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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 of (IRS Employer
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 November 1, 2006
----------------------------- -------------------------------
(Common stock, $.01 par value) 29,924,146 Shares
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AMCOL INTERNATIONAL CORPORATION
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INDEX
Page No.
--------
Part I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2006 and December 31, 2005 3
Condensed Consolidated Statements of Operations -
three and nine months ended September 30, 2006 and 2005 5
Condensed Consolidated Statements of Comprehensive Income -
three and nine months ended September 30, 2006 and 2005 6
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 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 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 33
Item 4 Controls and Procedures 33
Part II - Other Information
Item 1A Risk Factors 33
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 6 Exhibits 34
2
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Item 1. Financial Statements
SEPTEMBER 30, DECEMBER 31,
ASSETS 2006 2005
- ------------------------------------------------------------- ------------- -------------
(unaudited) *
Current assets:
Cash $ 15,319 $ 15,997
Accounts receivable, net 134,145 101,725
Inventories 79,364 75,455
Prepaid expenses 12,110 9,068
Current deferred tax assets 3,866 3,698
Income taxes receivable - 4,864
Other 573 402
------------- -------------
Total current assets 245,377 211,209
------------- -------------
Investment in and advances to affiliates and joint ventures 29,893 19,730
------------- -------------
Property, plant, equipment, and mineral rights and reserves:
Land and mineral rights 15,856 12,761
Depreciable assets 285,378 252,430
------------- -------------
301,234 265,191
Less: accumulated depreciation 179,296 165,127
------------- -------------
121,938 100,064
------------- -------------
Other assets:
Goodwill 26,462 20,644
Intangible assets, net 2,722 3,009
Deferred tax assets 5,275 4,579
Other assets 11,264 9,294
------------- -------------
45,723 37,526
------------- -------------
$ 442,931 $ 368,529
============= =============
Continued...
3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
- ----------------------------------------- -------------- --------------
(unaudited) *
Current liabilities:
Accounts payable $ 28,766 $ 24,722
Accrued liabilities 48,743 38,547
-------------- --------------
Total current liabilities 77,509 63,269
-------------- --------------
Long-term debt 60,100 34,838
-------------- --------------
Minority interests in subsidiaries 262 259
Deferred compensation 7,823 7,045
Other liabilities 15,186 14,262
-------------- --------------
23,271 21,566
-------------- --------------
Stockholders' equity:
Common stock 320 320
Additional paid in capital 76,140 72,194
Retained earnings 211,883 184,125
Accumulated other comprehensive income 13,936 8,644
-------------- --------------
302,279 265,283
Less:
Treasury stock 20,228 16,427
-------------- --------------
282,051 248,856
-------------- --------------
$ 442,931 $ 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 per share amounts)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
CONTINUING OPERATIONS
Net sales $ 455,637 $ 401,322 $ 160,172 $ 142,928
Cost of sales 337,995 296,977 117,954 104,831
------------ ------------ ------------ ------------
Gross profit 117,642 104,345 42,218 38,097
General, selling and administrative expenses 74,359 66,690 25,810 22,138
------------ ------------ ------------ ------------
Operating profit 43,283 37,655 16,408 15,959
------------ ------------ ------------ ------------
Other income (expense):
Interest expense, net (1,835) (1,195) (740) (390)
Other, net 259 (831) (273) 160
------------ ------------ ------------ ------------
(1,576) (2,026) (1,013) (230)
------------ ------------ ------------ ------------
Income before income taxes and income from
affiliates and joint ventures 41,707 35,629 15,395 15,729
Income tax expense 8,505 9,659 1,237 5,202
------------ ------------ ------------ ------------
Income before income from affiliates and
joint ventures 33,202 25,970 14,158 10,527
Income from affiliates and joint ventures 4,462 1,942 1,876 915
------------ ------------ ------------ ------------
Income from continuing operations 37,664 27,912 16,034 11,442
DISCONTINUED OPERATIONS:
Gain on disposal 585 4,755 585 -
------------ ------------ ------------ ------------
Income from discontinued operations 585 4,755 585 -
------------ ------------ ------------ ------------
Net income $ 38,249 $ 32,667 $ 16,619 $ 11,442
============ ============ ============ ============
Weighted average common shares outstanding 29,903 29,489 29,962 29,649
============ ============ ============ ============
Weighted average common and common equivalent
shares outstanding 30,874 30,798 30,825 30,832
============ ============ ============ ============
Basic earnings per share:
Continuing operations $ 1.26 $ 0.95 $ 0.54 $ 0.39
Discontinued operations - Gain on disposal 0.02 0.16 0.02 -
------------ ------------ ------------ ------------
Basic earnings per share $ 1.28 $ 1.11 $ 0.56 $ 0.39
============ ============ ============ ============
Diluted earnings per share:
Continuing operations $ 1.22 $ 0.91 $ 0.52 $ 0.37
Discontinued operations - Gain on disposal 0.02 0.15 0.02 -
------------ ------------ ------------ ------------
Diluted earnings per share $ 1.24 $ 1.06 $ 0.54 $ 0.37
============ ============ ============ ============
Dividends declared per share $ 0.35 $ 0.28 $ 0.12 $ 0.10
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net income $ 38,249 $ 32,667 $ 16,619 $ 11,442
Other comprehensive income (loss):
Minimum pension liability - 169 - -
Foreign currency translation adjustment 5,292 (5,557) 1,078 (237)
------------ ------------ ------------ ------------
Comprehensive income $ 43,541 $ 27,279 $ 17,697 $ 11,205
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2006 2005
------------ ------------
Cash flow from operating activities:
Net income $ 38,249 $ 32,667
Adjustments to reconcile from net income to net cash
provided by (used in) operating activities:
Gain on disposal of discontinued operations (585) (4,755)
Depreciation, depletion, and amortization 14,606 14,629
Changes in assets and liabilities, net of effects
of acquisitions:
Decrease (increase) in current assets (33,693) (25,748)
Decrease (increase) in noncurrent assets (2,171) (2,190)
Increase (decrease) in current liabilities 14,256 210
Increase (decrease) in noncurrent liabilities 1,703 1,358
Other (3,400) 1,276
------------ ------------
Net cash provided by (used in) operating
activities 28,965 17,447
------------ ------------
Cash flow from investing activities:
Capital expenditures (29,980) (19,988)
Acquisitions, net of cash (11,722) (1,997)
Investments in and advances to affiliates and joint
ventures (5,260) (2,336)
Net tax refunds from the sale of discontinued operations 585 7,300
Other 1,226 2,918
------------ ------------
Net cash used in investing activities (45,151) (14,103)
------------ ------------
Cash flow from financing activities:
Net change in outstanding debt 22,257 6,151
Proceeds from sales of treasury stock 2,350 1,247
Purchases of treasury stock (5,553) (1,946)
Dividends paid (10,488) (8,308)
Excess tax benefits from stock-based compensation 1,931 -
------------ ------------
Net cash provided by (used in) financing activities 10,497 (2,856)
------------ ------------
Effect of foreign currency rate changes on cash 5,011 (2,939)
------------ ------------
Net increase (decrease) in cash and cash equivalents (678) (2,451)
------------ ------------
Cash and cash equivalents at beginning of period 15,997 17,594
------------ ------------
Cash and cash equivalents at end of period $ 15,319 $ 15,143
============ ============
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 five segments:
minerals, environmental, oilfield services, transportation and corporate. 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
oilfield services segment provides onshore and offshore water treatment
filtration, pipeline separation, waste fluid treatment, rental tools and well
testing data services for the oil and gas industry. 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.
