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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2004
[ ] 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
(Title of Class)
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 an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the registrant's $.01 par value Common
Stock held by non-affiliates of the registrant (based upon the per share closing
price of $18.69 per share on June 30, 2004, and, for the purpose of this
calculation only, the assumption that all of the registrant's directors and
executive officers are affiliates) was approximately $413.0 million.
Registrant had 29,524,128 shares of $.01 par value Common Stock
outstanding as of February 28, 2005.
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.
The Company operates in two major industry segments: minerals and
environmental. The Company also operates a transportation business. The minerals
segment mines, processes and distributes clays and products with similar
applications to various industrial and consumer markets. The environmental
segment processes and distributes clays and products with similar applications
for use as a moisture barrier in commercial construction, landfill liners and in
a variety of other industrial and commercial applications. The transportation
segment includes a long-haul trucking business and a freight brokerage business,
which provide services to both the Company's plants and unrelated customers.
The following table sets forth the percentage contributions to net sales
of the Company attributable to its minerals, environmental and transportation
segments as well as intersegment shipping amounts for the last three calendar
years.
Percentage of Sales
--------------------------
2004 2003 2002
------ ------ ------
Minerals 58% 58% 57%
Environmental 37% 35% 36%
Transportation 9% 10% 11%
Intersegment Shipping -4% -3% -4%
------ ------ ------
100% 100% 100%
====== ====== ======
Net revenues, operating profit, assets, depreciation, depletion and
amortization, capital expenditures and research and development expenditures
attributable to each of the Company's business segments are set forth in Note 4
of the Company's Notes to Consolidated Financial Statements included elsewhere
herein.
MINERALS
The Company's minerals business is principally conducted through its
wholly-owned subsidiaries and subsidiaries consolidated in the financial
statements: American Colloid Company in the United States and Canada; Colin
Stewart Minchem Limited in the United Kingdom; Volclay Siam Ltd. in Thailand;
Volclay Korea Ltd. in South Korea; Volclay Pty., Ltd. in Australia; Volclay
MinChem Co. Ltd. and Volclay DongMing Industrial Minerals Co., Ltd. in China;
and through its joint venture companies: Volclay de Mexico S.A. & C.V. in
Mexico; Ashapura Volclay Limited in India; Egypt Mining & Drilling Chemicals
Company in Egypt; and Volclay Japan Co. Ltd. in Japan. The Company also has a
20% equity interest in Ashapura Minechem Ltd., a publicly traded Indian
bentonite producer.
Commercially produced bentonite is a type of montmorillonite clay found
in beds ranging in thickness from two to 50 feet under 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 occurs in the Western United States. Sodium bentonites
of lesser purity occur 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 commonly activated with sodium carbonate to produce properties similar to
natural sodium bentonite.
2
The Company's principal bentonite products are marketed under various
internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R),
PREMIUM GEL(R) and ADDITROL(R). The Company's cat litter is sold under various
trade names and private labels. Trade names include NATURAL SELECT(R), CAREFREE
KITTY(R), PREMIUM CHOICE(R) and CAT TAILS(R).
PRINCIPAL PRODUCTS AND MARKETS
Metalcasting. In the formation of sand molds for metal castings, sand is
bonded with bentonite and various other additives to yield desired casting form
and surface finish. The Company serves the foundry and casting industry
throughout North America, Asia and Australia 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).
Cat Litter. The Company produces and markets 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. The Company's scoopable
products' clump-forming capability traps urine, allowing for easy removal of the
odor-producing elements from the litter box. The Company's products are marketed
under various trade names.
Specialty Minerals. This category includes several business units that
are major suppliers of gelling, binding, thickening, plasticizing and
emulsifying agents for cosmetics, pharmaceuticals, drilling fluids or household
products. The Company is also a global supplier of nanoclays.
Detergents. The Company supplies high-grade agglomerated bentonite to
the detergent industry.
Health and Beauty. The Company manufactures adsorbent polymers and
purified grades of bentonite ingredients for sale to manufacturers of personal
care products. The adsorbent polymers are used to deliver high-value actives in
skin-care products. Bentonite-based materials act as thickening, suspension and
dispersion agent emollients.
Iron Ore Pelletizing. The Company supplies sodium bentonite for use as a
pelletizing aid in the production of taconite pellets.
Well Drilling. Sodium bentonite and leonardite, a form of oxidized
lignite mined and processed by the Company 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. The Company's primary trademark for this application is PREMIUM GEL(R).
Other Industrial. The Company produces 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.
Agricultural. Sodium bentonite and calcium bentonite are sold as
pelletizing aids in livestock feed and as anti-caking agents for livestock feed
in storage or during transit.
SALES AND DISTRIBUTION
In 2004, the top five customers of the minerals segment accounted for
approximately 31% of the segment sales worldwide.
3
The Company has established industry-specialized sales groups staffed
with technically oriented salespersons serving each of the Company's major
markets. Certain groups have networks of distributors and representatives,
including companies that warehouse products at strategic locations.
Most customers in the metalcasting industry are served on a direct basis
by teams of Company sales, technical and manufacturing personnel. The Company
also provides training courses and laboratory testing for customers who use the
Company's products in the metalcasting process.
Sales to the oil and gas well drilling industry are primarily made
directly to oil and gas well drilling fluid service companies, both under the
Company's trade name and under private label. Because bentonite is a major
component of drilling fluids, two service companies have captive bentonite
operations. The Company's potential market, therefore, generally is limited to
those service organizations that are not vertically integrated or do not have
long-term supply arrangements with other bentonite producers.
Detergent sales and marketing activities are performed on a direct basis
and primarily focused in Europe. Sales and marketing of health and beauty care
products is performed direct and through agents on a global basis.
Sales to the cat litter market are made on a direct basis and through
industry brokers. All sales to the iron ore pelletizing industry are made
directly to the end user. Sales to the Company's remaining markets are made
primarily through independent distributors and representatives.
COMPETITION
The Company is 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 as well as various regional suppliers in the areas the Company serves.
Some of the producers are companies primarily in other lines of business with
substantially greater financial resources than the Company.
SEASONALITY
Although business activities in certain portions of the industries in
which the Company's mineral products are sold, e.g. oil and gas well drilling
and construction, are subject to seasonal factors such as weather, the Company
does not consider its minerals business, as a whole, to be seasonal.
4
ENVIRONMENTAL
PRINCIPAL PRODUCTS AND MARKETS
Through its wholly-owned subsidiaries, Colloid Environmental
Technologies Company (CETCO) CETCO Oilfield Services, Inc. and Lafayette Well
Testing, Inc. in the United States and Canada, CETCO Korea Ltd. in South Korea,
CETCO Poland Sp. z o.o. in Poland, CETCO Technologies(Suzhou) Co. Ltd. in China,
Commercializadora y Exportadora Cetco Latino America Limited in Chile, Linteco
GmbH and Linteco Iberia S.L. in Spain, and CETCO (Europe) Ltd. in the United
Kingdom, the Company sells sodium bentonite, products containing sodium
bentonite, and other products, services and equipment for use in environmental
and construction applications.
Lining Technologies. CETCO sells bentonite in its geosynthetic clay
liner products 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, slurry walls, sewage lagoons and mine site
and wetlands reclamation applications.
Building Materials. The Company's 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. The Company also manufactures and sells asphalt emulsion based
waterproofing systems for residential and non-residential waterproofing
applications. In addition, the Company's STRONGSEAL(TM) and DUCKSBACK(TM)
roofing underlayment systems are sold to the residential and non-residential
roofing industry.
Industrial Water Treatment. Bentonite-based flocculants and customized
equipment are used to remove emulsified oils and heavy metals from wastewater.
Bentonite-based products are formulated to solidify liquid waste for proper
disposal in landfills. These products are sold primarily under the
SYSTEM-AC(TM), RM-10(R) and SORBOND(R) trade names.
Oilfield Services. CETCO's oilfield services group employs CRUDESORB(R)
and CRUDESEP(R) filtration technology, used primarily on offshore oil production
platforms. CETCO employs several technologies to allow platform operators to
maintain compliance with regulatory requirements governing discharge of waste
water generated during oil production. CETCO's filtration technology is marketed
with all necessary equipment, proprietary filter media and trained professional
service personnel. The Company is also actively involved in providing wastewater
treatment solutions to pipeline operators to enable them to meet wastewater
discharge requirements. Well testing services are also provided by the Company
as a result of the acquisition of Lafayette Well Testing, Inc., completed in
early 2004. The Company provides equipment and personnel for production well
control, clean-up, unload, separation, measure of component flow and disposal of
fluids from oil and gas wells.
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 drilling and water wells, rehabilitate
existing water wells and seal abandoned exploration drill holes. VOLCLAY(R)
GROUT, HYDRAUL-EZ(R), BENTOGROUT(R) and VOLCLAY(R) TABLETS are among the trade
names for products used in these applications. Geothermal grouting applications
utilizing GEOTHERMAL GROUT(TM) represent a developing area for CETCO drilling
products. VOLCLAY(R) SHORE PAC is used in special foundation drilling
applications.
5
COMPETITION
CETCO principally competes with seven regional geosynthetic clay liner
manufacturers worldwide and several suppliers of alternative technologies. The
construction and wastewater treatment product lines are specialized businesses
that compete primarily with alternative technologies. The groundwater
monitoring, well drilling and sealants products compete with the Company's
traditional rivals in the sodium bentonite business. The oilfield services group
competes with several larger oil services companies using different technology.
Competition is based on product quality, service, price, technical support and
availability of product. Historically, the competition has been vigorous.
SALES AND DISTRIBUTION
CETCO products are sold domestically and internationally. CETCO sells
most of its products through direct sales and marketing personnel specializing
in the Company's major product lines. CETCO employs technically oriented
marketing personnel to support its network of distributors and representatives
for several other product lines. Oilfield Services customers are primarily major
oil companies to which products are sold on a direct basis.
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, the Company considers the business of
this segment to be seasonal.
MINERALS/ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS
MINERAL RESERVES
The Company has reserves of sodium and calcium bentonite at various
locations in North America, including Wyoming, South Dakota, Montana and
Alabama, and in China. The Company, indirectly through its joint venture
companies, has access to bentonite deposits in Egypt, India and Mexico. At 2004
consumption rates and product mix, the Company estimates its proven, assigned
reserves of commercially usable sodium bentonite at approximately 18 years. The
Company estimates its proven, assigned reserves of calcium bentonite at
approximately 26 years in North America. While the Company, based upon its
experience, believes that its reserve estimates are reasonable and its title and
mining rights to its reserves are valid, the Company has not obtained any
independent verification of such reserve estimates or such title or mining
rights. The Company owns or controls the properties on which its reserves are
located through long-term leases, royalty agreements and patented and unpatented
mining claims. A majority of the Company's bentonite reserves are owned. All of
the properties on which the Company's 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. The Company believes that the unpatented mining claims that it
owns have been located in compliance with all applicable federal, state and
local mining laws, rules and regulations. The Company is not aware of any
material conflicts with other parties concerning its 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 the Company's unpatented claims may become
uneconomic and royalty rates for privately leased lands may be affected. The
Company cannot predict the form that any amendments might ultimately take or
whether or when any such amendments might be adopted.
The Company maintains a continuous program of worldwide exploration for
additional reserves and attempts to acquire reserves sufficient to replenish its
consumption each year, but it cannot assure that additional reserves will
continue to become available.
6
The Company oversees all of its mining operations, including its
exploration activity and securing the necessary state and federal mining
permits.
The following table shows a summary of minerals sold by the Company from
active mining areas for the last 3 years in short tons, as well as mineral
reserves by major mineral category.
TONS SOLD WET TONS
-------------------------------------- OF ASSIGNED
All amounts are in thousands of tons 2004 2003 2002 RESERVES RESERVES
- ------------------------------------ ---------- ---------- ---------- ---------- ----------
SODIUM BENTONITE
ASSIGNED
Belle/Colony, WY/SD 1,227 1,088 941 18,842 18,842
Lovell, WY 564 477 379 24,157 24,157
TOTAL ASSIGNED 1,791 1,565 1,320 42,999 42,999
Other / Unassigned
(SD, WY, MT, NV) 2 1 62 65,663 34
TOTAL OTHER / UNASSIGNED 2 1 62 65,663 34
TOTAL SODIUM BENTONITE 1,793 1,566 1,381 108,662 43,033
40%
CALCIUM BENTONITE
ASSIGNED
Sandy Ridge, AL 132 132 138 4,018 4,018
Chao Yang, Liaoning, China 88 57 31 3,758 3,758
TOTAL ASSIGNED 220 189 169 7,776 7,776
Other / Unassigned - - - 115 -
TOTAL OTHER / UNASSIGNED - - - 115 -
TOTAL CALCIUM BENTONITE 220 189 169 7,891 7,776
99%
LEONARDITE
Gascoyne, ND 41 34 25 504 504
TOTAL LEONARDITE 41 34 25 504 504
100%
---------- ---------- ---------- ---------- ----------
GRAND TOTALS 2,054 1,789 1,575 117,057 51,313
44%
MINING CLAIMS
--------------------------------------
UNASSIGNED CONVERSION UNPATENTED
All amounts are in thousands of tons RESERVES FACTOR OWNED ** LEASED
- ------------------------------------ ---------- ---------- ---------- ---------- ----------
SODIUM BENTONITE
ASSIGNED
Belle/Colony, WY/SD - 76.18% 811 380 17,651
Lovell, WY - 76.18% 14,096 9,727 334
TOTAL ASSIGNED - 14,907 10,107 17,985
Other / Unassigned
(SD, WY, MT, NV) 65,629 76.18% 55,446 4,154 6,063
TOTAL OTHER / UNASSIGNED 65,629 55,446 4,154 6,063
TOTAL SODIUM BENTONITE 65,629 - 70,353 14,261 24,048
60% 65% 13% 22%
CALCIUM BENTONITE
ASSIGNED
Sandy Ridge, AL - 72.70% 1,824 - 2,194
Chao Yang, Liaoning, China - 76.00% - - 3,758
TOTAL ASSIGNED - 1,824 - 5,952
Other / Unassigned 77.31% - - 115
TOTAL OTHER / UNASSIGNED 115 - - 115
TOTAL CALCIUM BENTONITE 115 1,824 - 6,067
1% 23% 77%
LEONARDITE
Gascoyne, ND - 63.43% - - 504
TOTAL LEONARDITE - - - 504
100%
---------- ---------- ---------- ---------- ----------
GRAND TOTALS 65,744 72,177 14,261 30,619
56% 62% 12% 26%
** Quantity of reserves that would be owned if patent was granted.
Assigned reserves means reserves which could be reasonably expected to
be processed in existing plants. Unassigned reserves means reserves which will
require additional expenditures for processing facilities. Conversion factor
means the percentage of reserves that will be available for sale after
processing.
The Company estimates that available supplies of other materials
utilized in its minerals business are sufficient to meet its 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 the Company's clay is done both by
the Company 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.
7
PRODUCT DEVELOPMENT AND PATENTS
The Company works actively with customers in each of its major markets
to develop commercial applications of specialized grades of bentonite. It
maintains a bentonite research center and laboratory testing facility adjacent
to its corporate headquarters. When a need for a product that will accomplish a
particular goal is perceived, the Company works to develop the product, research
its marketability and study the feasibility of its production. The Company also
co-develops products with customers, or others, as needs arise. The Company's
development efforts emphasize markets with which it is familiar and products for
which it believes there is a viable market.
The Company holds a number of U.S. and international patents covering
the use of bentonite and products containing bentonite. The Company follows the
practice of obtaining patents on new developments whenever feasible. The
Company, however, does not consider that any one or any combination of such
patents is material to its minerals and environmental businesses as a whole.
RESEARCH AND DEVELOPMENT
All Company business segments share research and laboratory facilities
adjacent to the corporate headquarters. Technological developments are shared
among the companies, subject to license agreements where appropriate. Notes 1
and 4 of the Notes to Consolidated Financial Statements include further
information on research and development activities.
REGULATION AND ENVIRONMENTAL
The Company believes it is in material compliance with applicable
regulations now in effect for surface mining. Since reclamation of exhausted
mining sites has been a regular part of the Company's 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 it generates dust, the Company's mineral processing plants
are subject to applicable clean air standards (including Title V of the Clean
Air Act). All of the Company's plants are equipped with dust collection systems.
The Company has not had, and does not presently anticipate, any significant
regulatory problems in connection with its dust emission, though it expects
ongoing expenditures for the maintenance of its dust collection systems and
required annual fees.
The Company's mineral 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
not had a material adverse effect on the Company, future events, such as changes
in or modified interpretations of existing laws and regulations, enforcement
policies, and 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 the Company.
TRANSPORTATION
The Company operates 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 the Company's
subsidiaries as well as third party customers. Through its transportation
operation, the Company is better able to control costs, maintain delivery
schedules and assure equipment availability for delivery of its products. In
2004, approximately 39% of the revenues of this operation involved services
provided to the Company's domestic minerals and environmental segments.
