38,547
-------------- --------------
Total current liabilities 55,148 63,269
-------------- --------------
Long-term debt 47,710 34,838
-------------- --------------
Minority interests in subsidiaries 262 259
Deferred compensation 7,631 7,045
Other liabilities 13,400 14,262
-------------- --------------
21,293 21,566
-------------- --------------
Stockholders' equity:
Common stock 320 320
Additional paid in capital 74,569 72,194
Retained earnings 190,542 184,125
Accumulated other comprehensive income 9,575 8,644
-------------- --------------
275,006 265,283
Less:
Treasury stock 16,997 16,427
-------------- --------------
258,009 248,856
-------------- --------------
$ 382,160 $ 368,529
============== ==============
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2006 2005
-------------- --------------
Net sales $ 142,764 $ 122,050
Cost of sales 107,035 92,370
-------------- --------------
Gross profit 35,729 29,680
General, selling and administrative expenses 23,682 21,445
-------------- --------------
Operating profit 12,047 8,235
-------------- --------------
Other income (expense):
Interest expense, net (477) (361)
Other, net 212 (105)
-------------- --------------
(265) (466)
-------------- --------------
Income before income taxes and income from
affiliates and joint ventures 11,782 7,769
Income tax expense 3,408 1,484
-------------- --------------
Income before income from affiliates and
joint ventures 8,374 6,285
Income from affiliates and joint ventures 1,337 667
-------------- --------------
Net income $ 9,711 $ 6,952
============== ==============
Weighted average common shares outstanding 29,773,953 29,333,627
============== ==============
Weighted average common and common equivalent
shares outstanding 30,894,234 30,769,482
============== ==============
Basic earnings per share $ 0.33 $ 0.24
============== ==============
Diluted earnings per share $ 0.31 $ 0.23
============== ==============
Dividends declared per share $ 0.11 $ 0.09
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2006 2005
-------------- --------------
Net income $ 9,711 $ 6,952
Other comprehensive income (loss):
Minimum pension liability - 114
Foreign currency translation adjustment 931 (1,498)
-------------- --------------
Comprehensive income $ 10,642 $ 5,568
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2006 2005
-------------- --------------
Cash flow from operating activities:
Net income $ 9,711 $ 6,952
Adjustments to reconcile from net income to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 4,907 4,885
Changes in assets and liabilities, net of
effects of acquisitions:
Increase in current assets (7,873) (7,290)
Increase in noncurrent assets (2,610) (3,059)
Increase (decrease) in current liabilities (6,929) 1,624
Increase (decrease) in noncurrent liabilities (276) (251)
Other (931) (184)
-------------- --------------
Net cash provided by (used in) operating activities (4,001) 2,677
-------------- --------------
Cash flow from investing activities:
Capital expenditures (9,311) (5,157)
Acquisitions, net of cash (1,289) (1,632)
Other 162 1,129
-------------- --------------
Net cash used in investing activities (10,438) (5,660)
-------------- --------------
Cash flow from financing activities:
Net change in outstanding debt 12,491 7,821
Proceeds from sales of treasury stock 1,373 550
Purchases of treasury stock (1,075) -
Dividends paid (3,291) (2,656)
Excess tax benefits from stock-based compensation 1,650 -
-------------- --------------
Net cash provided by financing activities 11,148 5,715
-------------- --------------
Effect of foreign currency rate changes on cash 743 (825)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (2,548) 1,907
-------------- --------------
Cash and cash equivalents at beginning of period 15,997 17,594
-------------- --------------
Cash and cash equivalents at end of period $ 13,449 $ 19,501
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 412 $ 327
============== ==============
Income taxes $ 1,222 $ 1,243
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY OPERATIONS
AMCOL International Corporation (the Company) operates in two principal
segments: minerals and environmental. We also operate a transportation business,
whose activities include delivering our own products. Intersegment revenues are
eliminated in the corporate segment. The composition of our revenues by segment
is as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2006 2005
-------------- --------------
Minerals 56% 60%
Environmental 39% 35%
Transportation 9% 9%
Intersegment Shipping -4% -4%
-------------- --------------
100% 100%
============== ==============
Further descriptions of our products, principal markets and the relative
significance of our operations are included in Note 4, "Business Segment
Information."