Intersegment sales are insignificant, other than intersegment shipping, which is
eliminated in the corporate segment. The composition of our revenues by segment
is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Minerals 52% 55% 49% 52%
Environmental 33% 32% 37% 35%
Oilfield services 9% 7% 9% 8%
Transportation 8% 9% 8% 9%
Intersegment shipping -2% -3% -3% -4%
------------ ------------ ------------ ------------
100% 100% 100% 100%
============ ============ ============ ============
Further discussion of segment information is 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 September 30,
2006 and 2005, and the financial position of the Company as of September 30,
2006, and all such adjustments are of a normal recurring nature. The
accompanying condensed consolidated financial information should 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.
8
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
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.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
RECLASSIFICATIONS
In addition to segment disclosures contained in Note 4, 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. 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. Our adoption of this guidance did not have a material impact on our
consolidated financial statements. Deferred stripping costs, which had been
reported within inventory in periods prior to January 1, 2006, have been
reclassified into prepaid expenses.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 is effective for
fiscal years beginning after December 15, 2006 and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. We
are currently evaluating the impact this standard may have on our financial
statements when we adopt it for our fiscal year beginning January 1, 2007.
9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 does not change existing guidance as to
whether or not an instrument be carried at fair value but rather eliminates
inconsistencies found in various prior accounting guidance. The provisions of
SFAS 157 are effective for our fiscal year beginning January 1, 2008 with
earlier adoption permitted for our fiscal year beginning January 1, 2007. We are
currently evaluating the impact this standard may have on our financial
statements.
In September 2006, the FASB issued SFAS 158, Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS 158 requires the recognition, in
our December 2006 balance sheet, of the overfunded or underfunded status of our
defined benefit plan as an asset or liability, measured as the difference
between the fair value of the plan assets and the projected benefit obligation.
Upon adoption, SFAS 158 also requires the recognition of previously unrecognized
actuarial gains and losses and prior service costs within Accumulated other
comprehensive income, net of tax. SFAS 158 also requires us to measure the
funded status of our Plans as of our year-end balance sheet date no later than
December 31, 2008. We are currently evaluating the impact this standard will
have on our financial statements when we adopt it.
In October 2006, the FASB issued FASB Staff Position ("FSP") FAS 123(R)-5,
Amendment of FASB Staff Position FAS 123(R)-1, which is effective for our
quarterly results ending December 2006. This FSP provides guidance on the
recognition of instruments originally issued as employee compensation and then
modified solely to reflect equity restructuring that occurs when the holder is
no longer an employee. We do not believe this FSP will have a material impact on
our financial statements when we adopt it in our quarterly results reported as
of December 2006.
In October 2006, the FASB issued FSP FAS 123(R)-6, Technical Corrections of
FASB Statement No. 123(R), which is effective for our fiscal year beginning
January 2007. Amongst other things, this pronouncement clarifies certain
illustrations and terms within SFAS 123(R) but does not alter the basic
principles of the standard. Specifically, it amends the definition of a
short-term inducement to exclude an offer to settle an award and corrects
certain examples within the appendices of the standard that were previously
inconsistent with the standard itself. We do not believe this FSP will have a
material impact on our financial statements when we adopt it in 2007.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), to address diversity in practice in quantifying financial
statement misstatements. SAB 108 requires that we quantify misstatements based
on their impact on each of our financial statements and related disclosures. SAB
108 is effective as of the end of our 2006 fiscal year, allowing a one-time
transitional cumulative effect adjustment to retained earnings as of January 1,
2006 for errors that were not previously deemed material, but are material under
the guidance in SAB 108. We do not believe SAB 108 will have a material impact
on our financial statements
10
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
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.
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Weighted average number of common shares outstanding 29,902,831 29,488,746 29,962,153 29,648,783
Dilutive impact of stock options 971,084 1,309,742 862,675 1,183,146
------------ ------------ ------------ ------------
Weighted average number of common and common equivalent
shares for the period 30,873,915 30,798,488 30,824,828 30,831,929
============ ============ ============ ============
Number of common shares outstanding at the end of the period 29,914,446 29,746,037 29,914,446 29,746,037
============ ============ ============ ============
Weighted average number of anti-dilutive shares excluded from the
computation of diluted earnings per share 232,660 235,120 290,200 293,900
============ ============ ============ ============
NOTE 3: ADDITIONAL BALANCE SHEET INFORMATION
Inventories at September 30, 2006 have been valued using the same methods
as at December 31, 2005. Our inventories are comprised of the following
components:
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- -------------
Crude stockpile inventories $ 22,872 $ 20,833
In-process inventories 28,610 25,935
Other raw material, container, and supplies inventories 27,882 28,687
------------- -------------
$ 79,364 $ 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:
11
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2006
------------------ ------------------
Balance at beginning of period $ 4,966 $ 5,524
Settlement of obligations (679) (175)
Liabilities incurred and accretion expense 1,221 159
------------------ ------------------
Balance at end of period $ 5,508 $ 5,508
================== ==================
A reconciliation of the activity within our accrued warranty obligation is
as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2006
------------------ ------------------
Balance at beginning of period $ 1,823 $ 1,107
Charged to costs and expenses (210) 75
Net settlements (588) (113)
Foreign currency translation 50 6
------------------ ------------------
Balance at end of period $ 1,075 $ 1,075
================== ==================
NOTE 4: BUSINESS SEGMENT INFORMATION
As previously mentioned, we operate in five business segments. We identify
segments based on management responsibility and the nature of the business
activities of each component of the Company. In the third quarter of 2006, we
reorganized how we view and manage our business. We began capturing discrete
financial information for our oilfield services business and reporting it
separately to our chief operating decision maker. In accordance with SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, we
have revised our segments reported in this Form 10-Q to reflect the way we now
manage and view our business - with oilfield services reported separately from
our environmental segment. We have also revised the segment information for
prior periods to conform to this new presentation.