8
CORPORATE ACTIVITIES - NANOCOMPOSITE PRODUCT DEVELOPMENT
The Company is always seeking to develop broader-based technologies that
may use bentonite for new, value-added applications. One such technology is
nanocomposites for the plastics industry. In the mid-90's, the Company
established its Nanocor subsidiary to develop surface-modified bentonites
suitable for the emerging nanocomposite market. The primary raw material is
bentonite. For some applications, material will be purchased from third-party
suppliers. Surface-treatment chemicals, added in the production process, are
readily available on the merchant market.
The Company has a nanocomposite production facility in Aberdeen,
Mississippi. All costs, in excess of sales, associated with the development,
production and sales of nanocomposites are included in corporate costs.
Although the Company is developing sales opportunities through multiple
supply channels, its primary business model centers around two commercial
alliances (discussed below), each intended to serve a major consumption sector.
In 2003, an agreement was reached with Mitsubishi Gas Chemical Company,
Inc. (MGC) which involves the manufacture and sale of high-barrier plastics that
will combine the Company's patented nanocomposite technology and MXD6, a form of
nylon. MGC is the world's largest producer of MXD6, which is an established
product used in consumer and industrial packaging. A MXD6-nanocomposite has
significantly higher gas-barrier properties, which could greatly improve sales
potential in the packaging market. Two products are commercially available under
the Imperm(R) brand. Imperm(R) is being evaluated for packaging of carbonated
soft drinks, beers and soft food products. Additional new product variations may
be introduced over the next 18 months. In addition to the sale of Nanomer(R)
products to MGC for use in the production of Imperm(R), the Company intends to
earn profits generated by sales to MGC's customers.
The Company has a similar agreement with PolyOne Corporation (PolyOne)
involving sales, marketing and development of polyolefin nanocomposite
concentrates and compounds. PolyOne is the world's largest polymer services
company which includes the production of plastic compounds. The alliance is
focused on improving strength, dimensional stability and fire-resistant
properties of plastics used in a wide variety of consumer and industrial
products, especially in the automotive sector. The Company's Nanomer (R)
Products and technology are included in two PolyOne product lines, Nanoblend(R)
and Maxxam(R) LST. These products are supplied commercially to customers, which
include automotive applications. Similar to its alliance agreement with MGC, the
Company profits from supply of Nanomer (R) Products to PolyOne and earns added
revenue from profits generated by sales to its customers.
Sales to date from these alliances have been minimal.
FOREIGN OPERATIONS AND EXPORT SALES
Approximately 37% of the Company's 2004 net sales were to customers in
countries outside North America. To enhance its overseas market penetration, the
Company maintains mineral processing plants in the United Kingdom, China,
Australia, South Korea, Poland and Thailand, as well as a blending plant in
Canada. Through joint ventures, the Company also has the capability to process
minerals in Japan, Egypt, India and Mexico. Chartered vessels deliver large
quantities of the Company's bulk, dried sodium bentonite to the plants in the
United Kingdom, Australia, Thailand and South Korea where it is processed and
mixed with other clays and distributed throughout Europe, Australia and
Southeast Asia. In addition, the Company maintains a worldwide network of
independent dealers, distributors and representatives.
The Company manufactures geosynthetic clay liners in the United Kingdom,
Poland, China and South Korea, primarily for the European and Asian markets.
The Company's 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.
9
See Note 4 of the Company's Notes to Consolidated Financial Statements
included elsewhere herein. This Note is incorporated by reference for sales
attributed to foreign operations and export sales from the United States.
EMPLOYEES
As of December 31, 2004, the Company employed 1,427 persons, 591 of whom
were employed outside of the United States. At December 31, 2004, there were
approximately 826, 515, and 29 persons employed in the Company's minerals,
environmental and transportation segments, respectively, along with 57 corporate
employees. The corporate employees include personnel engaged in the
nanocomposite research and development effort. Operating plants are adequately
staffed, and no significant labor shortages are presently foreseen.
AVAILABLE INFORMATION
The Company files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any reports, statements and other information
filed by the Company at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C., 20549. Please call (800) SEC-0330 for further
information on the Public Reference Room. The SEC maintains a website that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The Company's filings
are also available to the public at the website maintained by the SEC,
www.sec.gov.
The Company's principal Internet address is www.amcol.com. The Company's
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 the Company electronically files such material with, or furnishes it to,
the SEC.
CERTIFICATIONS
As required by the rules and regulations of the New York Stock Exchange
(the "NYSE"), the Company delivered to the NYSE a certification executed by the
Company's Chief Executive Officer, Lawrence E. Washow, certifying that Mr.
Washow was not aware of any violation by the Company of the NYSE's corporate
governance listing standards as of June 11, 2004.
As required by the rules and regulations of the SEC, the Sarbanes-Oxley
Act Section 302 certifications regarding the quality of the Company's public
disclosure are filed as exhibits to this Annual Report on Form 10-K.
10
ITEM 2. PROPERTIES
The Company and its subsidiaries operate the following principal plants,
mines and other facilities, all of which are owned, except as noted below. The
Company also has 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)(3) Process bentonite; blend ADDITROL(R)
Rayong, Thailand Process bentonite
Winsford, Cheshire, U.K. Process calcium bentonite and other minerals
Kyungju Kyung-Buk, South Korea Process bentonite
ENVIRONMENTAL
Broussard, LA Environmental Offshore operations and distribution
Cartersville, GA (2) Manufacture components for geosynthetic clay liners; manufacture
Bentomat(R) and Claymax(R) geosynthetic clay liners
Fairmount, GA Manufacture Bentomat(R) and Claymax(R) geosynthetic clay liners
Lovell, WY (1) Manufacture Bentomat(R) and Claymax(R) geosynthetic clay liners
Villa Rica, GA Manufacture components for geosynthetic clay liners
Birkenhead, Merseyside, U.K. (1)(3) Manufacture Bentomat(R) geosynthetic clay liner; research
laboratory; headquarters for CETCO (Europe) Ltd.
Pyeongtaek, South Korea Manufacture Bentomat(R) geosynthetic clay liners
Suzhou, Jiangsu, China Manufacture Bentomat(R) geosynthetic clay liners
Szczytno, Poland Manufacture Bentomat(R) and Claymax(R) geosynthetic clay liners
TRANSPORTATION
Scottsbluff, NE Transportation headquarters and terminal
CORPORATE
Arlington Heights, IL (3) Corporate headquarters; CETCO headquarters; American Colloid
Company headquarters; Nanocor, Inc. headquarters; research laboratory
Aberdeen, MS Process purified bentonite (Nanocor, Inc.)
(1) Shared facilities between minerals and environmental segments.
(2) This facility was acquired in October 2004 and was not yet operational at
December 31, 2004.
(3) Certain offices and facilities are leased.
ITEM 3. LEGAL PROCEEDINGS
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 position.
The Company's processing operations require permits from various
governmental authorities. From time to time, the Company has been contacted by
government agencies with respect to required permits or compliance with existing
permits. While the Company has been notified of certain situations of
non-compliance, management does not expect the fines or the cost of compliance,
if any, to be significant.
11
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 43 Senior Vice President, Chief Financial Officer
and Treasurer of the Company since February
2001; prior thereto, a consultant to AMCOL since
June 2000; prior thereto, Vice President of the
Company and President of Chemdal International
Corporation (this business is a former
subsidiary of AMCOL, and consisted of the
absorbent polymers business that was sold to
BASF AG in June 2000) since August 1997; since
January 2000, Director of M~Wave Incorporated, a
manufacturer and distributor of printed circuit
boards.
Peter L. Maul 55 Vice President of the Company since 1993 and
President of Nanocor, Inc. since 1995.
Ryan F. McKendrick 53 Vice President of the Company and President of
Colloid Environmental Technologies Company since
November 1998; President of Volclay
International Corporation since 2002; prior
thereto, Vice President of Colloid Environmental
Technologies Company since 1994.
Gary Morrison 49 Vice President of the Company and President of
American Colloid Company since February 2000;
prior thereto, Executive Vice President of
American Colloid Company since 1998.
Clarence O. Redman 62 Secretary of the Company since 1982. Clarence O.
Redman is of counsel to the law firm of Lord,
Bissell & Brook LLP, the law firm that serves as
Corporate Counsel to the Company, since October
1997.
Lawrence E. Washow 51 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.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's 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, 2004: 1st Quarter $ 24.36 $ 16.12 $ 0.07
2nd Quarter $ 20.11 $ 15.25 0.07
3rd Quarter $ 20.10 $ 16.99 0.09
4th Quarter $ 20.30 $ 17.15 0.09
Fiscal Year Ended December 31, 2003: 1st Quarter $ 6.19 $ 5.40 $ 0.03
2nd Quarter $ 8.30 $ 5.68 0.04
3rd Quarter $ 14.45 $ 7.83 0.04
4th Quarter $ 23.30 $ 12.36 0.05
The Company has paid cash dividends every year for 68 years.
As of March 3, 2005 there were 1,380 holders of record of the common
stock, excluding shares held in street name.
PURCHASES OF EQUITY SECURITIES
The Company has a program to repurchase its common stock in the open
market. The following table summarizes the repurchases made and the remaining
amount of repurchases authorized:
TOTAL NUMBER OF
SHARES MAXIMUM VALUE
REPURCHASED OF SHARES
AS PART THAT MAY YET BE
OF THE STOCK AVERAGE REPURCHASED
REPURCHASE PRICE PAID UNDER THE
PROGRAM PER SHARE PROGRAM
--------------- --------------- ---------------
January 1, 2004 - January 31, 2004
Shares repurchased - $ - $ 3,704,133
February 1, 2004 - February 29, 2004
Shares repurchased - $ - $ 3,704,133
March 1, 2004 - March 31, 2004
Shares repurchased 12,400 $ 15.83 $ 3,507,839
April 1, 2004 - April 30, 2004
Shares repurchased - $ - $ 3,507,839
May 1, 2004 - May 31, 2004
Shares repurchased 171,000 $ 15.69 $ 825,448
Cancellation of unused authorization (1) - $ - $ -
New repurchase authorization (2) - $ - $ 10,000,000
June 1, 2004 - June 30, 2004
Shares repurchased - $ - $ 10,000,000
July 1, 2004 - September 30, 2004
Shares repurchased - $ - $ 10,000,000
October 1, 2004 - December 31, 2004
Shares repurchased - $ - $ 10,000,000
--------------- ---------------
Total 183,400 $ 15.70 $ 10,000,000
=============== ===============
13
(1) On May 16, 2002, the Company announced a share repurchase program for
the repurchase of $10 million of its common stock during the following
24 months. The Company terminated this program on May 13, 2004.
(2) On May 13, 2004, the Company announced a share repurchase program for
the repurchase of $10 million of its common stock. The Company has not
set an expiration date for this program.
ITEM 6. SELECTED FINANCIAL DATA
The following is selected financial data for the Company as of and for
the five years ended December 31, 2004.
SUMMARY OF OPERATIONS
(In thousands, except ratios and share and per share amounts)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Restated Restated Restated Restated
OPERATIONS DATA
Net sales (4) $ 459,105 $ 371,966 $ 305,100 $ 281,155 $ 289,520
Gross profit (4) 115,895 97,551 78,095 72,172 73,776
General, selling and administrative expenses (4) 80,222 68,614 58,437 53,607 53,449
Business realignment and other charges - - - - 2,357
Operating profit 35,673 28,937 19,658 18,565 17,970
Investment income - - - 3,015 9,816
Change in value of interest rate swap - - - (401) -
Net interest expense (826) (280) (512) (2,196) (3,160)
Net other income (expense) 225 604 43 223 (23)
Pretax income 35,072 29,261 19,189 19,206 24,603
Income taxes (benefit) (3) 4,687 9,946 6,916 5,149 6,981
Income from joint ventures 1,180 600 531 28 470
Minority interest in net loss of subsidiary - - 164 59 -
Income from continuing operations (3) 31,565 19,915 12,968 14,144 18,092
Income (loss) from discontinued operations - - - (879) (8,185)
Gain on disposal of discontinued operations (2) - 8,950 - 1,154 321,876
Cumulative effect of change in accounting
principle (net of tax) - - - (182) -
Net income (2) (3) 31,565 28,865 12,968 14,237 331,783
PER SHARE DATA
Basic earnings (loss) per share
Continuing operations (3) 1.08 0.70 0.46 0.50 0.65
Discontinued operations (2) - 0.32 - 0.01 11.40
Cumulative effect of change in accounting
principle (net of tax) - - - (0.01) -
Net income (2)(3) 1.08 1.02 0.46 0.50 12.05
Diluted earnings (loss) per share
Continuing operations (3) 1.03 0.67 0.43 0.46 0.61
Discontinued operations (2) - 0.30 - 0.01 10.48
Cumulative effect of change in accounting
principle (net of tax) - - - (0.01) -
Net income (2)(3) 1.03 0.97 0.43 0.46 11.09
Stockholders' equity (1)(2)(3)(5) 7.55 6.58 5.66 5.21 4.88
Dividends 0.32 0.16 0.10 0.06 0.16
Partial liquidation distribution - - - - 14.00
14
SUMMARY OF OPERATIONS
(In thousands, except ratios and share and per share amounts)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(Restated) (Restated) (Restated) (Restated)
SHARES OUTSTANDING DATA
End of period 29,395,755 29,107,746 27,881,903 28,256,389 28,781,304
Weighted average for the period-basic 29,140,892 28,357,009 28,133,795 28,193,234 27,523,157
Incremental impact of stock options 1,561,969 1,492,569 2,014,725 2,412,826 2,433,533
Weighted average for the period-diluted 30,702,861 29,849,578 30,148,520 30,606,060 29,956,690
BALANCE SHEET DATA (AT END OF PERIOD)
Current assets (5)(6) $ 191,100 $ 143,574 $ 116,935 $ 106,979 $ 258,480
Cash equivalents included in current assets - - - - 168,549
Net current assets of discontinued
operations included in current assets - - 798 -
Net property and equipment 93,641 86,996 81,847 72,348 74,665
Other long-term assets (9)(6) 51,701 34,759 29,598 23,555 32,622
Net long-term assets of discontinued
operations included in long-term assets - - - 311 6,932
Total assets (5) 336,442 265,329 228,380 202,882 365,767
Current liabilities (7)(8)(9) 61,681 47,708 52,639 31,083 164,038
Long-term debt 34,295 9,006 5,573 13,245 51,334
Other long-term liabilities (8) 18,532 17,165 12,233 11,275 9,942
Stockholders' equity (5) 221,934 191,450 157,935 147,279 140,453
OTHER STATISTICS FOR CONTINUING OPERATIONS
Depreciation, depletion and amortization (10) $ 20,124 $ 18,910 $ 20,759 $ 18,552 $ 17,625
Capital expenditures 21,627 15,795 16,223 14,730 14,975
Gross profit margin (4) 25.2% 26.2% 25.6% 25.7% 25.5%
Operating profit margin (4) 7.8% 7.8% 6.4% 6.6% 6.2%
Pretax profit margin (4) 7.6% 7.9% 6.3% 6.8% 8.5%
Effective tax (benefit) rate (3) 13.4% 34.0% 36.0% 26.8% 28.4%
Net profit from continuing operations margin (3)(4) 6.9% 5.4% 4.3% 5.0% 6.2%
Return on average equity 15.3% 11.4% 8.5% 9.8% 11.1%
(1) Based on the number of common shares outstanding at the end of each year
rather than a weighted average.
(2) The amount for 2000 includes a prior period adjustment identified in 2004
to correct an error in the computation of taxes owed in 2000 on the gain on
the sale of a business. See Note 2 of Notes to Consolidated Financial
Statements for further information.
(3) The amount for 2001 includes a prior period adjustment identified in 2004
for adjustments to the computation of income taxes owed in 2001 to foreign
jurisdictions. See Note 2 of Notes to Consolidated Financial Statements for
further information.
(4) Amounts for 2000 through 2003 include reclassifications for commissions.
See Note 1 of Notes to Consolidated Financial Statements for further
information.
(5) Amounts in years 2000 through 2003 include the effect of adjustments noted
above in (2) and (3) above.
(6) Historical amounts include the reclassification of intangible assets and
prior period adjustments. See Note 1 and Note 2 of Notes to Consolidated
Financial Statements for further information.
(7) The amount discussed in note (2) above is included within taxes payable in
2000 as the Company had a net liability in 2000. In later years, the amount
was reclassified to current assets as the Company had a net tax receivable.
(8) Amount includes a reclassification for of certain reclamation liabilities.
See Note 1 of Notes to Consolidated Financial Statements for further
information.
(9) Amount in 2001 through 2003 includes the effect of the adjustment in note
(3) above.
(10) Amounts in 2000 through 2003 include adjustments related to the
reclassification of intangible assets. See Note 1 of Notes to Consolidated
Financial Statements for further information.
15
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 seven product lines. Our minerals segment operates manufacturing
facilities in North America, Europe, and Asia/Pacific regions and has three
business units: metalcasting, pet products and specialty minerals. Our
environmental segment operates seven manufacturing facilities in six countries
and has three business units: lining technologies, building materials and water
treatment. Additionally, we have a transportation segment that performs trucking
services for the minerals and environmental segments as well as unrelated
parties. We are also developing a nanocomposite business that is reported within
our corporate segment.
The principal mineral that we utilize to generate revenues is bentonite.