BASIS OF PRESENTATION
The financial information included herein has been prepared by
management and, other than the condensed consolidated balance sheet as of
December 31, 2005, is unaudited. The condensed consolidated balance sheet as of
December 31, 2005 has been derived from, but does not include all of the
disclosures contained in, the audited consolidated financial statements for the
year ended December 31, 2005. The information furnished herein includes all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results of operations and cash flows for the interim periods
ended March 31, 2006 and 2005, and the financial position of the Company as of
March 31, 2006, and all such adjustments are of a normal recurring nature.
Management recommends that the accompanying condensed consolidated financial
information be read in conjunction with the consolidated financial statements
and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2005, as amended.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
8
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
NEW ACCOUNTING STANDARDS
As discussed in Note 5, we adopted the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 123(R), Share Based Payment effective
January 1, 2006.
We adopted Emerging Issues Task Force ("EITF") Issue No. 04-6,
Accounting for Stripping Costs Incurred during Production in the Mining
Industry, effective January 1, 2006. This guidance requires that, once
production has commenced from a mine, production-related stripping costs be
accounted for as a current cost of production. It also requires that these costs
be included within inventories to the extent that minerals extracted from the
mine are still on hand at each period end. Our adoption of this guidance did not
have a material impact on our consolidated financial statements. Issue 04-6 does
not address the accounting for stripping costs incurred in the pre-production
phase of a mine site. These costs are deferred and amortized on a
units-of-production basis over the estimated life of each mine site. Deferred
stripping costs, which had been reported within inventory in periods prior to
January 1, 2006, have been reclassified into prepaid expenses.
NOTE 2: EARNINGS PER SHARE
The table below provides further share information used in computing our
earnings per share for the periods presented herein. Basic earnings per share
was computed by dividing net income by the weighted average number of common
shares outstanding during each period. Diluted earnings per share was computed
by dividing net income by the weighted average common shares outstanding after
consideration of the dilutive effect of stock options outstanding during each
period.
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2006 2005
-------------- --------------
Weighted average number of common shares outstanding 29,773,953 29,333,627
Dilutive impact of stock options 1,120,281 1,435,855
-------------- --------------
Weighted average number of common and common equivalent
shares for the period 30,894,234 30,769,482
============== ==============
Number of common shares outstanding at the end of the period 29,933,271 29,474,627
============== ==============
Weighted average number of anti-dilutive shares excluded
from the computation of diluted earnings per share 146,225 -
============== ==============
9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NOTE 3: ADDITIONAL BALANCE SHEET INFORMATION
Inventories at March 31, 2006 have been valued using the same methods as
at December 31, 2005. Our inventories are comprised of the following components:
MARCH 31, DECEMBER 31,
2006 2005
-------------- --------------
Crude stockpile inventories $ 20,177 $ 20,833
In-process inventories 27,202 25,935
Other raw material, container, and supplies inventories 26,416 28,687
-------------- --------------
$ 73,795 $ 75,455
============== ==============
We mine various minerals using a surface mining process that requires
the removal of overburden. Under various governmental regulations, we are
obligated to restore the land comprising each mining site to its original
condition at the completion of mining activity. The obligation is adjusted to
reflect the passage of time and changes in estimated future cash outflows. A
reconciliation of the activity within our reclamation obligation is as follows:
THREE MONTHS ENDED
MARCH 31,
2006
------------------
Balance at beginning of period $ 4,966
Settlement of obligations (342)
Liabilities incurred and accretion expense 447
------------------
Balance at end of period $ 5,071
==================
A reconciliation of the activity within our accrued warranty obligation
is as follows:
THREE MONTHS ENDED
MARCH 31,
2006
------------------
Balance at beginning of period $ 1,823
Charged to costs and expenses (304)
Net settlements (375)
Foreign currency translation 15
------------------
Balance at end of period $ 1,159
==================
10
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NOTE 4: BUSINESS SEGMENT INFORMATION
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. The transportation segment includes a
long-haul trucking business and a freight brokerage business, which provide
services to our other segments as well as third-party customers.
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 the
following table. We measure segment performance based on operating profit, which
is defined as net sales less cost of sales and general, selling and
administrative expenses related to a segment's operations. The costs deducted to
arrive at operating profit do not include interest or income taxes.
Segment assets are those assets used in the operations of that segment.
Corporate assets include cash and cash equivalents, corporate leasehold
improvements, the nanocomposite plant investment and other miscellaneous
equipment.
