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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _________
COMMISSION FILE NUMBER: 0-15661
AMCOL INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-0724340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One North Arlington, 1500 West Shure Drive,
Suite 500
Arlington Heights, Illinois 60004-7803
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 394-8730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definitions of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the registrant's $.01 par value Common
Stock held by non-affiliates of the registrant (based upon the per share closing
price of $26.35 per share on June 30, 2006, and, for the purpose of this
calculation only, the assumption that all of the registrant's directors and
executive officers are affiliates) was approximately $583.5 million.
Registrant had 30,028,878 shares of $.01 par value Common Stock
outstanding as of February 28, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement, which will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year covered by this Form 10-K, are incorporated by
reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
AMCOL International Corporation was originally incorporated in South
Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was
changed to American Colloid Company in 1927, and in 1959, the Company was
reincorporated in Delaware. In 1995, its name was changed to AMCOL International
Corporation. Except as otherwise noted or indicated by context, the term
"Company" refers to AMCOL International Corporation and its subsidiaries.
We operate in five segments: minerals, environmental, oilfield
services, transportation and corporate. Our minerals segment mines, processes
and distributes clays and products with similar applications for use in various
industrial and consumer markets. Our environmental segment processes and
distributes clays and products with similar applications for use as a moisture
barrier in commercial construction, landfill liners and a variety of other
industrial and commercial applications. Our oilfield services segment provides
both onshore and offshore water treatment filtration, pipeline separation, and
well testing services for the oil and gas industry. Our transportation segment
includes both a long-haul trucking business and a freight brokerage business for
our domestic subsidiaries as well as third parties. Intersegment shipping
revenues are eliminated in our corporate segment.
Prior to the third quarter of 2006, we did not report our oilfield
services business as a separate segment. This business was included as part of
our environmental segment. 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 management. As
a result, commencing in the third quarter of 2006, we recognized oilfield
services as a stand-along segment, separate from our environmental segment. We
have revised the segment information for prior periods to conform to this new
presentation.
The following table sets forth the percentage contributions of our
operating segments to our net sales for the last three years.
PERCENTAGE OF NET SALES
----------------------------------------------
2006 2005 2004
------------ ------------ ------------
Minerals 52% 55% 57%
Environmental 33% 32% 32%
Oilfield services 10% 7% 5%
Transportation 8% 9% 9%
Intersegment shipping -3% -3% -3%
------------ ------------ ------------
100% 100% 100%
============ ============ ============
Net revenues, operating profit, assets, depreciation, depletion and
amortization, capital expenditures and research and development expenditures
attributable to each of our business segments are set forth in our Notes to
Consolidated Financial Statements included later herein.
MINERALS SEGMENT
The business is principally conducted through wholly-owned subsidiaries
and investments in affiliates and joint ventures throughout the world. Our
principal bentonite products are marketed under various internationally
registered trade names, including VOLCLAY(R), PANTHER CREEK(R), PREMIUM GEL(R)
and ADDITROL(R).
2
Commercially produced bentonite is a type of montmorillonite clay found
in beds ranging in thickness from two to 50 feet beneath overburden of up to 60
feet. There are two basic types of bentonite, each having different chemical and
physical properties. These are commonly known as sodium bentonite and calcium
bentonite. Sodium bentonite is generally referred to as Western bentonite
because it predominately exists in the Western United States. Sodium bentonites
of lesser purity exist outside the United States. Calcium bentonite is sometimes
referred to as Southern bentonite in the United States and as Fuller's Earth
outside the United States. Calcium bentonites mined outside the United States
are sometimes activated with sodium carbonate or similar compounds to produce
properties similar to natural sodium bentonite.
PRINCIPAL PRODUCTS AND MARKETS
Metalcasting. In the formation of sand molds for metalcastings, sand is
bonded with bentonite and various other additives to yield desired casting form
and surface finish. We serve the foundry and casting industry throughout the
North America and the Asia-Pacific region with custom-blended bentonite and
allied non-bentonite products to strengthen sand molds for cast auto parts, farm
implements, railcars, home appliances and metallurgical products. The blended
mineral binders containing sodium bentonite, calcium bentonite, seacoal and
other ingredients are sold under the trade name ADDITROL(R). We also have a line
of formulated additives that are used to introduce silicon and carbon in the
melt phase of the casting process.
Pet Products. We produce and market sodium bentonite-based scoopable
(clumping), traditional and alternative cat litters as well as specialty pet
products to grocery and drug stores, mass merchandisers, wholesale clubs and pet
specialty stores throughout the U.S. Our scoopable products' clump-forming
capability traps urine, allowing for easy removal of the odor-producing elements
from the litter box. Our products are marketed under various trade names.
Specialty Minerals. Our products are sold in markets with generally
lower volume applications where our material acts as a performance additive. The
following are the major markets for such mineral applications:
o Detergents. We supply high-grade agglomerated bentonite to the detergent
industry. Bentonite performs as a softening agent in certain
powdered-detergent formulations. It can also act as a carrier for colorants
and fragrances.
o Health and Beauty. We manufacture adsorbent polymers and purified grades of
bentonite ingredients for sale to manufacturers of personal skin care
products. The adsorbent polymers are used to deliver high-value actives in
skin-care products. Bentonite-based materials act as thickening, suspension
and dispersion agent emollients.
o Nanocomposites. We determined that nanoclays which are surface-modified
could improve physical properties of certain polymers. Depending on the
product requirements, we source or purchase bentonite from third-party
suppliers. Surface-treatment chemicals are added in the production process
to enable the bentonite to properly function within the polymer. The
surface-treatment compounds are readily available on the market. Our
production facility is located in Aberdeen, Mississippi.
o Petroleum Products. Sodium bentonite and leonardite, a form of oxidized
lignite mined and processed by us in North Dakota, are components of
drilling fluids used in oil and gas well drilling. Bentonite imparts
thickening and suspension properties, which facilitate the transport of
rock cuttings to the surface during the drilling process. Drilling fluids
lubricate the drilling bit and coat the underground formations to prevent
hole collapse and drill-bit seizing. Our primary trademark for this
application is sold under the trade name PREMIUM GEL(R).
o Other Industrial. We produce bentonite and bentonite blends for the
construction industry, which are used as a plasticizing agent in cement,
plaster and bricks, and as an emulsifier in asphalt. We also supply grades
of bentonite used for pellitizing other materials for ease of use. Examples
of this application are iron ore and livestock feed.
3
SALES AND DISTRIBUTION
In 2006, the top five customers of the minerals segment accounted for
approximately 34% of the segment's sales worldwide. Approximately 73% of our
sales in this segment are to customers in North and South America. Metalcasting
is our largest market in the Americas and all of our pet products sales are in
this region. Our sales in Europe represent approximately 16% of sales and are
principally to detergent producers. The Asia-Pacific region represents
approximately 11% of sales with metalcasting being our largest market.
A large majority of our sales and distribution is conducted by our own
personnel and facilities. We have established industry-specialized sales groups
staffed with technically oriented salespersons serving each of our major
markets. Certain businesses will have networks of distributors and
representatives, including companies that warehouse products at strategic
locations.
We believe our strong global market position in the metalcasting market
is largely due to our technical service capabilities and our distribution
network. We provide training courses and laboratory testing for customers who
use our products in the metalcasting process. Our technical sales personnel
provide expertise to not only educate our customers on the bentonite blend
properties but also aid them in producing castings efficiently and productively.
For cat litter, we are primarily a private-label producer, and have
three principal sites from where we package and distribute finished goods. Our
transportation segment provides logistics services for the cat litter business,
and is a key component of our capability in supplying customers on a national
basis.
Certain specialty mineral markets require considerable technical
expertise. Our detergent additives market position requires an ability to not
only supply cost-effective products but also provide product development
capabilities to adapt to our customers' product requirements. We experience a
similar requirement for our health and beauty business, which makes use of
several patents with various durations that we believe are collectively
important to that business.
Petroleum products are sold under our own and private-label trade
names. Bentonite is a major component of drilling fluids. At least two drilling
fluid service companies have captive bentonite operations and others are party
to long-term bentonite supply agreements. Our potential market, therefore, is
generally limited to those service organizations that are not vertically
integrated or do not have long-term supply arrangements with other bentonite
producers.
COMPETITION
We are one of the largest producers of bentonite products globally.
There is substantial domestic and international competition, which is
essentially a matter of product quality, price, logistics, service and technical
support. There are at least 15 other major sodium bentonite or sodium activated
calcium bentonite producers throughout the world including several importers
into the U.S. market. There are also numerous major producers of calcium
bentonite and various regional suppliers in the areas we serve. Some of the
producers are companies primarily in other lines of business with substantially
greater financial resources than ours.
SEASONALITY
We do not consider our minerals segment to be seasonal in nature.
4
ENVIRONMENTAL SEGMENT
PRINCIPAL PRODUCTS AND MARKETS
The business is principally conducted through wholly-owned
subsidiaries, including Colloid Environmental Technologies Company ("CETCO"),
and joint ventures throughout the world. The following are our three principal
markets and a description of the products we produce for them:
Lining Technologies. CETCO sells geosynthetic clay liner products
containing bentonite under the BENTOMAT(R) and CLAYMAX(R) trade names for lining
and capping landfills and for containment in tank farms, storm water containment
systems, waste stabilization lagoons, sewage lagoons and mine site and wetlands
reclamation applications. Additionally, we provide contracting services in the
application of certain geosynthetic materials, including our clay liners, for a
number of civil infrastructure projects.
Building Materials. Our VOLCLAY(R) Waterproofing System is sold to the
non-residential construction industry. This line includes VOLTEX(R), a
waterproofing composite comprised of two polypropylene geotextiles filled with
sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground
foundation walls and slabs. The following products round out the principal
components of the product line: VOLCLAY PANELS(R), also used for below-grade
waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and
VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and
plaza areas. We also manufacture and sell asphalt emulsion-based waterproofing
systems for residential and non-residential waterproofing applications. In
addition, our STRONGSEAL(TM) and DUCKSBACK(TM) roofing underlayment systems are
sold to the residential and non-residential roofing industry.
Drilling Products. CETCO's drilling products are used in environmental
and geotechnical drilling applications, horizontal directional drilling, mineral
exploration and foundation construction. The products are used to install
monitoring wells, facilitate horizontal and water well drilling, rehabilitate
existing water wells and seal abandoned exploration drill holes. VOLCLAY
GROUT(R), HYDRAUL-EZ(R), BENTOGROUT(R) and VOLCLAY TABLETS(R) are among the
trade names for products used in these applications. Geothermal grouting
applications utilizing GEOTHERMAL GROUT(TM) represent a developing area for
CETCO drilling products. VOLCLAY SHORE PAC(R) is used in special foundation
drilling applications.
COMPETITION
CETCO principally competes with at least seven regional geosynthetic
clay liner manufacturers worldwide and several suppliers of alternative
technologies. The building materials product lines are specialized businesses
that compete primarily with alternative technologies. A number of integrated
bentonite companies compete against us in the drilling products business.
Competition is based on product quality, service, price, technical support and
product availability.
SALES AND DISTRIBUTION
The top five customers in our environmental segment accounted for less
than 10% of the segment sales worldwide. Approximately 54% of sales are in North
and South America. The United States is our largest geographical market for all
product lines. Approximately 40% of sales are in Europe and the remaining 6% in
the Asia-Pacific region.
Sales and distribution of the lining technologies are primarily
performed through our own personnel and facilities. Our staff includes engineers
who assist with specifying products for topographical conditions that liners
will endure.
The building materials products are primarily sold through distributor
and dealer networks. The end customers are generally building sub-contractors
who are responsible for installing the products.
5
For drilling product lines, we generally sell through distribution
networks. The end customers for the industrial product lines include metal
plating and finishing plants and corrugated cardboard operations. Drilling
products are also sold through distributors who are overseen by our regional
managers.
SEASONALITY
Much of the business in the environmental sector is impacted by weather
and soil conditions. Many of the products cannot be applied in harsh weather
conditions and, as such, sales and profits tend to be stronger during the period
from April through October. As a result, we consider the business of this
segment to be seasonal.
OILFIELD SERVICES SEGMENT
PRINCIPAL PRODUCTS AND MARKETS
Our oilfield services segment provides both onshore and offshore water
treatment filtration, pipeline separation, and well testing services for the oil
and gas industry. We sell products and services through wholly-owned
subsidiaries located in Australia; Brazil; Nigeria; the United Kingdom; and the
United States. The following are our principal markets and a description of the
products and services we provide:
Water Treatment. We employ several technologies allowing offshore oil
drilling and production platform operators to maintain compliance with
regulatory requirements governing the discharge of waste water generated during
oil production as well as refineries.
Well Testing. We provide equipment and personnel for production well
control, clean up, unload, separation, measure of component flow and disposal of
fluids from oil and gas wells.
Pipeline. Our personnel utilize engineered equipment that separates and
allows treatment of effluents arising from pipeline testing and maintenance
activities.
Other products and services. We rent specialized equipment such as
high-pressure pumps to oil and gas production platform operators. We also
provide liquid nitrogen with our personnel and mobile equipment to the same
production platforms, pipeline operators, and refineries. Liquid nitrogen is
commonly used to purge atmospheric conditions that will allow safe performance
of maintenance activities at these operations.
COMPETITION
Our oilfield services group competes with several larger oil services
companies using different technologies.
SALES AND DISTRIBUTION
The top five customers in our oilfield services segment accounted for
28% of the segment sales worldwide. Approximately 82% of sales are in North and
South America. The United States is our largest geographical market for all
product lines. The remaining 18% of sales primarily originate in Europe and
Africa.
Our filtration business primarily sells and distributes products and
services on a direct basis. Our principal customers are oil companies who
maintain substantial offshore drilling and production platforms. The well
testing business also sells and distributes services to customers on a direct
basis. Our customer base is comprised of onshore and offshore oil and gas
production firms.
6
SEASONALITY
Much of the business in the oilfield services sector is impacted by
weather conditions given that a significant portion of our customers' oil and
gas production facilities are subject to natural disasters, such as hurricanes.
MINERALS & ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS
MINERAL RESERVES
We have reserves of sodium and calcium bentonite at various locations
in the United States, including Wyoming, South Dakota, Montana and Alabama, and
also in Australia and China. Through our investments in affiliates and joint
ventures, we also have access to bentonite deposits in Egypt, India and Mexico.
At 2005 consumption rates and product mix, we estimate the proven, assigned
reserves of commercially usable sodium bentonite at approximately 17 years. We
estimate the proven, assigned reserves of calcium bentonite at approximately 22
years in North America. While we believe, based upon our experience, that our
reserve estimates are reasonable and our title and mining rights to our reserves
are valid, we have not obtained any independent verification of such reserve
estimates or such title or mining rights. We own or control the properties on
which reserves are located through long-term leases, royalty agreements and
patented and unpatented mining claims. A majority of our bentonite reserves are
owned. All of the properties on which our reserves are located are either
physically accessible for the purposes of mining and hauling or the cost of
obtaining physical access would not be material.
To retain possessory rights in unpatented mining claims in North
America, a fee of $100 per year for each unpatented mining claim is required.
The validity of title to unpatented mining claims is dependent upon numerous
factual matters. We believe that the unpatented mining claims that we own are in
compliance with all applicable federal, state and local mining laws, rules and
regulations. We are not aware of any material conflicts with other parties
concerning our claims. From time to time, members of Congress and members of the
executive branch of the federal government have proposed amendments to existing
federal mining laws. The various amendments would have had a prospective effect
on mining operations on federal lands and include, among other things, the
imposition of royalty fees on the mining of unpatented claims, the elimination
or restructuring of the patent system and an increase in fees for the
maintenance of unpatented claims. To the extent that future proposals may result
in the imposition of royalty fees on unpatented lands, the mining of our
unpatented claims may become uneconomic and royalty rates for privately leased
lands may be affected. We cannot predict the effect any potential amendments may
have or whether or when any such amendments might be adopted.
We maintain a continuous program of worldwide exploration for
additional reserves and attempt to acquire reserves sufficient to replenish our
consumption each year, but we cannot assure that additional reserves will
continue to become available.
We oversee all of our mining operations, including our exploration
activity and securing the necessary state and federal mining permits.
7
The following table shows a summary of minerals sold by the Company
from active mining areas for the last 3 years in short tons, as well as mineral
reserves by major mineral category.
TONS SOLD MINING CLAIMS
------------------------- WET TONS -------------------------------
ALL AMOUNTS ARE IN OF ASSIGNED UNASSIGNED CONVERSION UNPATENTED
THOUSANDS OF TONS 2006 2005 2004 RESERVES RESERVES RESERVES FACTOR OWNED ** LEASED
- ----------------------- ------- ------- ------- ---------- --------- ---------- ---------- -------- ---------- --------
SODIUM BENTONITE
Assigned
Belle/Colony,
WY/SD 1,310 1,295 1,227 19,328 19,328 -- 77.02% 826 342 18,160
Lovell, WY 663 609 564 21,996 21,996 -- 84.34% 12,262 9,413 321
TOTAL ASSIGNED 1,973 1,904 1,791 41,324 41,324 -- 13,088 9,755 18,481
Unassigned
SD, WY, MT -- -- -- 61,980 -- 61,980 76.18% 55,412 3,502 3,066
TOTAL OTHER
/ UNASSIGNED -- -- -- 61,980 -- 61,980 55,412 3,502 3,066
TOTAL SODIUM BENTONITE 1,973 1,904 1,791 103,304 41,324 61,980 -- 68,500 13,257 21,547
40% 60% 66% 13% 21%
CALCIUM BENTONITE
Assigned
Sandy Ridge, AL 124 120 132 3,690 3,690 -- 75.36% 1,660 -- 2,030
Chao Yang,
Liaoning, China 175 89 88 2,404 2,404 -- 76.00% -- -- 2,404
Nevada 1 2 2 3,534 37 3,497 76.18% 37 500 2,997
Queensland,
Australia 2 N/A N/A 426 426 -- 77.00% -- -- 426
TOTAL CALCIUM BENTONITE 302 211 222 10,054 6,557 3,497 1,697 500 7,857
65% 35% 17% 78%
LEONARDITE
Gascoyne, ND 63 50 41 1,297 1,297 -- 73.96% -- -- 1,297
100% 100%
OTHER
Unassigned
Other (NV, OK) -- -- -- 2,630 -- 2,630 76.18% -- -- 2,630
GRAND TOTALS 2,338 2,165 2,054 117,285 49,178 68,107 70,197 13,757 33,331
42% 58% 60% 12% 28%
** Quantity of reserves that would be owned if patent was granted.
Assigned reserves are reserves which could be reasonably expected to be
processed in existing plants. Unassigned reserves are reserves which will
require additional expenditures for processing facilities. Conversion factor is
the percentage of reserves that will be available for sale after processing.
We estimate that available supplies of other materials utilized in our
minerals business are sufficient to meet our production requirements for the
foreseeable future.
MINING AND PROCESSING
Bentonite is surface mined, generally with large earthmoving scrapers,
and then loaded into trucks and off-highway-haul wagons for movement to
processing plants. The mining and hauling of our clay is done by us and by
independent contractors.
At the processing plants, bentonite is dried, crushed and sent through
grinding mills, where it is sized to customer requirements, then chemically
modified where needed and transferred to silos for automatic bagging or bulk
shipment. Virtually all production is shipped as processed rather than stored
for inventory.