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.
12
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
The following summaries set forth certain financial information by business
segment:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Net sales:
Minerals $ 237,463 $ 222,643 $ 79,274 $ 74,318
Environmental 151,996 128,505 59,120 49,832
Oilfield services 43,270 28,710 14,157 11,245
Transportation 38,619 36,804 13,300 13,224
Intersegment shipping (15,711) (15,340) $ (5,679) (5,691)
-------------- -------------- -------------- --------------
Total $ 455,637 $ 401,322 $ 160,172 $ 142,928
============== ============== ============== ==============
Operating profit (loss):
Minerals $ 28,218 $ 28,259 $ 9,980 $ 9,799
Environmental 21,166 18,944 8,849 8,441
Oilfield services 7,346 3,818 2,270 1,677
Transportation 2,190 2,044 775 751
Corporate (15,637) (15,410) (5,466) (4,709)
-------------- -------------- -------------- --------------
Total $ 43,283 $ 37,655 $ 16,408 $ 15,959
============== ============== ============== ==============
SEPT. 30, 2006 DEC. 31, 2005
-------------- --------------
Assets:
Minerals $ 221,198 $ 186,718
Environmental 144,183 113,759
Oilfield services 45,993 32,829
Transportation 3,284 3,027
Corporate 28,273 32,196
-------------- --------------
Total $ 442,931 $ 368,529
============== ==============
NOTE 5: STOCK OPTION PLANS
Prior to 2003, we accounted for our stock-based compensation awards 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.
13
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 neither
significantly affected our statement of operations, balance sheet or statement
of comprehensive income for the three and nine months ended September 30, 2006
nor would it have materially affected our financial statements in prior years.
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 nine months ended
September 30, 2006, this amount was $1,984. While we cannot 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 nine months ended September 30, 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
$1,509.
NOTE 6: EMPLOYEE BENEFIT PLANS
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Service cost 1,303 1,387 434 462
Interest cost 1,490 1,480 497 493
Expected return on plan assets (1,891) (1,704) (630) (568)
Amortization of transition (asset) / obligation - (65) - (22)
Amortization of prior service cost 23 23 8 8
---------- ---------- ---------- ----------
Net periodic benefit cost 925 1,121 309 373
========== ========== ========== ==========
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.
14
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
NOTE 7: INCOME TAXES
Our effective tax rate from continuing operations for the nine months ended
September 30, 2006 was 20.4%, which differs from the U.S. Federal statutory rate
of 35% largely due to depletion deductions, differences in local tax rates on
the income from our foreign subsidiaries, and the settlement of our IRS audit.
In the nine month period ended September 30, 2006, we decreased our provision
for income taxes by $2,962 largely due to our settling an IRS audit discussed
below (benefit of $3,412) offset by a $450 increase in tax expense primarily for
provision to return differences relating to 2005. Excluding the $2,962 and the
$661 of professional fees discussed in the last paragraph of this Note, the
effective tax rate for the period ended September 30, 2006 would have been
27.1%.
Our effective tax rate for the nine months ended September 30, 2005 was
27.1%, which varies from the U.S. Federal statutory rate of 35% for the same
depletion and foreign tax rates mentioned above. Additionally, the 27.1%
includes a reduction to income tax expense of $727 largely due to changes in
estimates related to both our UK and domestic tax returns for 2004 and a $1,448
write-off of tax receivables. Excluding the $727, the effective tax rate for the
nine months ended September 30, 2005 would have been 25.1%.
In July 2006, the United States Internal Revenue Service (IRS) concluded
its audit of amended income tax returns we filed in 2004, resulting in refunds
and interest of $12,636 which we collected in September 2006. As a result of the
conclusion of this audit, we recognized additional tax benefits which were not
recorded in our financial statements prior to July 2006. In the three months
ended September 30, 2006, we recorded the following amounts: a benefit from
discontinued operations of $585, a reduction to our income tax expense of
$3,412, and professional fees of $661 within general, selling and administrative
expenses that relate to fees payable to advisors under arrangements contingent
upon settlement of the claims.
NOTE 8: ACQUISITIONS
We made payments of $1,270 in the nine months ended September 30, 2006 to
former owners of businesses we acquired pursuant to contingent payment
arrangements associated with those acquisitions. These payments had the effect
of increasing the amount of goodwill previously recorded. No such payments were
made in the three month period ended September 30, 2006.
In September 2006, our Oilfield services segment acquired a business which
rents equipment to customers in the oil and gas industry. Net cash paid was
$10,452; as part of the acquisition, we recognized $495 of intangible assets and
goodwill of $4,477 as of September 30, 2006. The allocation of this purchase
price has not been finalized as we are determining the fair values of the assets
acquired and liabilities assumed. The acquisition does contain contingent
consideration based on future performance of the acquired business which, if the
consideration is recognized, may result in additional goodwill.
15
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
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.
NOTE 10: DISCONTINUED OPERATIONS
In 2004, we filed an amended tax return seeking a refund of state taxes
paid on the sale of our absorbent polymers segment that occurred in 2000. No
amount for this refund was reflected in our financial statements prior to the
quarter ended June 30, 2005. In June 2005, we successfully settled our claim
with the state for $7,800 and recorded a net income tax receivable of $5,255,
accrued professional fees of $500 and a gain on the sale of discontinued
operations of $4,755. We received payment from the state in July 2005.