We own or lease bentonite reserves in the United States and China. Additionally,
through our joint ventures and minority interests, we have access to bentonite
reserves in Egypt, India and Mexico. Bentonite deposits have varying physical
properties which require us to characterize 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 the
longevity of our Company and our future prospects.
Our customer base is diverse in regard to their end-markets and
geography. They range from foundries that produce castings for automotive and
transportation products--heavy-duty trucks and railroad cars--to producers of
consumer goods--cat box filler, cosmetics and detergents. 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 63% 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 Central Europe and Asia, which have continued to outpace
the U.S. in economic growth. The weakening of the U.S. dollar has been a benefit
to our revenues and profits over the past year; however, our operating results
may be affected in the future by changes in the euro, British pound, and Polish
zloty compared to the U.S. dollar.
Sustainable, long-term profit growth is our primary objective. We are
undertaking a number of strategic initiatives to achieve this goal:
. Organic growth: The central component of our growth strategy is
expansion of our product lines and market presence. We have had 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.
. 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 China and India as significant opportunities 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.
. Mineral development: Bentonite is a component in over 90% of the
products we produce. Since it is a natural material, we must continually
expand our reserve base to maintain a long-term business. Our goal is to
add new reserves to replace the bentonite mined each year. Furthermore,
we need to assure new reserves meet the physical property requirements
for our diverse product lines and are economical to mine. Our
organization that is committed to developing its global reserve base to
meet these requirements.
. Acquisitions: We continually seek opportunities to add complementary
businesses to our portfolio of products. Over the last three years, we
have acquired seven businesses for a total cost of approximately $37
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.
16
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 7A. Quantitive and Qualitative Disclosures About
Market Risk". In general, the significance of these risks has not changed over
the past year. One particular situation, however, does present a challenge to
manage in the near term. Transportation costs continue to increase
significantly. Domestically, inland rail and trucking costs continue to
increase. In addition, bulk cargo shipping costs continue to increase due to
acute demand from China. We rely on shipping bulk cargos of bentonite from the
U.S. and China to customers, as well as our own subsidiaries. This issue is not
isolated to AMCOL; however, we may need to offset additional shipping costs with
price increases to customers in order to maintain our profitability. There can
be no assurance that we will be successful in achieving these price increases.
We are also reviewing our shipping patterns to determine more cost-effective
means of transporting bulk cargos.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations describes relevant aspects of our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to select accounting policies that are
appropriate for our business, and to make certain estimates, judgments and
assumptions about matters that are inherently uncertain in applying those
policies. On an ongoing basis, we re-evaluate these estimates, judgments and
assumptions for reasonableness because of the critical impact that these factors
have on the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. Actual results may differ from these estimates.
Our management has identified the most critical accounting policies upon
which the financial statements are based and that involve the most complex and
subjective decisions and assessments. These policies are discussed below and
also in Note 1 of the Notes to Consolidated Financial Statements. Our senior
management has discussed the development, selection and disclosure of these
policies with the members of the Audit Committee of our Board of Directors.
These accounting policies are disclosed in the notes to the consolidated
financial statements. The discussion which follows should be read in conjunction
with the consolidated financial statements and related notes included elsewhere
in this Annual Report on Form 10-K.
VALUATION OF ACCOUNTS RECEIVABLE
We provide credit to customers in the ordinary course of business and
perform ongoing credit evaluations. Our customer base is diverse and includes
customers located throughout the world. Payment terms in certain of the foreign
countries in which we do business are longer than those that are customary in
the United States, and as a result, may give rise to additional credit risk
related to outstanding accounts receivable from these non-U.S. customers.
Likewise, a change in the financial position, liquidity or prospects of any of
our customers could have an impact on our ability to collect amounts due. While
concentrations of credit risk related to trade receivables are somewhat limited
by our large customer base, we do extend significant credit to some of our
customers.
We make estimates of the amounts of our gross accounts receivable that
will not be collectible, and record an allowance for doubtful accounts to reduce
the carrying value of accounts receivable to the amount that is expected to be
realized. The allowance for doubtful accounts is established based upon the
Company's historical bad debt experience, a review of the overall aging of the
accounts, and an analysis of specific customer accounts, particularly those with
past-due balances. The recorded allowance for doubtful accounts is intended to
cover specific customer collection issues identified by management at the
balance sheet date, and to provide for potential losses from other accounts
based on our historical experience. Increases in the allowance for doubtful
accounts are recorded as an expense and included in general, selling and
administrative expenses in the period identified. Our estimate of the required
allowance for doubtful accounts is a critical accounting estimate because it is
susceptible to change from period to period. In addition, it requires management
to make judgments about the future collectibility of customer accounts.
17
INVENTORY VALUATION
Inventories are recorded at the lower of actual manufactured or
purchased cost, or estimated net realizable value. In order to determine net
realizable value, management regularly reviews inventory quantities on hand and
evaluates significant items to determine whether they are excess or obsolete. We
record the value of estimated excess or obsolete inventory as a reduction of
inventory and as an expense which is included in cost of sales in the period it
is identified. Our estimate of excess and obsolete inventory is a critical
accounting estimate because it is susceptible to change from period to period.
In addition, it requires management to make judgments about the future demand
for inventory.
In order to quantify excess or obsolete inventory, management prepares
lists of inventory quantities on hand and determines the amount of such
inventories that, based on projected demand, are not anticipated to be sold
within the next 12 to 24 months or, based on our current product offerings, are
excess or obsolete. This list is then reviewed with sales and production
management personnel to determine whether this list of potential excess or
obsolete inventory is complete. Factors which impact this evaluation include,
for example, whether there has been a change in the market or packaging for
particular products, and whether there are components of inventory that
incorporate obsolete formulations or technology. In certain businesses in which
we are engaged, such as the domestic cat litter business, product and packaging
changes can occur rapidly and expose us to excess and obsolete inventories.
GOODWILL AND LONG-LIVED ASSETS
We have made substantial investments in property, plant and equipment
and have a moderate investment in goodwill. For property, plant and equipment,
we evaluate the recoverability of these assets whenever events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. For goodwill, we perform an annual impairment assessment (or more
frequently if impairment indicators arise) as required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
In analyzing the fair value of goodwill and assessing the recoverability
of the carrying value of property, plant and equipment, management uses models
which are based on estimates of future operating performance and related cash
flows. In preparing these models, management must make estimates in projecting
future cash flows attributable to the reporting unit or assets being tested, in
selecting a discount rate that reflects the related business risks, and in
determining the appropriate perpetuity or disposal value. In developing these
projections of future cash flows, we make a variety of important assumptions and
estimates that have a significant impact on management's assessments of whether
the carrying values of goodwill and property, plant and equipment should be
adjusted to reflect impairment. Among these are assumptions and estimates about
the future growth and profitability of the related business unit or asset, and
assumptions about anticipated future economic, regulatory and political
conditions in the relevant market.
Our estimates related to the carrying values of goodwill and property,
plant and equipment are considered to be critical accounting estimates because
they are susceptible to change from period to period based on our judgments
about a variety of factors. For example, judgment is required to determine
whether events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. In addition, in performing assessments of the
carrying values of these assets, we must make judgments about the future
business, economic, regulatory, and political conditions affecting these assets,
as well as to select the appropriate risk-related rates for discounting
estimated future cash flows, and to develop reasonable estimates of disposal
values.
RETIREMENT BENEFITS
We sponsor a defined-benefit pension plan for substantially all of our
domestic employees hired on or before December 31, 2003. In order to measure the
expense and obligations associated with these retirement benefits, management
must make a variety of estimates including discount rates used to value certain
liabilities, expected return on plan assets set aside to fund these liabilities,
rate of compensation increase, employee turnover rates, retirement rates,
mortality rates and
18
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.
We base our estimates on our historical experience as well as current
facts and circumstances. The discount rate reflects the market rate for
high-quality fixed income debt instruments on the measurement date. The rate is
used to discount the future cash flows of benefit obligations back to the
measurement date. An increase in the discount rate reduces pension expense and
liabilities. The expected long-term rate of return on plan assets is determined
using historic market return trends together with current market conditions and
actual plan experience. An increase in the expected long-term rate of return on
plan assets reduces pension expense and liabilities. The expected rate of
compensation increase is determined based on our near-term outlook and assumed
inflation. Higher compensation rates increase the pension expense and
liabilities. Retirement rates are based primarily on actual plan experience.
Mortality rates are based on tables published by the insurance industry.
Different estimates used by management could result in our recognizing different
amounts of expense over different periods of time. Note 13 to Notes to
Consolidated Financial Statements describes details of our pension obligations
and the expense for the year ended December 31, 2004.
INCOME TAXES
Our effective tax rate is based on the expected income, statutory tax
rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. Significant judgment is required in
determining our effective tax rate and in evaluating our tax positions. We
establish reserves when, despite our belief that our tax return positions are
fully supportable, we believe those positions are likely to be challenged and
that we may not succeed. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. Our effective tax rate
includes the impact of changes to reserves that we consider appropriate. The
rate is then applied to pre-tax income reported in our consolidated statements
of operations. Our estimates of income tax items, expense and reserves are
considered to be critical accounting estimates because they are susceptible to
change from period to period based on our judgments about a variety of factors.
As of December 31, 2004, our income taxes receivable includes a contingency
reserve to reflect the potential reduction of refunds which may result from the
examination of the returns by the IRS.
Valuation allowances are recorded, if necessary, to measure a deferred
tax asset at an estimated realizable value. Both positive and negative evidence
are considered in forming our judgment as to whether a valuation allowance is
appropriate. Changes in a valuation allowance are recorded in the period when we
determine events have occurred that will impact the realizable value of the
asset.
A number of years may elapse before a particular matter, for which we
have established a reserve or valuation allowance, is audited and finally
resolved. Audits of our United States federal income tax returns have been
completed through 2001. State income tax returns are audited more infrequently.
Unfavorable settlement of any particular issue would require use of our cash and
could result in the recording of additional tax expense. Favorable resolution
would be recognized as a reduction to our tax provision in the year of
resolution.
The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $31.1 million of undistributed earnings from
international subsidiaries as of December 31, 2004 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 U.S. income tax liability.
In October 2004, the American Jobs Creation Act (the "Act") was enacted
which allowed for a temporary 85% dividends received deduction on certain
foreign earnings repatriated into the U.S. The portion of the dividend that
qualifies for the 85% deduction is that amount which exceeds an average of past
years' foreign dividends. Additionally, certain criteria must be met when the
funds are repatriated and may ultimately qualify for an effective tax rate as
low as 5.25%.
19
The Company is in process of evaluating whether it will repatriate
foreign earnings under the Act. The range of amounts that are reasonably under
consideration for repatriation are from $0 to $26.9 million. The Company will
evaluate the merits of repatriating foreign earnings in 2005 and report the tax
impact, if any, of an envisioned repatriation upon the finalization of a
repatriation plan. The Company has not recognized any income tax effect relating
to the Act as we are currently not in a position to reasonably estimate the tax
impact of any repatriation.
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4."
SFAS No. 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4, to
clarify that abnormal amounts of idle facility expense, freight, handling costs
and wasted materials (spoilage) should be recognized as current-period charges.
SFAS No. 151 also requires that allocation of fixed production overhead to
inventory be based on the normal capacity of the production facilities; it is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company adopted this Statement in 2004; the adoption of this
Statement did not have a material impact on our results of operations, financial
position or cash flows.
In December 2003, the FASB issued a revision to SFAS No. 132R,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," to
improve financial statement disclosure for defined benefit plans. This Statement
requires additional disclosures about the assets (including plan assets by
category), obligations and cash flows of defined pension plans and other defined
benefit postretirement plans. It also requires reporting of various elements of
pension and other postretirement benefit costs on a quarterly basis. Generally,
the disclosure requirements are effective for interim periods beginning after
December 15, 2003; however, information about foreign plans is effective for
fiscal years ending after June 15, 2004. We adopted the revised SFAS No. 132 in
December 2003.
We grant various types of stock-based compensation to directors,
executives and employees. The majority of our stock-based compensation is
awarded in the form of non-qualified stock options and restricted stock.
Effective January 1, 2003, we prospectively adopted the fair value method of
recording stock-based compensation as defined in SFAS No. 123, "Accounting for
Stock-based Compensation." As a result, in 2003 we began to expense the fair
value of stock options that were awarded to employees after January 1, 2003.
Prior to 2003, we accounted for stock options using the intrinsic method in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Under this method, no compensation expense was recognized for stock options
awarded prior to 2003.
The disclosure requirements of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which allowed us to adopt SFAS No.
123 prospectively, provide that the pro forma net earnings and net earnings per
share be presented as if the fair value based method had been applied to all
awards granted to employees, not just awards granted after the date of adoption.
Since we chose the prospective method of expensing stock options, the actual
stock-based compensation expense recorded in 2003 and 2004 was less than the
amount calculated for this pro forma requirement.
In December 2004, the FASB amended FAS 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. This Statement
eliminates the prospective option we have applied under SFAS No. 148 and
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim or annual period after June 15, 2005.
Due to the fact that the majority of our options issued prior to January 1,
2003, the date we adopted SFAS No. 123, will have vested as of June 15, 2005 the
revised computations will not have a material impact on our financial
statements.
FASB Staff Position ("FSP") No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" ("FSP 109-2"), provides guidance under SFAS No. 109,
"Accounting for Income Taxes," with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of 2004 (the "Jobs
Act") on enterprises' income tax expense and deferred tax liability. The Jobs
Act was enacted on October 22, 2004. The Jobs Act creates a temporary incentive
for U.S. corporations to repatriate income earned abroad principally for
earnings that have previously been deemed permanently reinvested by providing a
dividends received deduction for certain dividends from controlled foreign
corporations. We have previously deemed our foreign earnings as
20
permanently reinvested and have not fully provided for taxes on unremitted
foreign earnings. As a result and under the Company's current plans, we do not
expect that FSP 109-2 will have a material impact on our results of operations,
financial position or cash flows.
FSP No. 109-1, "Application of FASB Statement No.109, "Accounting for
Income Taxes," to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004" provides guidance on applying the
deduction for income from qualified domestic production activities. The
deduction will be phased in from 2005 through 2010. The Jobs Act also provides
for a two-year phase out of the existing extra-territorial income exclusion
("ETI") for foreign sales. The deduction will be treated as a "special
deduction" as described in FASB Statement No. 109. As such, the special
deduction has no effect on deferred tax assets and liabilities existing at the
enactment date. Rather, the impact of this deduction will be reported in the
period in which the deduction is claimed on our tax return. We do not expect the
net effect of the phase out of the ETI and the phase in of this new deduction to
result in a material change in our effective tax rate for fiscal years 2005 and
2006, based on current earnings levels.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2004
The discussion below references the consolidated statement of operations
on page F-4 in Part IV of this document.
Net sales for the year ended December 31, 2004 were $459.1 million
compared with $372.0 million for 2003 and $305.1 million for 2002. Minerals
contributed approximately 54% of the increase in net sales over 2003. The
environmental and transportation segments contributed 45% and 1%, respectively,
to the increase in net sales; intersegment shipping revenue increased by 12%
over 2003. Acquisitions and fluctuation in foreign currency translation
accounted for approximately 32% and 14%, respectively, of the 2004 over 2003
increase. In comparing 2003 with 2002, minerals accounted for approximately 67%
of the increase, while environmental and transportation contributed 30% and 3%,
respectively. Acquisitions and fluctuations in foreign currency translation
accounted for approximately 17% and 9%, respectively, of the 2003 over 2002
increase. Other elements of the increase in net sales are described in the
operating segment discussions below.
Gross profit was $115.9 million for the year ended December 31, 2004
compared with $97.6 million for 2003 and $78.1 million in 2002. The 19% increase
in gross profit in 2004 over 2003 resulted from the higher overall sales. Higher
minerals segment sales generated the 25% increase in gross profit in 2003
compared with 2002. Gross margin was 25.2% in 2004 compared with 26.2% in 2003
and 25.6% in 2002. Higher production costs and greater sales of low gross margin
products in the environmental segment led to the 100 basis point decline in 2004
compared with 2003. The 60 basis point improvement in gross margin in 2003 over
2002 followed the increase in net sales and lower production costs.
General, selling and administrative expenses were $80.2 million for the
year ended December 31, 2004 compared with $68.6 million in 2003 and $58.4
million in 2002. A number of expenses including higher compensation, employee
benefits and professional and consulting fees associated with Section 404 of the
Sarbanes-Oxley Act caused the increase in 2004 over 2003. Higher compensation
and employee benefit costs were the primary causes for the increase in 2003 over
2002.
Operating profit was $35.7 million for the year ended December 31, 2004,
compared with $28.9 million in 2003 and $19.7 million in 2002. The improvement
in operating profit in both periods followed the increase in sales and gross
profit. Operating margin for 2004 was 7.8% compared with 7.8% in 2003 and 6.4%
in 2002. Minerals segment margins improved in 2004 compared with 2003; however,
a decline in environmental segment margins offset the improvement. The 140 basis
point improvement in operating margin in 2003 resulted from increased
profitability in the minerals and environmental segments that was generated by
higher sales and gross profit.
21
A review of sales, gross profit, general, selling and administrative
expenses and operating profit by segment follows.