PRODUCT DEVELOPMENT AND PATENTS
We work actively with customers in each of our major markets to develop
commercial applications of specialized grades of bentonite. We maintain a
research center and laboratory testing facilities in Arlington Heights,
Illinois, and Birkenhead, England. When we perceive a need for a product that
will accomplish a particular goal, we work to develop the product, research its
marketability and study the feasibility of its production. We also co-develop
products with customers, or others, as needs arise. Our development efforts
emphasize markets with which we are familiar and products for which we believe
there is a viable market.
8
We hold a number of U.S. and international patents covering the use of
bentonite and products containing bentonite. We follow the practice of obtaining
patents on new developments whenever feasible. However, we do not consider that
any one or any combination of such patents is material to our businesses as a
whole.
RESEARCH AND DEVELOPMENT
Our business segments share research and laboratory facilities adjacent
to our corporate headquarters. Technological developments are shared among our
subsidiaries, subject to license agreements where appropriate. Further
information on research and development activities is included in our Notes to
Consolidated Financial Statements contained in Item 8 of this report.
REGULATION AND ENVIRONMENTAL
We believe we are in material compliance with current, applicable
regulations for surface mining. Since reclamation of exhausted mining sites has
been a regular part of our surface mining operations for the past 35 years,
maintaining compliance with current regulations has not had a material effect on
mining costs. Reclamation costs are reflected in the prices of the bentonite
sold.
The grinding and handling of dried clay is part of the production
process, and, because these processes generate dust, our mineral processing
plants are subject to applicable clean air standards (including Title V of the
Clean Air Act). All of our plants are equipped with dust collection systems. We
have not had, and do not presently anticipate, any significant regulatory
problems in connection with our dust emission, though we expect ongoing
expenditures for the maintenance of our dust collection systems and required
annual fees.
Our operations are also subject to other federal, state, local and
foreign laws and regulations relating to the environment and to health and
safety matters. Certain of these laws and regulations provide for the imposition
of substantial penalties for noncompliance. While the costs of compliance with,
and penalties imposed under, these laws and regulations have historically not
had a material adverse effect on us, future events, such as changes in or
modified interpretations of existing laws and regulations, enforcement policies,
or further investigation or evaluation of potential health hazards of certain
products, may give rise to additional compliance and other costs that could have
a material adverse effect on us.
TRANSPORTATION SEGMENT
We operate a long-haul trucking business and a freight brokerage
business primarily for delivery of finished products throughout the continental
United States. These services are provided to our subsidiaries as well as
third-party customers. Through our transportation business, we are better able
to control costs, maintain delivery schedules and assure equipment availability
in the delivery of our products. In 2006, approximately 41% of the revenues of
this operation involved services provided to our domestic minerals and
environmental segments.
FOREIGN OPERATIONS AND EXPORT SALES
Approximately 31% of our 2006 net sales were to customers in countries
outside North America. To enhance our overseas market presence, we maintain
mineral processing plants in the United Kingdom, Spain, China, Australia, South
Korea, Poland and Thailand, as well as a blending plant in Canada. Chartered
vessels deliver large quantities of our bulk, dried sodium bentonite to the
plants in the United Kingdom, Poland, Australia, Thailand and South Korea where
it is processed and mixed with other clays and distributed throughout Europe and
the Asia-Pacific region. In addition, we maintain a worldwide network of
independent dealers, distributors and representatives to support sales and
distribution.
9
We manufacture geosynthetic clay liners in the United Kingdom, Poland,
China, South Korea, and India through our joint venture company Ashapura Volclay
Limited. These international operations provide a cost-effective means of
supplying the European and Asia-Pacific markets.
Our international operations are subject to the usual risks of doing
business abroad, such as currency fluctuations and devaluation, restrictions on
the transfer of funds, and import and export duties.
The Notes to Consolidated Financial Statements included in Item 8 of
this report presents further details on our sales by geographic region. This
Note is incorporated by reference for sales attributed to foreign operations and
export sales from the United States.
EMPLOYEES
As of December 31, 2006, we employed 1,759 people in our global
organization, 706 of whom were employed outside of the United States. Operating
plants are adequately staffed, and no significant labor shortages are presently
foreseen. Labor relations have been satisfactory.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any reports, statements and other information filed by the Company
at the SEC's Public Reference Room at 100 F. Street N.E., Washington, D.C.,
20549. Please call (800) SEC-0330 for further information on the Public
Reference Room. The SEC maintains a website that contains reports, proxy and
information statements and the operations of other information regarding issuers
that file electronically with the SEC. Our filings are also available to the
public at the website maintained by the SEC, www.sec.gov.
Our principal Internet address is www.amcol.com. Our annual, quarterly
and current reports, and amendments to those reports, are available free of
charge on www.amcol.com, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
CERTIFICATIONS
As required by the rules and regulations of the New York Stock Exchange
(the "NYSE"), we delivered to the NYSE a certification executed by our Chief
Executive Officer, Lawrence E. Washow, certifying that Mr. Washow was not aware
of any violation by the Company of the NYSE's corporate governance listing
standards as of May 12, 2006.
As required by the rules and regulations of the SEC, the Sarbanes-Oxley
Act Section 302 certifications regarding the quality of our public disclosures
are filed as exhibits to this Annual Report on Form 10-K.
10
ITEM 1A. RISK FACTORS
Certain statements we make from time to time, including statements in
the Management's Discussion and Analysis of Financial Condition and Results of
Operation section hereafter, 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, acquisitions, levels of capital
expenditures, future dividends, expansion into global markets and the
development of new products. Such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties. Our actual results,
performance or achievements could differ materially from the results,
performance or achievements expressed in, or implied by, these forward-looking
statements as a result of various factors, including without limitation the
following:
COMPETITION
Our businesses are very competitive. We believe competition is
essentially a matter of product quality, price, delivery, service and technical
support. Several of our competitors in the world market are larger and have
substantially greater financial resources. If we fail to compete successfully
based on these or other factors, we may lose customers or fail to recruit new
customers and our business and future financial results could be materially and
adversely affected.
RELIANCE ON METALCASTING AND CONSTRUCTION INDUSTRIES
Approximately 44% of our minerals segment's sales and 34% of our
environmental segment's sales in 2006 were to the metalcasting and construction
markets, respectively. The metalcasting and construction markets depend heavily
upon the strength of the domestic and international economies. If these
economies weaken, demand for products by the metalcasting and construction
markets may decline and our business or future financial results may be
adversely affected.
RELIANCE ON THE OIL AND GAS ACTIVITIES
Our oilfield services segment now represents in excess of 10% of
consolidated revenues and approximately 19% of consolidated operating income.
Oil and gas production activities are heavily influenced by the benchmark price
of these commodities. In turn, both economic and political events can influence
the benchmark price which may ultimately affect the revenue potential of our
business.
INTEGRATION OF ACQUIRED BUSINESSES
We completed three business acquisitions in 2006 and another in January
2007. Acquisitions may continue to be an element of our growth strategy in the
future. If actual integration costs are higher than amounts assumed, the
profitability of acquired businesses is lower than amounts assumed, or we are
unable to integrate the assets and personnel acquired in an acquisition as
anticipated, our future earnings may be lower than anticipated.
REGULATORY AND LEGAL MATTERS
Our operations are subject to various federal, state, local and foreign
laws and regulations relating to the environmental and to health and safety
matters. Substantial penalties may be imposed if we violate certain of these
laws and regulations even if the violation was inadvertent or unintentional. If
these laws or regulations are changed or interpreted differently in the future,
it may become more difficult or expensive for us to comply. In addition,
investigations or evaluations of our products by government agencies may require
us to adopt additional safety measures or precautions. If our costs to comply
with such laws and regulations in the future materially increase, our business
and future financial results could be materially and adversely affected. We may
also be subject to adverse litigation results in addition to increased
compliance costs arising from future changes in laws and regulations that may
negatively impact our operations and profits.
11
RISKS OF INTERNATIONAL EXPANSION
An important part of our business strategy is to expand
internationally. We intend to seek acquisitions, joint ventures and strategic
alliances globally. Sales and earnings from our overseas operations have
increased considerably in recent years. In 2006, approximately 23% and 8% of
consolidated net sales were from Europe and the Asia-Pacific regions,
respectively. Approximately 43% of operating profit in 2006 was earned by our
overseas businesses. We also recorded approximately $0.17 per diluted share for
earnings, under the equity method of accounting, from investments in affiliate
businesses. As we expand internationally, we will be subject to increased risks,
which may include the following:
o currency exchange or price control laws;
o currency translation adjustments;
o political and economic instability;
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers;
o longer accounts receivable collection cycles; and
o adverse tax consequences.
The above listed events could result in sudden, and potentially
prolonged, changes in demand for our products. Also, we may have difficulty
enforcing agreements and collecting accounts receivable through a foreign
country's legal system.
OCEAN SHIPPING AND LOGISTICS
Bulk cargo shipping costs have been rising significantly due to greater
demand from China. We rely on shipping bulk cargos of bentonite from the United
States and China to customers, as well as our own subsidiaries. We may need to
offset additional shipping costs with price increases to customers in order to
maintain our profitability. Other factors in the United States that will
potentially impact us are escalating costs of purchased raw materials derived
from petrochemical stocks and increases in rail and long-haul freight rates.
While we have been successful in attaining price increases in certain markets to
offset some of these rising costs, there can be no assurance that we will be
successful in continuing to achieve these price increases.
VOLATILITY OF STOCK PRICE
The stock market has been extremely volatile in recent years. These
broad market fluctuations may adversely affect the market price of our common
stock. In addition, factors such as the following may have a significant effect
on the market price of our common stock:
o quarterly fluctuations in our financial results;
o our introduction of new services or products;
o announcements of acquisitions, strategic alliances or joint ventures by
us, our customers or our competitors;
o changes in analysts' recommendations regarding our common stock; and
o general economic conditions.
There can be no assurance that the price of our common stock will
increase in the future or be maintained at its recent levels.
12
ITEM 2. PROPERTIES
We operate the following principal plants, mines and other facilities,
all of which are owned, except as noted below. We also have numerous other
facilities which blend ADDITROL (R), package cat litter and chromite sand,
warehouse products and serve as sales offices.
LOCATION PRINCIPAL FUNCTION
- ------------------------------------- ----------------------------------------------------------------------------
MINERALS
Belle Fourche, SD Mine and process sodium bentonite
Colony, WY (two plants) Mine and process sodium bentonite, package cat litter
Gascoyne, ND Mine and process leonardite
Lovell, WY (1) Mine and process sodium bentonite
Sandy Ridge, AL Mine and process calcium bentonite; blend ADDITROL(R)
Chao Yang, Liaoning, China Mine and process calcium bentonite
Geelong, Victoria, Australia (1)(2) Process sodium and calcium bentonite; blend ADDITROL(R)
Rayong, Thailand Process sodium and calcium bentonite
Winsford, Cheshire, U.K. Process bentonite and other minerals
Kyungju Kyung-Buk, South Korea Process sodium and calcium bentonite
Aberdeen, MS Process purified bentonite (Nanocor, Inc.)
ENVIRONMENTAL
Cartersville, GA Manufacture components for geosynthetic clay liners; manufacture
Bentomat(R)and Claymax(R)geosynthetic
clay liners
Lovell, WY (1) Manufacture Bentomat(R)and Claymax(R)geosynthetic clay liners
Philadelphia, PA Provider of services for the design and installation of geosynthetic systems
Birkenhead, Merseyside, U.K. (1)(2) Manufacture Bentomat(R)geosynthetic clay liner; research laboratory;
headquarters for CETCO (Europe) Ltd.
Pyeongtaek, South Korea Manufacture Bentomat(R)geosynthetic clay liners
Segovia, Spain Manufacture Bentomat(R)geosynthetic clay liners
Suzhou, Jiangsu, China Manufacture Bentomat(R)geosynthetic clay liners
Szczytno, Poland Manufacture Bentomat(R)and Claymax(R)geosynthetic clay liners
OILFIELD SERVICES
Broussard, LA Central operations and distribution
Aberdeen, Scotland Oilfield operations and distribution
Harvey, LA Nitrogen sales and service
TRANSPORTATION
Scottsbluff, NE Transportation headquarters and terminal
CORPORATE
Arlington Heights, IL (2) Corporate headquarters; CETCO headquarters; American Colloid Company
headquarters; Nanocor, Inc.
headquarters; research laboratory
(1) Shared facilities between minerals and environmental segments.
(2) Certain offices and facilities are leased.
ITEM 3. LEGAL PROCEEDINGS
We are party to a number of lawsuits arising in the normal course of
our business. We do not believe that any pending litigation will have a material
adverse effect on our consolidated financial position or results of operations.
Our processing operations require permits from various governmental
authorities. From time to time, we have been contacted by government agencies
with respect to required permits or compliance with existing permits. While we
have been notified of certain situations of non-compliance, management does not
expect the fines or the cost of becoming compliant, if any, to be significant.
13
We have neither been nor expect to be assessed any tax shelter
penalties by the United States Internal Revenue Service for tax shelter
transactions that either the IRS deems abusive or have significant tax avoidance
penalties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF REGISTRANT
NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
- -------------------- -------- -----------------------------------------------------------------------------
Gary L. Castagna 45 Senior Vice President, Chief Financial Officer and Treasurer of the Company
since February 2001; prior thereto, a consultant to AMCOL since June 2000;
prior thereto, Vice President of the Company and President of Chemdal
International Corporation (this business is a former subsidiary of AMCOL, and
consisted of the absorbent polymers business that was sold to BASF AG in June
2000) since August 1997; since January 2000, Director of M~Wave Incorporated,
a manufacturer and distributor of printed circuit boards.
Ryan F. McKendrick 55 Vice President of the Company and President of CETCO since November 1998;
President of Volclay International Corporation since 2002; prior thereto, Vice
President of CETCO since 1994.
Gary Morrison 51 Vice President of the Company and President of American Colloid Company since
February 2000; prior thereto, Executive Vice President of American Colloid
Company since 1998.
Lawrence E. Washow 53 Chief Executive Officer since May 2000; President of the Company since May
1998; Chief Operating Officer of the Company since 1997; a Director since
February, 1998.
All executive officers of the Company are elected annually by the Board
of Directors for a term expiring at the annual meeting of directors following
their election or when their respective successors are elected and shall have
qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the New York Stock Exchange under the symbol
"ACO." The following table sets forth, for the periods indicated, the high and
low closing sale prices of the common stock, as reported by the New York Stock
Exchange, and cash dividends declared per share.
CASH
STOCK PRICE DIVIDENDS
-------------------------- DECLARED
HIGH LOW PER SHARE
------------ ------------ -----------
Fiscal Year Ended December 31, 2006: 1st Quarter $ 29.40 $ 20.28 $ 0.11
2nd Quarter 33.49 22.56 0.12
3rd Quarter 26.95 18.71 0.12
4th Quarter 29.43 23.87 0.14
Fiscal Year Ended December 31, 2005: 1st Quarter $ 23.09 $ 18.11 $ 0.09
2nd Quarter 21.27 16.90 0.09
3rd Quarter 20.75 18.20 0.10
4th Quarter 21.65 16.35 0.10
We have paid cash dividends every year for 69 years. As of March 5,
2007, there were 7,225 holders of record of the common stock, including shares
held in street name.
14
PURCHASES OF EQUITY SECURITIES
On May 13, 2004, we announced a share repurchase program for the
repurchase of $10 million of our common stock in the open market. This program
terminated on September 30, 2006 and was replaced with a share repurchase
program that provides for the repurchase of up to $15 million of our common
stock on the open market or in privately negotiated transactions. This new
program terminates on November 10, 2008. The following table summarizes the
repurchases made during the year under the terminated 2004 stock repurchase
program. In 2006, we did not purchase any of our common stock under the
currently authorized stock repurchase program.
MAXIMUM VALUE OF
TOTAL NUMBER OF SHARES THAT
SHARES REPURCHASED AVERAGE MAY YET BE
AS PART OF THE STOCK PRICE PAID REPURCHASED
REPURCHASE PROGRAM PER SHARE UNDER THE PROGRAM
-------------------- ----------------- -----------------
Amount of authorization
outstanding at December 31, 2005 $ 8,035,285
Activity in current year:
January 1 - January 31
Shares repurchased -- N/A $ 8,035,285
February 1 - February 28
Shares repurchased -- N/A $ 8,035,285
March 1 - March 31
Shares repurchased 40,000 $ 26.89 $ 6,959,825
April 1 - April 30
Shares repurchased 10,000 $ 29.48 $ 6,665,075
May 1 - May 31
Shares repurchased 30,000 $ 28.69 $ 5,804,367
June 1 - June 30
Shares repurchased 40,000 $ 24.70 $ 4,816,242
July 1 - July 31
Shares repurchased 15,000 $ 23.05 $ 4,470,492
August 1 - August 31
Shares repurchased 40,100 $ 22.86 $ 3,553,806
September 1 - September 30
Shares repurchased 44,900 $ 23.87 $ 2,482,043
October 1 - October 31
Shares repurchased -- N/A $ --
November 1 - November 30
Shares repurchased -- N/A $ 15,000,000
December 1 - December 31
Shares repurchased -- N/A $ 15,000,000
-----------------
Total 220,000 $ 25.24 $ 15,000,000
=================
15
ITEM 6. SELECTED FINANCIAL DATA
The following is selected financial data for the Company as of and for
the five years ended December 31, 2006.
SUMMARY OF OPERATIONS
(In thousands, except ratios and share and per share amounts)
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------
OPERATIONS DATA
Net sales $ 611,556 $ 535,924 $ 461,778 $ 374,483 $ 307,422
Gross profit 159,466 138,023 118,568 100,068 80,417
General, selling and administrative expenses 102,078 90,947 82,584 71,053 60,764
Operating profit 57,388 47,076 35,984 29,015 19,653
Net interest expense (2,951) (1,660) (826) (280) (512)
Net other income (expense) 231 (393) (86) 526 48
Pretax income 54,668 45,023 35,072 29,261 19,189
Income taxes 10,425 11,645 4,687 9,946 6,916
Income from affiliates and joint ventures 5,420 2,912 1,180 600 531
Minority interest in net loss of subsidiary -- -- -- -- 164
Income from continuing operations 49,663 36,290 31,565 19,915 12,968
Gain on disposal of discontinued operations 585 4,755 -- 8,950 --
Net income 50,248 41,045 31,565 28,865 12,968
PER SHARE DATA
Basic earnings per share
Continuing operations 1.65 1.23 1.08 0.70 0.46
Discontinued operations 0.02 0.16 -- 0.32 --
Net income 1.67 1.39 1.08 1.02 0.46
Diluted earnings per share
Continuing operations 1.60 1.18 1.03 0.67 0.43
Discontinued operations 0.02 0.15 -- 0.30 --
Net income 1.62 1.33 1.03 0.97 0.43
Stockholders' equity (1) 9.85 8.36 7.55 6.58 5.66
Dividends 0.49 0.38 0.32 0.16 0.10
Continued
16
SUMMARY OF OPERATIONS
(In thousands, except ratios and share and per share amounts)
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------
SHARES OUTSTANDING DATA
End of period 29,936,356 29,783,639 29,395,755 29,107,746 27,881,903
Weighted average for the period-basic 30,054,267 29,525,033 29,140,892 28,357,009 28,133,795
Incremental impact of stock options 971,621 1,278,105 1,561,969 1,492,569 2,014,725
Weighted average for the period-diluted 31,025,888 30,803,138 30,702,861 29,849,578 30,148,520
BALANCE SHEET DATA (at end of period)
Current assets $ 251,684 $ 211,209 $ 192,724 $ 143,574 $ 116,935
Net property and equipment 140,772 100,064 93,641 86,996 81,847
Other long-term assets 118,768 57,256 50,077 34,759 29,598
Total assets 511,224 368,529 336,442 265,329 228,380
Current liabilities 78,383 63,269 61,681 47,708 52,639
Long-term debt 112,448 34,838 34,295 9,006 5,573
Other long-term liabilities 25,575 21,566 18,532 17,165 12,233
Stockholders' equity 294,818 248,856 221,934 191,450 157,935
OTHER STATISTICS FOR CONTINUING OPERATIONS
Depreciation, depletion and amortization $ 20,483 $ 19,558 $ 20,124 $ 18,910 $ 20,759
Capital expenditures 42,099 28,626 21,627 15,795 16,223
Gross profit margin 26.1% 25.8% 25.7% 26.7% 26.2%
Operating profit margin 9.4% 8.8% 7.8% 7.7% 6.4%
Pretax profit margin 8.9% 8.4% 7.6% 7.8% 6.2%
Effective tax rate 19.1% 25.9% 13.4% 34.0% 36.0%
Net profit from continuing operations margin 8.1% 6.8% 6.8% 5.3% 4.2%
Return on average equity 18.3% 15.4% 15.3% 11.4% 8.5%
(1) Based on the number of common shares outstanding at the end of each year
rather than a weighted average.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a global, specialty minerals company and earn our revenues and
profits from a diverse group of industrial and consumer product lines. The
principal mineral that we utilize to generate revenues is bentonite. We own or
lease bentonite reserves in the United States, Australia and China.