In the quarter ended September 2006, we recorded additional benefits from
the sale of this business totaling $585 and also relating to tax refunds
received. For further information, please see Note 7.
NOTE 11: SUBSEQUENT EVENT
In October 2006, our minerals segment acquired a business which blends
bentonite with other products for sale to foundries. Net cash paid approximates
$20,600. We are currently determining the allocation of this purchase price to
the fair market value of assets acquired and liabilities assumed.
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
From time to time, certain statements we make, including statements in this
Management's Discussion and Analysis of Financial Condition and Results of
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.
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
principal operations are located in North America, Europe and the Asia-Pacific
region.
We operate in five segments: minerals, environmental, oilfield services,
transportation and corporate. Our minerals segment operates in three principal
markets: metalcasting, pet products and specialty minerals. The environmental
segment's principal markets include lining technologies, building materials and
water treatment. Our oilfield services segment provides both onshore and
offshore water treatment filtration, pipeline separation, and well testing data
services for the oil and gas industry. Our transportation segment provides
trucking services for our domestic businesses as well as third parties.
Intersegment shipping revenues are eliminated in our corporate segment.
The principal mineral that we utilize to generate revenues is bentonite. We
own or lease bentonite reserves in the United States, China and Australia.
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 require 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 various end-markets and geographies. Customers
in the mineral 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.
17
The majority of our revenues are generated in North America; consequently,
the state of the United States 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 in recent years.
Sustainable, long-term profit growth is our primary objective. We employ a
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 European and Asia-Pacific regions 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
bentointe mined each year. Furthermore, we need to assure new
reserves meet the physical property requirements for our diverse
product lines and are economical to mine. Our organization is
committed to developing its global reserve base to meet these
requirements.
o Acquisitions: We continually seek opportunities to add
complementary businesses to our portfolio of products. Over the
last four years, we have acquired a number of businesses. A
strong financial position will enable us to continue to acquire
businesses which, in our assessment, are fairly valued and fit
with our growth strategy.
A number of risks will challenge us in meeting these long-term objectives,
and there can be no assurance that we will achieve success in implementing any
one or more of them. We describe certain risks under "Item 1A. Risk Factors" and
"Item 7A. Quantitative and Qualitative Disclosure About Market Risk" within our
Annual Report on Form 10-K, as amended, for the year ended December 31, 2005. In
general, the significance of these risks has not materially changed over the
past year.
18
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.
THREE MONTHS ENDED SEPTEMBER 30, 2006 VS. SEPTEMBER 30, 2005
RESULTS OF OPERATIONS (in millions):
NET SALES: 2006 2005 % Change
---------- ---------- ----------
$ 160.2 $ 142.9 12%
Net sales from base businesses (those operations owned for greater than one
year) accounted for approximately 59% of the growth, or 7.1 percentage points,
over the prior year period. Acquisitions and foreign exchange contributed 27%
and 14% of the growth, respectively. On an operating segment basis, the
environmental segment contributed approximately 54% of the growth while the
minerals and oilfield services segments contributed 29% and 17% of the growth,
respectively.
GROSS PROFIT: 2006 2005 % Change
---------- ---------- ----------
$ 42.2 $ 38.1 11%
Margin 26.4% 26.7% N/A
Increased sales were responsible for the increase in gross profit in the
period. Gross margin declined by 30 basis points due to higher production costs
incurred in the domestic minerals and environmental segment operations.
19
GENERAL, SELLING &
ADMINISTRATIVE EXPENSES: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 25.8 $ 22.1 17%
Corporate segment costs were the primary contributor to the increase in
general, selling and administrative expenses for the period. Tax advisory fees
associated with the non-recurring tax benefit described below accounted for
approximately $0.7 million of the increase. Additionally, we incurred greater
tax and audit compliance-related fees in the current year period.
Personnel-related costs were greater in the environmental and oilfield services
segments which also caused the increase over the 2005 quarter.
OPERATING PROFIT: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 16.4 $ 16.0 3%
Margin 10.2% 11.2% N/A
Although gross profit increased significantly, operating profit marginally
increased over the prior-year quarter due to increased general, selling and
administrative expenses. This also caused the 100 basis point decline in
operating margin.
INTEREST EXPENSE, NET: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 0.7 $ 0.4 90%
Interest expense in the 2006 third quarter increased due both to greater
average long-term debt compared with the prior year period and increased
interest rates. The increase in long-term debt was attributed to increased
capital expenditures, acquisitions and 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 LIBOR.
OTHER INCOME / (expense): 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ (0.3) $ 0.2 N/A
In the current reporting period, we recognized foreign exchange losses
primarily resulting from transactions originated at our international
subsidiaries. Conversely, we recognized foreign exchange gains in the prior-year
reporting period. Fluctuation between the Polish Zloty to Euro exchange rates
was the primary contributor to the losses in the current-year period. We do not
actively hedge our exposures to foreign currencies.
INCOME TAX EXPENSE: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 1.2 $ 5.2 (76)%
Effective tax rate 8.0% 33.1% N/A
Our effective tax rate in both reporting periods continues to differ from
the U.S. Federal statutory 35% rate due to depletion deductions and differences
in local tax rates on the income of our foreign subsidiaries which are generally
lower than the U.S. rates. In addition in the current-year period, we recorded a
reduction to income tax expense of approximately $3.4 million as a result of the
completion of the IRS examination and the 2005 quarter included a charge of
approximately $1.5 million for the write-off of tax receivables associated with
our foreign investments. After factoring out the adjustments described above and
the previously mentioned $0.7 million tax advisory fees from their respective
reporting periods, the effective tax rates would have been 29.0% and 23.9%,
respectively. In the 2006 period, we recorded adjustments increasing tax
liabilities due to completing our income tax returns for 2005 which caused the
difference in effective tax rates.
20
INCOME FROM AFFILIATES
& JOINT VENTURES 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 1.9 $ 0.9 105%
Increased earnings from our India-based investments accounted for the
increase over the 2005 third 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.
INCOME FROM
CONTINUING OPERATIONS 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 16.0 $ 11.4 40%
Margin 10.0% 8.0% N/A
A lower effective tax rate and a greater contribution from investments in
affiliates and joint ventures accounted for the improvement in earnings and
margin in the 2006 period.