11
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
The following summaries set forth certain financial information by
business segment:
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2006 2005
-------------- --------------
Net sales:
Minerals $ 80,071 $ 73,448
Environmental 55,130 42,304
Transportation 12,471 10,985
Intersegment shipping (4,908) (4,687)
-------------- --------------
Total $ 142,764 $ 122,050
============== ==============
Operating profit (loss):
Minerals $ 8,767 $ 7,795
Environmental 7,731 5,137
Transportation 683 573
Corporate (5,134) (5,270)
-------------- --------------
Total $ 12,047 $ 8,235
============== ==============
MAR. 31, 2006 DEC. 31, 2005
-------------- --------------
Assets:
Minerals $ 193,502 $ 186,718
Environmental 152,481 146,588
Transportation 3,057 3,027
Corporate 33,120 32,196
-------------- --------------
Total $ 382,160 $ 368,529
============== ==============
NOTE 5: 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.
No stock-based employee compensation cost was reflected in net income prior to
2003, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant.
Effective January 1, 2003, we adopted the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and elected
to apply those provisions prospectively, in accordance with SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment
of FASB Statement No. 123, to all employee awards granted, modified, or settled
after January 1, 2003. Awards granted after 2002 vest over three years.
12
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
Effective January 1, 2006, we adopted SFAS 123(R), Share Based Payment,
under the modified prospective transition method. This adoption did not
significantly affect our statement of operations, balance sheet or statement of
comprehensive income for the three months ended March 31, 2006. Statement 123(R)
does require, however, that the benefits of tax deductions in excess of
recognized compensation cost be reported as a financing cash flow rather than as
an operating cash flow as required prior to January 1, 2006; this has the effect
of reducing net operating cash flows and increasing net financing cash flows for
all periods after December 31, 2005. For the three months ended March 31, 2006,
this amount was $1,650. While we can not estimate what those amounts will be in
the future (because they depend on, amongst other factors, when employees
exercise options), the amount of operating cash flows recognized for such excess
tax deductions for the three month period ended March 31, 2005 (and hence the
amount that would have been reclassified as a cash inflow from financing
activities if SFAS 123(R) had been applicable in the prior period) was $728.
The cost related to stock-based employee compensation included in the
determination of net income for 2005 is less than that which would have been
recognized if the fair value based method had been applied to all awards as
required by SFAS 123(R). Results for periods prior to January 1, 2006 have not
been restated 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 2005:
THREE MONTHS ENDED
MARCH 31,
2005
------------------
Net income, as reported $ 6,952
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 368
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (403)
------------------
Pro forma net income $ 6,917
==================
Earnings per share:
Basic - as reported $ 0.24
Basic - pro forma $ 0.24
Diluted - as reported $ 0.23
Diluted - pro forma $ 0.22
13
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NOTE 6: EMPLOYEE BENEFIT PLANS
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2006 2005
-------------- --------------
Service cost $ 434 $ 463
Interest cost 497 493
Expected return on plan assets (630) (568)
Amortization of transition (asset) / obligation - (22)
Amortization of prior service cost 8 8
Amortization of net (gain) loss - -
-------------- --------------
Net periodic benefit cost $ 309 $ 374
============== ==============
We previously disclosed in our Annual Report on Form 10-K, as amended,
for the year ended December 31, 2005 that we expected to contribute $1,000 to
our pension plan in 2006. That full contribution was made in the first quarter
of 2006.
NOTE 7: INCOME TAXES
Our effective tax rate for the three months ended March 31, 2006 was
28.9%, which differs from the statutory rate of 35% largely due to depletion
deductions and differences in local tax rates on the income from our foreign
subsidiaries. In the three month period ending March 31, 2006, we increased our
provision for taxes owed by $157 largely due to provision to return differences.
Excluding the effect of these differences, the effective tax rate for the period
ending March 31, 2006 would have been 27.7%.
Our effective tax rate for the three months ended March 31, 2005 was
19.1%, which varies from the 35% statutory rate for the same depletion and
foreign tax rates mentioned above. Additionally, the 19.1% includes a further
reduction to income tax expense of $574 largely due to changes in estimated
depletion deductions; excluding this benefit, the effective tax rate would have
approximated 26.5%.
NOTE 8: ACQUISITIONS
We made payments of $1,289 in the quarter ended March 31, 2006 to former
owners of businesses we acquired pursuant to contingent payment arrangements
associated with those acquisitions.