MINERALS SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
MINERALS 2004 2003 2002 2004 VS. 2003 2003 VS. 2002
- ------------------------- ------------------ ------------------ ----------------- ------------------ ------------------
(Dollars in Thousands)
Net sales 264,065 100.0% 217,104 100.0% 172,570 100.0% 46,961 21.6% 44,534 25.8%
Cost of sales 211,228 80.0% 174,048 80.2% 139,636 80.9%
--------- ------ --------- ------ --------- ------
Gross profit 52,837 20.0% 43,056 19.8% 32,934 19.1% 9,781 22.7% 10,122 30.7%
General, selling and
administrative expenses 22,518 8.5% 19,633 9.0% 17,064 9.9% 2,885 14.7% 2,569 15.1%
--------- ------ --------- ------ --------- ------
Operating profit $ 30,319 11.5% $ 23,423 10.8% $ 15,870 9.2% $ 6,896 29.4% $ 7,553 47.6%
2004 VS. 2003
The $47.0 million increase in sales resulted from strong volume growth
in the metalcasting and specialty minerals businesses. Metalcasting sales were
also aided by price increases implemented as a result of rising raw materials
and logistics costs. The detergents additives business led the increase in
specialty minerals sales. Pet products sales were relatively stable.
Acquisitions and fluctuations in foreign currency translation accounted for
approximately 11% and 13%, respectively, of the increase in sales.
Gross profit increased commensurate with higher sales. Gross margin
improved by 20 basis points due to higher volumes which contributed to lower
production costs for certain businesses.
General, selling and administrative expenses increased due to higher
compensation and benefit costs. Acquisitions and foreign exchange also
contributed to the increase.
Operating profit improved due to the greater sales and gross profit as
explained above. Operating margin improved by 70 basis points with the higher
volume in the metalcasting and specialty minerals businesses.
2003 VS. 2002
Approximately 24% of the $44.5 million increase in minerals net sales
over 2002 was attributed to the January through April period in 2003, which is
the period in 2002 prior to the acquisition of Colin Stewart Minchem Limited
(CSM). Net sales improved over 2002 in all three business units, metalcasting,
pet products and specialty minerals. Metalcasting volumes improved in North
America primarily from increased demand from certain foundry customers. Pricing
also improved in certain product lines to offset higher raw material and
shipping costs. Our Asian metalcasting businesses also increased volumes over
2002, particularly in China. Pet products sales increased due to higher volume
and improved pricing, which was aided by lower customer discounts. Specialty
minerals sales primarily improved due to higher volume to detergent customers.
Oil and gas drilling volume also improved over 2002.
Gross profit increased over 2002 primarily as a result of the
improvement in net sales described above. In addition, productivity improvements
in the pet products business decreased unit manufacturing costs. Higher volume
and productivity improvements expanded gross margin by 70 basis points to 19.8%
in 2003.
The inclusion of a full year of costs related to CSM, together with
higher compensation and employee benefit costs accounted for a majority of the
increase in general, selling and administrative expenses.
22
ENVIRONMENTAL SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
ENVIRONMENTAL 2004 2003 2002 2004 VS. 2003 2003 VS. 2002
- ------------------------- ----------------- ----------------- ----------------- ----------------- -----------------
(Dollars in Thousands)
Net sales 170,152 100.0% 131,351 100.0% 111,126 100.0% 38,801 29.5% 20,225 18.2%
Cost of sales 111,565 65.6% 80,897 61.6% 69,333 62.4%
-------- ------ -------- ------ -------- ------
Gross profit 58,587 34.4% 50,454 38.4% 41,793 37.6% 8,133 16.1% 8,661 20.7%
General, selling and
administrative expenses 38,028 22.3% 32,599 24.8% 27,420 24.7% 5,429 16.7% 5,179 18.9%
-------- ------ -------- ------ -------- ------
Operating profit $ 20,559 12.1% $ 17,855 13.6% $ 14,373 12.9% $ 2,704 15.1% $ 3,482 24.2%
2004 VS. 2003
The $38.8 million increase in sales was primarily attributed to the
impact of acquisitions. The two acquisitions, which were completed as of January
1, 2004, contributed approximately 58% of the growth in sales. See Note 10 of
the accompanying consolidated financial statements for further details on the
acquisitions. Fluctuations in foreign currency translation accounted for
approximately 17% of the increase. Strong volume increases in the European
lining technologies and building materials businesses also contributed to the
increase.
Gross profit increased due to the increase in sales; however, gross
margins declined by 400 basis points. Lower relative profitability on sales
generated by the acquired businesses was the primary reason for the margin
decline. The domestic businesses also experienced margin pressure due to
increased raw materials and logistics costs.
General, selling and administrative expenses increased due to higher
compensation and benefit costs. Acquisitions and foreign exchange also accounted
for the increase.
Operating profit improved with the increase in sales and gross profit;
however, operating margin declined by 150 basis points. As referenced in the
explanation for the gross margin decline, acquisitions had the primary
detrimental impact on operating margin.
2003 VS. 2002
Lining technologies shipments in the U.S. and Europe primarily accounted
for the increase in net sales. Building materials shipments in Europe also
improved over 2002. Water treatment revenues declined from 2002 primarily due to
the lower sales in the offshore services group.
The increase in gross profit over 2002 corresponds with the increase in
sales. Unit production costs in 2003 were comparable to the prior year levels.
Higher compensation and benefit costs accounted for the increase in
general, selling and administrative expenses over the prior year period.
23
TRANSPORTATION SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
TRANSPORTATION 2004 2003 2002 2004 VS. 2003 2003 VS. 2002
- ------------------------- ----------------- ----------------- ----------------- ----------------- -----------------
(Dollars in Thousands)
Net sales $ 40,650 100.0% $ 37,549 100.0% $ 32,509 100.0% 3,101 8.3% 5,040 15.5%
Cost of sales 36,179 89.0% 33,508 89.2% 29,141 89.6%
-------- ------ -------- ------ -------- ------
Gross profit 4,471 11.0% 4,041 10.8% 3,368 10.4% 430 10.6% 673 20.0%
General, selling and
administrative expenses 2,751 6.8% 2,494 6.6% 2,401 7.4% 257 10.3% 93 3.9%
-------- ------ -------- ------ -------- ------
Operating profit $ 1,720 4.2% $ 1,547 4.2% $ 967 3.0% $ 173 11.2% $ 580 60.0%
2004 VS. 2003
A majority of the increase in sales was attributed to greater
intersegment business. Both the domestic minerals and environmental segments
experienced higher volumes that led to the increase in transportation services.
Intersegment sales accounted for approximately 39% of the segment total. Higher
freight rates also contributed to the increase.
2003 VS. 2002
Approximately 37% of the segment's sales in 2003 were to the domestic
minerals and environmental segments. Intersegment sales contributed
approximately 58% of the sales increase over 2002. Higher traffic levels and new
customer sales accounted for the remainder of the increase. Gross margin
increased 40 basis points due to higher equipment utilization rates and better
sales pricing. General, selling and administrative expenses increased due to
higher compensation and employee benefit costs.
CORPORATE SEGMENT
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
CORPORATE 2004 2003 2002 2004 VS. 2003 2003 VS. 2002
- --------------------------- --------- --------- --------- ------------------- -------------------
(Dollars in Thousands)
Intersegment shipping sales $ (15,762) $ (14,038) $ (11,105)
Intersegment shipping costs (15,762) (14,038) (11,105)
--------- --------- ---------
Gross profit - - -
Corporate general, selling
and administrative expenses 13,270 10,090 7,108 $ 3,180 31.5% $ 2,982 42.0%
Nanocomposite business
development expenses 3,655 3,798 4,444 (143) -3.8% (646) -14.5%
--------- --------- ---------
Operating loss $ (16,925) $ (13,888) $ (11,552) $ (3,037) 21.9% $ (2,336) 20.2%
2004 VS. 2003
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 operating costs related to the development of the
nanocomposite business are included in this segment.
24
Segment operating expenses were primarily impacted by increased stock
compensation costs and higher professional and consulting fees associated with
complying with Section 404 of the Sarbanes-Oxley Act. We recorded approximately
$1.2 million of tax consulting fees in 2004 in connection with the filing of
amended federal income tax returns which are claiming refunds for increased
deductions and credits for the 1999 through 2002 periods. Further background on
the amended returns is described below in the income taxes narrative.
Nanocomposite expenses declined slightly due lower net manufacturing
costs.
2003 VS. 2002
The increase in corporate general, selling and administrative expenses
in 2003 related to higher compensation and employee benefit costs. Included in
compensation costs in the current period were costs associated with stock
options granted to employees in the current year. As disclosed in Note 1 to the
Consolidated Financial Statements included in Item IV of this document,
effective from January 1, 2003, we adopted the fair value recognition provisions
of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for
Stock-Based Compensation. We elected to record stock-based compensation costs
using fair value under the prospective method.
Lower nanocomposite development expenses in 2003 were due to a decline
in research and development costs and lower net manufacturing costs.
NET INTEREST EXPENSE
Net interest expense was $0.8 million, $0.3 million and $0.5 million in
2004, 2003, and 2002, respectively. Higher average funded debt was the primary
cause for the increase in 2004 over 2003. Debt increased due to acquisitions and
an increase in working capital. The change from 2002 to 2003 was due to lower
average funded debt.
OTHER INCOME (EXPENSE)
Other income in 2004 was approximately $0.2 million. In 2003 and 2002,
other income was $0.6 million and less than $0.1 million, respectively. This
item reflects a number of miscellaneous transactions including gains and losses
related to foreign exchange transactions and disposals of fixed assets. The
decline in 2004 from 2003 was primarily attributed to lower recognized foreign
exchange gains at our U.K. and Poland businesses in the current year.
INCOME TAXES
The effective income tax rate for 2004 was 13% compared with 34% in 2003
and 36% in 2002. In 2004, the Company recorded a reduction to income tax expense
of $4,789 associated with depletion deductions and research and development
credits available in computing income tax expense. Approximately $821 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 $3,968 relates to the
filing of amended federal income tax returns dating from 1999 through 2002.
Regarding the $4,789 mentioned above, the Company recomputed its federal
income tax liability for these periods after determining that it 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, the Company
determined that a contingency reserve was necessary to reflect potential
reduction of the refund after examination of the returns by the IRS. The Company
also recorded, in 2004, a $1.1 million credit to income tax expense for the
adjustment of deferred income tax assets and income tax payables 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 these two adjustments had not been recorded, the effective
income tax rate for 2004 would have been 30%.
25
Our effective tax rate is also influenced by the mix of earnings amongst
various tax jurisdictions and changes in tax deductions that impact our federal
income tax return, but are not recorded in our financial statements. In 2004,
the rate was positively impacted due to our use of alternative percentage
depletion calculations. Additionally, we incurred lower effective tax rates in
foreign jurisdictions. Note 8 of Notes to Consolidated Financial Statements,
which is included in Part IV of this report, provides further detail on the
reconciliation of our effective tax rate to the statutory rate. The decrease in
the 2003 rate from 2002 was due to increased taxable income in foreign
jurisdictions which have lower statutory rates than the U.S.
DISCONTINUED OPERATIONS
Discontinued operations reported in 2003 reflected the recording of a
tax benefit associated with the disposal of the U.K.-based metalcasting and cat
litter businesses. The disposal transactions were completed in 2001.
On February 18, 2004, the Internal Revenue Service notified us that
audits of certain federal income tax returns, including 2001, had been completed
and approved by the Committee on Joint Taxation. The 2001 return included
deductions for losses associated with the disposal of the aforementioned
businesses. Upon receiving this notification, effective as of December 31, 2003,
we revised our estimate of income taxes payable previously recorded to recognize
an income tax receivable of $8.9 million, including interest on the forthcoming
refund. The tax refunds were received in 2004.
NET INCOME
Net income for 2004 was $31.6 million compared with $28.9 million and
$13.0 million in 2003 and 2002, respectively. In 2003, net income included an
$8.9 million benefit from discontinued operations as previously discussed. The
improvement in income from continuing operations in both comparison periods
(2004 vs. 2003 and 2003 vs. 2002) was attributed to the increase in operating
profit for the reasons described earlier in this report. Net income in 2004 was
also positively impacted by the adjustments to income tax expense which reduced
the overall effective tax rate as previously discussed.
EARNINGS PER SHARE
Diluted earnings per share were calculated using the weighted average
number of shares of common stock, including common share equivalents,
outstanding during the year. Stock options issued to key employees and directors
are considered common share equivalents. The weighted average number of shares
of common stock and common stock equivalent shares outstanding was approximately
30.7 million in 2004, 29.8 million in 2003 and 30.1 million in 2002.
There were 29.4 million shares outstanding, excluding common share
equivalents, at December 31, 2004, compared with 29.1 million at December 31,
2003, and 27.9 million at December 31, 2002. The increase in shares in 2004 was
due to exercise of stock options which was partially offset by stock
repurchases. The 1.2 million share increase in 2003 was related to the issuance
of 1.5 million shares of treasury stock to employees in connection with the
exercise of stock options. This increase was offset by the repurchase of 267,000
shares of common stock on the open market.
Diluted earnings per share from continuing operations in 2004 were $1.03
per share compared with $0.67 per share and $0.43 per share in 2003 and 2002,
respectively. The improvement for both comparison periods was commensurate with
the increase in net income from continuing operations previously described. Also
impacting 2004, was a reduction of income tax expense, described above, which
contributed approximately $0.14 per share. Net income per diluted share was
$0.97 share in 2003 which was positively impacted by $0.30 per diluted share due
to the effect of discontinued operations as previously described. Net income per
diluted share was equal to income from continuing operations per share in 2004
and 2002.
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 the
sources of funds to purchase property, plant and equipment; acquire businesses;
repurchase common stock; and pay dividends to shareholders. We believe cash
flows from operations and borrowings from an unused and committed revolving
credit facility will be adequate to support our operating plans for the
foreseeable future. Following is a discussion and analysis of our cash flow
activities as presented in the Consolidated Statements of Cash Flows within Part
IV of this report.
26
During 2004, cash provided by operating activities of continuing
operations was $17.4 million compared with $28.6 million in 2003 and $38.4
million in 2002. The decline in 2004 was primarily attributed to cash used for
working capital. Accounts receivable and inventories in 2004 increased by $22.0
million and $16.8 million, respectively, over 2003. The increases were
commensurate with our sales growth. The decline in 2003 from 2002 was also due
to an increase in working capital. Accounts receivable and inventories increases
also accounted for the working capital increase in 2003. Net cash provided by
discontinued operations was $8.6 million in 2004, which was attributed to the
receipt of federal income tax refunds recorded as receivables in December, 2003.
Net cash used in investing activities in 2004 was $34.7 million compared
with $22.8 million in 2003 and $32.3 million in 2002. Capital expenditures
totaled $21.6 million and acquisitions were $13.3 million in 2004. In 2003 and
2002, capital expenditures were $15.8 million and $16.2 million, respectively,
while acquisitions were $7.1 million and $17.0 million, respectively.
Capital expenditures increased in 2004 over 2003 primarily due to an
acquisition of a vacant facility in the U.S. for $4.4 million that is planned
for consolidating certain manufacturing operations for our environmental
segment. The remaining portion of the increase was due to further expansion of
operations in Asia. There was minimal change in capital expenditures in 2003
compared with 2002. Acquisitions increased in 2004 over 2003 due to two
acquisitions that added to our environmental segment.
We foresee capital expenditures in 2005 to be comparable to 2004. We
continue to seek businesses to acquire that meet our strategic objectives;
however, we currently do not anticipate any significant funding requirements for
such activities in 2005.
Cash provided by financing activities was $9.3 million in 2004, while
cash used in financing activities was $11.6 million in 2003 and $3.0 million in
2002. Net borrowings of debt in 2004 were approximately $20.5 million. We had
net repayments of debt totaling approximately $8.3 million and net borrowings of
approximately $4.9 million in 2003 and 2002, respectively. The increase in
borrowings in 2004 was attributed to acquisitions and funding working capital
growth. Net debt repayments in 2003 were the result of higher cash flow from
operations and relatively lower spending on acquisitions. Acquisitions completed
in 2002 were the primary reason for the net borrowings in that year.
We repurchased approximately $2.9 million of our common stock in 2004
compared with $1.6 million in 2003 and $6.9 million in 2002. Our Board of
Directors authorized $10 million for stock repurchases in May, 2004. All of the
funds remain available for stock repurchases as of December 31, 2004. We elect
to repurchase our common stock in the open market from time to time when we
consider utilizing funds for this purpose represent a good return to our
shareholders.
Dividends on our common stock were $9.4 million in 2004 compared with
$4.6 million in 2003 and $2.7 million in 2002. Declared dividends were $0.32 per
share in 2004 compared with $0.16 per share in 2003 to $0.095 per share in 2002.
The increases reflected the improvement in our earnings and cash flows from 2002
through 2004.
As of December 31, 2004, we had outstanding debt of $34.3 million and
cash of $17.6 million, compared with $9.9 million of outstanding debt and $13.5
million of cash at December 31, 2003. Long-term debt represented 13% of total
capitalization at December 31, 2004, compared with 5% at December 31, 2003.