DISCONTINUED OPERATIONS 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 0.6 $ 0.0 N/A
The 2006 period included a benefit from completion of an IRS examination of
amended income tax returns described above. The benefit arose from interest
income associated with previously unclaimed tax deductions related to the sale
of the absorbent polymers segment in 2000.
DILUTED EARNINGS PER SHARE
FROM CONTINUING OPERATIONS: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 0.52 $ 0.37 41%
Earnings per share improved commensurate with greater income from
operations. Weighted average common and common equivalent shares outstanding
remained relatively constant compared to the 2005 period.
21
SEGMENT ANALYSIS:
Following is a review of operating results for each of our five reporting
segments:
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
MINERALS 2006 2005 2006 vs. 2005
- --------------------------- ----------------------- ----------------------- -----------------------
(Dollars in Thousands)
Net sales $ 79,274 100.0% $ 74,318 100.0% $ 4,956 6.7%
Cost of sales 63,503 80.1% 59,275 79.8%
---------- ---------- ---------- ----------
Gross profit 15,771 19.9% 15,043 20.2% 728 4.8%
General, selling and
administrative expenses 5,791 7.3% 5,244 7.1% 547 10.4%
---------- ---------- ---------- ---------- ----------
Operating profit 9,980 12.6% 9,799 13.1% 181 1.8%
Base businesses, on a constant currency basis, accounted for approximately
83% of the sales increase over the prior-year period. Favorable exchange rates
provided approximately 17% of the growth due to strengthening of the British
Pound and Asian currencies against the US dollar. Higher shipments and pricing
within the specialty materials product lines (additives for oil and gas
drilling; laundry care and health and beauty markets) contributed a large
portion of the sales growth. We saw declines in shipments in the domestic
metalcasting and pet products sectors. Shipments continued to grow in the
Asia-Pacific region, principally for the metalcasting sector.
Gross profit margin declined by 30 basis points due to unfavorable product
mix in the domestic metalcasting market and Asia-Pacific region. Energy-related
and raw material costs continued to increase over the 2005 period, however,
price increases, for the most part, offset the impact.
General, selling and administrative expenses increased due to non-recurring
items recognized in the 2005 period. We realized approximately $0.3 million in
gains on disposals of fixed assets in the prior-year period.
Operating margin declined by 50 basis points primarily due to lower gross
margin experienced in the current-year period. Higher growth in general, selling
and administrative expenses also contributed to the decline in operating margin.
22
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
ENVIRONMENTAL 2006 2005 2006 vs. 2005
- --------------------------- ----------------------- ----------------------- -----------------------
(Dollars in Thousands)
Net sales $ 59,120 100.0% $ 49,832 100.0% $ 9,288 18.6%
Cost of sales 39,303 66.5% 31,999 64.2%
---------- ---------- ---------- ----------
Gross profit 19,817 33.5% 17,833 35.8% 1,984 11.1%
General, selling and
administrative expenses 10,968 18.6% 9,392 18.8% 1,576 16.8%
---------- ---------- ---------- ---------- ----------
Operating profit 8,849 14.9% 8,441 17.0% 408 4.8%
Base businesses, on a constant currency basis, accounted for approximately
39% of the growth over the prior-year period. Acquired businesses and favorable
foreign currencies contributed 45% and 16%, respectively, to the growth in
sales. Relative strengthening of the Polish Zloty, British Pound and the Asian
currencies against the US dollar led to the foreign currency-based growth.
On a product line basis, building materials experienced increased shipments
globally and increased pricing in the U.S. market. Lining technologies
shipments, after factoring out acquired businesses, marginally increased over
the prior-year period. On a regional basis, a majority of the base business
growth arose from international markets.
Gross profit improved in conjunction with sales. Despite the increase in
sales, gross margin declined by 230 basis points primarily due to lower
profitability generated by the contracting services business. Additionally,
gross margin was depressed due to higher manufacturing costs in the domestic
operations.
G, S & A grew due to higher personnel-related costs. Operating margin
declined by 210 basis points due to the depressed gross margin and higher growth
in G, S & A expenses.
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
OILFIELD SERVICES 2006 2005 2006 vs. 2005
- --------------------------- ----------------------- ----------------------- -----------------------
(Dollars in Thousands)
Net sales $ 14,157 100.0% $ 11,245 100.0% $ 2,912 25.9%
Cost of sales 9,090 64.2% 7,605 67.6%
---------- ---------- ---------- ----------
Gross profit 5,067 35.8% 3,640 32.4% 1,427 39.2%
General, selling and
administrative expenses 2,797 19.8% 1,963 17.5% 834 42.5%
---------- ---------- ---------- ---------- ----------
Operating profit 2,270 16.0% 1,677 14.9% 593 35.4%
Base businesses contributed approximately 83% of the growth in revenues
with acquisitions accounting for the remainder. We acquired an equipment rental
business in September 2006. On a regional basis, domestic markets saw a large
majority of the increased business activity. Domestic well testing and pipeline
businesses generated the largest portion of the increase.
Gross margin improved by 340 basis points primarily due to revenue mix.
Domestic pipeline activity generated improved gross margins compared with the
prior-year period.
23
General, selling and administrative expenses increased due to higher
personnel levels and compensation costs. Operating margin improved by 110 basis
points due to the expansion in gross margin over the prior-year period.
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
TRANSPORTATION 2006 2005 2006 vs. 2005
- --------------------------- ----------------------- ----------------------- -----------------------
(Dollars in Thousands)
Net sales $ 13,300 100.0% $ 13,224 100.0% $ 76 0.6%
Cost of sales 11,737 88.2% 11,643 88.0%
---------- ---------- ---------- ----------
Gross profit 1,563 11.8% 1,581 12.0% (18) -1.1%
General, selling and
administrative expenses 788 5.9% 830 6.3% (42) -5.1%
---------- ---------- ---------- ---------- ----------
Operating profit 775 5.9% 751 5.7% 24 3.2%
Higher traffic levels lead to the increase in revenues over the prior-year
period. Gross profit and margins were negatively impacted by fuel surcharges. G,
S & A spending declined over the 2005 quarter in several categories.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
CORPORATE 2006 2005 2006 VS. 2005
- ---------------------------------------- ---------- ---------- ------------------------
(Dollars in Thousands)
Intersegment shipping sales $ (5,679) $ (5,691)
Intersegment shipping costs (5,679) (5,691)
---------- ----------
Gross profit - -
Corporate general, selling
and administrative expenses 5,070 3,786 1,284 33.9%
Nanocomposite business
development expenses 396 923 (527) -57.1%
---------- ---------- ----------
Operating loss (5,466) (4,709) (757) 16.1%
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.