NOTE 9: CONTINGENCIES
We are party to a number of lawsuits arising in the normal course of
business. We do not believe that any pending litigation will have a material
adverse effect on our consolidated financial statements.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
From time to time, certain statements we make, including statements in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations section, constitute "forward-looking statements" made in reliance
upon the safe harbor contained in Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements include statements relating to
our Company or our operations that are preceded by terms such as "expects,"
"believes," "anticipates," "intends" and similar expressions, and statements
relating to anticipated growth and levels of capital expenditures. Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Our actual results, performance or achievements could
differ materially from the results, performance or achievements expressed in, or
implied by, these forward-looking statements as a result of various factors,
including without limitation the following: actual performance in our various
markets; conditions in the metalcasting and construction industries; operating
costs; competition; currency exchange rates and devaluations; delays in
development, production and marketing of new products; and other factors set
forth from time to time in our reports filed with the Securities and Exchange
Commission.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States. We evaluate the accounting policies and estimates used to prepare
the financial statements on an ongoing basis. We consider the accounting
policies used in preparing our financial statements to be critical accounting
policies when they are both important to the portrayal of our financial
condition and results of operations, and require us to make estimates, complex
judgments and assumptions, including with respect to events which are inherently
uncertain. As a result, actual results could differ from these estimates. For
more information on our critical accounting policies, one should also read our
Annual Report on Form 10-K, as amended, for the year ended December 31, 2005.
ANALYSIS OF RESULTS OF OPERATIONS
- ---------------------------------
Following is a discussion and analysis that describes certain factors
that have affected, and may continue to affect, our financial position and
operating results. This discussion should be read with the accompanying
condensed consolidated financial statements. In addition, as discussed in Note 1
of the Notes to Condensed Consolidated Financial Statements in Item 1, we have
reclassified certain prior year amounts to conform to the current year's
presentation. The following discussion and analysis of results of operations and
financial condition are based upon such reclassified financial data.
15
THREE MONTHS ENDED MARCH 31, 2006 VS. MARCH 31, 2005:
RESULTS OF OPERATIONS (IN MILLIONS):
NET SALES: 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 142.8 $ 122.1 17%
Net sales from base businesses (those operations owned for greater than
one year) accounted for approximately 97% of the growth, or 16.5 percentage
points, over the prior year period. On an operating segment basis, minerals
accounted for approximately 32% of the increase in net sales while environmental
contributed approximately 62% of the growth. Our transportation segment
accounted for approximately 6% of the sales growth over the first quarter of
2005.
GROSS PROFIT: 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 35.7 $ 29.7 20%
Margin 25.0% 24.3% N/A
Gross profit improved in the first quarter of 2006 in conjunction with
the increase in net sales. Gross margin increased by 70 basis points due to a
relatively large increase in environmental segment sales which generates our
highest margins.
GENERAL, SELLING &
ADMINISTRATIVE EXPENSES: 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 23.7 $ 21.4 10%
Higher personnel and operating expenses in the environmental segment
were the primary causes for the increase in G, S &A over the first quarter of
2005.
OPERATING PROFIT: 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 12.0 $ 8.2 46%
Margin 8.4% 6.7% N/A
Our environmental segment contributed approximately 68% of the increase
as a result of higher sales. Operating margins improved in all three reporting
segments. Higher shipments and selling prices aided the increase in operating
margins.
INTEREST EXPENSE, NET: 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 0.5 $ 0.4 32%
Interest expense in the 2006 first quarter increased due both to higher
average long-term debt compared with the prior year period and higher interest
rates. The increase in long-term debt was attributed to higher working capital
funding in the current-year period. The majority of our long-term debt has a
variable rate of interest which is primarily influenced by the changes in the
LIBOR.
16
INCOME TAX EXPENSE: 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 3.4 $ 1.5 130%
Effective tax rate 28.9% 19.1% N/A
Our effective tax rate has differed from the statutory 35% rate due
primarily to depletion deductions and differences in local tax rates on the
income of our foreign subsidiaries. Our effective tax rate in the current year
period was negatively impacted by changes in estimated taxes payable for 2005 in
certain foreign jurisdictions. The 2005 period, conversely, was favorably
impacted by estimated changes for taxes payable in the U.S. After factoring out
the negative impact of adjustments in the first quarter of 2006, we estimated
our effective tax rate for 2006 to be approximately 28%. This estimate is
subject to change if the distribution of taxable income between foreign and U.S.
jurisdictions is altered through the course of the year. Foreign jurisdictions,
in general, have lower corporate income tax rates than the U.S.