We had a current ratio of 3.1-to-1 as of December 31, 2004, and working
capital of approximately $129.4 million, compared with 3.0-to-1 and $95.9
million, respectively, as of December 31, 2003. The current ratio and working
capital increased due to the growth in sales we experienced in 2004.
27
The following schedule sets forth details of our contractual obligations
at December 31, 2004:
PAYMENTS DUE BY PERIOD
----------------------------------------------------
LESS
THAN 1 1-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
-------- -------- -------- -------- --------
(in millions)
Bank debt 34.3 $ - $ 29.5 $ - $ 4.8
Operating leases 13.4 4.1 8.0 0.5 0.8
-------- -------- -------- -------- --------
Total contractual cash obligations $ 47.7 $ 4.1 $ 37.5 $ 0.5 $ 5.6
======== ======== ======== ======== ========
Bank debt includes approximately $29.5 million due under a revolving
credit agreement, which provides for a commitment of $100 million in borrowing
capacity and matures on October 31, 2006. Borrowing rates on the facility can
range from 0.625% to 1.20% above the 3-month London Inter Bank Offered Rate
(LIBOR) depending upon the amount of the credit line used and certain
capitalization ratios. The facility requires certain covenants to be met
including specific amounts of net worth, and also limits our ability to make
additional borrowings and guarantees. We were in compliance with these covenants
at December 31, 2004.
Operating leases relate to non-cancelable obligations for railroad cars,
truck trailers, computer software, office equipment, certain automobiles, and
office and plant facilities. Additional information regarding operating leases
is disclosed in Note 12 of Notes to the Consolidated Financial Statements
included in Part IV of this report.
At December 31, 2004 and 2003, the Company had outstanding standby
letters of credit of $13.9 million and $13.7 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. The Company has
recognized the estimated costs of its obligations related to land reclamation
and workers' compensation claims in the Company's consolidated balance sheets as
of December 31, 2004 and 2003.
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.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
Certain statements we make from time to time, including statements in
the Management's Discussion and Analysis of Financial Condition and Results of
Operation section above, constitute "forward-looking statements" made in
reliance upon the safe harbor contained in Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements include
statements relating to our Company or our operations that are preceded by terms
such as "expects," "believes," "anticipates," "intends" and similar expressions,
and statements relating to anticipated growth, levels of capital expenditures,
future dividends, expansion into global markets and the development of new
products. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Our actual results, performance
or achievements could differ materially from the results, performance or
achievements expressed in, or implied by, these forward-looking statements as a
result of various factors, including without limitation the following:
COMPETITION
The minerals market is very competitive. We believe competition is
essentially a matter of product quality, price, delivery, service and technical
support. Several of our competitors in the U.S. market are larger and have
substantially greater financial resources. If we fail to compete successfully
based on these or other factors, we may lose customers or fail to recruit new
customers and our business and future financial results could be materially and
adversely affected.
28
RELIANCE ON METALCASTING AND CONSTRUCTION INDUSTRIES
Approximately 45% of our minerals segment's sales and 30% of our
environmental segment's sales in 2004 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 in the minerals
and environmental segments may be adversely affected.
REGULATORY AND LEGAL MATTERS
Our operations are subject to various federal, state, local and foreign
laws and regulations relating to the environment and to health and safety
matters. Substantial penalties may be imposed if we violate certain of these
laws and regulations even if the violation was inadvertent or unintentional. If
these laws or regulations are changed or interpreted differently in the future,
it may become more difficult or expensive for us to comply. In addition,
investigations or evaluations of our products by government agencies may require
us to adopt additional safety measures or precautions. If our costs to comply
with such laws and regulations in the future materially increase, our business
and future financial results could be materially and adversely affected. We may
also be subject to adverse litigation results in addition to increased
compliance costs arising from future changes in laws and regulations that may
negatively impact our operations and profits.
RISKS OF INTERNATIONAL EXPANSION
An important part of our business strategy is to expand internationally.
We intend to seek acquisitions, joint ventures and strategic alliances globally.
In 2004, our business outside North America represented approximately 37% of our
consolidated sales. The approximate breakdown of the sales outside of the United
States for 2004 was as follows: Europe 73%; Asia Pacific 24%; and other regions
3%. As we expand internationally, we will be subject to increased risks, which
may include the following:
. currency exchange or price control laws;
. currency translation adjustments;
. political and economic instability;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. longer accounts receivable collection cycles; and
. 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 acute
demand from China. We rely on shipping bulk cargos of bentonite from the U.S.
and China to customers, as well as our own subsidiaries. This issue is not
isolated to AMCOL; however, we may need to offset additional shipping costs with
price increases to customers in order to maintain our profitability. Other
factors in the U.S. that will potentially impact us are escalating costs of
purchased raw materials derived from petrochemical stocks and increases in rail
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.
29
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:
. fluctuations in our financial results;
. our introduction of new services or products;
. announcements of acquisitions, strategic alliances or joint ventures
by us, our customers or our competitors;
. changes in analysts' recommendations regarding our common stock; and
. 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.
FINANCIAL REGULATION RISK
In response to recently enacted changes in the laws and regulations
affecting public companies, including the provisions of the Sarbanes Oxley Act
of 2002, we continue to devote significant resources and time to comply with
these new requirements. In particular, we are currently undertaking a full
analysis and documentation of the Company's internal control over financial
reporting. In addition to significant expenditures, compliance with these new
rules has also required significant time and attention by our management, which
has caused disruptions to normal business operations.
As discussed in Item 9A. Controls and Procedures, we have identified a
material weakness that relates to financial statement tax provisions. Additional
testing could identify additional deficiencies in our internal control over
financial reporting. We expect to conclude that the Company has at least one
material weakness in internal control over financial reporting. As a result, we
will be unable to conclude that our disclosure controls or our internal control
over financial reporting are effective as of December 31, 2004. We are not
certain of the consequences of our inability to conclude that our disclosure
controls and internal control over financial reporting are effective, although
possible consequences could include actions by regulatory authorities such as
the SEC or the New York Stock Exchange, a loss of confidence by our investors in
our reported financial information, and a decline in the trading price of our
common stock.
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 does 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, 2004, we had no material
outstanding foreign currency contracts.
30
INTEREST RATE SENSITIVITY
The following table provides information about our financial instruments
that are sensitive to changes in interest rates. The table presents principal
cash flows and related weighted average interest rates by expected maturity
dates for debt obligations. Weighted average variable rates are based on implied
forward rates in the yield curve at the reporting date. The instruments' actual
cash flows are denominated in U.S. dollars.
EXPECTED MATURITY DATE
----------------------------------------------------------------------------------------------
FAIR
2005 2006 2007 2008 2009 THEREAFTER TOTAL VALUE
--------- --------- --------- --------- --------- ---------- --------- ---------
(US$ equivalent in thousands)
Short-term debt:
Variable rate $ - $ - $ - $ - $ - $ - $ - $ -
Average interest rate - - - - - - - -
Long-term debt:
Variable rate - 29,495 - - - 4,800 - 34,295
Average interest rate - 3.0% - - - 1.7% - -
--------- --------- --------- --------- --------- ---------- --------- ---------
Total $ - $ 29,495 $ - $ - $ - $ 4,800 $ - $ 34,295
========= ========= ========= ========= ========= ========== ========= =========
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 2004 and 2003, there were no interest rate
swaps outstanding.
CREDIT RISK
We are exposed to credit risk on certain assets, primarily accounts
receivable. We provide credit to customers in the ordinary course of business
and perform ongoing credit evaluations. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising our customer base. We currently believe our allowance for doubtful
accounts is sufficient to cover customer credit risks. Our accounts receivable
financial instruments are carried at amounts that approximate fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Financial Statement Schedule
on Page F-1. Such financial statements and schedule are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934) as of December 31, 2004.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, solely as a result of the material weakness in our
internal control over financial reporting discussed below under "Management's
Report on Internal Control Over Financial Reporting," our disclosure controls
and procedures were not effective as of December 31, 2004 to ensure that
information required to be disclosed in the reports we file or submit under the
Exchange Act are recorded, processed, summarized and reported as and when
required. Notwithstanding the foregoing, management believes that the financial
statements included within this report fairly present in all material respects
the financial position and results of operations of the Company, in conformity
with generally accepted accounting principles in the United States, for the
periods presented.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Rule
13a-15(f) of the Exchange Act. Those rules define internal control over
financial reporting as a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our
consolidated financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Because of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changing conditions, effectiveness of
internal control over financial reporting may vary over time.
As permitted by an exemptive order issued by the SEC on November 30,
2004 (SEC Release No. 34-50754), management's annual report on internal control
over financial reporting, required by Item 308(a) of Regulation S-K, and the
related attestation report of our registered independent auditors required by
Item 308(b) of Regulation S-K, may be filed by amendment to our Annual Report on
Form 10-K within forty five days after the original filing period for such
Annual Report on Form 10-K (the "Extension Order").
Because our management continues to assess the effectiveness of it's
internal control over financial reporting, we will take advantage of the
extension provided by the Extension Order and file management's annual report on
internal control over financial reporting and the related attestation report of
our independent registered public accounting firm by amendment to this Annual
Report on Form 10-K prior to the expiration of such extension on May 2, 2005.
Although we are relying upon the Extension Order, management of the
Company will report a material weakness in internal control over financial
reporting as of December 31, 2004 with respect to controls over accounting for
income taxes, when it completes the assessment required by Section 404 of the
Sarbanes-Oxley Act. Therefore, management will be required to conclude that the
Company's internal control over financial reporting was ineffective as of
December 31, 2004. In making this assessment, our management will use the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In conducting the aforementioned evaluation and assessment, management
identified a material weakness in internal control over financial reporting
relative to our accounting for income taxes. In particular, our design of
internal controls did not address the accounting considerations arising from the
filing of tax returns or the timing of recording of changes in accounting
estimates relating to income taxes of foreign subsidiaries. This control
weakness resulted in errors in our accounting for income taxes, which were
identified during the course of our 2004 audit, and resulted in (i) restatement
of our financial results for the quarter ended September 30, 2004 to both
increase net income reported in such financial statements to recognize expected
federal income tax refunds relating to certain deductions and credits claimed in
amended tax returns filed in September 2004 and to make certain adjustments to
deferred income tax assets and income taxes payable by a wholly-owned Company
subsidiary in the United Kingdom and (ii) increase retained earnings to reflect
its estimate of the refund resulting from such certain state tax deductions
claimed in amended tax returns filed in September 2004.
32
Our management is in the process of further assessing the effectiveness
of our internal controls over financial reporting. Additional testing may cause
management to identify additional deficiencies in our internal controls over
financial reporting as of December 31, 2004.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the
Securities Exchange Act of 1934) during the fourth quarter of 2004 that
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
We are working to design and implement appropriate procedures in order
to remediate the deficiencies in our internal control over financial reporting
concerning accounting for income taxes. After the discovery, in the first
quarter of 2005, of the errors resulting in the restatement of our financial
statements for the quarter ended September 30, 2004, we implemented changes to
our design of internal control with respect to accounting for income taxes.
Specifically, we will formalize procedures relating to determination of
appropriate accounting treatment for certain deduction and credit positions
taken in filing income tax returns, both amended and original. Our Tax Manager
will be responsible to report to the Controller and Chief Financial Officer each
quarter changes in such tax positions that may have a material effect on the
financial statements. The Controller and Chief Financial Officer will review the
positions and document conclusions as to the accounting treatment. Additionally,
we will enhance controls over financial reporting of our foreign subsidiaries to
assure the consolidated financial statements are presented in accordance with
U.S. generally accepted accounting principles and changes in accounting
estimates are recorded in the appropriate reporting period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is included under the
captions "Election of Directors", "Corporate Governance Matters" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this Form
10-K, and is incorporated herein by reference.
Information regarding the executive officers of the Company is included
under a separate caption in Part I hereof in accordance with General Instruction
G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
We have adopted a Code of Business Conduct and Ethics (the "Code") that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller and persons performing similar
functions, as well as other employees. The Code, our Corporate Governance
Guidelines and the charters of our Audit Committee, Compensation Committee and
Nominating and Governance Committee are publicly available on our website at
www.amcol.com and are available in print, free of charge, to any shareholder
upon request to the Company's Corporate Secretary at AMCOL International
Corporation, One North Arlington, 1500 West Shure Drive, Suite 500, Arlington
Heights, Illinois 60004-7803. If we make any substantive amendments to the Code
or grant any waiver, including any implicit waiver, from a provision of the Code
to our principal executive officer, principal financial officer, principal
accounting officer or controller or persons performing similar functions, we
will disclose the nature of such amendment or waiver on our website or in a
report on Form 8-K in accordance with applicable rules and regulations.
33
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the above is included under the captions "Named
Officers' Compensation" and "Stock Performance Graph" in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-K, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is included under the caption "Security Ownership" in the
Company's definitive proxy statement, which will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Form 10-K, and is incorporated herein by reference.
Information regarding the Company's securities authorized for issuance
under equity compensation plans is included under the caption "Named Officers'
Compensation" and "Equity Compensation Plan Information" in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-K, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the above is included under the caption "Certain
Relationships and Related Transactions" in the Company's definitive proxy
statement, which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K,
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is included
under the captions "Independent Public Accountants" and "Corporate Governance
Matters - The Audit Committee" in the Company's definitive proxy statement,
which will be filed with the Securities and Exchange Commission not later than
120 days after the end of the fiscal year covered by this Form 10-K, and is
incorporated herein by reference.
34
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) 1. See Index to Financial Statements and Financial Statement Schedule below.
2. See Financial Statements and Index to Financial Statement Schedule below.
Such Financial Statements and Schedule are incorporated herein by reference.
3. See Index to Exhibits immediately following the signature page.
(b) See Index to Exhibits immediately following the signature page.
(c) See Index to Financial Statements and Financial Statement Schedule below.
ITEM 15(a) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets, December 31, 2004 and 2003 F-3
Consolidated Statements of Operations, Years ended December 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Comprehensive Income, Years ended December 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Stockholders' Equity, Years ended December 31, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows, Years ended December 31, 2004, 2003 and 2002 F-7
Notes to Consolidated Financial Statements F-8
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-30
All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required, or because the required
information is not material.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
AMCOL International Corporation:
We have audited the consolidated financial statements of AMCOL
International Corporation and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule 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, 2004 and 2003, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As described in Note 2 to the consolidated financial statements, the
Company's consolidated balance sheet as of December 31, 2003 and the related
consolidated statements of stockholders' equity for the years ended December 31,
2003 and 2002 have been restated.
As described in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for stock based compensation effective
January 1, 2003, and its method of accounting for goodwill as of
January 1, 2002.
KPMG LLP
Chicago, Illinois
March 30, 2005
F-2
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
DECEMBER 31,
-----------------------------
2003
Restated
ASSETS 2004 (Note 2)
- ---------------------------------------------- ------------ ------------
Current assets:
Cash $ 17,594 $ 13,525
Accounts receivable:
Trade, less allowance for doubtful
accounts of $4,637 and $3,455 in
2004 and 2003, respectively 86,128 58,385
Other 2,214 2,612
Inventories 63,882 46,182
Prepaid expenses 7,111 5,108
Current deferred tax assets 4,293 3,639
Income taxes receivable 9,126 14,123
Assets held for sale 752 -
------------ ------------
Total current assets 191,100 143,574
------------ ------------
Investment in and advances to joint
ventures 15,023 13,068
------------ ------------
Property, plant, equipment, and mineral
rights and reserves:
Land and mineral rights 12,019 10,275
Depreciable assets 247,280 226,221
------------ ------------
259,299 236,496
Less: accumulated depreciation 165,658 149,500
------------ ------------
93,641 86,996
------------ ------------
Other assets:
Goodwill 19,225 5,633
Intangible assets, less accumulated
amortization of $4,953 and $3,872 in
2004 and 2003, respectively 3,802 4,345
Deferred tax assets 6,444 5,314
Other assets 7,207 6,399
------------ ------------
36,678 21,691
------------ ------------
$ 336,442 $ 265,329
============ ============
DECEMBER 31,
-----------------------------
2003
Restated
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 (Note 2)
- ---------------------------------------------- ------------ ------------
Current liabilities:
Current maturities of long-term debt and
notes payable $ - $ 844
Accounts payable 25,474 20,365
Accrued liabilities 36,207 26,499
------------ ------------
Total current liabilities 61,681 47,708
------------ ------------
Long-term debt 34,295 9,006
------------ ------------
Minority interests in subsidiaries 5 116
Deferred compensation 5,872 4,583
Other liabilities 12,655 12,466
------------ ------------
18,532 17,165
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share.
Authorized 100,000,000 shares; issued
32,015,771 shares in 2004 and 2003 320 320
Additional paid in capital 69,763 67,513
Retained earnings 154,366 132,179
Accumulated other comprehensive income 14,905 8,372
------------ ------------
239,354 208,384
Less:
Treasury stock (2,620,016 and 2,908,025
shares in 2004 and 2003, respectively) 17,420 16,934
------------ ------------
221,934 191,450
------------ ------------
$ 336,442 $ 265,329
============ ============
See accompanying notes to consolidated financial statements.