Tax advisory fees and compliance-related costs led to the increase in
corporate general, selling and administrative expenses over the prior-year
period. Approximately $0.7 million of the tax advisory fee increase was
attributable to preparation of the amended income tax returns, as previously
mentioned.
Nanocomposite development costs declined primarily due to favorable
adjustments of $0.2 million for depreciation expense and inventory obsolescence
reserves. The remaining improvement over the prior-year period was attributable
to greater profits on shipments and decreased operating expenses. These costs
will be influenced by the change in sales as we continue market development
activities.
24
NINE MONTHS ENDED SEPTEMBER 30, 2006 VS. SEPTEMBER 30, 2005
RESULTS OF OPERATIONS (in millions):
NET SALES: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 455.6 $ 401.3 14%
Net sales from base businesses (those operations owned for greater than one
year) accounted for approximately 83% of the growth, or 11.2 percentage points,
over the prior year period. On an operating segment basis, the environmental
segment accounted for approximately 43% of the increase over the 2005 period
while minerals and oilfield services each contributed approximately 27% of the
growth.
Following is the geographic sales distribution for the respective nine
month periods:
2006 2005
---------- ----------
Americas 69% 69%
EUMEA* 23 24
Asia-Pacific 8 7
*EUMEA - Europe, Middle East & Africa.
GROSS PROFIT: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 117.6 $ 104.3 13%
Margin 25.8% 26.0% N/A
Gross profit margin declined primarily due to a $2.1 million one-time
benefit recognized in the prior-period which resulted from a decision by the
State of Montana to abate mining-related taxes for a certain period. After
factoring out this non-recurring benefit, gross profit would have increased by
15 percent and gross margin would have improved over the 2005 period by 30 basis
points. The increase in gross margin, after excluding the effect of the
non-recurring benefit, was due to greater relative profits earned in the
environmental and oilfield services segments.
GENERAL, SELLING &
ADMINISTRATIVE EXPENSES: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 74.4 $ 66.7 11%
Personnel and operating expenses in the environmental and oilfield services
segments caused the increase in G, S &A over the 2005 period. Tax advisory fees
incurred due to the filing of amended income tax returns also contributed to the
increase.
OPERATING PROFIT: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 43.3 $ 37.7 15%
Margin 9.5% 9.4% N/A
Improvement in operating profit in the current-year period was generated by
the environmental and oilfield services segments. Operating margin increased due
to the greater relative profits earned from these two segments.
25
INTEREST EXPENSE, NET: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 1.8 $ 1.2 54%
Interest expense in the 2006 period increased due both to greater average
long-term debt compared with the prior year period and increased interest rates.
The increase in long-term debt was attributed to greater acquisitions, capital
expenditures and 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 LIBOR.
OTHER INCOME / (expense): 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 0.3 $ (0.8) N/A
In the current reporting period, we recognized foreign exchange gains
primarily resulting from transactions with our foreign subsidiaries. Foreign
exchange losses were the cause of the expense in the prior-year reporting
period. The current-year period benefited from strengthening of European and
Asian currencies versus the U.S. Dollar. However, this trend may not continue as
exchange rate fluctuations were unfavorable in the third quarter of 2006 as
previously mentioned. We also benefited from securing more foreign denominated
borrowings this year to offset our working capital exposures to British Pounds
and Euro fluctuations. We do not actively hedge our exposures to foreign
currencies.
INCOME TAX EXPENSE: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 8.5 $ 9.7 (12)%
Effective tax rate 20.4% 27.1% N/A
Our effective tax rate in both reporting periods differs from the U.S.
Federal statutory 35% rate due in part to depletion deductions and differences
in local tax rates on the income of our foreign subsidiaries which are generally
lower than the U.S. rates. In the 2006 period, we decreased our provision for
taxes owed by $3.0 million largely due to our settling an IRS audit (benefit of
$3.4 million) offset by a $0.4 million increase in tax expense for provision to
return differences. Excluding the $3.0 million and the $0.7 million tax advisory
fees previously discussed, the effective tax rate for the 2006 period would have
been 27.1%.
The 2005 period's effective tax rate includes a further reduction to income
tax expense of $0.7 million largely due to changes in estimates related to both
our UK and domestic tax returns for 2004 and a $1.5 million write-off of tax
receivables. Excluding the $0.7 million, the effective tax rate for the 2005
period would have been 25.1%.
INCOME FROM AFFILIATES
& JOINT VENTURES 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 4.5 $ 1.9 130%
Earnings from our India-based investments accounted for the increase over
the 2005 period. 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.
26
INCOME FROM
CONTINUING OPERATIONS 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 37.7 $ 27.9 35%
Margin 8.3% 7.0% N/A
Greater operating profit, lower income tax expenses and increased
contribution from investments in affiliates and joint ventures accounted for the
improvement in earnings in the 2006 period. The 130 basis point increase in net
margin was principally due to a decline in the effective tax rate and the large
increase in income from affiliates and joint ventures.
DISCONTINUED OPERATIONS: 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 0.6 $ 4.8 N/A
Per diluted share $ 0.2 $ 0.15
The 2006 period included a benefit from completion of an IRS examination of
amended income tax returns previously described. The benefit arose from interest
income associated with previously unclaimed tax deductions related to the sale
of the absorbent polymers segment in 2000.
In September 2004, we filed an amended income tax return in the State of
Mississippi requesting a refund of approximately $12.5 million of taxes paid
relating to the gain on the sale of the absorbent polymer segment. The sale of
the segment was originally reported as a discontinued operation in the second
quarter of 2000. With the assistance of a professional accounting firm, we
concluded that a gain on the sale of a business under these circumstances was
not taxable in Mississippi according to its laws. After negotiations and
hearings with officials, the Board of Review of the Mississippi State Tax
Commission accepted our settlement offer of $7.8 million in June 2005, and we
received payment of the refund in July 2005.