Additionally, through our affiliates and joint ventures, we have access to
bentonite reserves in Egypt, India and Mexico. Bentonite deposits have varying
physical properties which 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.
We operate in five segments: minerals, environmental, oilfield
services, transportation and corporate. Prior to the third quarter of 2006, we
did not report our oilfield services business as a separate segment. This
business was included as part of our environmental segment. 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 management. As a result, commencing in the third quarter of
2006, we recognized oilfield services as a stand-alone segment, separate from
our environmental segment. We have revised the segment information for prior
periods to conform to this new presentation.
Both our minerals and environmental segments operate manufacturing
facilities in North America, Europe, and Asia-Pacific regions. Our oilfield
services segment operates principally in North America, Europe and Africa.
Additionally, we have a transportation segment that performs trucking services
for our domestic minerals and environmental businesses as well as third parties.
Our customers are engaged in varied end-markets and geographies.
Customers in the minerals segment range from foundries that produce castings for
automotive, industrial, and transportation equipment, including heavy-duty
trucks and railroad cars, to producers of consumer goods, including cat box
filler, cosmetics and detergents. The customers for our lining technologies and
building materials products are predominantly engineering contractors. The
oilfield services customer base is primarily comprised of oil and gas service or
exploration companies. A significant portion of our products have been used in
the same applications for decades and have experienced minimal technological
obsolescence. A majority of our business is performed under short-term
agreements; therefore, terms of sale, such as pricing and volume, can change
within our fiscal year.
Approximately 69% of our revenue is generated in North America;
consequently, the state of the U.S. economy impacts our revenues. Our fastest
growing markets are in the Asia-Pacific and European regions, which have
continued to outpace the United States in economic growth.
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 Europe and Asia-Pacific over the last 40 years. This
operating experience enables us to expand further into emerging
markets. We see the significant opportunities in the Asia-Pacific
region for expanding our revenues and earnings over the long-term as a
number of markets we serve, such as metalcasting and lining
technologies, are expected to grow. We expect to take advantage of
these growth areas either through our wholly-owned subsidiaries or
investments in affiliates and joint ventures.
18
o Mineral development: Bentonite is a component in a majority of the
products we produce. Since it is a natural material, we must
continually expand our reserve base to maintain a long-term business.
Our goal is to add new reserves to replace the bentonite mined each
year. Furthermore, we need to assure that 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. In 2006, we acquired a number
of businesses for a total cost of approximately $63 million. A strong
financial position will enable us to continue to acquire businesses
which, in our assessment, are valued fairly and fit with our growth
strategy.
There can be no assurance that we will achieve success in implementing
any one or more of the strategic initiatives described above.
A number of risks will challenge us in meeting our long-term
objectives. We describe certain risks, such as competition and our reliance on
economically sensitive markets, under "Item 1A. Risk Factors" and "Item 7A.
Quantitative and Qualitative Disclosures About Market Risk." In general, the
significance of these risks has not changed over the past year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations describes relevant aspects of our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to select accounting policies that are appropriate for
our business, and to make certain estimates, judgments and assumptions about
matters that are inherently uncertain in applying those policies. On an ongoing
basis, we re-evaluate these estimates, judgments and assumptions for
reasonableness because of the critical impact that these factors have on the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Actual results may differ from these estimates.
Our financial statements are based in part upon critical accounting
policies that involve complex and subjective decisions and assessments. Our
senior management has discussed the development, selection and disclosure of
these policies with the members of the Audit Committee of our Board of
Directors. We believe our selection of accounting policies has resulted in
actual results approximating the estimated amounts in each respective area.
These policies are discussed below and also in Note 1 of the Notes to
Consolidated Financial Statements. The discussion which follows should be read
in conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-K.
VALUATION OF ACCOUNTS RECEIVABLE
We provide credit to customers in the ordinary course of business and
perform ongoing credit evaluations. Our customer base is diverse and includes
customers located throughout the world. Payment terms in certain of the foreign
countries in which we do business are longer than those that are customary in
the United States, and as a result, may give rise to additional credit risk
related to outstanding accounts receivable from these non-U.S. customers.
Likewise, a change in the financial position, liquidity or prospects of any of
our customers could have an impact on our ability to collect amounts due. While
concentrations of credit risk related to trade receivables are somewhat limited
by our large customer base, we do extend significant credit to some of our
customers.
We make estimates of the amounts of our gross accounts receivable that
will not be collectible, and record an allowance for doubtful accounts to reduce
the carrying value of accounts receivable to the amount that is expected to be
realized. The allowance for doubtful accounts is established based upon the
Company's historical bad debt experience, a review of the overall aging of the
accounts, and an analysis of specific customer accounts, particularly those with
past-due balances. The recorded allowance for doubtful accounts is intended to
cover specific customer collection issues identified by management at the
balance sheet date, and to provide for potential losses from other accounts
based on our historical experience. Increases in the allowance for doubtful
accounts are recorded as an expense and included in general, selling and
administrative expenses in the period identified. Our estimate of the required
allowance for doubtful accounts is a critical accounting estimate because it is
susceptible to change from period to period. In addition, it requires management
to make judgments about the future collectibility of customer accounts.
19
INVENTORY VALUATION
Inventories are recorded at the lower of actual manufactured or
purchased cost, or estimated net realizable value. In order to determine net
realizable value, management regularly reviews inventory quantities on hand and
evaluates significant items to determine whether they are excess or obsolete. We
record the value of estimated excess or obsolete inventory as a reduction of
inventory and as an expense which is included in cost of sales in the period it
is identified. Our estimate of excess and obsolete inventory is a critical
accounting estimate because it is susceptible to change from period to period.
In addition, it requires management to make judgments about the future demand
for inventory.
Our process to evaluate inventories for excess or obsolete items is
comprehensive. We quantify the amount of inventory on hand that, based on
projected demand, is not anticipated to be sold within the next 12 to 24 months
or, based on our current product offerings, is excess or obsolete. This involves
a review by sales and production management personnel to determine whether this
list of potential excess or obsolete inventory is complete. Factors which impact
this evaluation include, for example, whether there has been a change in the
market or packaging for particular products, and whether there are components of
inventory that incorporate obsolete formulations or technology. In certain
businesses in which we are engaged, such as the domestic cat litter business,
product and packaging changes can occur rapidly and expose us to excess and
obsolete inventories.
GOODWILL AND LONG-LIVED ASSETS
We have made substantial investments in property, plant and equipment
and have a moderate investment in goodwill. For property, plant and equipment,
we evaluate the recoverability of these assets whenever events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. For goodwill, we perform an annual impairment assessment at the
reporting unit level (or more frequently if impairment indicators arise).
In analyzing the fair value of each reporting unit and assessing the
recoverability of the carrying value of property, plant and equipment,
management uses models which are based on estimates of future operating
performance and related cash flows. In preparing these models, management must
make estimates in projecting future cash flows attributable to the reporting
unit or assets being tested, in selecting a discount rate that reflects the
related business risks, and in determining the appropriate perpetuity or
disposal value. In developing these projections of future cash flows, we make a
variety of important assumptions and estimates that have a significant impact on
management's assessments of whether the carrying values of goodwill and
property, plant and equipment should be adjusted to reflect impairment. Among
these are assumptions and estimates about the future growth and profitability of
the related business unit or asset, and assumptions about anticipated future
economic, regulatory and political conditions in the relevant market.
Our estimates related to the carrying values of goodwill and property,
plant and equipment are considered to be critical accounting estimates because
they are susceptible to change from period to period based on our judgments
about a variety of factors. For example, judgment is required to determine
whether events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. In addition, in performing assessments of the
carrying values of these assets, we must make judgments about the future
business, economic, regulatory, and political conditions affecting these assets,
as well as to select the appropriate risk-related rates for discounting
estimated future cash flows, and to develop reasonable estimates of disposal
values.
20
RETIREMENT BENEFITS
We sponsor a defined-benefit pension plan for substantially all of our
United States employees hired on or before December 31, 2003. In order to
measure the expense and obligations associated with these retirement benefits,
we must make a variety of estimates including discount rates used to value
certain liabilities, expected return on plan assets set aside to fund these
liabilities, rate of compensation increases, employee turnover rates, retirement
rates, mortality rates and other factors. Our benefit plan committee determines
the key assumptions related to the discount rate, expected investment rate of
return and compensation increases after consulting with the actuarial firm that
performs the calculations. Other assumptions are also set based on consultation
with our actuaries.
To determine our net accrued benefit and net periodic benefit cost, we
form judgments about the best estimate for each assumption used in the actuarial
computation. The most important assumptions that affect the computations are the
discount rate and the expected long-term rate of return on plan assets.
Our discount rate assumption is intended to reflect the rate at which
the retirement benefits could be effectively settled based upon the assumed
timing of the benefit payments. In determining the discount rate, we utilize the
yield of a standardized benchmark, the Moody's Aa Corporate Bond Index, which
consists of high quality fixed income investments, and round it to the nearest
25 basis points. The discount rate used to determine our retirement pension
benefit obligation at September 30, 2006, was 5.75%. A 50 basis point decrease
in this discount rate would have increased the benefit obligation at December
31, 2006 by $3.4 million and would increase net cost expected in 2007 by 14%, or
$176 thousand. Likewise at December 31, 2006, a 50 basis point increase in the
discount rate would have decreased the benefit obligation by $3.1 million and
would decrease the net cost expected in 2007 by 14%, or $175 thousand.
The expected long-term rate of return on plan assets was based on our
current asset allocations and the historical long-term performance, as adjusted
for existing market conditions. Information regarding our asset allocations is
included in the Notes to Consolidated Financial Statements in "Item 8. Financial
Statements and Supplementary Data." We assumed a weighted-average expected
long-term rate of return on pension plan assets of 8.50% to determine our net
benefit cost in 2006. A 50 basis point decrease in the expected return would
increase the net cost expected in 2007 by approximately 13%, or $163 thousand.
Likewise, a 50 basis point increase in the expected return would decrease the
net cost expected in 2007 by $163 thousand.
INCOME TAXES
Our effective tax rate is based on the income, statutory tax rates and
tax planning opportunities available to us in the various jurisdictions in which
we operate. Significant judgment is required in determining our effective tax
rate and in evaluating our tax positions. We establish reserves when, despite
our belief that our tax return positions are fully supportable, we believe our
positions may be overturned. We adjust these reserves in light of changing facts
and circumstances, such as the progress of a tax audit. Our effective tax rate
includes the impact of changes to reserves that we consider appropriate. Our
estimates of income tax items, expense and reserves are considered to be
critical accounting estimates because they are susceptible to change from period
to period based on our judgments about a variety of factors.
Valuation allowances are recorded, if necessary, to measure a deferred
tax asset at an estimated realizable value. Both positive and negative evidence
are considered in forming our judgment as to whether a valuation allowance is
appropriate. Changes in a valuation allowance are recorded in the period when we
determine events have occurred that will impact the realizable value of the
asset.
A number of years may elapse before a particular matter, for which we
have established a reserve or valuation allowance, is audited and finally
resolved. Audits of our United States federal income tax returns have been
completed for our income tax returns relating to fiscal years of 2002 and prior.
State income tax returns are audited more infrequently. Unfavorable settlement
of any particular issue would require use of our cash and could result in the
recording of additional tax expense. Favorable resolution would be recognized as
a reduction to our tax provision in the year of resolution.
21
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2006
The discussion below references the consolidated statement of
operations included in "Item 8. Financial Statements and Supplementary Data."
Net sales for the year ended December 31, 2006 were $611.6 million,
compared with $535.9 million for 2005 and $461.8 million for 2004, which were
increases of 14% and 16% in 2006 and 2005, respectively. Minerals contributed
approximately 28% of the increase in net sales over 2005. The environmental and
oilfield services segments contributed 42% and 29%, respectively. Transportation
segment revenues increased 1%. Acquisitions and favorable foreign translation
accounted for approximately 29% of the growth over 2005.
In comparing 2005 with 2004, minerals accounted for approximately 43%
of the increase, while environmental and oilfield services contributed 31% and
20%, respectively. Transportation segment revenues increased by approximately
12%, while intersegment revenues, which are generated by transportation, were
6%. Approximately 4% of the growth in net sales for 2005 was attributed to
acquisitions and favorable foreign currency translation combined.
Gross profit was $159.5 million for the year ended December 31, 2006,
compared with $138.0 million for 2005 and $118.6 million in 2004. The 16%
increase in gross profit in 2006 over 2005 was generated by the growth in net
sales. On a segment basis, minerals contributed approximately 14% of the
increase over 2005, while environmental and oilfield services accounted for 44%
and 42%, respectively. Relative to the comparison of 2005 with 2004, the 16%
increase in gross profit followed sales growth. Minerals contributed
approximately 30% of the growth in gross profit, while environmental and
oilfield services accounted for 30% and 33%, respectively. The transportation
segment accounted for the remaining increase over 2004.
Gross margin was 26.1% in 2006, 25.8% in 2005 and 25.7% in 2004. The
improvement in 2006 and 2005 gross margin was attributed to higher relative
contribution by the environmental and oilfield services segments.
General, selling and administrative expenses were $102.1 million for
the year ended December 31, 2006, compared with $90.9 million in 2005 and $82.6
million in 2004. Higher personnel costs and added expenses from acquired
businesses accounted for the increase in 2006 over 2005. The increase in 2005
over 2004 was primarily attributable to greater employee benefit and
compensation costs, Sarbanes-Oxley compliance-related costs, and audit fees.
Operating profit was $57.4 million for the year ended December 31,
2006, compared with $47.1 million in 2005 and $36.0 million in 2004. The
improvement in operating profit for 2006 and 2005 resulted from the increase in
sales and gross profit in all operating segments. Operating margin for 2006 was
9.4%, compared with 8.8% in 2005 and 7.8% in 2004. The 2006 margin expansion
resulted from higher profitability in the oilfield services segment and reduced
corporate segment expenses. Margin improvement in the oilfield services and
environmental segments led to improvement in 2005 over 2004.
A review of sales, gross profit, general, selling and administrative
expenses and operating profit by segment follows.
22
MINERALS SEGMENT
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
MINERALS 2006 2005 2004 2006 VS. 2005 2005 VS. 2004
- ----------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(Dollars in Thousands)
Net sales $ 316,751 100.0% $ 295,686 100.0% $ 264,167 100.0% 21,065 7.1% 31,519 11.9%
Cost of sales 255,064 80.5% 236,916 80.1% 211,228 80.0%
--------- -------- --------- -------- --------- -----
Gross profit 61,687 19.5% 58,770 19.9% 52,939 20.0% 2,917 5.0% 5,831 11.0%
General, selling and
administrative expenses 24,983 7.9% 22,268 7.5% 22,307 8.4% 2,715 12.2% (39) -0.2%
--------- -------- --------- -------- -------- -----
Operating profit 36,704 11.6% 36,502 12.4% 30,632 11.6% 202 0.6% 5,870 19.2%
2006 vs. 2005
Base businesses (those businesses owned for greater than one year)
accounted for 69% of the growth in net sales over 2005, while acquisitions and
foreign currency translation represented 20% and 11%, respectively, for the
increase. Product line sales were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
MINERALS PRODUCT LINE SALES 2006 2005 %
- ------------------------------ ---------- ---------- ----------
(Dollars in Thousands)
Metalcasting $ 136,357 $ 134,138 1.7%
Specialty minerals 118,016 96,758 22.0%
Pet products 58,332 60,177 -3.1%
Other product lines 4,046 4,613 *
---------- ----------
Total 316,751 295,686
========== ==========
* Not meaningful.
Metalcasting sales principally increased due to an acquisition
completed in October. After factoring out the acquisition, domestic sales
declined due to lower volumes of specialty products. Asia-Pacific sales
increased due to continued market expansion, particularly in China. Specialty
minerals revenues increased due to higher pricing and volume levels for oil and
gas drilling fluid additives along with increased market penetration for health
and beauty product lines. Detergent additives volumes declined in 2006. Lower
volumes due to customer losses led to decreased pet products sales.
Gross profit improved with the increase in net sales; however, gross
margin declined by 40 basis points. A majority of the margin decline was due to
a benefit recorded in 2005 from a $2.1 million one-time reduction in
mining-related taxes owed to the State of Montana. Excluding this benefit, gross
profit would have improved over 2005 by approximately 9% and gross margin
increased by 30 basis points.
General, selling and administrative expenses increased due to benefits
recorded in 2005 for gains on asset sales as well as increased personnel-related
costs incurred this year.
Acquisitions and foreign currency translation were the primary
contributors to the improvement in operating profit. Operating margin declined
by 80 basis points largely due to the benefit recorded in 2005 for
mining-related taxes previously described plus the impact of the increase in
general, selling and administrative expenses.
23
2005 vs. 2004
Base businesses (those businesses owned for greater than one year)
accounted for all of the growth over the prior year. Product line sales were as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------
MINERALS PRODUCT LINE SALES 2005 2004 %
- ------------------------------ ---------- ---------- ----------
(Dollars in Thousands)
Metalcasting $ 134,138 $ 112,558 19.2%
Specialty minerals 96,758 95,142 1.7%
Pet products 60,177 53,288 12.9%
Other product lines 4,613 3,179 *
---------- ----------
Total 295,686 264,167
========== ==========
* Not meaningful.
Domestic metalcasting revenue growth was primarily attributed to
selling price increases that were implemented to offset increases in raw
materials, transportation and energy-related costs. Metalcasting revenue also
improved due to higher sales volumes in China and Thailand. Higher volumes and
selling price increases led to the improvement in pet products revenues.
Specialty minerals revenues were relatively flat in comparison with the prior
year. Detergent additive volumes declined in 2005 but were offset by increases
in volumes and selling prices in the oil and gas drilling fluids product lines.
Gross profit improved with the increase in net sales; however, gross
margin declined by 10 basis points. Additionally, gross profit in 2005 benefited
from a $2.1 million one-time reduction in mining-related taxes owed to the State
of Montana. Excluding this benefit, gross profit would have improved over 2004
by approximately 7% and gross margin would have been 19.2%. Selling price
increases were not large enough to offset the actual increase in raw materials,
transportation and energy-related costs.