F-3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
CONTINUING OPERATIONS
Net sales $ 459,105 $ 371,966 $ 305,100
Cost of sales 343,210 274,415 227,005
------------ ------------ ------------
Gross profit 115,895 97,551 78,095
General, selling and administrative expenses 80,222 68,614 58,437
------------ ------------ ------------
Operating profit 35,673 28,937 19,658
------------ ------------ ------------
Other income (expense):
Interest expense, net (826) (280) (512)
Other, net 225 604 43
------------ ------------ ------------
(601) 324 (469)
------------ ------------ ------------
Income before income taxes, equity in income
of joint ventures, and minority interest 35,072 29,261 19,189
Income tax expense 4,687 9,946 6,916
------------ ------------ ------------
Income before equity in income of joint
ventures and minority interest 30,385 19,315 12,273
Income from joint ventures 1,180 600 531
Minority interest in net loss of subsidiary - - 164
------------ ------------ ------------
Income from continuing operations 31,565 19,915 12,968
------------ ------------ ------------
DISCONTINUED OPERATIONS
Gain on 2001 disposal (including income tax
benefits of $8,741 in 2003) - 8,950 -
------------ ------------ ------------
Income from discontinued operations - 8,950 -
------------ ------------ ------------
Net income $ 31,565 $ 28,865 $ 12,968
============ ============ ============
See accompanying notes to consolidated financial statements.
Continued...
F-4
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
EARNINGS PER SHARE
Basic earnings per share:
Continuing operations $ 1.08 $ 0.70 $ 0.46
------------ ------------ ------------
Discontinued operations:
Gain on disposal - 0.32 -
------------ ------------ ------------
- 0.32 -
------------ ------------ ------------
Net income $ 1.08 $ 1.02 $ 0.46
============ ============ ============
Diluted earnings per share:
Continuing operations $ 1.03 $ 0.67 $ 0.43
------------ ------------ ------------
Discontinued operations:
Gain on disposal - 0.30 -
------------ ------------ ------------
- 0.30 -
------------ ------------ ------------
Net income $ 1.03 $ 0.97 $ 0.43
============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net income $ 31,565 $ 28,865 $ 12,968
Other comprehensive income (loss) -
Minimum pension liability (457) - -
Foreign currency translation adjustment 6,990 6,367 4,693
------------ ------------ ------------
Comprehensive income $ 38,098 $ 35,232 $ 17,661
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
COMMON STOCK
--------------------------
NUMBER ADDITIONAL
OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
----------- ----------- ----------- -----------
Balance at December 31, 2001 32,015,771 320 71,905 91,017
Prior period adjustments (Note 2) 6,552
----------- ----------- ----------- -----------
Balance at December 31, 2001 (Restated) 32,015,771 320 71,905 97,569
Net income - - - 12,968
Cash dividends ($0.095 per share) - - - (2,663)
Translation adjustment - - - -
Purchase of 1,248,407 treasury
shares - - - -
Sales of 873,921 treasury
shares pursuant to options - - (2,993) -
Tax benefit from employee stock
plans - - 938 -
----------- ----------- ----------- -----------
Balance at December 31, 2002 (Restated) 32,015,771 320 69,850 107,874
Net income - - - 28,865
Cash dividends ($0.16 per share) - - - (4,560)
Translation adjustment - - - -
Purchase of 266,963 treasury
shares - - - -
Sales of 1,492,806 treasury
shares pursuant to options - - (5,145) -
Tax benefit from employee stock
plans - - 2,195 -
Vesting of common stock in
connection with employee stock
plans - - 613 -
----------- ----------- ----------- -----------
Balance at December 31, 2003 (Restated) 32,015,771 320 67,513 132,179
Net income 31,565
Cash dividends ($0.32 per share) (9,378)
Translation adjustment
Purchase of 189,800 treasury
shares
Sales of 477,809 treasury
shares pursuant to options (1,551)
Tax benefit from employee stock
plans 2,027
Vesting of common stock in
connection with employee stock
plans 1,774
Minimum pension liability
----------- ----------- ----------- -----------
Balance at December 31, 2004 32,015,771 320 69,763 154,366
=========== =========== =========== ===========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TREASURY
(LOSS) STOCK TOTAL
------------- ----------- -----------
Balance at December 31, 2001 (2,688) (19,828) 140,726
Prior period adjustments (Note 2) 6,552
------------- ----------- -----------
Balance at December 31, 2001 (Restated) (2,688) (19,828) (147,278)
Net income - - 12,968
Cash dividends ($0.095 per share) - - (2,663)
Translation adjustment 4,693 - 4,693
Purchase of 1,248,407 treasury
shares - (6,933) (6,933)
Sales of 873,921 treasury
shares pursuant to options - 4,647 1,654
Tax benefit from employee stock
plans - - 938
------------- ----------- -----------
Balance at December 31, 2002 (Restated) 2,005 (22,114) 157,935
Net income - - 28,865
Cash dividends ($0.16 per share) - - (4,560)
Translation adjustment 6,367 - 6,367
Purchase of 266,963 treasury
shares - (2,853) (2,853)
Sales of 1,492,806 treasury -
shares pursuant to options - 7,273 2,128
Tax benefit from employee stock
plans - - 2,195
Vesting of common stock in
connection with employee
stock plans - 760 1,373
------------- ----------- -----------
Balance at December 31, 2003 (Restated) 8,372 (16,934) 191,450
Net income 31,565
Cash dividends ($0.32 per share) (9,378)
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 2,757 1,206
Tax benefit from employee stock
plans 2,027
Vesting of common stock in
connection with employee stock
plans 1,774
Minimum pension liability (457) (457)
------------- ----------- -----------
Balance at December 31, 2004 14,905 (17,420) 221,934
============= =========== ===========
See accompanying notes to consolidated financial statements.
F-6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flow from operating activities:
Income from continuing operations $ 31,565 $ 19,915 $ 12,968
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation, depletion, and amortization 20,124 18,910 20,759
Equity in income of joint ventures (1,187) (600) (531)
Minority interest in net loss of
subsidiary 7 - (164)
Change in minority interest in
subsidiaries - - 92
Increase (decrease) in allowance for
doubtful accounts 1,063 813 515
Decrease (increase) in deferred income
taxes (856) (2,586) 2,882
Tax benefit from employee stock plans 2,027 2,195 938
Gain on sale of depreciable assets (311) (73) (11)
Stock compensation expense 1,772 613 -
Other non-cash charges (457) - -
(Increase) decrease in current assets,
net of effects of acquisitions:
Accounts receivable (22,040) (12,615) (2,133)
Income taxes receivable (3,688) 897 2,403
Inventories (16,817) (6,721) (585)
Prepaid expenses (2,003) (1,588) 149
Increase (decrease) in current
liabilities, net of effects of
acquisitions:
Accounts payable 2,897 2,447 5,051
Accrued liabilities 5,975 8,841 (2,713)
Increase in other noncurrent assets (1,893) (1,345) (3,026)
Increase (decrease) in other noncurrent
liabilities 1,209 (457) 1,775
------------ ------------ ------------
Net cash provided by operating
activities of continuing operations 17,387 28,646 38,369
------------ ------------ ------------
Net cash provided by discontinued
operations 8,625 - -
------------ ------------ ------------
Cash flow from investing activities:
Proceeds from sale of depreciable assets 739 195 187
Capital expenditures for land, mineral
reserves, and depreciable assets (21,627) (15,795) (16,223)
(Increase) decrease in investments in and
advances to joint ventures (775) (49) 1,495
Acquisitions (13,333) (7,144) (16,982)
Payment of minority interest (111) (499) -
Decrease (increase) in other assets 427 505 (767)
------------ ------------ ------------
Net cash used in investing activities (34,680) (22,787) (32,290)
------------ ------------ ------------
Cash flow from financing activities:
Proceeds from issuance of debt 88,208 17,145 28,100
Principal payments of debt (67,718) (25,469) (23,172)
Proceeds from sales of treasury stock 1,090 2,888 1,653
Purchases of treasury stock (2,879) (1,593) (6,933)
Dividends paid (9,377) (4,560) (2,663)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 9,324 (11,589) (3,015)
------------ ------------ ------------
Effect of foreign currency rate changes
on cash 3,413 3,658 2,213
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 4,069 (2,072) 5,277
Cash and cash equivalents at beginning of year 13,525 15,597 10,320
------------ ------------ ------------
Cash and cash equivalents at end of year $ 17,594 $ 13,525 $ 15,597
============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid for:
Interest, Net $ 537 $ 415 $ 671
============ ============ ============
Net income taxes paid (refunded) $ (706) $ 12,808 $ 1,632
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Operations
AMCOL International Corporation (the Company) operates in two principal
areas of activity: minerals and environmental. The Company also operates a
transportation business which includes delivery of its own products. In 2004,
the Company's revenues were derived 58% from minerals, 37% from environmental,
and 9% from transportation operations, all reduced by 4% from the elimination of
intersegment shipping revenues. The Company's sales in 2004 were approximately
63% from North America and 37% outside of North America. Further descriptions of
the Company's products, its principal markets and the relative significance of
its operations are included in Note 4, "Business Segment and Geographic Area
Information."
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its foreign and domestic subsidiaries. All subsidiaries greater than
50% owned by the Company are consolidated. The Company's ownership interests in
the U.K., Mexican, Indian, and Egyptian ventures range between 20% and 50%.
Accordingly, these investments are accounted for using the equity method. The
Company's ownership interest in the Japanese investment is recorded at cost. All
material intercompany balances and transactions between wholly-owned
subsidiaries, 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
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Translation of Foreign Currencies
The assets and liabilities of subsidiaries located outside of the United
States are translated into U.S. dollars at the rates of exchange at the balance
sheet dates. The statements of operations are translated at the weighted average
rates during the periods. Foreign exchange translation adjustments are
accumulated as a separate component of stockholders' equity, while foreign
currency transaction gains or losses are included in income.
Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined by the first-in, first-out (FIFO) or moving average methods.
Exploration costs are expensed as incurred. Costs incurred in removing
overburden and mining bentonite are capitalized as advance mining costs until
the bentonite from such mining area is transported to the plant site, at which
point the costs are included in crude bentonite stockpile inventory.
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.
F-8
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value
of the net assets of acquired businesses. Pursuant to Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets",
goodwill is tested annually (or more frequently if impairment indicators arise)
for impairment. Other intangibles, including trademarks and non-compete
agreements, are amortized on the straight-line method over the expected periods
to be benefited, which extend up to 10 years.
The adoption of the provisions within SFAS 142 relating to goodwill
amortization resulted in the Company discontinuing the amortization of goodwill
effective January 1, 2002. At the date of adoption, the Company's goodwill
balance was not significant.
Impairment of Long-Lived Assets
The Company reviews 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
The Company and its U.S. subsidiaries file a consolidated tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be in effect for the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Revenue Recognition
Product revenue is recognized when products are shipped to customers.
Allowances for discounts, rebates, and estimated returns are recorded at the
time of sale and are reported as a reduction in revenue. The Company generates
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 upon receipt of signed proof of delivery documents. Amounts payable
for purchased transportation, commissions and insurance are accrued when the
related revenue is recognized.
Service revenues, primarily earned by the environmental segment,
represent less than 10% of consolidated net sales. Revenue for services
performed are recognized in the period such services are performed and customer
acceptance is obtained.
Shipping Revenues and Costs
The Company reports shipping and handling costs that are passed on to
customers as sales revenue and cost of sales in the consolidated statements of
operations.
F-9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Land Reclamation
The Company mines various minerals using a surface-mining process which
requires the removal of overburden. The Company is obligated to restore the land
comprising each mining site to its original condition at the completion of
mining activity. The Company recognizes the 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. At
December 31, 2004 the Company's recorded reclamation obligation was $4,850.
During the year ended December 31, 2004, the obligation was reduced by $1,325
due to payments made in connection with ongoing reclamation activities offset by
accretion of $97 and recognition of additional obligations resulting from normal
mining activities of $1,018.
Research and Development
Research and development costs are included in general, selling and
administrative expenses and amounted to approximately $5,349, $5,018, and $5,953
for the years ended December 31, 2004, 2003 and 2002, respectively.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income by the weighted average common shares
outstanding after consideration of the dilutive effect of stock options. A
reconciliation between the number of shares used to compute basic and diluted
earnings per share follows:
2004 2003 2002
------------ ------------ ------------
Weighted average of common shares outstanding
for the year 29,140,892 28,357,009 28,133,795
Dilutive impact of stock equivalents 1,561,969 1,492,569 2,014,725
------------ ------------ ------------
Weighted average of common and common
equivalent shares for the year 30,702,861 29,849,578 30,148,520
============ ============ ============
Common shares outstanding at December 31 29,395,755 29,107,746 27,881,903
============ ============ ============
Stock-Based Compensation
Prior to 2003, the Company accounted for its 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, the Company adopted the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and has
elected to apply these provisions prospectively, in accordance with SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure, an
Amendment of FASB Statement No. 123, to all employee awards granted, modified,
or settled after January 1, 2003. Awards under the Company's plans vest over
three years. Therefore, the cost related to stock-based employee compensation
included in the determination of net income for 2003 and 2004 is less than that
which would have been recognized if the fair value based method had been applied
to all awards since the original effective date of SFAS 123.
F-10
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Results for prior years have not been adjusted to reflect the use of the
fair value based method of accounting for employee awards. The following table
illustrates the effect on net income and earnings per share if the fair value
based method had been applied to all outstanding and unvested awards in each
period:
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net income, as reported $ 31,565 $ 28,865 $ 12,968
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects 1,090 405 -
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of related tax effects (1,348) (962) (781)
------------ ------------ ------------
Pro forma net income $ 31,307 $ 28,308 $ 12,187
============ ============ ============
Earnings per share:
Basic - as reported $ 1.08 $ 1.02 $ 0.46
Basic - pro forma $ 1.07 $ 1.00 $ 0.43
Diluted - as reported $ 1.03 $ 0.97 $ 0.43
Diluted - pro forma $ 1.02 $ 0.95 $ 0.40
Derivative Instruments and Hedging Activities
The Company occasionally uses derivative financial instruments
(principally interest rate swaps or options) to manage its exposure to changes
in interest rates. The Company does not use derivative instruments for trading
or other speculative purposes. The Company had no derivative financial
instruments outstanding at December 31, 2004 and 2003.
Reclassifications
Certain items in the consolidated financial statements contained herein
and notes thereto have been reclassified to conform with the consolidated
financial statement presentation for 2004; these reclassifications relate to
commissions, intangible assets and reclamation liabilities.
Commissions paid to external sales representatives have been
reclassified, resulting in increases in net sales, gross profit, and operating
expenses. The amounts reclassified for 2002 and 2003 are $6,227 and $8,000,
respectively.
An intangible asset for the environmental segment have been reclassified
to reduce prepaid expenses and other long term assets and increase intangible
assets; the $750 amortization expense each year relating to the intangible asset
within the statement of cash flows has also been reclassified to amortization
expense. The reduction in prepaid expenses in 2002 and 2003 was $750 each year;
the reduction in other assets in 2002 and 2003 was $3,000 and $2,250,
respectively.
The portion of the reclamation liability expected to be paid within one
year for the minerals segment has been reclassified to accrued liabilities in
2003; the amount was $1,337.
(2) RESTATEMENT
During 2004, the Company recorded an adjustment of $5,546 to increase
retained earnings and income taxes receivable to reflect the correction of an
accounting error that occurred in 2000. Commensurate with the sale of its
absorbent polymer segment in June 2000, the Company recorded an income tax
accrual for the gain on the sale of the segment. In connection with the filing
of amended income tax returns in 2004 that, in part, reduced the 2000 income tax
liability, the Company discovered an error in the computation of the income tax
accrual associated with the sale of the segment.
Also during 2004, the Company recorded an adjustment of $1,006 to
increase retained earnings resulting from a $524 increase in long-term deferred
income tax assets, a $350 increase in short-term deferred tax assets and a $132
reduction in income tax accrual to reflect the correction of an accounting error
that occurred in 2001.
The aforementioned adjustments of $1,006 and $5,546 have been recorded
as adjustments to retained earnings in the Consolidated Statement of
Stockholders' Equity as of January 1, 2002.
F-11
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(3) DISCONTINUED OPERATIONS
In 2003, the Internal Revenue Service concluded audits which resulted in
a reduction of the Company's income taxes payable and the recording of an income
tax receivable of approximately $8.9 million related to the sale of the
Company's U.K. metalcasting business in 2001 and closure of the U.K. cat litter
business in 2000. Those audits resulted in an actual tax liability that was
lower than the estimate of taxes payable related to those periods. Therefore,
the Company adjusted its estimate of taxes payable to reflect the actual amount
due as of December 31, 2003 and recorded $8.9 million of income from
discontinued operations.
(4) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in two principal business segments: minerals and
environmental. The Company also operates a transportation business. The minerals
segment mines, processes and distributes clays and products with similar
applications to various industrial and consumer markets. The environmental
segment processes and distributes clays and products with similar applications
for use as a moisture barrier in commercial construction, landfill liners and in
a variety of other industrial and commercial applications. The transportation
segment includes a long-haul trucking business and a freight brokerage business,
which provide services to both the Company's plants and outside customers.