DILUTED EARNINGS PER SHARE
FROM CONTINUING OPERATIONS 2006 2005 % Change
- ------------------------------ ---------- ---------- ----------
$ 1.22 $ 0.91 34%
Earnings per share improved commensurate with greater income from
operations. Weighted average common and common equivalent shares outstanding
increased by less than 1% over the 2005 period.
27
SEGMENT ANALYSIS:
Following is a review of operating results for each of our five reporting
segments:
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
MINERALS 2006 2005 2006 vs. 2005
- --------------------------- ----------------------- ----------------------- -----------------------
(Dollars in Thousands)
Net sales $ 237,463 100.0% $ 222,643 100.0% $ 14,820 6.7%
Cost of sales 191,152 80.5% 177,343 79.7%
---------- ---------- ---------- ----------
Gross profit 46,311 19.5% 45,300 20.3% 1,011 2.2%
General, selling and
administrative expenses 18,093 7.6% 17,041 7.7% 1,052 6.2%
---------- ---------- ---------- ---------- ----------
Operating profit 28,218 11.9% 28,259 12.6% (41) -0.1%
Base businesses accounted for approximately 97% of the sales growth over
the prior-year period with favorable foreign currency translation accounting for
the remainder. Specialty minerals and the Asia-Pacific metalcasting product
lines accounted for the increase. Domestic metalcasting was flat while pet
products saw a small decline compared with prior-period sales. Within specialty
minerals, higher volumes and pricing of drilling fluid additives supplied to the
oil and gas market was the largest contributor followed by health and beauty
products and iron binding agents. Sales in the China and Korea markets led the
increase in Asia-Pacific metalcasting revenues.
Gross profit margin declined by 80 basis points primarily due to a one-time
benefit in 2005 associated with severance tax relief as previously described in
this report. Had we not recognized this benefit in the 2005 period, gross profit
would have increased by approximately $3.1 million, or 7.2 percent; and gross
margin would have increased by 10 basis points. Gross margin was hampered by
unfavorable product mix in the current-year period in the domestic metalcasting
sales and a decline in profitability in the Asia-Pacific metalcasting markets.
G, S & A expenses increased due to Asia/Pacific operating costs related to
market development activities. Additionally, the prior-year period benefited
from gains on the sales of fixed assets.
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
ENVIRONMENTAL 2006 2005 2006 VS. 2005
- --------------------------- ----------------------- ----------------------- -----------------------
(Dollars in Thousands)
Net sales $ 151,996 100.0% $ 128,505 100.0% $ 23,491 18.3%
Cost of sales 99,934 65.7% 83,131 64.7%
---------- ---------- ---------- ----------
Gross profit 52,062 34.3% 45,374 35.3% 6,688 14.7%
General, selling and
administrative expenses 30,896 20.3% 26,430 20.6% 4,466 16.9%
---------- ---------- ---------- ---------- ----------
Operating profit 21,166 14.0% 18,944 14.7% 2,222 11.7%
Base businesses accounted for approximately 64% of the growth over the
prior-year period. Acquisitions and favorable foreign currency translation
accounted for 33% and 3%, respectively. A contracting service business related
to our lining technologies product lines was acquired in August 2005. Shipments
were higher globally for the building materials business, leading the growth in
base business revenues. Higher pricing in the U.S. market also aided the
increase in building materials. Lining technology grew primarily from greater
market share gains in China and Central Europe. Domestic lining technology sales
grew modestly. Domestic market backlog remains relatively strong at this point
compared with prior years.
28
Gross profit improved in conjunction with sales. Despite the increase in
sales, gross margin declined by 100 basis points primarily due low relative
profitability generated by the aforementioned contracting service business.
Additionally, we experienced higher manufacturing overhead costs in our domestic
manufacturing operations.
G, S & A grew due to higher personnel levels and compensation-related
costs. We also experienced higher market development costs associated with our
U.S. contracting services unit.
Operating profit improved with the gross profit increase. Operating margin
declined due to the gross margin compression explained above and relatively high
G, S, &A spending growth.
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
OILFIELD SERVICES 2006 2005 2006 VS. 2005
- --------------------------- ----------------------- ----------------------- -----------------------
(Dollars in Thousands)
Net sales $ 43,270 100.0% $ 28,710 100.0% $ 14,560 50.7%
Cost of sales 28,558 66.0% 19,502 67.9%
---------- ---------- ---------- ----------
Gross profit 14,712 34.0% 9,208 32.1% 5,504 59.8%
General, selling and
administrative expenses 7,366 17.0% 5,390 18.8% 1,976 36.7%
---------- ---------- ---------- ---------- ----------
Operating profit 7,346 17.0% 3,818 13.3% 3,528 92.4%
Base businesses contributed approximately 97% of the growth in revenues
with acquisitions accounting for the remainder. We acquired a rental tool
business in September 2006. On a regional basis, domestic markets saw a large
majority of the increased business activity. Domestic well testing and pipeline
businesses generated the largest portion of the increase.
Gross margin improved by 190 basis points primarily due to revenue mix.
Domestic pipeline activity generated improved gross margins compared with the
prior-year period.
General, selling and administrative expenses increased due to higher
personnel levels and compensation costs. Operating margin improved by 370 basis
points due to the expansion in gross margin over the prior-year period.
29
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
TRANSPORTATION 2006 2005 2006 VS. 2005
- ------------------------- ----------------------- ----------------------- ------------------------
(Dollars in Thousands)
Net sales $ 38,619 100.0% $ 36,804 100.0% $ 1,815 4.9%
Cost of sales 34,062 88.2% 32,341 87.9%
---------- ---------- ---------- ----------
Gross profit 4,557 11.8% 4,463 12.1% 94 2.1%
General, selling and
administrative expenses 2,367 6.1% 2,419 6.6% (52) -2.1%
---------- ---------- ---------- ---------- ----------
Operating profit 2,190 5.7% 2,044 5.5% 146 7.1%
Higher traffic and pricing lead to the increase in revenues over the
prior-year period. Gross profit was positively impacted by the improvement in
revenues; however, gross margin declined due to larger fuel surcharges which
were not passed through to customers.