General, selling and administrative expenses declined slightly in 2005
partly because 2004 included a charge of $0.9 million related to bad debt
reserves. Also, 2005 included a $0.5 million greater benefit from gains on the
disposals of certain assets.
Operating margin improved by 80 basis points due to flat general,
selling and administrative expenses.
ENVIRONMENTAL SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
ENVIRONMENTAL 2006 2005 2004 2006 VS. 2005 2005 VS. 2004
- ------------------------ ----------------- ------------------ ------------------ ------------------ ------------------
(Dollars in Thousands)
Net sales $ 203,128 100.0% $ 171,144 100.0% $ 147,896 100.0% 31,984 18.7% 23,248 15.7%
Cost of sales 133,414 65.7% 110,815 64.7% 93,360 63.1%
--------- ----- --------- ----- --------- -----
Gross profit 69,714 34.3% 60,329 35.3% 54,536 36.9% 9,385 15.6% 5,793 10.6%
General, selling and
administrative expenses 42,963 21.2% 36,978 21.6% 35,926 24.3% 5,985 16.2% 1,052 2.9%
--------- ----- --------- ----- --------- -----
Operating profit 26,751 13.1% 23,351 13.7% 18,610 12.6% 3,400 14.6% 4,741 25.5%
24
2006 vs. 2005
Base businesses accounted for approximately 67% of the growth in net
sales, while favorable foreign currency translation and acquisitions represented
the remainder. Product line sales were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
ENVIRONMENTAL PRODUCT LINE SALES 2006 2005 %
- -------------------------------- ---------- ---------- ----------
(Dollars in Thousands)
Lining technologies $ 110,906 $ 93,797 18.2%
Building materials 69,529 55,621 25.0%
Other product lines 22,693 21,726 *
---------- ----------
Total 203,128 171,144
========== ==========
* Not meaningful.
Lining technologies sales were aided by the acquisition of a
contracting services business in August 2005, as well as continued market
expansion in Asia and Central Europe. Domestic revenues improved principally due
to price increases. Building materials product line sales improved through
market share gains throughout Europe and Asia. Other product lines are largely
comprised of infrastructure drilling products.
Gross profit rose commensurate with sales increases. Gross margin
declined by 100 basis points principally due to changes in product mix and
higher production costs at the U.S. operations. Contracting revenues within the
lining technologies product line generated lower gross margins.
General, selling and administrative expenses increased primarily due to
higher personnel-related expenses and acquisitions.
Operating profit improved along with gross profit and sales. Operating
margin declined by 60 basis points following the decrease in gross margin.
2005 vs. 2004
Base businesses accounted for approximately 89% of the growth in net
sales, while favorable foreign currency translation and acquisitions represented
the remainder. Product line sales were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
ENVIRONMENTAL PRODUCT LINE SALES 2005 2004 %
- ----------------------------------- ---------- ---------- ----------
(Dollars in Thousands)
Lining technologies $ 93,797 $ 77,031 21.8%
Building materials 55,621 53,552 3.9%
Other product lines 21,726 17,313 *
---------- ----------
Total 171,144 147,896
========== ==========
* Not meaningful.
Lining technologies product line revenues accounted for a large
majority of the increase. Greater volumes in all geographic regions led to the
increase in lining technologies revenues. We also benefited from higher average
selling prices in the United States. Specialty infrastructure drilling product
revenues were responsible for most of the increase in other product lines.
Gross profit increased in conjunction with sales. Gross margin
decreased by 60 basis points due to a greater proportion of revenues generated
from lower profit product lines. Certain lining technologies product/service
lines have lower gross margins.
General, selling and administrative expenses grew at more modest rates
as employee headcount levels remained fairly stable compared with 2004.
25
Operating profit improved in conjunction with the increase in gross
profit. Operating margin improved by 110 basis points which largely resulted
from less of an increase in general, selling and administrative expenses.
OILFIELD SERVICES SEGMENT
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
OILFIELD SERVICES 2006 2005 2004 2006 VS. 2005 2005 VS. 2004
- ----------------------- ------------------ ------------------- ------------------- ---------------- ----------------
(Dollars in Thousands)
Net sales $ 61,928 100.0% $ 39,702 100.0% $ 24,827 100.0% 22,226 56.0% 14,875 59.9%
Cost of sales 39,933 64.5% 26,711 67.3% 18,205 73.3%
--------- ------ --------- ------- --------- -------
Gross profit 21,995 35.5% 12,991 32.7% 6,622 26.7% 9,004 69.3% 6,369 96.2%
General, selling and
administrative expenses 10,934 17.7% 7,674 19.3% 4,710 19.0% 3,260 42.5% 2,964 62.9%
--------- ------ --------- ------- --------- -------
Operating profit 11,061 17.8% 5,317 13.4% 1,912 7.7% 5,744 108.0% 3,405 178.1%
2006 vs. 2005
Base businesses contributed approximately 80% of the growth in revenues
over the prior year. Acquired business accounted for the remainder of the
improvement. Business gained due to the hurricanes in the Gulf of Mexico aided
2006 results by approximately $5 million. Higher natural gas production activity
in Northern and Eastern Texas also aided the 2006 results. International
business, in particular West Africa, helped sales increase over 2005.
Gross profit improved commensurate with the increase in sales. Gross
margin rose by 280 basis points due to higher personnel and equipment
utilization along with favorable pricing attained from hurricane-related
services.
General, selling and administrative expenses increased due to an
expanded sales force and expansion of operations in Eastern Texas.
Operating profit improved with the positive gross profit results.
Operating margin expanded by 440 basis points due to high operating leverage on
our cost base.
2005 vs. 2004
Base businesses accounted for all of the improvement over 2004. Higher
oil and gas production activity in the Gulf of Mexico and in Eastern Texas
provided more sales opportunities in 2005.
Gross profit improved due to improved personnel and equipment
utilization and higher pricing. Consequently, gross margins increased by 600
basis points. Higher profit margins attained with new business in West Africa
also contributed to the margin increase.
General, selling and administrative expenses increased due to higher
personnel levels including establishment of new overseas offices.
Operating profit improved along with the increase in gross profit.
Operating margin increased by 570 basis points as a result of higher operating
leverage and the expansion in gross margin.
26
TRANSPORTATION SEGMENT
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
TRANSPORTATION 2006 2005 2004 2006 VS. 2005 2005 VS. 2004
- ----------------------- ------------------ ------------------- ------------------- ---------------- ----------------
(Dollars in Thousands)
Net sales $ 50,228 100.0% $ 49,708 100.0% $ 40,650 100.0% 520 1.0% 9,058 22.3%
Cost of sales 44,158 87.9% 43,775 88.1% 36,179 89.0%
--------- ------ --------- ------- --------- -------
Gross profit 6,070 12.1% 5,933 11.9% 4,471 11.0% 137 2.3% 1,462 32.7%
General, selling and
administrative expenses 3,198 6.4% 3,216 6.5% 2,751 6.8% (18) -0.6% 465 16.9%
--------- ------ --------- ------- --------- -------
Operating profit 2,872 5.7% 2,717 5.4% 1,720 4.2% 155 5.7% 997 58.0%
2006 vs. 2005
Revenues were flat compared with 2005 due to unchanged equipment
utilization and average rates charged per mile. Approximately 41% of the
segment's revenues were generated from services provided to certain domestic
subsidiaries within our minerals and environmental segments. Gross margin
improved despite the modest sales increase because profit per mile improved
since fuel surcharges were less of an impact in 2006. Operating margin improved
by 30 basis points due to the gross margin expansion and lower selling and
administrative expenses.
2005 vs. 2004
Revenues grew due to higher business levels, equipment utilization
rates, and average rates charged to customers. Approximately 41% of the
segment's revenues were generated from services provided to certain domestic
subsidiaries within our minerals and environmental segments. Gross profit
improved commensurate with the increase in revenues. Gross margin benefited from
improved equipment utilization and higher revenue rates. Diesel fuel surcharges
negatively impacted gross margin; however, the segment was able to offset a
majority of the cost by passing-through those charges to customers.
CORPORATE SEGMENT
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
CORPORATE 2006 2005 2004 2006 VS. 2005 2005 VS. 2004
- --------------------------------------------- ---------- ---------- ---------- -------------------- --------------------
(Dollars in Thousands)
Intersegment shipping sales $ (20,479) $ (20,316) $ (15,762)
Intersegment shipping costs (20,479) (20,316) (15,762)
---------- ---------- ----------
Gross profit -- -- --
Corporate general, selling and
administrative expenses 17,507 17,190 13,244 $ 317 1.8% $ 3,946 29.8%
Nanocomposite business development expenses 2,493 3,621 3,646 (1,128) -31.2% (25) -0.7%
---------- ---------- ----------
Operating loss $ (20,000) $ (20,811) $ (16,890) $ 811 -3.9% $ (3,921) 23.2%
2006 vs. 2005
Intersegment shipping sales and costs are related to billings from the
transportation segment to the domestic minerals and environmental segments for
services. These services are invoiced to the minerals and environmental segments
at arms-length rates and those costs are subsequently charged to customers.
Intersegment sales and costs reported above reflect the elimination of these
transactions.
Corporate costs include management information systems, human
resources, investor relations, corporate communications and finance.
Additionally, marketing, research and development and operating costs related to
the development of the nanocomposite business are included in this segment.
Corporate administrative expenses grew modestly in 2006. While
independent registered accountant fees, tax consulting and stock compensation
costs increased over 2005, those items were offset by lower spending for
information technology and self-insured employee medical expenses. Nanocomposite
business losses declined primarily from reduced personnel-related expenses and
depreciation.
27
Beginning with our quarterly report for the first quarter of 2007, we
will include the nanocomposites business results of operations and financial
position within our minerals segment.
2005 vs. 2004
Contributing to the increase in general, selling and administrative
expenses at corporate in 2005 were greater expenses associated with stock-based
compensation, corporate development activities, professional service fees
related to Sarbanes-Oxley compliance, independent registered accountant services
and tax services.
Nanocomposite business development expenses were comparable to the
prior-year. No material changes occurred in 2005 related to new customers or
product introductions.
NET INTEREST EXPENSE
Net interest expense was $3.0 million, $1.7 million, and $0.8 million
in 2006, 2005, and 2004, respectively. Average debt levels were $73.6 million
and $34.6 million in 2005 and 2004, respectively. Debt increased in 2006 to
support working capital and capital expenditure funding. Additionally, we
invested $63.2 million in acquired businesses in 2006. In 2005, debt increased
principally due to higher average working capital and greater capital
expenditures. Average interest rates on our funded debt were 5.8%, 4.7% and 2.8%
in 2006, 2005 and 2004, respectively. A majority of the interest on our debt is
based upon LIBOR rates.
OTHER INCOME (EXPENSE), NET
Net other income was $0.2 million in 2006; while net other expense in
2005 and 2004 was approximately $0.4 million and $0.1, respectively. Other
income is composed of a number of miscellaneous transactions, primarily foreign
currency transaction gains and losses.
INCOME TAXES
The effective income tax rate for 2006 was 19.1%, compared with 25.9%
in 2005 and 13.4% in 2004. A schedule reconciling the U.S. federal statutory
income tax rate to our effective rate is included in Note 8 of the Notes to
Consolidated Financial Statements. Income tax expense was positively impacted in
2006 by completion of audits of amended income tax returns filed in 2004, as
described below. The result was a reduction in our tax contingency reserves of
approximately $3.4 million. In addition, we estimated higher depletion
deductions in 2006 and reported more of our earnings from overseas subsidiaries,
which have lower average income tax rates.
The largest benefit to the tax rate in 2005 was higher depletion
deductions, lower average foreign tax rates and reductions in estimates of 2004
taxes payable which were determined in conjunction with preparation of the
income tax returns in 2005.
In 2004, we recorded a reduction to income tax expense of $4.8 million
associated with depletion deductions and research and development credits
available in computing income tax expense. Approximately $0.8 million of this
amount relates to changes in estimates resulting from the finalization, in 2004,
of the tax return for the 2003 tax year. The remaining $4.0 million relates to
the filing of amended federal income tax returns dating from 1999 through 2002.
Regarding the amended income tax returns, after consultation with tax
advisors, we recomputed our federal income tax liability for these periods after
determining that we could increase certain deductions and credits as allowed
under the Internal Revenue Code. The total refund claimed on the returns was
$5.2 million; however, we determined that a contingency reserve was necessary to
reflect potential reduction of the refund after examination of the returns by
the IRS. No adjustments were recorded in 2005 to the contingency reserve
established for these refund claims.
28
We also recorded, in 2004, a $1.1 million credit to income tax expense
for the adjustment of deferred income tax assets and income taxes payable at a
U.K. subsidiary. A portion of this adjustment related to prior reporting
periods, but was considered immaterial to those periods; therefore, the entire
amount was reflected in 2004. If the $1.1 million and $4.8 million reductions
had not been recorded, the effective income tax rate for 2004 would have been
approximately 30%. No adjustments were recorded in 2005 to reflect a change in
the estimates for these items.
INCOME FROM AFFILIATES AND JOINT VENTURES
We reported income from affiliates and joint ventures of $5.4 million,
$2.9 million and $1.2 million for 2006, 2005 and 2004, respectively. The major
component of the increase for each of the last two years was largely related to
our investments in two businesses based in India; we own 21% of the larger
business and 50% of the other. The larger business has substantial bauxite and
bentonite operations. Bauxite is used to produce alumina, which is then used to
produce aluminum. The bauxite business had particularly strong earnings over the
last two years. The second business in India is engaged in manufacturing,
marketing and distributing a specialized bentonite application involving
clarification of edible oils. That business has continued to increase its
profits over the last two years.
DISCONTINUED OPERATIONS
In July 2006, the Internal Revenue Service completed audits of amended
income tax returns which were filed in 2004 but relate to years prior to 2004
and are described in the income tax section of this report. We accounted for
$0.6 million of the settlement as interest income related to that portion of the
settlement as a discontinued operation since it related to a business we sold 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 our absorbent polymer segment. The sale of
the segment was reported as a discontinued operation in the second quarter of
2000. With the assistance of a professional accounting firm, we concluded that a
gain on the sale of a business under these circumstances was not taxable in
Mississippi according to its laws. After negotiations and hearings with
officials, the Board of Review of the Mississippi State Tax Commission accepted
our settlement offer of $7.8 million in June 2005, and we received payment of
this refund in July 2005.
NET INCOME
Net income for 2006 was $50.3 million compared with $41.0 million and
$31.6 million in 2005 and 2004, respectively. In 2006 and 2005, net income
included $0.6 million and $4.8 million, respectively, of a benefit from
discontinued operations as previously discussed. The increase in income from
continuing operations in both comparison periods (2006 vs. 2005 and 2005 vs.
2004) was attributed to the increase in operating profit for the reasons
described earlier in this report. Net income in 2006 and 2004 was also
positively impacted by the adjustments to income tax expense, as previously
discussed, which reduced the overall effective tax rate.
EARNINGS PER SHARE
Diluted earnings per share are calculated using the weighted average
number of shares of common stock, including common share equivalents,
outstanding during the year. Stock options issued to key employees and directors
are considered common share equivalents. The weighted average number of shares
of common stock and common stock equivalent shares outstanding was approximately
31.0 million in 2006, 30.8 million in 2005 and 30.7 million in 2004.
Diluted earnings per share from continuing operations in 2006 were
$1.60 compared with $1.18 and $1.03 in 2005 and 2004, respectively. The
improvement for both 2006 and 2005 was commensurate with the increase in income
from continuing operations previously described. In 2006, our diluted earnings
per share include a $0.09 per share benefit from income associated with tax
refunds mentioned earlier. Similarly in 2004, diluted earnings per share include
a $0.14 per share benefit associated with the reductions in income tax expense
previously mentioned. Net income per diluted share was $1.62, $1.33, and $1.03
in 2006, 2005 and 2004, respectively. Both 2006 and 2005 were positively
impacted by discontinued operations.
29
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. Effective March 9,
2007, we amended our revolving credit agreement to increase our borrowing
capacity from $120 million to $150 million; all other substantive terms and
conditions remained the same. We believe cash flows from operations and
borrowing capabilities are adequate to support our operating plans for the next
12 to 18 months. Following is a discussion and analysis of our cash flow
activities as presented in the Consolidated Statements of Cash Flows within Item
8 of this report.
Cash provided by operating activities of continuing operations in 2006
was $46.7 million, compared with $36.3 million in 2005 and $17.4 million in
2004. The improvements in 2006 and 2005 largely result from greater income from
continuing operations. Accounts receivable and inventories in 2006 increased by
$40.9 million over 2005; they increased in 2005 by $25.9 million over 2004. A
large portion of the increase in 2006 was due to acquisitions completed during
the year. The remaining increase was commensurate with our sales growth.
Net cash used in investing activities in 2006 was $110.9 million,
compared with $22.3 million and $26.1 million in 2005 and 2004, respectively.
Capital expenditures totaled $42.1 million in 2006, compared with $28.6 and
$21.6 million in 2005 and 2004, respectively. The increase in capital
expenditures in both comparable periods was due to a number of new sites
including a metalcasting products plant in China, a lining technologies
manufacturing plant in Spain and infrastructure investments at our U.S. mining
site facilities.
Acquisitions were $63.2 million, $2.1 million and $13.3 million in
2006, 2005 and 2004, respectively. In 2006, we acquired three businesses. Two of
the businesses are included within our Oilfield Services segment and the other
in the Minerals segment.
Cash provided by financing activities was $59.8 million and $9.3
million in 2006 and 2004, respectively. Cash used in financing activities was
$11.8 million in 2005. Financing cash flows are primarily affected by borrowings
from our revolving credit facility. We had net borrowings from the revolving
credit facility totaling $75.5 million and $20.5 million in 2006 and 2004,
respectively. Net borrowings were negligible in 2005. The increase in borrowings
in 2006 and 2004 was attributed to acquisitions as well capital expenditures.
As noted in Item 5 of this Form 10-K, we repurchased approximately $5.6
million of our common stock in 2006 compared with $2.0 million in 2005 and $2.9
million in 2004. We elect to repurchase our common stock in the open market from
time to time when we believe utilizing funds in this manner will provide a good
return to our shareholders. We have up to $15 million of funds authorized by our
Board of Directors to use for stock repurchases until November 10, 2008.
Dividends on our common stock were $14.7 million in 2006, compared with
$11.3 million in 2005 and $9.4 million in 2004. Declared dividends were $0.49
per share in 2006, compared with $0.38 per share in 2005 and $0.32 per share in
2004.
As of December 31, 2006, we had outstanding debt of $112.5 million and
cash of $17.8 million, compared with $34.8 million of outstanding debt and $16
million of cash at December 31, 2005. Total funded debt represented 28%, 12% and
13% of total capitalization at December 31, 2006, 2005 and 2004, respectively.
30
Working capital was approximately $173.3 million and $147.9 million as
of December 31, 2006 and 2005, respectively. The current ratio (current assets
divided by current liabilities) was 3.2-to-1 and 3.3-to-1 as of the end of 2006
and 2005, respectively. Greater sales generated by our international businesses
resulted in increased working capital in 2006 since customer payment terms tend
to be longer in those areas.
Since the mid-1980s, we and/or our subsidiaries have been named as one
of a number of defendants in product liability lawsuits relating to the minor
free-silica content of our bentonite products used in the metalcasting industry.