INCOME FROM AFFILIATES
& JOINT VENTURES 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 1.3 $ 0.7 100%
Higher earnings from our India-based investments accounted for the
increase over the 2005 first quarter results. A major impact on the earnings of
our largest investment in India, Ashapura Minechem Limited, is the rapid
development of its bauxite business. Bauxite is primarily used in the production
of alumina, which, in turn, is used to produce aluminum. Ashapura is benefiting
from the high demand for aluminum in China.
NET INCOME 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 9.7 $ 7.0 40%
Margin 6.8% 5.7% N/A
Growth in operating profit and income from affiliates and joint ventures
accounted for the increase in net income over the first quarter of 2005. Net
margin also improved with the higher operating margins we generated this year.
DILUTED EARNINGS
PER SHARE: 2006 2005 % Change
- ----------------------- ------- ------- --------
$ 0.31 $ 0.23 35%
Earnings per share improved commensurate with higher net income.
Weighted average common and common equivalent shares outstanding increased by
less than 1% over the 2005 quarter.
17
SEGMENT ANALYSIS:
- ----------------
Following is a review of operating results for each of our four
reporting segments:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------
MINERALS 2006 2005 2006 VS. 2005
- ------------------------------ --------------------- --------------------- ---------------------
(Dollars in Thousands)
Net sales $ 80,071 100.0% $ 73,448 100.0% $ 6,623 9.0%
Cost of sales 65,179 81.4% 59,974 81.7%
--------- --------- --------- ---------
Gross profit 14,892 18.6% 13,474 18.3% 1,418 10.5%
General, selling and
administrative expenses 6,125 7.6% 5,679 7.7% 446 7.9%
--------- --------- --------- --------- ---------
Operating profit 8,767 11.0% 7,795 10.6% 972 12.5%
Base businesses accounted for all of the growth over the prior-year
period. Net sales for the quarter improved primarily from growth in metalcasting
and specialty mineral revenues. A majority of metalcasting revenue growth was
due to higher prices passed on to domestic customers to cover rising
energy-related and raw material costs. We also continued to see growth in
volumes for our Asia/Pacific metalcasting product lines. Specialty mineral sales
were positively impacted by higher prices and volumes for petroleum product
drilling fluids. This offset a decline in our detergent specialty products which
suffered from lower volumes compared with the 2005 quarter. Pet products revenue
was relatively unchanged over the prior-year quarter.
Gross profit improved in conjunction with sales and the margin increased
30 basis points. Higher selling prices were realized in a majority of our
domestic product lines while energy-related and raw material costs did not
increase at the rates seen in 2005. This benefit was partially offset by higher
production costs at our Asia/Pacific operations primarily due to transportation
costs for imported raw materials.
G, S & A expenses increased due to Asia/Pacific operating costs related
to market development activities.
Operating profit and margin improved commensurate with the gross profit
growth and lower G, S&A spending.
18
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------
ENVIRONMENTAL 2006 2005 2006 VS. 2005
- ------------------------------ --------------------- --------------------- ---------------------
(Dollars in Thousands)
Net sales $ 55,130 100.0% $ 42,304 100.0% $ 12,826 30.3%
Cost of sales 35,775 64.9% 27,444 64.9%
--------- --------- --------- ---------
Gross profit 19,355 35.1% 14,860 35.1% 4,495 30.2%
General, selling and
administrative expenses 11,624 21.1% 9,723 23.0% 1,901 19.6%
--------- --------- --------- --------- ---------
Operating profit 7,731 14.0% 5,137 12.1% 2,594 50.5%
Base businesses accounted for nearly all of the growth over the
prior-year period. Higher oilfield service revenues, which is part of our water
treatment product line, contributed a majority of the growth over the 2005
quarter. Building materials product line sales increased as result of higher
volumes and pricing in the U.S. We also continued to see higher volumes in
Europe and China. Lining technology sales increased in the U.S. due to higher
pricing. Other geographical markets for lining technology products grew due to
higher volumes.
Gross profit improved in conjunction with sales. Despite the increase in
sales, gross margin was unchanged over the prior-year quarter. Higher raw
materials and manufacturing costs in the U.S. negatively impacted gross margin
in the period.
G, S & A grew due to higher personnel and product warranty expenses.
Also, we experienced higher market development costs associated with our U.S.
contracting services unit.
Operating profit and margin improved with the gross profit increase and
relatively modest G, S, & A spending growth.