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
CORPORATE 2006 2005 2006 VS. 2005
- ------------------------------ ---------- ---------- -------------------------
(Dollars in Thousands)
Intersegment shipping sales $ (15,711) $ (15,340)
Intersegment shipping costs (15,711) (15,340)
---------- ----------
Gross profit - -
Corporate general, selling
and administrative expenses 13,591 12,819 772 6.0%
Nanocomposite business
development expenses 2,046 2,591 (545) -21.0%
---------- ---------- ----------
Operating loss (15,637) (15,410) (227) 1.5%
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 increase in G, S & A spending was primarily attributed to tax advisory
fees related the filing of amended income tax returns, the benefit of which was
previously described in this report. Stock-based compensation costs increased
over the 2005 period, but were offset by lower business development expenses.
Nanocomposite development costs declined primarily due to lower operating
costs. Additionally, we recorded approximately $0.2 million in one-time
favorable adjustments related to depreciation and inventory obsolescence. These
costs will be influenced by the change in sales as we continue market
development activities. After completing organizational changes in the first
quarter of 2006, we expect operating costs for the business to be relatively
stable thereafter.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flows from operations, borrowings from a revolving credit facility and
proceeds from the exercise of stock options by employees have been our sources
of funds to purchase property, plant and equipment; acquire businesses;
repurchase common stock; and pay dividends to shareholders. We believe cash
flows from operations and borrowings from an unused and committed revolving
credit facility will be adequate to support our operating plans for the
foreseeable future. Following is a discussion and analysis of our cash flow
activities as presented in the Condensed Consolidated Statement of Cash Flows
presented within Part 1 of this report.
30
NINE MONTHS ENDED
SEPTEMBER 30,
CASH FLOWS ------------------------
($ in millions) 2006 2005
- ------------------------------------------------------- ---------- ----------
Net cash provided by (used in) operating activities $ 29.0 $ 17.4
Net cash provided by (used in) investing activities $ (45.2) $ (14.1)
Net cash provided by (used in) financing activities $ 10.5 $ (2.9)
Cash flows from operating activities improved primarily due to higher
current-year net income and the receipt of approximately $13 million in income
tax refunds in the third quarter of 2006. 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.
Cash flows used in investing activities increased in the 2006 period due to
increased capital expenditures, acquisitions and investments in affiliates. 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. In addition, the 2006 period includes capital expenditures
of approximately $2.9 million relating to the purchase of mining rights and
equipment in Australia. 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 $40 million to $44
million.
On September 1, 2006, we expended approximately $10.5 million to acquire a
business in the oilfield services market. Other acquisition-related investments
were performance payments to owners of businesses that were acquired in prior
years. Through the nine-month period ended September 30th, 2006, we invested
approximately $5.3 million to acquire additional shares in Ashapura Minechem
Limited, an industrial minerals company based in India. As of September 30,
2006, we own approximately 25.8% of the shares of Ashapura. In October
2006, Ashapura issued additional shares to foreign institutional investors in a
private placement offering. In October 2006, our minerals segment acquired a
business which blends bentonite with other products for sale to foundries. Net
cash paid approximates $20.6 milliion, which we financed with additional debt
borrowings; no amounts for this acquisition are reflected in the amounts
included in this Form 10-Q.
Cash flows provided by financing activities increased due to additional debt
borrowings to fund working capital and capital expenditures in the 2006 period.
Dividends increased to $0.35 per share from $0.28 per share in the prior year's
corresponding period, consequently increasing the financing needs this year. We
also repurchased 220,000 shares of our stock on the open market in the nine
months ended September 30, 2006 for an aggregate amount of $5.6 million, or an
average price of $25.24 per share. The stock repurchase authorization granted by
the board of directors expired as of September 30, 2006. In the 2006 period, we
received $2.4 million from employees on their exercise of stock options; we also
recorded a $1.9 million benefit resulting from reduced tax payments on these
option exercises.
31
AS AT
---------------------------------
FINANCIAL POSITION SEPTEMBER 30, DECEMBER 31,
($ in millions) 2006 2005
- ---------------------------------------- --------------- ---------------
Working capital $ 167.9 $ 147.9
Goodwill & intangible assets $ 29.2 $ 23.7
Total assets $ 442.9 $ 368.5
Long-term debt $ 60.1 $ 34.8
Other long-term obligations $ 23.3 $ 21.6
Stockholder's equity $ 282.1 $ 248.9
Working capital at September 30, 2006, increased over the amount at December
31, 2005, due to an increase in accounts receivable commensurate with the growth
in sales. Current ratio was 3.2-to-1 and 3.3-to-1 at September 30, 2006, and
December 31, 2005, respectively.
Long-term debt increased commensurate with greater working capital
requirements and funding of capital expenditures and acquisitions. Consequently,
long-term debt relative to total capitalization rose to 18% at September 30,
2006, compared with 12% at December 31, 2005. At September 30, 2006, we had
approximately $73.1 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 September 30, 2006.
We have evaluated the funding requirements of our defined benefit pension
plans following passage of the Pension Reform Act of 2006. At this time, we do
not anticipate any material funding requirement for our plan as a consequence of
the Act.
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.
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 condensed consolidated financial statements herein 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.
32
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
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.
33
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 expired September
30, 2006. The following table 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
2006 REPURCHASE PROGRAM PER SHARE PROGRAM
- ---------------------------------------- -------------------- ---------- ----------------------
Balance at the beginning of the year $ 8,035,285
Activity in 2006 calendar month of:
January - $ - $ 8,035,285
February - $ - $ 8,035,285
March 40,000 $ 26.89 $ 6,959,825
April 10,000 $ 29.48 $ 6,665,075
May 30,000 $ 28.69 $ 5,804,367
June 40,000 $ 24.70 $ 4,816,242
July 15,000 $ 23.05 $ 4,470,492
August 40,100 $ 22.86 $ 3,553,806
September 44,900 $ 23.87 $ 2,482,043
--------------------
Total 220,000 $ 25.24 $ -
====================
ITEM 6: EXHIBITS
EXHIBIT
NUMBER
- -------
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMCOL INTERNATIONAL CORPORATION
Date: November 9, 2006 /s/ Lawrence E. Washow
-------------------------------
Lawrence E. Washow
President and
Chief Executive Officer
Date: November 9, 2006 /s/ Gary L. Castagna
-------------------------------
Gary L. Castagna
Senior Vice President and
Chief Financial Officer and
Principal Accounting Officer
35