The plaintiffs in these lawsuits are primarily employees of our foundry
customers. To date, we have not incurred significant costs in defending these
matters. We believe we have adequate insurance coverage and do not believe the
litigation will have a material adverse impact on our financial condition,
liquidity or results of the operations.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following schedule sets forth details of our long-term contractual
obligations at December 31, 2006:
PAYMENTS DUE BY PERIOD
---------------------------------------------------------
LESS THAN 2-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
--------- --------- --------- --------- ---------
(in millions)
Bank debt $ 112.5 $ 0 $ 107.6 $ 0.1 $ 4.8
Lease obligations 13.6 5.9 6.1 1.3 0.3
Capital expenditures 6.9 6.9 -- -- --
--------- --------- --------- --------- ---------
Total contractual cash obligations $ 133.0 $ 12.8 $ 113.7 $ 1.4 $ 5.1
========= ========= ========= ========= =========
Long-term debt includes bank debt of approximately $98.2 million due
under a revolving credit agreement, which provides for a commitment of $120
million in borrowing capacity and matures on October 31, 2010. Effective March
9, 2007, we amended this revolving credit agreement to increase the borrowing
capacity from $120 million to $150 million and extend the maturity to April 1,
2012; all other substantive terms and conditions remained the same. The
agreement is a multi-currency arrangement that allows us to borrow certain
foreign currencies at rates that can range from 0.50% to 1.125% above the London
Inter Bank Offered Rate (LIBOR), depending upon the amount of the credit line
used and certain capitalization ratios. The facility requires us to meet certain
covenants, such as specific amounts of net worth, and limits our ability to make
additional borrowings and guarantees. We were in compliance with these covenants
at December 31, 2006.
Operating leases relate to non-cancelable obligations for railroad
cars, truck trailers, computer software, office equipment, certain automobiles,
and office and plant facilities. Additional information regarding operating
leases is disclosed our Notes to the Consolidated Financial Statements included
in Part IV of this report.
The Company occasionally enters into unconditional purchase obligations
which contemplate future, irrevocable payments under enforceable contracts which
can not be cancelled without penalty. Such payments are excluded from the above
table as they are entered into in the ordinary course of business, and we
believe the anticipated expenditures associated with them are not material.
We have recorded $5.7 million of liabilities to satisfy the land
reclamation obligations discussed in our Notes to Consolidated Financial
Statements. Expenditures to satisfy these liabilities are excluded from the
above table of contractual obligations as the timing of these payments are not
contractually due until the expiration of individual mining permits, which are
frequently renewed.
We anticipate our funding obligation for our defined benefit pension
plan will approximate $1 million in 2007. That amount principally represents
contributions required by regulations or laws. We have not presented this
obligation or the obligation for future years in the table above as the funding
can vary from year to year based on changes in fair value of pension plan assets
and actuarial assumptions.
At December 31, 2006 and 2005, we had outstanding standby letters of
credit of $17.7 million and $14.2 million, respectively, which are not included
in the obligations in the table above. These letters of credit typically serve
to guarantee the Company's performance of its obligations related to land
reclamation and workers' compensation claims. We have recognized the estimated
costs of our obligations related to land reclamation and workers' compensation
claims in our consolidated balance sheets as of December 31, 2006 and 2005.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational corporation that manufactures and markets products
in countries throughout the world, we are subject to certain market risks,
including those related to foreign currency, interest rates and government
actions. We use a variety of practices to manage these market risks, including,
when considered appropriate, derivative financial instruments. We use derivative
financial instruments only for risk management and do not use them for trading
or speculative purposes.
EXCHANGE RATE SENSITIVITY
We are exposed to potential gains or losses from foreign currency
fluctuations affecting net investments and earnings denominated in foreign
currencies. Our primary exposures are to changes in exchange rates for the U.S.
dollar versus the Euro, the British pound, and the Polish zloty. We also have
significant exposure to changes in exchange rates between the British pound and
the Euro and the Polish zloty and the Euro.
Our various currency exposures often offset each other, providing a
natural hedge against currency risk. Periodically, specific foreign currency
transactions (e.g. inventory purchases) are hedged with forward contracts to
reduce the foreign currency risk. As of December 31, 2006, we did not have any
material foreign currency contracts outstanding.
INTEREST RATE SENSITIVITY
The following table provides information about our financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted average interest rates by expected
maturity dates for debt obligations. Weighted average variable rates are based
on implied forward rates in the yield curve at the reporting date. The
instruments' actual cash flows are denominated in U.S. dollars.
EXPECTED MATURITY DATE
------------------------------------------------------------------------------------------------
2007 2008 2009 2010 2011 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- -------- -------- ---------- ---------- ----------
(US$ equivalent in thousands)
Short-term debt:
Fixed rate $ 28 $ -- $ -- $ -- $ -- $ -- $ 28 $ 28
Interest rate 5.69% -- -- -- -- --
Long-term debt:
Variable rate (US$) -- 6,695 -- 80,500 85 4,800 92,080 92,080
Average interest rate -- 6.09% -- 5.88% 0.15% 3.95%
Fixed rate (THB) 2,624 -- -- -- -- -- 2,624 2,624
Interest rate 7.25% -- -- -- -- --
Variable rate (UK(pound)) -- -- -- 12,341 -- -- 12,341 12,341
Average interest rate -- -- -- 5.76% -- --
Variable rate ((euro)) -- -- -- 2,640 -- -- 2,640 2,640
Average interest rate -- -- -- 4.23% -- --
Variable rate (AUD) -- -- -- 2,763 -- -- 2,763 2,763
Average interest rate -- -- -- 6.83% -- --
-------- -------- -------- -------- -------- ---------- ---------- ----------
Total $ 2,652 $ 6,695 $ -- $ 98,244 $ 85 $ 4,800 $ 112,476 $ 112,476
======== ======== ======== ======== ======== ========== ========== ==========
We periodically use interest rate swaps to manage interest rate risk on
debt securities. These instruments allow us to change the characteristics of
variable rate debt into fixed rate or fixed rate debt into variable rate.
Interest rate differentials are paid or received on these arrangements over the
life of the agreements. At the end of 2006 and 2005, there were no interest rate
swaps outstanding.
32
CREDIT RISK
We are exposed to credit risk on certain assets, primarily accounts
receivable. We provide credit to customers in the ordinary course of business
and perform ongoing credit evaluations. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising our customer base. We currently believe our allowance for doubtful
accounts is sufficient to cover customer credit risks. Our accounts receivable
financial instruments are carried at amounts that approximate fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Financial Statement Schedule
on Page F-1. Such financial statements and schedule are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of such period, our disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information we are required to disclose in the reports we file or submit
under the Exchange Act.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) of the
Exchange Act. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on criteria established in the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As provided for by current regulation,
our evaluation did not include an assessment of the internal control over
financial reporting of the three businesses we acquired in 2006. Based on this
evaluation, we concluded that our internal control over financial reporting was
effective as of December 31, 2006.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies or procedures may deteriorate.
Our independent registered public accounting firm has audited our
assessment of the effectiveness of our internal control over financial reporting
as of the end of the period covered by this report as stated in their report,
which appears in Part IV of this Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial
reporting during the year ended December 31, 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors is included in our definitive proxy
statement, which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K,
and is incorporated herein by reference.
Information regarding our executive officers is included under a
separate caption in Part I hereof in accordance with General Instruction G(3) to
Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
We have adopted a Code of Business Conduct and Ethics (the "Code") that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller and persons performing similar
functions, as well as other employees. The Code, our Corporate Governance
Guidelines and the charters of our Audit Committee, Compensation Committee and
Nominating and Governance Committee are publicly available on our website at
www.amcol.com and are available in print, free of charge, to any shareholder
upon request to our Corporate Secretary at AMCOL International Corporation, One
North Arlington, 1500 West Shure Drive, Suite 500, Arlington Heights, Illinois
60004-7803. If we make any substantive amendments to the Code or grant any
waiver, including any implicit waiver, from a provision of the Code to our
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions, we will disclose
the nature of such amendment or waiver on our website or in a report on Form 8-K
in accordance with applicable rules and regulations.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the above is included in our definitive proxy
statement, which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K,
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is included in our definitive proxy statement, which will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year covered by this Form 10-K, and is incorporated herein
by reference.
Information regarding our securities authorized for issuance under
equity compensation plans is included in our definitive proxy statement, which
will be filed with the Securities and Exchange Commission not later than 120
days after the end of the fiscal year covered by this Form 10-K, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the above is included in our definitive proxy
statement, which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K,
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is
included in our definitive proxy statement, which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K, and is incorporated herein by reference.
34
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) 1. See Index to Financial Statements and Financial Statement
Schedule below.
2. See Financial Statements and Index to Financial Statement
Schedule below.
Such Financial Statements and Schedule are incorporated
herein by reference.
3. See Index to Exhibits immediately following the signature page.
(b) See Index to Exhibits immediately following the signature page.
(c) See Index to Financial Statements and Financial Statement Schedule
below.
ITEM 15(a) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
----
(1) Financial Statements:
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets, December 31, 2006 and 2005 F-6
Consolidated Statements of Operations, Years ended December 31, 2006, 2005 and 2004 F-8
Consolidated Statements of Comprehensive Income, Years ended December 31, 2006, 2005 and 2004 F-9
Consolidated Statements of Stockholders' Equity, Years ended December 31, 2006, 2005 and 2004 F-10
Consolidated Statements of Cash Flows, Years ended December 31, 2006, 2005 and 2004 F-11
Notes to Consolidated Financial Statements F-12
All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required, or because the required
information is not material.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders of AMCOL International Corporation
We have audited the accompanying consolidated balance sheet of AMCOL
International Corporation and subsidiaries as of December 31, 2006, and the
related consolidated statements of operations, comprehensive income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
AMCOL International Corporation at December 31, 2006, and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 13 to the consolidated financial
statements, the Company adopted the recognition and disclosure provisions of
Statement of Financial Accounting Standards No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of AMCOL
International Corporation's internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 16, 2007 expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG LLP
- ----------------------
Chicago, Illinois
March 16, 2007
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders of AMCOL International Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that AMCOL
International Corporation maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). AMCOL
International Corporation's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal
Control Over Financial Reporting, management's assessment of and conclusion on
the effectiveness of internal control over financial reporting did not include
the internal controls of the three businesses acquired during the year ended
December 31, 2006, which are included in the 2006 consolidated financial
statements of AMCOL International Corporation and subsidiaries and constituted
$64,052 and $62,063 of total and net assets, respectively, as of December 31,
2006 and $8,536 and $1,737 of revenues and net income, respectively, for the
year then ended. Our audit of internal control over financial reporting of AMCOL
International Corporation also did not include an evaluation of the internal
control over financial reporting of these businesses.
In our opinion, management's assessment that AMCOL International
Corporation maintained effective internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, AMCOL International Corporation maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.
F-3
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the 2006 consolidated
financial statements of AMCOL International Corporation and subsidiaries and our
report dated March 16, 2007, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
- ----------------------
Chicago, Illinois
March 16, 2007
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders
AMCOL International Corporation:
We have audited the accompanying consolidated balance sheet of AMCOL
International Corporation and subsidiaries as of December 31, 2005, and the
related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AMCOL International
Corporation and subsidiaries as of December 31, 2005, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
March 16, 2007
F-5
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
DECEMBER 31,
-----------------------
ASSETS 2006 2005
- --------------------------------------------------------------- ---------- ----------
Current assets:
Cash $ 17,805 $ 15,997
Accounts receivable:
Trade, less allowance for doubtful accounts of $3,986 and
$2,350 in 2006 and 2005, respectively 127,041 98,824
Other 6,391 2,901
Inventories 84,612 75,455
Prepaid expenses 10,142 9,068
Deferred income taxes 4,648 3,698
Income taxes receivable - 4,864
Other 1,045 402
---------- ----------
Total current assets 251,684 211,209
---------- ----------
Investment in and advances to affiliates and joint ventures 31,049 19,730
Property, plant, equipment, and mineral rights and reserves:
Land and mineral rights 17,428 12,761
Depreciable assets 305,013 252,430
---------- ----------
322,441 265,191
Less: accumulated depreciation 181,669 165,127
---------- ----------
140,772 100,064
---------- ----------
Other assets:
Goodwill 40,341 20,644
Intangible assets, less accumulated amortization of $6,948
and $5,479 in 2006 and 2005, respectively 25,611 3,009
Deferred income taxes 6,643 4,579
Other assets 15,124 9,294
---------- ----------
87,719 37,526
---------- ----------
$ 511,224 $ 368,529
========== ==========
Continued...
F-6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
DECEMBER 31,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
- --------------------------------------------------------------- ---------- ----------
Current liabilities:
Accounts payable 26,107 24,722
Accrued income taxes 4,844 -
Accrued liabilities 47,432 38,547
---------- ----------
Total current liabilities 78,383 63,269
---------- ----------
Long-term debt 112,448 34,838
---------- ----------
Minority interests in subsidiaries 276 259
Deferred compensation 6,880 7,045
Other liabilities 18,419 14,262
---------- ----------
25,575 21,566
---------- ----------
Stockholders' equity:
Common stock, par value $.01 per share, Authorized
100,000,000 shares; issued 32,015,771
shares in 2006 and 2005 320 320
Additional paid in capital 76,686 72,194
Retained earnings 219,690 184,125
Accumulated other comprehensive income 16,658 8,644
---------- ----------
313,354 265,283
Less:
Treasury stock (2,079,415 and 2,232,132 shares
in 2006 and 2005, respectively) 18,536 16,427
---------- ----------
294,818 248,856
---------- ----------
$ 511,224 $ 368,529
========== ==========
See accompanying notes to consolidated financial statements.
F-7
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
CONTINUING OPERATIONS
Net sales $ 611,556 $ 535,924 $ 461,778
Cost of sales 452,090 397,901 343,210
------------ ------------ ------------
Gross profit 159,466 138,023 118,568
General, selling and administrative expenses 102,078 90,947 82,584
------------ ------------ ------------
Operating profit 57,388 47,076 35,984
------------ ------------ ------------
Other income (expense):
Interest expense, net (2,951) (1,660) (826)
Other, net 231 (393) (86)
------------ ------------ ------------
(2,720) (2,053) (912)
------------ ------------ ------------
Income before income taxes and income from affiliates and
joint ventures 54,668 45,023 35,072
Income tax expense 10,425 11,645 4,687
------------ ------------ ------------
Income before income from affiliates and joint ventures 44,243 33,378 30,385
Income from affiliates and joint ventures 5,420 2,912 1,180
------------ ------------ ------------
Income from continuing operations 49,663 36,290 31,565
DISCONTINUED OPERATIONS
Gain on disposal of discontinued operations 585 4,755 -
------------ ------------ ------------
Net income $ 50,248 $ 41,045 $ 31,565
============ ============ ============
See accompanying notes to consolidated financial statements.
Continued...
F-8
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
Earnings per share
Basic earnings per share:
Continuing operations $ 1.65 $ 1.23 $ 1.08
Discontinued operations 0.02 0.16 -
------------ ------------ ------------
Net income $ 1.67 $ 1.39 $ 1.08
============ ============ ============
Diluted earnings per share:
Continuing operations $ 1.60 $ 1.18 $ 1.03
Discontinued operations 0.02 0.15 -
------------ ------------ ------------
Net income $ 1.62 $ 1.33 $ 1.03
============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
Net income $ 50,248 $ 41,045 $ 31,565
Other comprehensive income (loss) -
Minimum pension liability (net of $125 tax expense
in 2006 and $169 tax benefit in 2005) 216 154 (457)
Foreign currency translation adjustment 9,787 (6,415) 6,990
------------ ------------ ------------
Comprehensive income $ 60,251 $ 34,784 $ 38,098
============ ============ ============
See accompanying notes to consolidated financial statements.
F-9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
COMMON STOCK ACCUMULATED
----------------------- OTHER
NUMBER ADDITIONAL COMPREHENSIVE
OF PAID-IN RETAINED INCOME TREASURY
SHARES AMOUNT CAPITAL EARNINGS (LOSS) STOCK TOTAL
------------ -------- ---------- ---------- ------------- --------- ----------
Balance at December 31, 2003 32,015,771 $ 320 $ 67,513 $ 132,179 $ 8,372 $ (16,934) $ 191,450
Net income 31,565 31,565
Cash dividends ($0.32 per share) (9,378) (9,378)
Currency translation adjustment 6,990 6,990
Purchase of 189,800 treasury
shares (3,243) (3,243)
Sales of 477,809 treasury
shares pursuant to options (1,551) 2,757 1,206
Tax benefit from employee stock plans 2,027 2,027
Vesting of common stock in connection
with employee stock plans 1,774 1,774
Minimum pension liability (457) (457)
------------ -------- ---------- ---------- ------------- --------- ----------
Balance at December 31, 2004 32,015,771 320 69,763 154,366 14,905 (17,420) 221,934
Net income 41,045 41,045
Cash dividends ($0.38 per share) (11,286) (11,286)
Currency translation adjustment (6,415) (6,415)
Purchase of 109,629 treasury
shares (2,058) (2,058)
Sales of 497,513 treasury
shares pursuant to options (1,561) 3,051 1,490
Tax benefit from employee stock plans 1,601 1,601
Vesting of common stock in connection
with employee stock plans 2,391 2,391
Minimum pension liability 154 154
------------ -------- ---------- ---------- ------------- --------- ----------
Balance at December 31, 2005 32,015,771 320 72,194 184,125 8,644 (16,427) 248,856
Net income 50,248 50,248
Cash dividends ($0.49 per share) (14,683) (14,683)
Currency translation adjustment 9,787 9,787
Purchase of 259,446 treasury
shares (6,645) (6,645)
Sales of 412,163 treasury
shares pursuant to options (385) 4,536 4,151
Tax benefit from employee stock plans 2,241 2,241
Vesting of common stock in connection
with employee stock plans 2,636 2,636
Minimum pension liability (net of
$125 tax expense) 216 216
Adjustment upon adoption of SFAS 158
(net of tax benefit of $975) (1,989) (1,989)
------------ -------- ---------- ---------- ------------- --------- ----------
Balance at December 31, 2006 32,015,771 $ 320 $ 76,686 $ 219,690 $ 16,658 $ (18,536) $ 294,818
============ ======== ========== ========== ============= ========= ==========
See accompanying notes to consolidated financial statements.