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------
TRANSPORTATION 2006 2005 2006 VS. 2005
- ------------------------------ --------------------- --------------------- ---------------------
(Dollars in Thousands)
Net sales $ 12,471 100.0% $ 10,985 100.0% $ 1,486 13.5%
Cost of sales 10,989 88.1% 9,639 87.7%
--------- --------- --------- ---------
Gross profit 1,482 11.9% 1,346 12.3% 136 10.1%
General, selling and
administrative expenses 799 6.4% 773 7.0% 26 3.4%
--------- --------- --------- --------- ---------
Operating profit 683 5.5% 573 5.3% 110 19.2%
Higher traffic and pricing lead to the increase in revenues over the
prior-year period. Gross profit and margins were positively impacted by the
improvement in revenues. G, S & A spending rose modestly due to higher
compensation costs.
19
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
CORPORATE 2006 2005 2006 VS. 2005
- --------------------------------------- --------- --------- ----------------------
(Dollars in Thousands)
Intersegment shipping sales $ (4,908) $ (4,687)
Intersegment shipping costs (4,908) (4,687)
--------- ---------
Gross profit - -
Corporate general, selling
and administrative expenses 4,255 4,361 (106) -2.4%
Nanocomposite business
development expenses 879 909 (30) -3.3%
--------- --------- ---------
Operating loss (5,134) (5,270) 136 -2.6%
Intersegment shipping revenues and costs are related to billings from
the transportation segment to the domestic minerals and environmental segments
for services. These services are invoiced to the minerals and environmental
segments at arms-length rates and those costs are subsequently charged to
customers. Intersegment sales and costs reported above reflect the elimination
of these transactions.
The decline in G, S & A spending was attributed to the lower audit and
Sarbanes-Oxley compliance-related costs. We also incurred higher product
development costs in the 2005 quarter which were not a factor in this year.
Nancocomposite development costs remained relatively unchanged. These
costs will be influenced by the change in sales as we continue market
development activities. After completing organizational changes in the first
quarter of 2006, we expect operating costs for the business to be relatively
stable hereafter.
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 Condensed Consolidated Statement of Cash Flows
presented within Part 1 of this report.
THREE MONTHS ENDED
MARCH 31,
CASH FLOWS -------------------------------
($ in millions) 2006 2005
- ------------------------------------------------------------ -------------- --------------
Net cash provided by (used in) operating activities $ (4.0) $ 2.7
Net cash provided by (used in) investing activities $ (10.4) $ (5.7)
Net cash provided by (used in) financing activities $ 11.1 $ 5.7
Cash flows from operating activities declined primarily due to a greater
decrease in accrued liabilities relative to the prior-year quarter. We tend to
pay a number of accruals in the first quarter of each year, such as incentive
bonuses. In the 2006 period, we paid greater amounts for these items than in the
first quarter of 2005. Historically, cash flows from operations have increased
over the course of the year and we anticipate this pattern to continue for the
remainder of 2006.
20
Cash flows used in investing activities increased in the 2006 quarter
due to higher capital expenditures. We have a number of expansion projects
ongoing this year, including new manufacturing operations in Spain for the
environmental segment and in China for the minerals segment, that were not
included in the 2005 capital expenditure plan. We are also expending more funds
for improving productivity at our U.S.-based mineral processing operations in
2006. Capital expenditures for 2006 are estimated to be in the range of $34
million to $38 million.
Cash flows provided by financing activities increased due to higher debt
borrowings. The increase was due to higher working capital and capital
expenditures in the 2006 period. Dividends increased to $0.11 per share from
$0.09 per share in the 2005 quarter, consequently increasing the financing needs
this year. We also repurchased 40 thousand shares of our stock on the open
market in the 2006 first quarter for an aggregate amount of $1.1 million, or an
average price of $26.89 per share. We have $7.0 million remaining in funds
authorized by our board of directors for the repurchase of common stock. We plan
to utilize these funds for stock repurchases over the course of 2006, unless we
determine a better utilization of our cash or financing means. In the first
quarter of 2006, we received $1.4 million from employees on their exercise of
stock options; we also recorded a $1.7 million cash benefit resulting from
reduced tax payments on these option exercises.