The Company identifies segments based on management responsibility and
the nature of the business activities of each component of the Company.
Intersegment sales are insignificant, other than intersegment shipping, which is
disclosed in the following table. The Company measures segment profit based on
operating profit. Operating profit is defined as sales less cost of sales and
general, selling and administrative expenses related to a segment's operations.
The costs deducted to arrive at operating profit do not include interest or
income taxes.
Segment assets are those assets used in the Company's operations in that
segment. Corporate assets include cash, corporate leasehold improvements, the
nanocomposite plant investment and other miscellaneous equipment.
The following summaries set forth certain financial information by
business segment and geographic area as of and for the years ended December 31,
2004, 2003 and 2002; the amounts in the prior years have been restated as a
result of the prior period adjustments detailed in Note 2.
F-12
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2004 2003 2002
------------ ------------ ------------
Business Segment:
Revenues:
Minerals $ 264,065 $ 217,104 $ 172,570
Environmental 170,152 131,351 111,126
Transportation 40,650 37,549 32,509
Intersegment shipping (15,762) (14,038) (11,105)
------------ ------------ ------------
Total $ 459,105 $ 371,966 $ 305,100
============ ============ ============
Operating profit (loss):
Minerals $ 30,319 $ 23,423 $ 15,870
Environmental 20,559 17,855 14,373
Transportation 1,720 1,547 967
Corporate (16,925) (13,888) (11,552)
------------ ------------ ------------
Total $ 35,673 $ 28,937 $ 19,658
============ ============ ============
Assets:
Minerals $ 172,972 $ 144,973 $ 128,566
Environmental 128,154 83,459 66,789
Transportation 3,122 1,891 1,895
Corporate 32,194 35,006 31,130
Discontinued operations (net liabilities) - -
------------ ------------ ------------
Total $ 336,442 $ 265,329 $ 228,380
============ ============ ============
Depreciation, depletion and amortization:
Minerals $ 10,546 $ 10,334 $ 10,840
Environmental 6,751 6,002 7,365
Transportation 108 88 58
Corporate 2,719 2,486 2,496
------------ ------------ ------------
Total $ 20,124 $ 18,910 $ 20,759
============ ============ ============
Capital expenditures:
Minerals $ 9,860 $ 6,464 $ 8,263
Environmental 10,647 7,660 6,174
Transportation 101 80 145
Corporate 1,019 1,591 1,641
------------ ------------ ------------
Total $ 21,627 $ 15,795 $ 16,223
============ ============ ============
Research and development expenses:
Minerals $ 2,517 $ 2,184 $ 2,632
Environmental 1,921 1,873 2,051
Corporate 911 961 1,270
------------ ------------ ------------
Total $ 5,349 $ 5,018 $ 5,953
============ ============ ============
Continued...
F-13
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2004 2003 2002
------------ ------------ ------------
Geographic area:
Sales to unaffiliated customers shipped to:
North America $ 289,795 $ 245,715 $ 221,863
Europe 123,485 90,683 57,172
Asia Pacific 40,621 30,967 21,243
Other 5,204 4,601 4,822
------------ ------------ ------------
Total $ 459,105 $ 371,966 $ 305,100
============ ============ ============
Operating profit from sales to:
North America $ 16,728 $ 15,188 $ 10,263
Europe 12,686 8,655 5,966
Asia Pacific 5,441 4,113 2,409
Other 818 981 1,020
------------ ------------ ------------
Total $ 35,673 $ 28,937 $ 19,658
============ ============ ============
Identifiable assets in:
North America $ 202,766 $ 170,797 $ 149,614
Europe 97,777 70,114 58,585
Asia Pacific 35,899 24,418 20,181
Discontinued operations - - -
------------ ------------ ------------
Total $ 336,442 $ 265,329 $ 228,380
============ ============ ============
The Company reported revenues for the following product lines:
2004 2003 2002
------------ ------------ ------------
Metalcasting $ 117,653 $ 91,767 $ 83,404
Pet products 53,370 48,319 44,467
Specialty Minerals 89,863 77,017 44,699
Lining technologies 78,218 56,061 38,946
Water treatment 42,512 34,429 38,696
Building materials 52,601 40,862 33,484
Transportation 40,650 37,549 32,509
Intersegment shipping revenue (15,762) (14,038) (11,105)
------------ ------------ ------------
Total $ 459,105 $ 371,966 $ 305,100
============ ============ ============
(5) INVENTORIES
Inventories at December 31 consisted of:
2004 2003
------------ ------------
Advance mining $ 2,277 $ 2,605
Crude stockpile inventories 25,159 14,410
In-process inventories 18,123 14,190
Other raw material, container, and supplies
inventories 18,323 14,977
------------ ------------
$ 63,882 $ 46,182
============ ============
F-14
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(6) PROPERTY, PLANT, EQUIPMENT, AND MINERAL RIGHTS AND RESERVES
Property, plant, equipment and mineral rights and reserves consisted of
the following:
DECEMBER 31, DEPRECIATION/
Amortization
2004 2003 Annual Rates
------------ ------------ --------------
Mineral rights and reserves $ 4,169 $ 4,030
Other land 7,850 6,244
Buildings and improvements 61,987 55,635 4.9% to 25.0%
Machinery and equipment 185,293 170,587 10.0% to 50.0%
------------ ------------
$ 259,299 $ 236,496
============ ============
Depreciation and depletion were charged to income as follows:
2004 2003 2002
------------ ------------ ------------
Depreciation expense $ 18,895 $ 17,759 $ 19,064
Depletion expense 149 232 806
------------ ------------ ------------
$ 19,044 $ 17,991 $ 19,870
============ ============ ============
(7) GOODWILL AND INTANGIBLE ASSETS
As of December 31, goodwill and other intangible assets consisted of:
DECEMBER 31,
-----------------------------
2004 2003
------------ ------------
Goodwill $ 19,225 $ 5,633
Intangible assets, at cost 8,755 8,217
Less: accumulated amortization 4,953 3,872
------------ ------------
Intangible assets, net 3,802 4,345
------------ ------------
Goodwill and intangible assets, net $ 23,027 $ 9,978
============ ============
The Company's increases in goodwill are primarily attributable to
acquisitions as detailed in Note 10. The carrying values of goodwill and
intangible assets (net) as of December 31, by segment are as follows:
DECEMBER 31,
-----------------------------
2004 2003
------------ ------------
Goodwill
Minerals $ 5,773 $ 5,394
Environmental 13,452 239
Intangible assets, net
Minerals 425 494
Environmental 2,926 3,504
Corporate 451 347
------------ ------------
Goodwill and intangible assets, net $ 23,027 $ 9,978
============ ============
In accordance with SFAS 142, the Company evaluated the goodwill
attributable to each reporting unit for impairment, and concluded that there was
no indication of goodwill impairment. If indicators of impairment are deemed to
be present, and future cash flows are not expected to be sufficient to recover
the assets and carrying amounts, an
F-15
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
impairment loss would be charged to expense in the period identified.
The Company reviewed the intangible assets, net book values and
estimated useful lives by class. As of December 31, 2004, there was no
impairment related to the intangible assets. The Company will continue to
amortize the remaining net book values of intangible assets over their remaining
useful lives.
(8) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31,
2004, 2003 and 2002 was allocated as follows:
2004 2003 2003
------------ ------------ ------------
Income from continuing operations $ 4,687 $ 9,946 $ 6,916
Discontinued operations - (8,741) -
------------ ------------ ------------
$ 4,687 $ 1,205 $ 6,916
============ ============ ============
Domestic and foreign components of income from continuing operations
before income taxes, equity in income of joint ventures and minority interest
are shown below:
2004 2003 2002
------------ ------------ ------------
Income from continuing operations before
income taxes, equity in income of joint
ventures and minority interest:
Domestic $ 20,662 $ 18,972 $ 12,266
Foreign 14,410 10,289 6,923
------------ ------------ ------------
$ 35,072 $ 29,261 $ 19,189
============ ============ ============
The components of the provision for income taxes attributable to income
from continuing operations before income taxes, equity in income of joint
ventures and minority interest for the years ended December 31, 2004, 2003 and
2002 consisted of:
2004 2003 2002
------------ ------------ ------------
Provision (benefit) for income taxes:
Federal:
Current $ 1,170 $ 8,921 $ 647
Deferred (95) (2,296) 2,641
State:
Current 1,404 1,265 741
Deferred (9) (230) 264
Foreign:
Current 3,890 2,345 2,647
Deferred (1,673) (59) (24)
------------ ------------ ------------
$ 4,687 $ 9,946 $ 6,916
============ ============ ============
The Company believes it is more likely than not that the deferred tax
assets above will be realized in the normal course of business.
The Company's federal income tax returns have been audited through 2001.
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2004 and
2003 were as follows:
F-16
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2003
Restated
2004 (Note 2)
------------ ------------
Deferred tax assets attributable to:
Accounts receivable, due to allowance for
doubtful accounts $ 938 $ 994
Inventories 1,638 1,669
Employee benefit plans 5,660 4,350
Intangible assets 2,384 2,706
Accrued liabilities 2,024 1,883
Maintenance of controlled foreign
corporations 1,624 1,443
Other 583 186
------------ ------------
Total deferred tax assets 14,851 13,231
Deferred tax liabilities attributable to:
Plant and equipment, due to differences
in depreciation (2,007) (1,503)
Land and mineral reserves, due to
differences in depletion (1,171) (1,498)
Other (936) (1,277)
------------ ------------
Total deferred tax liabilities (4,114) (4,278)
------------ ------------
Net deferred tax assets $ 10,737 $ 8,953
============ ============
The following analysis reconciles the statutory Federal income tax rate
to the effective tax rates related to income from continuing operations before
income taxes, equity in income of joint ventures and minority interest:
2004 2003 2002
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------------ ------------ ------------ ------------ ------------ ------------
Provision for income taxes at
U.S. statutory rates $ 12,275 35.0% $ 10,241 35.0% $ 6,716 35.0%
Increase (decrease) in taxes resulting
from:
Percentage depletion (1,832) -5.2% (1,040) -3.6% (742) -3.9%
State taxes, net of federal benefit 913 2.6% 824 2.8% 482 2.5%
Foreign tax rates (1,445) -4.1% (738) -2.5% 200 1.0%
Foreign tax adjustments (1,119) -3.2% - - - -
Depletion and research and development
adjustments (4,789) -13.7% - - - -
Other 684 2.0% 659 2.3% 260 1.4%
------------ ------------ ------------ ------------ ------------ ------------
$ 4,687 13.4% $ 9,946 34.0% $ 6,916 36.0%
============ ============ ============ ============ ============ ============
In 2004, the Company recorded a reduction to income tax expense of
$4,789 associated with depletion deductions and research and experimentation
credits available in computing income tax expense. Approximately $821 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 $3,968 relates to the
filing of amended federal income tax returns dating from 1999 through 2002.
Regarding the $4,789 mentioned above, the Company recomputed its federal
income tax liability for these periods after determining that it 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, the Company
determined that a contingency reserve was necessary to reflect a potential
reduction of the refund after examination of the returns by the IRS. The Company
also recorded, in 2004, a $1.1 million income tax benefit for the adjustment of
deferred income tax assets and income tax payable at a U.K. subsidiary. If these
two adjustments had not been recorded, the effective income tax rate for 2004
would have been 30%.
The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $31.1 million of undistributed earnings from
international subsidiaries as of December 31, 2004 because such earnings are
intended to be reinvested indefinitely outside of the United States. If these
earnings were distributed, foreign tax credits
F-17
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
may become available under current law to reduce or eliminate the resulting U.S.
income tax liability.
In October 2004, the American Jobs Creation Act (the "Act") was enacted
which allowed for a temporary 85% dividends received deduction on certain
foreign earnings repatriated into the U.S. The portion of the dividend that
qualifies for the 85% deduction is that amount which exceeds an average of past
years' foreign dividends. Additionally, certain criteria must be met when the
funds are repatriated and may ultimately qualify for an effective tax rate as
low as 5.25%.
The Company is in process of evaluating whether it will repatriate
foreign earnings under the Act. The range of amounts that are reasonably under
consideration for repatriation are from $0 to $26.9 million. The Company will
evaluate the merits of repatriating foreign earnings in 2005 and report the tax
impact, if any, of an envisioned repatriation upon the finalization of a
repatriation plan. The Company has not recognized any income tax effect relating
to the Act as we are currently not in a position to reasonably estimate the tax
impact of any repatriation.
(9) LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-----------------------------
2004 2003
------------ ------------
Borrowings under revolving credit agreement $ 29,325 $ 4,000
Industrial revenue bond 4,800 4,800
Other notes payable 170 1,050
------------ ------------
34,295 9,850
Less: current portion - 844
------------ ------------
$ 34,295 $ 9,006
============ ============
The Company has a committed $100,000 revolving credit agreement, which
matures October 31, 2006. As of December 31, 2004, there was $70,675 in
borrowing capacity available under the line of credit. The revolving credit
agreement is a multi-currency arrangement, which allows the Company to borrow at
an adjusted LIBOR rate plus .625% to 1.20%, depending upon the amount of the
credit line used and certain capitalization ratios. The facility requires
certain covenants to be met including specific amounts of net worth and also
limits the Company's ability to make additional borrowings and guarantees. The
Company was in compliance with these covenants at December 31, 2004. The
interest rate at December 31, 2004 was 3.019%.
The Company has a short-term credit facility with maximum borrowings of
$7,000, of which $844 was outstanding as of December 31, 2003. No amounts were
outstanding under this facility as of December 31, 2004. The interest rate at
December 31, 2003 was 4%.
At December 31, 2004 and 2003, the Company had outstanding standby
letters of credit of $13.9 million and $13.7 million, respectively. These
letters of credit typically serve to guarantee the Company's performance of its
obligations related to land reclamation and workers' compensation claims. The
Company has recognized the estimated costs of its obligations related to land
reclamation and workers' compensation claims in the accompanying consolidated
balance sheets as of December 31, 2004 and 2003.
F-18
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Maturities of long-term debt outstanding at December 31, 2004, were as
follows:
2005 2006 2007 2008 2009 THEREAFTER
------------ ------------ ------------ ------------ ------------ ------------
Borrowings under revolving
credit agreement - $ 29,325 - - - -
Industrial revenue bond and
other notes payable - 170 - - - 4,800
------------ ------------ ------------ ------------ ------------ ------------
$ - $ 29,495 $ - $ - $ - $ 4,800
============ ============ ============ ============ ============ ============
The estimated fair value of the above borrowings at December 31, 2004,
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.
(10) ACQUISITIONS
On May 1, 2002, the Company acquired all of the outstanding stock of
Colin Stewart Minchem Limited (CSM), a specialty minerals and chemical company
located in the United Kingdom, in exchange for cash. The aggregate purchase
price was $15,507. The purchase was financed utilizing the Company's revolving
credit facility.
CSM supplies intermediate products, industrial minerals, inorganic
chemicals, and additives to customers operating in the laundry detergent,
packaging, oil exploration and water treatment markets. The acquisition of CSM
provides an additional platform for the Company to expand its global operations
and presence. The results of CSM's operations have been included in the
consolidated financial statements from the acquisition date.
The following tables summarize the estimated fair values of the assets
acquired and liabilities assumed at the date of the acquisition and unaudited
pro forma combined results of continuing operations as if the acquisition of CSM
had occurred at the beginning of each year presented. The unaudited pro forma
combined information is not necessarily indicative of the combined results that
would have occurred had the acquisition taken place at the beginning of the
periods presented, nor is it necessarily indicative of future results.
AT APRIL 30,
2002
------------
Current assets $ 6,263
Fixed assets 10,520
Goodwill 4,172
------------
Total assets acquired $ 20,955
------------
Current liabilities $ 3,023
Other liabilities 2,425
------------
Total liabilities assumed $ 5,448
------------
Net assets acquired $ 15,507
============
F-19
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
PRO FORMA
Twelve Months Ended
December 31,
2002
------------------
Net sales $ 315,759
Income from continuing operations 13,683
Net income 13,683
Basic earnings per share 0.49
Diluted earnings per share 0.45
The Company also completed several less significant acquisitions during
2004, 2003 and 2002. The acquisitions in these years, individually and in
aggregate, did not materially affect the Company's operating results or
financial position in the years presented. Summarized information related to
these acquisitions is as follows:
2004 2003 2002
------------ ------------ ------------
Number of acquisitions 2 3 1
Net cash paid $ 13,333 $ 7,144 $ 1,475
Goodwill and intangible assets recorded 12,742 1,118 369
(11) MARKET RISKS AND FINANCIAL INSTRUMENTS
As a multinational corporation that manufactures and markets products in
countries throughout the world, the Company is subject to certain market risks,
including those related to foreign currency, interest rates and government
actions. The Company uses a variety of practices to manage these market risks,
including, when considered appropriate, derivative financial instruments. The
Company uses derivative financial instruments only for risk management and does
not use them for trading or speculative purposes.
Exchange Rate Sensitivity
The Company is exposed to potential gains or losses from foreign
currency fluctuations affecting net investments and earnings denominated in
foreign currencies. The Company's primary exposures are to changes in exchange
rates for the U.S. dollar versus the euro, the British pound and the Polish
zloty. The Company also has significant exposure to changes in exchange rates
between the British pound and the euro as well as between the Polish zloty and
the euro.