F-10
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Cash flow from operating activities:
Net income $ 50,248 $ 41,045 $ 31,565
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on the disposal of discontinued operations (585) (4,755) -
Depreciation, depletion, and amortization 20,483 19,558 20,124
Undistributed earnings from affiliates and joint ventures (4,836) (3,156) (867)
Minority interest in income of subsidiaries - 42 7
Increase (decrease) in allowance for doubtful accounts 1,460 (2,381) 1,063
Decrease (increase) in deferred income taxes (3,852) (1,139) (995)
Tax benefit from employee stock plans 2,241 1,601 2,027
Gain on sale of depreciable assets (929) (1,433) (311)
Impairment charge 950 - -
Stock compensation expense 2,636 2,391 1,772
Other - - (457)
(Increase) decrease in current assets, net of effects of acquisitions:
Accounts receivable (28,452) (10,172) (22,040)
Income taxes receivable 4,864 5,886 (3,869)
Inventories (5,803) (12,544) (17,463)
Prepaid expenses (3,496) (994) (1,357)
Increase (decrease) in current liabilities, net of effects of acquisitions:
Accounts payable (127) (1,109) 2,897
Accrued liabilities and income taxes 12,675 2,878 5,975
Increase in other noncurrent assets (2,758) (2,362) (1,893)
Increase (decrease) in other noncurrent liabilities 3,924 2,934 1,209
Excess tax benefits on stock option exercises (1,955) - -
------------ ------------ ------------
Net cash provided by operating activities 46,688 36,290 17,387
------------ ------------ ------------
Cash flow from investing activities:
Proceeds from sale of depreciable assets 3,155 3,574 739
Capital expenditures for land, mineral reserves, and depreciable assets (42,099) (28,626) (21,627)
Investments in and advances to affiliates and joint ventures (5,645) (901) (775)
Acquisitions of businesses (63,248) (2,118) (13,333)
Net tax refunds from the sale of discontinued operations 585 4,755 8,625
Receipts from (payments to) minority interest partners - 259 (111)
Investments in restricted cash (3,706) - -
Decrease (increase) in other assets 69 735 427
------------ ------------ ------------
Net cash used in investing activities (110,889) (22,322) (26,055)
------------ ------------ ------------
Cash flow from financing activities:
Proceeds from issuance of debt 160,453 55,785 88,208
Principal payments of debt (84,977) (55,764) (67,718)
Proceeds from sales of treasury stock 2,577 1,397 1,090
Purchases of treasury stock (5,554) (1,965) (2,879)
Excess tax benefits on stock option exercises 1,955 - -
Dividends declared (14,678) (11,286) (9,377)
------------ ------------ ------------
Net cash provided by (used in) financing activities 59,776 (11,833) 9,324
------------ ------------ ------------
Effect of foreign currency rate changes on cash 6,233 (3,732) 3,413
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,808 (1,597) 4,069
Cash at beginning of year 15,997 17,594 13,525
------------ ------------ ------------
Cash at end of year $ 17,805 $ 15,997 $ 17,594
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest, net $ 2,507 $ 1,755 $ 537
============ ============ ============
Net income taxes paid (refunded) $ 596 $ 1,451 $ (706)
============ ============ ============
See accompanying notes to consolidated financial statements.
F-11
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New Accounting Standards
As discussed later in this Note, we adopted the provisions of Statement
of Financial Accounting Standards ("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 No. 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.
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 do
not believe our adoption of this standard in 2007 will have a material impact 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 underfunded status of our defined
benefit and supplemental pension plans as a 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. Our Notes to Consolidated
Financial Statements include a table illustrating the effect the adoption of
this standard had on our balance sheet as of December 31, 2006. SFAS 158 also
requires that we measure the funded status of our plans as of our year-end
balance sheet date (i.e. December 31st); however, this requirement is not
mandatory until December 31, 2008. Thus, we continue to measure our plan's
funded status as of October 1st of each year.
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. Our adoption of SAB 108 in 2006 did not have an impact
on our financial statements.
F-12
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Segments
We operate in four principal segments with intersegment shipping
revenues being eliminated in the corporate segment. The composition of
consolidated revenues by segment is as follows:
PERCENTAGE OF NET SALES
--------------------------------------
2006 2005 2004
---------- ---------- ----------
Minerals 52% 55% 57%
Environmental 33% 32% 32%
Oilfield services 10% 7% 5%
Transportation 8% 9% 9%
Intersegment shipping -3% -3% -3%
---------- ---------- ----------
100% 100% 100%
========== ========== ==========
Further descriptions of our products, principal markets and the relative
significance of segment operations within AMCOL International Corporation (the
Company) are included in Note 3.
Principles of Consolidation
The consolidated financial statements include the accounts of our
domestic and foreign subsidiaries. We consolidate all subsidiaries which are
greater than 50% owned by us. Our ownership interests in the Mexican, Indian,
Japanese and Egyptian ventures range between 20% and 50%. Accordingly, these
investments are accounted for using the equity method. All intercompany balances
and transactions, including profits on inventories, have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
Translation of Foreign Currencies
The assets and liabilities of subsidiaries located outside of the United
States are translated into U.S. dollars at the rates of exchange at the balance
sheet dates. The statements of operations are translated at the weighted average
rates during the periods. Foreign exchange translation adjustments are
accumulated as a separate component of stockholders' equity, while foreign
currency transaction gains or losses are included in income.
Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined by the first-in, first-out (FIFO) or moving average methods.
Exploration costs are expensed as incurred.
F-13
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Property, Plant, Equipment, and Mineral Rights and Reserves
Property, plant, equipment, and mineral rights and reserves are carried
at cost less accumulated depreciation. Depreciation is computed using the
straight-line method for substantially all of the assets. Certain other assets,
primarily field equipment, are depreciated on the units-of-production method.
Mineral rights and reserves are depleted using the units-of-production method.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value
of the net assets of acquired businesses. Goodwill is tested annually (or more
frequently if impairment indicators arise) for impairment as of October 1st of
each year. Other intangibles, including trademarks and non-compete agreements,
are amortized on the straight-line method over the expected periods to be
benefited, which extend up to 10 years.
Impairment of Long-Lived Assets
We review the carrying values of long-lived assets whenever facts and
circumstances indicate that the assets may be impaired. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be generated by the
asset. If an asset is considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the asset exceeds the
fair value. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs of disposal.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be in effect for the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. We classify interest and penalties associated with
income taxes within the income tax line item of our consolidated statement of
operations.
Revenue Recognition
Product revenue is recognized when products are shipped to customers.
Allowances for discounts, rebates, and estimated returns are recorded at the
time of sale and are reported as a reduction in revenue. We generate some sales
through independent, third-party representatives. These sales are recorded in
revenues, and the commission compensation paid to the representatives is
recorded in general, selling and administrative expenses.
Transportation segment revenue for freight delivery services is
recognized when the service is provided. Amounts payable for purchased
transportation, commissions and insurance are accrued when the related revenue
is recognized.
Service and rental revenues, primarily earned by the environmental and
oilfield services segments, respectively, each comprise less than 10% of
consolidated net sales. Service and rental revenues are recognized in the period
such services are performed or the period in which customers utilize the rented
assets.
F-14
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Freight and sales taxes
We report amounts charged to customers for shipping and handling fees as
revenues and we report amounts incurred for these costs within cost of sales in
the consolidated statements of operations (i.e. gross presentation with revenues
and cost of sales). Also, we report amounts charged to customers for sales taxes
and the related costs incurred for sales tax remittances to governmental
agencies within net sales in the consolidated statement of operations (i.e. net
presentation within revenues).
Product Liability & Warranty Expenses
We report expenses incurred for warranty and product costs in general,
selling and administrative expenses in the consolidated statements of
operations. Our warranty accrual is based on known warranty issues as of the
balance sheet date as well as a reserve for unidentified claims based on
historical experience.
Land Reclamation
We mine various minerals using a surface-mining process that requires
the removal of overburden. We are obligated to restore the land comprising each
mining site upon completion of mining activity. We recognize this liability for
land reclamation based on the estimated fair value of the obligation. The
obligation is adjusted to reflect the passage of time and changes in estimated
future cash outflows.
Research and Development
Research and development costs are included in general, selling and
administrative expenses.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income by the weighted average number of common
shares outstanding after consideration of the dilutive effect of stock options
and restricted stock. A reconciliation between the shares used to compute basic
and diluted earnings per share follows:
2006 2005 2004
------------ ------------ ------------
Weighted average common shares outstanding for the year 30,054,267 29,525,033 29,140,892
Dilutive impact of stock equivalents 971,621 1,278,105 1,561,969
------------ ------------ ------------
Weighted average common and common equivalent shares for the year 31,025,888 30,803,138 30,702,861
============ ============ ============
Common shares outstanding at December 31 29,936,356 29,783,639 29,395,755
============ ============ ============
Weighted average anti-dilutive shares excluded from
the computation of diluted earnings per share 245,765 248,685 234,970
============ ============ ============
Stock-Based Compensation
Prior to 2003, we accounted for fixed plan stock options under the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
No stock-based employee compensation cost was reflected in operations prior to
2003, as all options granted had an exercise price equal to the market value of
the underlying common stock on the date of grant.
Effective January 1, 2003, we adopted the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123),
and elected to apply these provisions prospectively, in accordance with SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure, an
Amendment of FASB Statement No. 123, to all employee awards granted, modified,
or settled after January 1, 2003. Awards granted after 2002 vest over three
years.
F-15
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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 2006. SFAS 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 in the statements
of cash flows 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 year ended December 31, 2006, this
amount was $1,955. 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 tax deductions
in each year ending December 31, 2005 and 2004 (and hence the amount that would
have been reclassified as a cash inflow from financing activities if SFAS 123(R)
had been applicable in each prior period) was $1,586 and $1,887, respectively.
Derivative Instruments and Hedging Activities
Occasionally, we use derivative financial instruments (principally
interest rate swaps or options) to manage exposure to changes in interest rates.
We do not use derivative instruments for trading or other speculative purposes,
and we did not have any material derivative financial instruments outstanding at
either December 31, 2006 or 2005.
Reclassifications and Revisions
Certain items in the prior years consolidated financial statements
contained herein and notes thereto have been reclassified to conform with the
consolidated financial statement presentation for 2006. These reclassifications
did not have a material impact on our financial statements.
(2) DISCONTINUED OPERATIONS
In 2004, we filed an amended tax return seeking a refund of state taxes
paid on the sale of our absorbent polymers segment that occurred in 2000. No
amounts for this refund were reflected in the financial statements in 2004. In
June 2005, we successfully settled this claim for $7,800 and recorded a net
income tax receivable of $5,255, accrued professional fees of $500 and a gain on
the sale of discontinued operations of $4,755.
(3) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
We operate in five business segments. 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
both onshore and offshore water treatment filtration, pipeline separation, 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
that provides services to our subsidiaries as well as third-party customers.
Intersegment shipping revenues are eliminated in our corporate segment.
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. We measure segment profit
based on operating profit, and the costs deducted to arrive at operating profit
do not include interest or income taxes.
F-16
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Segment assets are those assets used in the operations of that segment.
Corporate assets include cash, corporate leasehold improvements, the
nanocomposite investment and other miscellaneous equipment.
The following table sets forth certain financial information by
business segment as of and for the years ended December 31, 2006, 2005 and 2004:
2006 2005 2004
------------ ------------ ------------
Net Sales:
Minerals $ 316,751 $ 295,686 $ 264,167
Environmental 203,128 171,144 147,896
Oilfield services 61,928 39,702 24,827
Transportation 50,228 49,708 40,650
Intersegment shipping (20,479) (20,316) (15,762)
------------ ------------ ------------
Total $ 611,556 $ 535,924 $ 461,778
============ ============ ============
Operating profit (loss):
Minerals $ 36,704 $ 36,502 $ 30,632
Environmental 26,751 23,351 18,610
Oilfield services 11,061 5,317 1,912
Transportation 2,872 2,717 1,720
Corporate (20,000) (20,811) (16,890)
------------ ------------ ------------
Total $ 57,388 $ 47,076 $ 35,984
============ ============ ============
Assets:
Minerals $ 245,417 $ 186,718 $ 172,972
Environmental 145,884 113,565 103,266
Oilfield services 84,917 33,023 24,888
Transportation 3,722 3,027 3,122
Corporate 31,284 32,196 32,194
------------ ------------ ------------
Total $ 511,224 $ 368,529 $ 336,442
============ ============ ============
Depreciation, depletion and amortization:
Minerals $ 11,125 $ 10,295 $ 10,546
Environmental 4,343 4,193 4,179
Oilfield services 3,143 2,123 2,572
Transportation 69 97 108
Corporate 1,803 2,850 2,719
------------ ------------ ------------
Total $ 20,483 $ 19,558 $ 20,124
============ ============ ============
Capital expenditures:
Minerals $ 27,281 $ 13,751 $ 9,860
Environmental 9,958 9,549 8,323
Oilfield services 4,024 3,649 2,324
Transportation 50 29 101
Corporate 786 1,648 1,019
------------ ------------ ------------
Total $ 42,099 $ 28,626 $ 21,627
============ ============ ============
Research and development expenses:
Minerals $ 2,805 $ 2,715 $ 2,517
Environmental 2,390 1,865 1,921
Corporate 1,050 1,665 911
------------ ------------ ------------
Total $ 6,245 $ 6,245 $ 5,349
============ ============ ============
Continued...
F-17
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following table sets forth certain geographic financial information
by business segment as of and for the years ended December 31, 2006, 2005 and
2004. Geographic revenues and operating profit are determined based on origin
rather than destination:
2006 2005 2004
------------ ------------ ------------
Sales to unaffiliated customers
shipped from:
Americas $ 422,235 $ 371,836 $ 311,081
Europe 142,979 125,512 122,967
Asia Pacific 46,342 38,576 27,730
------------ ------------ ------------
Total $ 611,556 $ 535,924 $ 461,778
============ ============ ============
Operating profit from sales from:
Americas $ 32,522 $ 25,213 $ 20,761
Europe 17,201 15,831 12,556
Asia Pacific 7,665 6,032 2,667
------------ ------------ ------------
Total $ 57,388 $ 47,076 $ 35,984
============ ============ ============
Identifiable assets in:
Americas $ 326,337 $ 227,923 $ 202,766
Europe 120,571 94,165 97,777
Asia Pacific 64,316 46,441 35,899
------------ ------------ ------------
Total $ 511,224 $ 368,529 $ 336,442
============ ============ ============
Revenues by product line for each fiscal year are as follows:
2006 2005 2004
------------ ------------ ------------
Metalcasting $ 136,357 $ 134,138 $ 112,558
Specialty minerals 118,073 97,046 95,142
Lining technologies 112,546 94,942 78,688
Oilfield services and waste water 66,825 45,780 29,950
Drilling products 18,878 16,067 12,714
Pet products 58,332 60,177 53,288
Building materials 70,796 58,382 54,550
Transportation 50,228 49,708 40,650
Intersegment shipping revenue (20,479) (20,316) (15,762)
------------ ------------ ------------
Total $ 611,556 $ 535,924 $ 461,778
============ ============ ============
(4) BALANCE SHEET RELATED INFORMATION
The allowance for doubtful accounts as of and the activity for the years
ended December 31 was as follows:
2006 2005 2004
------------ ------------ ------------
Balance at the beginning of the year $ 2,350 $ 4,637 $ 3,455
Charged to expense (income) 1,159 (731) 2,467
Acquisitions 459 94 -
Write-offs and currency translation
adjustments 18 (1,650) (1,285)
------------ ------------ ------------
Balance at the end of the year $ 3,986 $ 2,350 $ 4,637
============ ============ ============
The above allowance is based on historical bad debt experience, an
analysis of aged accounts and a consideration of specific accounts.
F-18
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Inventories at December 31 consisted of:
2006 2005
------------ ------------
Crude stockpile inventories $ 26,390 $ 20,833
In-process inventories 32,640 25,935
Other raw material, container, and supplies inventories 25,582 28,687
------------ ------------
$ 84,612 $ 75,455
============ ============
Included within Other raw material, container and supplies inventories
in the table above is our reserve for slow moving and obsolete inventory. The
balance of this reserve as of and the activity for the years ended December 31
was as follows:
2006 2005 2004
------------ ------------ ------------
Balance at the beginning of the year $ 1,985 $ 1,574 $ 1,747
Charged to costs and expenses 1,022 872 784
Acquisitions - - 277
Disposals and currency translation
adjustments (613) (461) (1,234)
------------ ------------ ------------
Balance at the end of the year $ 2,394 $ 1,985 $ 1,574
============ ============ ============
The following table presents our reclamation liability at the end of
and changes during each of the years presented:
2006 2005
------------ ------------
Balance at beginning of the year $ 4,966 $ 4,850
Settlement of obligations (1,140) (1,403)
Liabilities incurred and accretion expense 1,889 1,519
------------ ------------
Balance at the end of the year $ 5,715 $ 4,966
============ ============
Accrued liabilities at December 31 consisted of:
2006 2005
------------ ------------
Accrued severance taxes $ 2,022 $ 1,419
Accrued employee costs 3,852 2,951
Accrued vacation pay 2,438 2,077
Accrued bonus 9,366 6,976
Accrued dividends payable 4,190 2,978
Accrued warranties 911 1,823
Accrued commissions 2,712 2,352
Accrued reclamation costs 1,214 1,004
Other 20,727 16,967
------------ ------------
$ 47,432 $ 38,547
============ ============
F-19
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following table presents our warranty liability at the end of and
changes during each of the years presented:
2006 2005
------------ ------------
Balance at the beginning of the year $ 1,823 $ 2,037
Charged to costs and expenses (274) 1,159
Acquisitions - -
Net settlements (709) (1,299)
Foreign currency translation 71 (74)
------------ ------------
Balance at the end of the year $ 911 $ 1,823
============ ============
Accumulated other comprehensive income at December 31 was comprised of
the following components:
2006 2005
------------ ------------
Cumulative foreign currency translation $ 18,734 $ 8,947
Minimum pension liability, net of $169 tax benefit in 2005 - (303)
Transition obligation on pension plans (net of tax benefit of $2 in 2006) (4) -
Prior service cost on pension plans (net of tax benefit of $204 in 2006) (414) -
Net actuarial loss on pension plans (net of tax benefit of $817 in 2006) (1,658) -
------------ ------------
$ 16,658 $ 8,644
============ ============
(5) PROPERTY, PLANT, EQUIPMENT AND MINERAL RIGHTS AND RESERVES
Property, plant, equipment and mineral rights and reserves consisted of
the following:
DECEMBER 31,
---------------------------
2006 2005
------------ ------------
Mineral rights and reserves $ 6,715 $ 3,770
Other land 10,713 8,991
Buildings and improvements 73,086 63,105
Machinery and equipment 221,433 180,181
Construction in progress 10,494 9,144
------------ ------------
$ 322,441 $ 265,191
============ ============
The range of useful lives to depreciate plant and equipment is as
follows:
Buildings and improvements 5-45 years
Machinery and equipment 1-20 years
Depreciation and depletion were charged to income as follows:
2006 2005 2004
------------ ------------ ------------
Depreciation expense $ 18,682 $ 18,197 $ 18,895
Depletion expense 340 108 149
------------ ------------ ------------
$ 19,022 $ 18,305 $ 19,044
============ ============ ============
F-20
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(6) GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill by segment and the activity occurring in the
past two fiscal years is as follows:
MINERALS ENVIRONMENTAL OILFIELD SERVICES CONSOLIDATED
----------------- ----------------- ----------------- -----------------
Balance at December 31, 2004 $ 5,773 $ 8,437 $ 5,015 $ 19,225
Change in goodwill relating to:
Acquisitions 1,024 1,318 314 2,656
Foreign exchange translation (414) (823) - (1,237)
----------------- ----------------- ----------------- -----------------
Total changes 610 495 314 1,419
----------------- ----------------- ----------------- -----------------
Balance at December 31, 2005 6,383 8,932 5,329 20,644
Change in goodwill relating to:
Acquisitions 6,011 853 11,067 17,931
Foreign exchange translation 616 1,150 - 1,766
----------------- ----------------- ----------------- -----------------
Total changes 6,627 2,003 11,067 19,697
----------------- ----------------- ----------------- -----------------
Balance at December 31, 2006 $ 13,010 $ 10,935 $ 16,396 $ 40,341
================= ================= ================= =================
Annually, we evaluate the goodwill attributable to each reporting unit
for impairment. In 2006, we changed this annual testing date to October 1st from
December 31st in order for us to complete the required testing prior to our
year-end closing activities. This change did not delay, accelerate or avoid an
impairment charge. Accordingly, we believe that this accounting change is
preferable in our circumstances. This change had no impact on our consolidated
financial statements for any period presented. For the years above, we concluded
that there was no goodwill impairment. If indicators of impairment are deemed to
be present, we would perform an interim impairment test and any resulting
impairment loss would be charged to expense in the period identified.