AS AT
-------------------------------
FINANCIAL POSITION MARCH 31, DECEMBER 31,
($ in millions) 2006 2005
- ------------------------------------------------------------ -------------- --------------
Working capital $ 161.1 $ 147.9
Goodwill & Intangible assets $ 23.6 $ 23.7
Total assets $ 382.2 $ 368.5
Long-term debt $ 47.7 $ 34.8
Other long-term obligations $ 21.3 $ 21.6
Stockholder's equity $ 258.0 $ 248.9
Working capital at March 31, 2006, increased over the amount at December
31, 2005, due the growth in accounts receivable and lower accrued liabilities
that was described earlier. Current ratio was 3.9-to-1 and 3.3-to-1 at March 31,
2006, and December 31, 2005, respectively.
Long-term debt increased commensurate with higher working capital
requirements and capital expenditure funding requirements. Consequently,
long-term debt relative to total capitalization rose to 16% at March 31, 2006,
compared with 12% at December 31, 2005. At March 31, 2006, we had approximately
$82.0 million of borrowing capacity available from our revolving credit
facility. We are in compliance with financial covenants related to the revolving
credit facility as of March 31, 2006.
We believe future cash flows from operations combined with financing
capability from our revolving credit facility will be adequate to fund necessary
investing activities planned in the future.
21
Since the mid 1980's, we have been named as one of a number of
defendants in product liability lawsuits relating to the minor free-silica
content within our bentonite products used in the metalcasting industry. The
plaintiffs in these lawsuits are primarily employees of our former and current
customers. To date, we have not incurred significant costs in defending these
matters. We believe we have adequate insurance coverage and do not believe the
litigation will have a material adverse impact on our financial position,
liquidity or results of operations.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS (IN MILLIONS):
- -------------------------------------------------------------------------
Item 7 of our Annual Report on Form 10-K for the year ended December 31,
2005, as amended, discloses our contractual obligations and off-balance sheet
arrangements. Other than the increase in our long-term bank debt as disclosed in
our financial statements and the contribution to our defined benefit plan as
discussed in Note 6 of the Notes to Condensed Consolidated Financial Statements
within this Form 10-Q, there were no material changes in our contractual
obligations and off-balance sheet arrangements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no material changes in our market risk from the disclosures
made in our Annual Report on Form 10-K for the year ended December 31, 2005, as
amended.
ITEM 4: 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 were
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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
- ----------------------------------------------------
There were no changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
22
PART II - OTHER INFORMATION
ITEM 1A: RISK FACTORS
Information regarding risk factors appears in Part 1, "Item 1A. Risk
Factors" of our Annual Report on Form 10-K for the year ended December 31, 2005,
as amended. There have been no material changes from the risk factors disclosed
therein.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 13, 2004, the Board of Directors authorized a program to
repurchase up to $10 million of our outstanding stock; this authorization
expires September 30, 2006. The table below illustrates the stock repurchases
made in 2006.
TOTAL NUMBER OF MAXIMUM VALUE OF
SHARES REPURCHASED AVERAGE SHARES THAT MAY YET BE
AS PART OF THE STOCK PRICE PAID REPURCHASED UNDER THE
REPURCHASE PROGRAM PER SHARE PROGRAM
-------------------- ---------- ----------------------
Balance at the beginning of the year $ 8,035,285
January 1, 2006 - January 31, 2006 - $ - $ 8,035,285
February 1, 2006 - February 28, 2006 - $ - $ 8,035,285
March 1, 2006 - March 31, 2006 40,000 $ 26.89 $ 6,959,825
--------------------
Total 40,000 $ 26.89
====================
ITEM 6: EXHIBITS
EXHIBIT
NUMBER
- -------
10.1 Employment Agreement dated March 24, 2006 between AMCOL International
Corporation and Lawrence E. Washow*
10.2 Employment Agreement dated March 24, 2006 between AMCOL International
Corporation and Gary L. Castagna*
10.3 Employment Agreement dated March 24, 2006 between AMCOL International
Corporation and Ryan F. McKendrick*
10.4 Employment Agreement dated March 24, 2006 between AMCOL International
Corporation and Gary Morrison*
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350
* Exhibit is incorporated by reference to our Form 8-K filed with the Securities
and Exchange Commission on March 29, 2006
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMCOL INTERNATIONAL CORPORATION
Date: May 10, 2006 /s/ Lawrence E. Washow
-------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
Date: May 10, 2006 /s/ Gary L. Castagna
-------------------------------------
Gary L. Castagna
Senior Vice President and
Chief Financial Officer and
Principal Accounting Officer
24