Intangible assets were as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005
------------------------------------------- -------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING GROSS CARRYING ACCUMULATED NET CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
-------------- ------------ ------------ -------------- ------------ ------------
Intangtibles subject to amortization:
Trademarks $ 727 $ (182) $ 545 $ 477 $ (108) $ 369
Patents 642 (280) 362 642 (178) 464
License agreements 6,250 (5,500) 750 6,250 (4,750) 1,500
Customer related assets 22,278 (341) 21,937 - - -
Non-compete agreements 1,700 (78) 1,622 - - -
Other 928 (567) 361 914 (443) 471
-------------- ------------ ------------ -------------- ------------ ------------
Subtotal 32,525 (6,948) 25,577 8,283 (5,479) 2,804
Intangibles not subject to amortization:
Other 34 - 34 - - -
Pension related intangibles - - - 205 - 205
-------------- ------------ ------------ -------------- ------------ ------------
Total $ 32,559 $ (6,948) $ 25,611 $ 8,488 $ (5,479) $ 3,009
============== ============ ============ ============== ============ ============
Intangible assets are being amortized primarily on a straight-line
basis over their estimated useful lives of 3 to 20 years. For the years above,
there was no impairment related to the intangible assets. Amortization expense
on intangible assets for each of the years ending December 31, 2006 and 2005 was
$1,469 and $1,253, respectively. We estimate amortization expense of intangible
assets for the future years ending December 31 will approximate the following
amounts:
F-21
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
AMOUNT
--------
2007 $ 3,294
2008 2,513
2009 2,379
2010 1,850
2011 1,633
(7) INVESTMENTS IN JOINT VENTURES
Information about our investments in affiliates and joint ventures at
December 31, 2006 is as follows:
AMOUNT OF OUR
INVESTMENT LESS
THE UNDERLYING
OWNERSHIP ACCOUNTING NET EQUITY VALUE AT QUOTED
INTEREST POLICY OF THE INVESTEE MARKET PRICE
--------------- --------------- --------------- ---------------
Ashapura Minechem Limited 22% Equity Method $ 2,812 $ 42,681
Ashapura Volclay Limited 50% Equity Method 74 N/A
Volclay Japan Co., Ltd. 50% Equity Method 426 N/A
Egypt Mining & Drilling Co. and
Egypt Bentonite & Derivatives Co. 25% Equity Method 997 N/A
Egypt Nano Bentonite Co. 27% Equity Method (46) N/A
Volclay de Mexico, S.A. de C.V. 49% Equity Method (61) N/A
Only our investment in Ashapura Minechem Limited is publicly traded on
the Bombay Stock Exchange Limited. In 2006, our ownership percentage in this
investment experienced a net decrease from 22% to 21% due to the investee's
issuance of additional stock offset by additional shares that we purchased.
Significant information regarding each investee's financial and operating
performance is in the following table.
F-22
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2006 2005
------------ ------------
Ashapura Minechem Limited:
Net Sales $ 249,203 $ 175,286
Operating income 32,369 16,903
Affiliate income as reported 21,896 11,379
Current assets 78,884 63,906
Non-current assets 54,958 15,332
Total assets 133,842 79,238
Current liabilities 17,071 12,170
Non-current liabilities 36,774 51,534
Total liabilities 53,845 63,704
Ashapura Volclay Limited:
Net Sales 7,392 6,096
Operating income 2,013 1,731
Affiliate income as reported 1,469 1,146
Current assets 4,479 3,718
Non-current assets 11,828 8,637
Total assets 16,307 12,355
Current liabilities 1,607 1,746
Non-current liabilities 8,212 5,516
Total liabilities 9,819 7,262
All other affliates and joint ventures:
Net Sales 29,836 30,617
Operating income 2,277 2,729
Affiliate income as reported 2,090 2,081
Current assets 18,596 20,621
Non-current assets 5,289 3,793
Total assets 23,885 24,414
Current liabilities 8,043 11,867
Non-current liabilities 1,155 1,154
Total liabilities 9,198 13,021
We record the majority of our equity in the earnings of our investments
in affiliates and joint ventures on a one quarter lag. However, the amounts for
Ashapura Minechem Limited's assets and liabilities in the above table are as at
March 31, 2005 for 2005 as this was the latest information available for that
fiscal year.
(8) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31 was
comprised of the following:
2006 2005 2004
------------ ------------ ------------
Continuing operations $ 10,425 $ 11,645 $ 4,687
Discontinued operations (585) (5,255) -
------------ ------------ ------------
$ 9,840 $ 6,390 $ 4,687
============ ============ ============
F-23
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
For each of the years ended December 31 in the table below, domestic
and foreign components of income from continuing operations before income taxes
and equity in income of affiliates and joint ventures are:
2006 2005 2004
------------ ------------ ------------
Income from continuing operations
before income taxes and income
from affiliates and joint ventures:
Domestic $ 30,239 $ 22,485 $ 20,662
Foreign 24,429 22,538 14,410
------------ ------------ ------------
$ 54,668 $ 45,023 $ 35,072
============ ============ ============
The components of the provision for income taxes attributable to income
from continuing operations before income taxes and income from affiliates and of
joint ventures for the years ended December 31 consisted of:
2006 2005 2004
------------ ------------ ------------
Provision (benefit) for income taxes:
Federal:
Current $ 6,595 $ 6,257 $ 1,170
Deferred (3,090) 210 (95)
State:
Current 1,229 1,719 1,404
Deferred 83 341 (9)
Foreign:
Current 5,731 1,192 3,890
Deferred (123) 1,926 (1,673)
------------ ------------ ------------
$ 10,425 $ 11,645 $ 4,687
============ ============ ============
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities as of December 31 were as
follows:
2006 2005
------------ ------------
Deferred tax assets attributable to:
Accounts receivable $ 537 $ 324
Inventories 2,003 1,734
Employee benefit plans 8,792 6,584
Intangible assets 2,438 2,733
Accrued liabilities 1,030 1,301
Tax credit carryforwards 1,021 -
Other 991 1,516
------------ ------------
Total deferred tax assets 16,812 14,192
Deferred tax liabilities attributable to:
Plant and equipment (1,395) (1,793)
Land and mineral reserves (1,122) (1,187)
Joint ventures (2,579) (1,591)
Other (425) (1,344)
------------ ------------
Total deferred tax liabilities (5,521) (5,915)
------------ ------------
Net deferred tax assets $ 11,291 $ 8,277
============ ============
We believe it is more likely than not that the deferred tax assets
above will be realized in the normal course of business.
F-24
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following analysis reconciles the U.S. statutory federal income tax
rate to the effective tax rates related to income from continuing operations
before income taxes and equity income of affiliates and joint ventures:
2006 2005 2004
------------------------ ----------------------- ----------------------
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
---------- ---------- ---------- ---------- ---------- ----------
Provision for income taxes at
U.S. statutory rates $ 19,133 35.0% $ 15,791 35.0% $ 12,275 35.0%
Increase (decrease) in taxes resulting from:
Percentage depletion (3,208) -5.9% (2,173) -4.8% (1,832) -5.2%
State taxes, net of federal benefit 909 1.7% 1,177 2.6% 913 2.6%
Foreign tax rates (4,031) -7.4% (4,308) -9.5% (1,445) -4.1%
Foreign tax adjustments - - - - (1,119) -3.2%
Depletion and research and experimentation
adjustments (3,667) -6.7% - - (4,789) -13.7%
Dividend pursuant to American Jobs Creation
Act of 2004 - - 665 1.5% - -
Tax receivable write-off - - 1,448 3.1% - -
Other 1,289 2.4% (955) -2.0% 684 2.0%
---------- ---------- ---------- ---------- ---------- ----------
$ 10,425 19.1% $ 11,645 25.9% $ 4,687 13.4%
========== ========== ========== ========== ========== ==========
Tax on reinvested earnings
We have not provided for the United States federal income and foreign
income withholding taxes on approximately $69,970 of undistributed earnings from
international subsidiaries as of December 31, 2006 because such earnings are
intended to be reinvested indefinitely outside of the United States. If these
earnings were distributed, foreign tax credits may become available under
current law to reduce or eliminate the resulting income tax liability in the
United States.
Tax holidays
We benefit from tax holidays in both Poland and Thailand as a result of
our locating and investing in special economic zones in each country. In 2006,
these tax holidays resulted in a $1,508 reduction in income tax expense and a
$0.05 benefit to diluted earnings per share.
Our agreement with the Polish tax authorities makes us eligible, based
on certain terms and conditions, for a tax holiday exemption for all income tax
activities through 2009 and a 50% exemption in 2010, and we have enjoyed tax
holidays through 2006. Based on recent events and circumstances, we are
evaluating whether we will be able to take advantage of these tax holidays in
future years and have not yet concluded on our ability to do so. We continue to
seek tax concessions when applicable.
Our agreement with the Thai tax authorities provides for tax holidays
on several investments. The most significant tax exemption is on all income from
manufacturing operations (distributed goods are still subject to taxation)
related to our initial investment. These initial manufacturing activities were
exempt through December 31, 2005 and are taxable at 50% in years 2006 through
2010. We attempt to modify and obtain tax concessions when applicable.
Results of recent IRS audits
In July 2006, the United States Internal Revenue Service (IRS)
concluded its audit of amended 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.
Specifically, we recorded the following: a benefit from discontinued operations
of $585, a reduction to our income tax expense of $3,412, and $661 of general,
selling and administrative expense for professional advisor fees that were
contingent upon settlement of the amended tax returns.
F-25
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
NOLs and credit carryforwards
We have recorded deferred tax assets related to U.S. foreign tax credit
carryforwards of approximately $1,021 which expire beginning 2016.
Adoption of FIN 48
As previously mentioned, the FASB issued FIN 48 in 2006 to clarify the
accounting for uncertainty in income taxes. The provisions of FIN 48 are
effective for our calendar year beginning January 1, 2007. We are currently
evaluating the provisions of FIN 48 and can not yet estimate the impact it will
have on our financial statements.
(9) LONG-TERM DEBT
Long-term debt consisted of the following:
December 31,
---------------------------
2006 2005
------------ ------------
Borrowings under revolving credit agreement $ 98,244 $ 25,759
Industrial revenue bond 4,800 4,800
Other notes payable 9,432 4,279
------------ ------------
112,476 34,838
Less: current portion (28) -
------------ ------------
$ 112,448 $ 34,838
============ ============
We have a revolving credit agreement that provides a committed $120,000
revolving line of credit maturing on October 31, 2010. Effective March 9, 2007
we amended this revolving credit agreement to increase the borrowing capacity
from $120,000 to $150,000 and extend the maturity to April 1, 2012; all other
substantive terms and conditions remained the same. As of December 31, 2006,
there was $21,756 in borrowing capacity available under the line of credit. The
revolving credit agreement is a multi-currency arrangement that allows us to
borrow certain foreign currencies at an adjusted LIBOR rate plus .50% to 1.125%,
depending upon the amount of the credit line used and certain capitalization
ratios. The facility requires certain covenants to be met, such as specific
amounts of net worth, and limits our ability to make additional borrowings and
guarantees. We were in compliance with these covenants at December 31, 2006. The
borrowings under this revolving credit line at December 31, 2006 carried an
average interest rate of 5.85%.
We also have an uncommitted, short-term credit facility maturing on
November 15, 2008 that allows for maximum borrowings of $12,000, of which $6,695
was outstanding as of December 31, 2006 at an interest rate of 6.09%.
Maturities of long-term debt outstanding at December 31, 2006, were as
follows:
2007 2008 2009 2010 2011 THEREAFTER
---------- ---------- ---------- ---------- ---------- ----------
Borrowings under
revolving credit agreement $ - $ - $ - $ 98,244 $ - $ -
Industrial revenue bond and other
notes payable 28 6,695 - 2,624 85 4,800
---------- ---------- ---------- ---------- ---------- ----------
$ 28 $ 6,695 $ - $ 100,868 $ 85 $ 4,800
========== ========== ========== ========== ========== ==========
The estimated fair value of the above borrowings at December 31, 2006,
was approximately equal to their carrying amounts based on discounting future
cash payments using current market interest rates for loans with similar terms
and maturities.
At December 31, 2006 and 2005, we had outstanding standby letters of
credit of approximately $17,700 and $14,200, respectively. These letters of
credit typically serve to guarantee the Company's performance of its obligations
related to land reclamation and workers' compensation claims. The accompanying
consolidated balance sheets as of December 31, 2006 and 2005 include amounts
accrued for the estimated costs of obligations related to land reclamation and
workers' compensation claims.
F-26
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(10) ACQUISITIONS
On November 10, 2006, our subsidiary, CETCO Oilfield Services Company,
acquired substantially all of the net assets of Nitrogen Specialty Company, LLC
("NSC") to complement the filtration, well testing and other services that our
oilfield segment currently provides. NSC provides nitrogen pumping, nitrogen
delivery and other related services in the oil and gas pipeline, petrochemical
and refining industries. We purchased the business for $30,736 and have
preliminary allocated the purchase price amongst the assets acquired and
liabilities assumed as follows:
AT NOVEMBER 10,
2006
---------------
Cash $ 88
Other current assets 3,373
Property, plant and equipment 8,450
Intangible assets 12,500
Goodwill 7,120
Other long term assets 4
---------------
Total assets acquired 31,535
Current liabilities 799
---------------
Total liabilities assumed 799
---------------
Net assets acquired $ 30,736
===============
We expect to deduct the full amount of goodwill from taxable income in
accordance with tax regulations. The following table shows the intangible assets
acquired and the weighted average amortization period for each class of
intangible asset acquired:
AT NOVEMBER 10, AMORTIZATION
2006 PERIOD (YEARS)
--------------- ---------------
Customer related assets $ 10,700 12
Non-compete agreements 1,550 3
Trademarks 250 4
---------------
Total $ 12,500 11
===============
The allocation of the purchase price has not been finalized as we are
still determining the fair value of the assets acquired and liabilities assumed.
Moreover, $3,706 of additional purchase price could be paid in the future, which
would result in additional goodwill, as it is contingent upon the satisfaction
of certain representations and warranties made by the former owners. These
amounts have been deposited into an escrow account and are reflected as
restricted cash, substantially all of which is classified within other assets in
our consolidated balance sheet at December 31, 2006.
Our results of operations for the year ending December 31, 2006 include
the results of NSC from the acquisition date. The table below presents our
unaudited, pro forma, combined results of operations as if the acquisition of
NSC had occurred at the beginning of each year presented. These results are not
necessarily indicative of the combined results that would have occurred had the
acquisition taken place at the beginning of the periods presented, nor are they
necessarily indicative of future results.
F-27
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2006 2005
------------ ------------
Net sales $ 624,103 $ 546,955
Net income $ 51,542 $ 41,982
Basic earnings per share $ 1.71 $ 1.42
Diluted earnings per share $ 1.66 $ 1.36
In addition, we completed several acquisitions during 2006, 2005 and
2004 which were immaterial to our financial statements. The acquisitions in
these years, individually and in aggregate, did not materially affect our
operating results or financial position. Summarized information related to these
acquisitions is as follows:
2006 2005 2004
------------ ------------ ------------
Number of acquisitions 2 1 2
Net cash paid $ 31,258 $ 527 $ 13,333
Goodwill and intangible assets recorded 21,648 628 12,742
(11) MARKET RISKS AND FINANCIAL INSTRUMENTS
As a multinational corporation that manufactures and markets products
in countries throughout the world, we are subject to certain market risks,
including those related to foreign currency, interest rates and government
actions. We use a variety of practices to manage these market risks, including,
when considered appropriate, derivative financial instruments. We use derivative
financial instruments only for risk management and not for trading or
speculative purposes.
We are exposed to potential gains or losses from foreign currency
fluctuations affecting net investments and earnings denominated in foreign
currencies. Our primary exposures are to changes in exchange rates for the U.S.
dollar versus the Euro, the British pound and the Polish zloty. We also have
significant exposure to changes in exchange rates between the British pound and
the Euro as well as between the Polish zloty and the Euro.
Our various currency exposures often offset each other, providing
natural hedges against currency risk. Periodically, specific foreign currency
transactions (e.g. inventory purchases) are hedged with forward contracts to
reduce the foreign currency risk. As of December 31, 2006 and 2005, the notional
amount and fair value foreign currency contracts outstanding was not material.
We periodically use interest rate swaps to manage interest rate risk on
debt securities. These instruments allow us to change variable rate debt into
fixed rate or fixed rate debt into variable rate. Interest rate differentials
are paid or received on these arrangements over the life of the agreements. At
the end of 2006 and 2005, there were no interest rate swaps outstanding.
We are exposed to credit risk on certain assets, primarily cash
equivalents, short-term investments and accounts receivable. The credit risk
associated with cash equivalents and short-term investments is mitigated by our
policy of investing in securities with high credit ratings and investing through
major financial institutions with high credit ratings.
We provide credit to customers in the ordinary course of business and
perform ongoing credit evaluations. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers comprising
our customer base. We believe our allowance for doubtful accounts is sufficient
to cover customer credit risks. Our accounts receivable financial instruments
are carried at amounts that approximate fair value.
F-28
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(12) LEASES
We have several noncancelable leases for railroad cars, trailers,
computer software, office equipment, certain automobiles, and office and plant
facilities, including three domestic facilities which are also sublet to third
parties. Total rent expense under operating lease agreements was approximately
$5,923, $4,540, and $3,945 in 2006, 2005 and 2004, respectively.
The following is a schedule of future minimum lease payments for
operating leases (with initial terms in excess of one year) and related sublease
income as of December 31, 2006:
MINIMUM LEASE
PAYMENTS SUBLEASE
------------------------------------ RENTAL
DOMESTIC FOREIGN TOTAL INCOME
---------- ---------- ---------- ----------
Year ending December 31:
2007 $ 5,211 $ 647 $ 5,858 $ 535
2008 3,616 391 4,007 558
2009 1,769 287 2,056 331
2010 578 198 776 -
2011 307 168 475 -
Thereafter 225 118 343 -
---------- ---------- ---------- ----------
Total $ 11,706 $ 1,809 $ 13,515 $ 1,424
========== ========== ========== ==========
(13) EMPLOYEE BENEFIT PLANS
Defined benefit pension plan
We have a noncontributory pension plan covering substantially all of
our domestic employees for domestic employees hired before January 1, 2004. The
benefits are based upon years of service and qualifying compensation. Our
funding is calculated using the actuarially determined unit credit cost method.
Contributions are intended to provide not only for benefits attributed to
services to date, but also for those expected to be earned in the future.
F-29
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following tables set forth our pension obligations at December 31:
PENSION BENEFITS
----------------------------
2006 2005
------------ ------------
Change in benefit obligations:
Beginning projected benefit obligation $ 38,370 $ 34,807
Service cost 1,738 1,850
Interest cost 1,988 1,973
Plan amendments 385 -
Actuarial loss (2,528) 748
Benefits paid (1,001) (1,008)
------------ ------------
Ending projected benefit obligation $ 38,952 $ 38,370
Change in plan assets:
Beginning fair value $ 29,541 $ 26,683
Actual return 3,089 3,004
Company contribution 1,000 862
Benefits paid (1,001) (1,008)
------------ ------------
Ending fair value $ 32,629 $ 29,541
Funded status of the plan $ (6,323) $ (8,829)
Unrecognized actuarial and investment (gain) loss, net - 2,636
Prior service cost - 349
------------ ------------
Accrued pension cost liability included in the consolidated financial statements $ (6,323) $ (5,844)
============ ============
Pension cost for each of the following years was comprised of:
2006 2005 2004
------------ ------------ ------------
Service cost - benefits earned during the year $ 1,738 $ 1,850 $ 1,449
Interest cost on accumulated benefit obligation 1,988 1,973 1,827
Expected return on plan assets (2,521) (2,272) (1,938)
Net amortization and deferral 30 (56) (106)
------------ ------------ ------------
Net periodic pension cost $ 1,235 $ 1,495 $ 1,232
============ ============ ============
The following table summarizes the assumptions used in determining the
pension obligation at December 31:
2006 2005
------------ ------------
Discount rate 5.75% 5.25%
Rate of compensation increase 5.75% 5.75%
Long-term rate of return 8.25% 8.50%
Each year, we conduct our valuation of the pension benefit plan as of
October 1st. We expect to contribute $1,000 to the Plan in 2007. The accumulated
benefit obligation (ABO) was $29,790 and $29,887 at December 31, 2006 and 2005,
respectively.
F-30
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Our Plan assets at December 31 for each year below, by asset category,
are as follows:
2006 2005
------------ ------------
U.S. equity securities 56% 54%
AMCOL International common stock 6% 7%
International equity securities 7% 5%
Fixed income securities and bonds 29% 30%
Other investments 2% 4%
We employ a total return investment approach whereby a mix of equities
and fixed income investments are used to maximize the long-term return of plan
assets for a prudent level of risk. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status, and corporate
financial condition. The investment portfolio contains a diversified blend of
equity and fixed-income investments. The investment objectives emphasize
maximizing returns consistent with ensuring that sufficient assets are available
to meet liabilities, and minimizing corporate cash contributions. The Plan's
assets are managed so as to include investments that balance income and capital
appreciation.
The Plan has a target range for equity securities of between 60% and
75%. This allocation takes into account factors such as the average age of
employees covered by the Plan (benefit obligations) as well as overall market
conditions. Interim portfolio reviews result in investment allocations being
evaluated at least twice a year by the Pension Committee and rebalancing takes
place as needed. Equity investments are diversified across U.S. and non-U.S.
stocks, as well as growth, value, and small and large capitalizations. Debt
securities include both government and corporate investment vehicles. These
include a series of laddered debt securities as well as bond funds.
Historical markets are studied and long-term historical relationships
between equities and fixed-income are preserved consistent with the widely
accepted capital market principle that assets with higher volatility generate a
greater return over the long run. Current market factors such as inflation and
interest rates are evaluated before long-term capital market assumptions are
determined. The long-term rate of return for plan assets is established via a
building block approach with proper consideration of diversification and
rebalancing.
The estimated future benefit payments from the defined benefit plan,
reflecting expected future service, as appropriate, are presented in the
following table:
PER YEAR
------------
2007 $ 1,113
2008 1,239
2009 1,308
2010 1,415
2011 1,539
2012 through 2016 10,726
------------
Total $ 17,340
============
Supplemental pension plan
In addition to the qualified plan, we sponsor a supplementary pension
plan (SERP) that provides benefits in excess of qualified plan limitations for
certain employees. The projected benefit obligation for this plan was $6,887 and
$7,155 at December 31, 2006 and 2005, respectively. Also, we have invested
assets for the benefit of the employees covered by the supplemental pension plan
in the event that there is a change in control.
F-31
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Adoption of SFAS 158
As previously mentioned, the FASB issued SFAS 158 in September 2006.
This pronouncement requires us to recognize the funded status of our benefit
plans as measured by the difference between plan assets at fair value and the
projected benefit obligation in the balance sheet. The offset of recognizing the
funded status is recorded in accumulated other comprehensive income within
stockholders' equity. The following table shows the effect, excluding taxes, of
adopting SFAS 158 on our balance sheet at December 31, 2006 by individual
balance sheet classification:
CHANGES RESULTING
2006 BALANCE: FROM ADOPTION OF 2006
2005 BALANCE PRE-SFAS 158 SFAS 158 ENDING BALANCE
------------- ------------- ----------------- -----------------
Qualified plan liability $ 5,844 $ 6,080 $ 243 $ 6,323
SERP liability $ 3,275 $ 4,171 $ 2,715 $ 6,886
------------- ------------- ----------------- -----------------
Amounts included within other long-term liabilities $ 9,119 $ 10,251 $ 2,958 $ 13,209
============= ============= ================= =================
Intangible asset $ 204 $ 6 $ (6) $ -
Accumulated other comprehensive income $ (472) $ (135) $ (2,964) $ (3,099)
The following table shows the amounts included within accumulated other
comprehensive income as of December 31, 2006 that have not yet been recognized
as components of net periodic benefit cost and the amounts expected to be
amortized in the next fiscal year:
EXPECTED TO BE
AS OF DECEMBER AMORTIZED IN
31, 2006 2007
-------------- --------------
Unamortized actuarial loss $ 2,475 $ 107
Prior service cost 618 60
Transition obligation 6 3
-------------- --------------
Balances included within accumulated other comprehensive
income, excluding taxes $ 3,099 $ 170
============== ==============
Defined contribution plan
Employees hired after December 31, 2003 do not participate in our
defined benefit plan. Instead, they participate in a defined contribution plan
whereby we make a retirement contribution into the employee's savings plan equal
to 3% of their compensation. Under this defined contribution plan, we made total
cash contributions of $505, $312 and $148 into employees' savings accounts in
2006, 2005 and 2004, respectively.
Savings plan
We also have a savings plan for our U.S. personnel. In 2006, we made a
contribution in an amount equal to an employee's contributions up to a maximum
of 4% of the employee's annual earnings. Company contributions are made using
Company stock purchased in the open market. Our contributions under the savings
plan were $1,937 in 2006, $1,529 in 2005 and $1,440 in 2004.
Other
We also have a deferred compensation plan and a 401(k) restoration plan
for our executives.
F-32
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(14) STOCK OPTION PLANS
For purposes of calculating compensation cost, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The fair value calculation included the following weighted
average assumptions for grants made in each of the following years:
2006 2005 2004
------------ ------------ ------------
Risk-free interest rate 4.6% 3.5% 3.0%
Expected life of option in years 4 4 5
Expected dividend yield of stock 1.7% 1.7% 1.5%
Expected volatility of stock price 43.3% 52.7% 53.3%
Weighted-average fair value of options granted $ 7,610 $ 6,143 $ 5,333
The 1983, 1987 and 1993 Plans
We previously granted incentive and nonqualified stock options to our
directors, officers and key employees under the 1983 Incentive Stock Option
Plan, 1993 Stock Plan and 1987 Nonqualified Stock Option Plan. Options awarded
under these plans were granted with an exercise price equal to the fair market
value of the underlying common stock at the time of grant. The options expire 10
years after the date of grant, except in the event of termination, retirement or
death of the optionee, or a change in control of the Company.
These plans expired as of December 31, 2000, though options that were
granted prior to expiration of the plans continue to be valid until the
individual option grants expire. Changes in options outstanding are summarized
as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005 DECEMBER 31, 2004
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
EXPIRED STOCK OPTION PLANS SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Options outstanding at January 1 222,657 $ 2.14 472,743 $ 2.10 709,279 $ 2.07
Exercised (97,903) 2.05 (250,086) 2.06 (236,536) 2.01
Cancelled - - - - - -
------------ ------------ ------------
Options outstanding at December 31 124,754 2.21 222,657 2.14 472,743 2.10
============ ============ ============
Options exercisable at December 31 124,754 222,657 472,743
============ ============ ============
Shares available for future grant
at December 31 - - -
============ ============ ============
1998 Long-Term Incentive Plan
We reserved 3,900,000 shares of our common stock for issuance to our
officers, directors and key employees. This plan provides for the award of
incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights and phantom stock. Different terms and conditions apply to
each form of award made under the plan. Awards granted since 2003 vest ratably
over a three year period and expire 6 years after the date of grant, except in
the event of termination, retirement or death of the optionee or a change in
control of the Company. Options awarded under these plans prior to 2003
generally vest 40% after two years and continued to vest at the rate of 20% per
year for each year thereafter, until they are fully vested. These options are
exercisable as they vest and expire 10 years after the date of grant, except in
the event of termination, retirement or death of the optionee or a change in
control of the Company.
F-33
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Changes in options outstanding are summarized as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005 DECEMBER 31, 2004
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1998 LONG-TERM INCENTIVE PLAN SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Options outstanding at January 1 1,673,330 $ 9.68 1,627,144 $ 6.78 1,611,318 $ 4.11
Granted 292,450 26.02 293,900 20.90 294,650 18.10
Exercised (314,136) 7.80 (247,427) 3.95 (258,491) 2.94
Cancelled (14,895) 16.44 (287) 1.57 (20,333) 7.97
------------ ------------ ------------
Options outstanding at December 31 1,636,749 12.90 1,673,330 9.68 1,627,144 6.78
============ ============ ============
Options exercisable at December 31 1,019,548 924,673 826,121
============ ============ ============
Shares available for future grant
at December 31 605,140 882,695 1,176,308
============ ============ ============
Restricted Stock
On May 22, 2003, we awarded 141,000 shares of restricted stock to six
officers. Restricted stock awards are independent of option grants and are
subject to restrictions considered appropriate by the Compensation Committee of
the Board of Directors. Restricted stock has the same cash dividend and voting
rights as other common stock. The cost of the awards, determined to be the fair
market value of the shares at the date of the grant, is expensed ratably over
the period the restrictions lapse. Total compensation expense of $921 related to
this grant was recorded over the three year period from the date of grant.
2006 Long-Term Incentive Plan
On May 11, 2006, our shareholders approved the AMCOL International
Corporation 2006 Long-Term Incentive Plan. This plan permits a total of
1,500,000 shares of AMCOL common stock to be awarded to eligible directors and
employees through the use of nonqualifed stock options, incentive stock options,
restricted stock or restricted stock units, and stock appreciation rights.
Different terms and conditions apply to each form of award made under the plan.
Awards of stock options have a six year life from the date of grant and vest
ratably over a three year period from the date of grant. The Board of Directors
may amend the plan at any time. The plan will automatically terminate on May 12,
2016. During 2006, no awards under this plan were granted.
All Stock Option Plans
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OF CONTRACTUAL EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YRS). PRICE SHARES PRICE
- ------------------------- ------------ ------------ ------------ ------------ ------------
$ 1.57 - $ 2.45 377,536 1.62 $ 2.02 377,536 $ 2.01
$ 3.88 - $ 5.67 413,054 3.20 5.04 413,054 5.04
$ 5.98 - $ 18.10 419,583 3.97 13.21 276,779 12.82
$ 20.90 - $ 20.90 261,880 4.11 20.90 76,933 20.90
$ 26.02 - $ 26.02 289,450 5.10 26.02 - -
------------ ------------
Total 1,761,503 3.49 12.14 1,144,302 6.99
============ ============
F-34
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(15) CONTINGENCIES
The Company is party to a number of lawsuits arising in the normal
course of its business. The Company does not believe that any pending litigation
will have a material adverse effect on its consolidated financial statements.
(16) QUARTERLY RESULTS (UNAUDITED)
Unaudited summarized results for each quarter of the last two years are
as follows:
2006 QUARTERS
------------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
Minerals $ 80,071 $ 78,118 $ 79,274 $ 79,288
Environmental 40,158 52,718 59,120 51,132
Oilfield services 14,972 14,141 14,157 18,658
Transportation 12,471 12,848 13,300 11,609
Intersegment shipping (4,908) (5,124) (5,679) (4,768)
------------ ------------ ------------ ------------
Net sales $ 142,764 $ 152,701 $ 160,172 $ 155,919
============ ============ ============ ============
Minerals $ 14,892 $ 15,648 $ 15,771 $ 15,376
Environmental 14,278 17,967 19,817 17,652
Oilfield services 5,077 4,568 5,067 7,283
Transportation 1,482 1,512 1,563 1,513
------------ ------------ ------------ ------------
Gross profit $ 35,729 $ 39,695 $ 42,218 $ 41,824
============ ============ ============ ============
Minerals $ 8,767 $ 9,471 $ 9,980 $ 8,486
Environmental 4,786 7,640 8,849 5,476
Oilfield services 2,945 2,022 2,270 3,824
Transportation 683 732 775 682
Corporate (5,134) (5,037) (5,466) (4,363)
------------ ------------ ------------ ------------
Operating profit $ 12,047 $ 14,828 $ 16,408 $ 14,105
============ ============ ============ ============
Income from continuing operations $ 9,711 $ 11,919 $ 16,034 $ 11,999
============ ============ ============ ============
Net income $ 9,711 $ 11,919 $ 16,619 $ 11,999
============ ============ ============ ============
Basic earnings per share (A) $ 0.33 $ 0.40 $ 0.56 $ 0.40
============ ============ ============ ============
Diluted earnings per share (A) $ 0.31 $ 0.39 $ 0.54 $ 0.39
============ ============ ============ ============
F-35
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2005 QUARTERS
------------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
Minerals $ 73,448 $ 74,877 $ 74,318 $ 73,043
Environmental 33,872 44,801 49,832 42,639
Oilfield services 8,432 9,033 11,245 10,992
Transportation 10,985 12,595 13,224 12,904
Intersegment shipping (4,687) (4,962) (5,691) (4,976)
------------ ------------ ------------ ------------
Net sales $ 122,050 $ 136,344 $ 142,928 $ 134,602
============ ============ ============ ============
Minerals $ 13,474 $ 16,783 $ 15,043 $ 13,470
Environmental 12,225 15,316 17,833 14,955
Oilfield services 2,635 2,933 3,640 3,783
Transportation 1,346 1,536 1,581 1,470
------------ ------------ ------------ ------------
Gross profit $ 29,680 $ 36,568 $ 38,097 $ 33,678
============ ============ ============ ============
Minerals $ 7,795 $ 10,665 $ 9,799 $ 8,243
Environmental 4,064 6,439 8,441 4,407
Oilfield services 1,073 1,068 1,677 1,499
Transportation 573 720 751 673
Corporate (5,270) (5,431) (4,709) (5,401)
------------ ------------ ------------ ------------
Operating profit $ 8,235 $ 13,461 $ 15,959 $ 9,421
============ ============ ============ ============
Income from continuing operations $ 6,952 $ 9,518 $ 11,442 $ 8,378
============ ============ ============ ============
Net income $ 6,952 $ 14,273 $ 11,442 $ 8,378
============ ============ ============ ============
Basic earnings per share (A) $ 0.24 $ 0.48 $ 0.39 $ 0.28
============ ============ ============ ============
Diluted earnings per share (A) $ 0.23 $ 0.46 $ 0.37 $ 0.27
============ ============ ============ ============
(A) Earnings per share (EPS) for each quarter is computed using the
weighted-average number of shares outstanding during the quarter, while EPS
for the year is computed using the weighted-average number of shares
outstanding during the year. Thus, the sum of the EPS for each of the four
quarters may not equal the EPS for the year.
F-36
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2007
AMCOL INTERNATIONAL CORPORATION
By: /s/ Lawrence E. Washow
-------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ John Hughes March 16, 2007
- -------------------------------------
John Hughes
Chairman of the Board and Director
/s/ Lawrence E. Washow March 16, 2007
- -------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
and Director
/s/ Gary L. Castagna March 16, 2007
- -------------------------------------
Gary L. Castagna
Senior Vice President and Chief
Financial Officer; Treasurer and
Chief Accounting Officer
/s/ Arthur Brown March 16, 2007
- -------------------------------------
Arthur Brown
Director
/s/ Daniel P. Casey March 16, 2007
- -------------------------------------
Daniel P. Casey
Director
/s/ Jay D. Proops March 16, 2007
- -------------------------------------
Jay D. Proops
Director
/s/ Clarence O. Redman March 16, 2007
- -------------------------------------
Clarence O. Redman
Director
/s/ Dale E. Stahl March 16, 2007
- -------------------------------------
Dale E. Stahl
Director
/s/ Audrey L. Weaver March 16, 2007
- -------------------------------------
Audrey L. Weaver
Director
/s/ Paul C. Weaver March 16, 2007
- -------------------------------------
Paul C. Weaver
Director
F-37
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- -------
3.1 Restated Certificate of Incorporation of the Company (1), as amended
(2), as amended (3)
3.2 Bylaws of the Company (2)
4 Article Four of the Company's Restated Certificate of Incorporation
(1), as amended (3)
10.1 Lease Agreement for office space dated September 29, 1986, between the
Company and American National Bank and Trust Company of Chicago (4);
First Amendment dated June 2, 1994 (5); Second Amendment dated June 2,
1997 (6)
10.2 AMCOL International Corporation 1987 Non-Qualified Stock Option Plan
(7); as amended (8)
10.3 AMCOL International Corporation Dividend Reinvestment and Stock
Purchase Plan (9); as amended (8)
10.4 AMCOL International Corporation 1993 Stock Plan, as amended and
restated* (2)
10.5 AMCOL International Corporation 1998 Long-Term Incentive Plan (10), as
amended* (11)
10.6 AMCOL International Corporation 2006 Long-Term Incentive Plan* (12)
10.7 AMCOL International Corporation Annual Cash Incentive Plan* (12)
10.8 AMCOL International Corporation Discretionary Cash Incentive Plan*
(12)
10.9 Employment Agreement effective as of March 24, 2006 by and between
Registrant and Gary D. Morrison* (13)
10.10 Employment Agreement effective as of March 24, 2006 by and between
Registrant and Gary Castagna* (13)
10.11 Employment Agreement effective as of March 24, 2006 by and between
Registrant and Ryan F. McKendrick* (13)
10.12 Employment Agreement effective as of March 24, 2006 by and between
Registrant and Lawrence E. Washow* (13)
10.13 A written description of compensation for the Board of Directors of
the Company is set forth under the caption "Director Compensation" in
the definitive Proxy Statement to be filed with the Securities and
Exchange Commission and delivered to the Company's shareholders in
connection with the Annual Meeting of Shareholders to be held on May
10, 2007, and is hereby incorporated by reference.*
10.14 Credit Agreement by and among AMCOL International Corporation and
Harris Trust and Savings Bank, individually and as agent, Wells Fargo
Bank, N.A., Bank of America N.A. and the Northern Trust Company dated
October 31, 2003 (14), as amended (15)
10.15 Asset Purchase Agreement dated as of November 10, 2006 by and among
CETCO Oilfield Services Company and Nitrogen Specialty Company,
L.L.C., together with its members (16)
18 Letter regarding change in Accounting Principles
21 AMCOL International Corporation Subsidiary Listing
23.1 Consent of Independent Registered Public Accounting Firm
23.2 Consent of former Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350
F-38
- ----------
(1) Exhibit is incorporated by reference to the Registrant's Form S-3
filed with the Securities and Exchange Commission on September 15,
1993.
(2) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1995.
(3) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter
ended June 30, 1998.
(4) Exhibit is incorporated by reference to the Registrant's Form 10 filed
with the Securities and Exchange Commission on July 27, 1987.
(5) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1994.
(6) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter
ended June 30, 1997.
(7) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1988.
(8) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1993.
(9) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1992.
(10) Exhibit is incorporated by reference to the Registrant's Form S-8
(File 333-56017) filed with the Securities and Exchange Commission on
June 4, 1998.
(11) Exhibit is incorporated by reference to the Registrant's Form S-8
(File 333-68664) filed with the Securities and Exchange Commission on
August 30, 2001.
(12) Exhibit is incorporated by reference to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on May 12, 2006.
(13) Exhibit is incorporated by reference to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on March 29, 2006.
(14) Exhibit is incorporated by reference to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on November 15,
2005.
(15) Exhibit is incorporated by reference to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on June 19, 2006.
(16) Exhibit is incorporated by reference to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on November 14,
2006.
*Management compensatory plan or arrangement
F-39