The Company's 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, 2004, the
Company did not have any material outstanding foreign currency contracts.
Interest Rate Sensitivity
The following table provides information about the Company's 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.
F-20
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
EXPECTED MATURITY DATE
---------------------------------------------------------------------------------------
FAIR
2005 2006 2007 2008 2009 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- --------
(US$ equivalent in thousands)
Short-term debt:
Variable rate $ - $ - $ - $ - $ - $ - $ - $ -
Average interest rate - - - - - - - -
Long-term debt:
Variable rate - 29,495 - - - 4,800 - 34,295
Average interest rate - 3.0% - - - 1.7% - -
-------- -------- -------- -------- -------- ---------- -------- --------
Total $ - $ 29,495 $ - $ - $ - $ 4,800 $ - $ 34,295
======== ======== ======== ======== ======== ========== ======== ========
The Company periodically uses interest rate swaps to manage interest
rate risk on debt securities. These instruments allow the Company 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 2004 and 2003, there were no interest rate
swaps outstanding.
The Company is 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 the
Company's policy of investing in securities with high credit ratings and
investing through major financial institutions with high credit ratings.
The Company provides credit to customers in the ordinary course of
business and performs ongoing credit evaluations. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base. The Company believes its
allowance for doubtful accounts is sufficient to cover customer credit risks.
The Company's accounts receivable financial instruments are carried at amounts
that approximate fair value.
(12) LEASES
The Company has several noncancelable leases for railroad cars,
trailers, computer software, office equipment, certain automobiles, and office
and plant facilities. Total rent expense under operating lease agreements was
approximately $3,945, $4,208, and $4,099 in 2004, 2003 and 2002, respectively.
Additionally, the Company has three domestic facilities that are being
subleased.
F-21
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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, 2004:
MINIMUM LEASE
PAYMENTS SUBLEASE
------------------------------------------ RENTAL
DOMESTIC FOREIGN TOTAL INCOME
------------ ------------ ------------ ------------
Year ending December 31:
2005 $ 3,630 $ 474 $ 4,104 $ 509
2006 3,220 335 3,555 538
2007 2,685 228 2,913 565
2008 1,308 228 1,536 336
2009 306 216 522 -
Thereafter 52 779 831 -
------------ ------------ ------------ ------------
Total $ 11,201 $ 2,260 $ 13,461 $ 1,948
============ ============ ============ ============
(13) EMPLOYEE BENEFIT PLANS
The Company has a noncontributory pension plan covering substantially
all of its domestic employees. The benefits are based upon years of service and
qualifying compensation. The Company's funding is calculated using the
actuarially determined unit credit cost method. Contributions are intended to
provide not only for benefits attributed to services to date, but also for those
expected to be earned in the future.
The following tables set forth pension obligations included in the
Company's balance sheet at December 31, 2004 and 2003:
PENSION BENEFITS
-----------------------------
2004 2003
------------ ------------
Change in benefit obligations:
Beginning benefit obligation $ 29,732 $ 26,392
Service cost 1,449 1,325
Interest cost 1,827 1,751
Actuarial loss 2,819 1,267
Benefits paid (1,020) (1,003)
------------ ------------
Ending benefit obligation $ 34,807 $ 29,732
Change in plan assets:
Beginning fair value $ 22,682 $ 17,912
Actual return 4,021 4,661
Company contribution 1,000 1,112
Benefits paid (1,020) (1,003)
------------ ------------
Ending fair value $ 26,683 $ 22,682
Funded status of the plan $ (8,124) $ (7,050)
Unrecognized actuarial and investment (gain)
loss, net 2,620 1,884
Prior service cost 379 410
Transition asset (87) (224)
------------ ------------
Accrued pension cost liability includeded in
the consolidated financial statements $ (5,212) $ (4,980)
============ ============
F-22
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Pension cost was comprised of:
2004 2003 2002
------------ ------------ ------------
Service cost - benefits earned during the year $ 1,449 $ 1,325 $ 1,157
Interest cost on accumulated benefit obligation 1,827 1,751 1,634
Expected return on plan assets (1,938) (1,576) (1,777)
Net amortization and deferral (106) (36) (106)
------------ ------------ ------------
Net periodic pension cost $ 1,232 $ 1,464 $ 908
============ ============ ============
The following table summarizes the assumptions used in determining the
pension obligation:
2004 2003
------------ ------------
Discount rate 5.75% 6.25%
Rate of compensation increase 5.75% 5.75%
Long-term rate of return 8.50% 8.75%
The valuation of the Company's pension benefit plan was performed as of
October 1, 2004 and 2003. The Company expects to contribute $862 to the Plan in
2005. The accumulated benefit obligation (ABO) was $25,704 and $23,148 at
December 31, 2004 and 2003, respectively.
The Company's Plan assets, by asset category, are as follows:
2004 2003
------------ ------------
U.S. equity securities 63% 65%
International equity securities 4% 4%
Fixed income securities and bonds 33% 31%
Real estate and Other 0% 0%
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. Risk tolerance is established
through careful consideration of plan liabilities, plan funded status, and
corporate financial condition. The investment portfolio contains a diversified
blend of equity and fixed-income investments. The investment objectives
emphasize maximizing returns consistent with ensuring that sufficient assets are
available to meet liabilities, and minimizing corporate cash contributions. The
Plan's assets are managed so as to include investments that balance income and
capital appreciation.
The Plan has a target range for equity securities of between 60% and
75%. This allocation takes into account factors such as the average age of
employees covered by the Plan (benefit obligations) as well as overall market
conditions. Interim portfolio reviews result in investment allocations being
evaluated at least twice a year by the Pension Committee and rebalancing takes
place as needed. Equity investments are diversified across U.S. and non-U.S.
stocks, as well as growth, value, and small and large capitalizations. Debt
securities include both government and corporate investment vehicles. These
include a series of laddered debt securities as well as bond funds. Although
real estate investments have been employed in the past, none are being used at
the present.
AMCOL employs a building block approach in determining the long-term
rate of return for plan assets.
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
F-23
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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 portfolio return is established via a building block approach with
proper consideration of diversification and rebalancing. The average long-term
rate of return on the Plan's assets since 1994 has been approximately 10.2%.
The estimated future benefit payments from the defined benefit plan,
reflecting expected future service, as appropriate, are presented in the
following table:
PER YEAR
-----------
2005 1,061
2006 1,139
2007 1,205
2008 1,284
2009 1,358
2010 through 2014 8,987
-----------
Total $ 15,034
===========
In addition to the qualified plan outlined above, the Company sponsors a
supplementary pension plan that provides benefits in excess of qualified plan
limitations for certain employees. The unfunded accrued liability for this plan
was $3,406 and $2,911 at December 31, 2004 and 2003, respectively. However, the
Company has invested assets for the benefit of the employees covered by the
supplemental pension plan in the event that there is a change in control. The
Company has a minimum pension liability of $457 at December 31, 2004.
The Company also has a savings plan for its U.S. personnel. In 2004, the
Company 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 on the open market. Company contributions
under the savings plan were $1,440 in 2004, $1,202 in 2003 and $1,251 in 2002.
Employees hired after December 31, 2003 do not participate in the
Company's defined benefit plan. Instead, they participate in a defined
contribution plan whereby the Company makes a retirement contribution into their
savings plan equal to 3% of the individual's compensation. Under this defined
contribution plan, the Company made a total cash contribution of $148 into
employees' savings accounts in 2004.
The Company also has a deferred compensation plan and a 401(k)
restoration plan for its executives.
The foreign pension plans, which are not subject to United States
pension funding laws, are funded using individual annuity contracts and,
therefore, are not included in the information reflected above.
(14) STOCK OPTION PLANS
Prior to 2003, the Company accounted for its fixed plan stock options
under the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Effective January 1, 2003, the Company adopted the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
and has elected to apply these provisions prospectively, in accordance with SFAS
No. 148, to all employee awards granted, modified, or settled after January 1,
2003. Beginning in 2003, awards granted under the Company's plans vest over
three years. Therefore, the cost related to stock-based employee compensation
included in the determination of net income for 2003 and 2004 are less than
that which would have been recognized if the fair value based method had been
applied to all awards since the original effective date of Statement No. 123.
Had compensation cost for the Company's stock option plans been determined using
the fair value method of accounting described in SFAS 123 for years prior to
2003, the Company's net income would have been changed to the pro forma amounts
indicated in note 1 of Notes to Consolidated Financial Statements.
F-24
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
For purposes of calculating the compensation cost consistent with SFAS
123, the fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2004, 2003 and 2002:
2004 2003 2002
------------ ------------ ------------
Risk-free interest rate 3.0% 3.0% 4.5%
Expected life of option in years 5 5 6
Expected dividend yield of stock 1.5% 2.1% 0.9%
Expected volatility of stock price 53.3% 54.9% 44.6%
Weighted-average fair value of options granted $ 5,333 $ 1,763 2,038
The 1983, 1987 and 1993 Plans
The Company has reserved shares of its common stock for issuance of
incentive and nonqualified stock options to its directors, officers and key
employees under its 1983 Incentive Stock Option Plan, 1993 Stock Plan and 1987
Nonqualified Stock Option Plan. Options awarded under these plans, which entitle
the optionee to one share of common stock, may be exercised at a price equal to
the fair market value of the underlying common stock at the time of grant.
Options awarded under these plans generally vest 40% after two years and
continue to vest at the rate of 20% per year for each year thereafter, until
they are fully vested. Options are exercisable as they vest and expire 10 years
after the date of grant, except in the event of termination, retirement or death
of the optionee, or a change in control of the Company.
These plans expired as of December 31, 2000, though options that were
granted prior to expiration of the plans continue to be valid until the
individual option grants expire. Changes in options outstanding are summarized
as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
EXPIRED STOCK OPTION PLANS SHARES PRICE SHARES PRICE SHARES PRICE
- -------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Options outstanding at January 1 709,279 $ 2.07 1,884,421 $ 2.07 2,531,037 $ 2.09
Exercised (236,536) 2.01 (1,169,816) 2.07 (640,958) 1.92
Cancelled - - (5,326) 1.97 (5,658) 2.23
----------- ----------- -----------
Options outstanding at December 31 472,743 2.10 709,279 2.07 1,884,421 2.07
=========== =========== ===========
Options exercisable at December 31 472,743 709,279 1,725,105
=========== =========== ===========
Shares available for future grant at
December 31 - - -
=========== =========== ===========
1998 Long-Term Incentive Plan
The Company reserved 3,900,000 shares of its common stock for issuance
to its 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 in 2003 vested 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 previously awarded under these plans generally
vested 40% after two years and continued to vest at the rate of 20% per year for
each year thereafter, until they are fully vested. These options are exercisable
as they vest and expire 10 years after the date of grant, except in the event of
termination, retirement or death of the optionee or a change in control of the
Company. Changes in options outstanding are summarized as follows:
F-25
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- ------------------------- -------------------------
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 1,611,318 $ 4.11 1,731,194 $ 3.46 1,693,162 $ 2.66
Granted 294,650 18.10 310,950 5.67 307,450 6.63
Exercised (258,491) 2.94 (355,334) 2.46 (232,027) 1.84
Cancelled (20,333) 7.97 (75,492) 3.32 (37,391) 3.72
----------- ----------- -----------
Options outstanding at December 31 1,627,144 6.78 1,611,318 4.11 1,731,194 3.46
=========== =========== ===========
Options exercisable at December 31 826,121 634,547 551,527
=========== =========== ===========
Shares available for future grant at
December 31 1,176,308 1,450,625 686,083
=========== =========== ===========
Restricted stock awards are independent of option grants and are subject
to restrictions considered appropriate by the Compensation Committee of the
Board of Directors. The shares of restricted stock outstanding at December 31,
2003 are subject to forfeiture if employment terminates prior to six years from
the date of the grant. If certain performance criteria are satisfied, the
forfeiture period may be shortened to three years for a portion of, or the
entire award. During the remaining period through the sixth anniversary of a
grant, ownership of the shares cannot be transferred. Restricted stock has the
same cash dividend and voting rights as other common stock and is considered to
be currently issued and outstanding. The cost of the awards, determined to be
the fair market value of the shares at the date of the grant, is expensed
ratably over the period the restrictions lapse. On May 22, 2003, AMCOL awarded
141,000 shares of restricted stock to six officers, and these same shares were
outstanding at December 31, 2004. Total compensation expense related to this
grant of $921 will be recorded over the three year period.
All Stock Option Plans
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OF CONTRACTUAL EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (Yrs). PRICE SHARES PRICE
- --------------------------------------------- ------------ ------------ ------------ ------------ ------------
$ 1.350 - $ 2.062 529,744 2.97 $ 1.733 529,744 $ 1.733
$ 2.091 - $ 4.030 525,620 4.04 2.800 478,190 2.692
$ 5.000 - $ 6.650 753,623 5.80 5.799 290,930 5.697
$ 18.100 - $ 18.100 290,900 5.11 18.100 - -
------------ ------------
Total 2,099,887 4.55 5.727 1,298,864 2.974
============ ============
F-26
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(15) ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of:
2004 2003
------------ ------------
Accrued severance taxes $ 2,726 $ 2,588
Accrued employee costs 1,972 1,813
Accrued vacation pay 1,650 1,650
Accrued bonus 5,131 5,139
Accrued product liability 632 1,060
Accrued commissions 2,092 2,217
Accrued reclamation costs 1,626 1,337
Other 20,378 10,695
------------ ------------
$ 36,207 $ 26,499
============ ============
(16) 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.
(17) QUARTERLY RESULTS (Unaudited)
Unaudited summarized results for each quarter in 2004 and 2003 are as
follows; the amounts for the third quarter of 2004 have been restated as
detailed in the table following the 2003 quarterly results:
2004 QUARTER
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
Restated
------------ ------------ ------------ ------------
Minerals (A) $ 64,313 $ 66,686 $ 67,430 $ 65,636
Environmental (A) 33,249 46,588 49,983 40,332
Transportation 9,332 10,058 10,979 10,281
Intersegment shipping (3,187) (4,197) (4,326) (4,052)
------------ ------------ ------------ ------------
Net sales (A) $ 103,707 $ 119,135 $ 124,066 $ 112,197
============ ============ ============ ============
Minerals (A) $ 12,861 $ 13,756 $ 14,223 $ 11,997
Environmental (A) 12,378 16,187 16,985 $ 13,037
Transportation 1,037 1,112 1,214 $ 1,108
------------ ------------ ------------ ------------
Gross profit (A) $ 26,276 $ 31,055 $ 32,422 $ 26,142
============ ============ ============ ============
Minerals $ 7,435 $ 8,238 $ 8,098 $ 6,548
Environmental 3,079 6,152 6,820 4,508
Transportation 386 451 523 360
Corporate (3,660) (3,740) (5,166) (4,359)
------------ ------------ ------------ ------------
Operating profit $ 7,240 $ 11,101 $ 10,275 $ 7,057
============ ============ ============ ============
Income from continuing operations $ 5,083 $ 7,740 $ 12,469 $ 6,273
============ ============ ============ ============
Discontinued operations $ - $ - $ - $ -
============ ============ ============ ============
Net income $ 5,083 $ 7,740 $ 12,469 $ 6,273
============ ============ ============ ============
Basic earnings per share (B) $ 0.17 $ 0.27 $ 0.43 $ 0.21
============ ============ ============ ============
Diluted earnings per share (B) $ 0.16 $ 0.25 $ 0.41 $ 0.20
============ ============ ============ ============
F-27
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2003 QUARTER
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
Minerals (A) $ 50,452 $ 53,832 $ 55,467 $ 57,353
Environmental (A) 24,722 36,035 40,305 30,289
Transportation 8,797 9,390 10,367 8,995
Intersegment shipping (2,996) (3,592) (4,379) (3,071)
------------ ------------ ------------ ------------
Net sales (A) $ 80,975 $ 95,665 $ 101,760 $ 93,566
============ ============ ============ ============
Minerals (A) $ 9,725 $ 10,787 $ 11,026 $ 11,518
Environmental (A) 9,429 13,796 15,509 11,720
Transportation 978 1,025 1,124 914
------------ ------------ ------------ ------------
Gross profit (A) $ 20,132 $ 25,608 $ 27,659 $ 24,152
============ ============ ============ ============
Minerals $ 4,917 $ 5,882 $ 6,055 $ 6,569
Environmental 2,383 5,321 7,171 2,980
Transportation 376 399 477 295
Corporate (3,346) (3,335) (3,761) (3,446)
------------ ------------ ------------ ------------
Operating profit $ 4,330 $ 8,267 $ 9,942 $ 6,398
============ ============ ============ ============
Income from continuing operations $ 2,930 $ 5,709 $ 6,632 $ 4,644
============ ============ ============ ============
Discontinued operations $ - $ - $ - $ 8,950
============ ============ ============ ============
Net income $ 2,930 $ 5,709 $ 6,632 $ 13,594
============ ============ ============ ============
Basic earnings per share (B) $ 0.10 $ 0.20 $ 0.23 $ 0.48
============ ============ ============ ============
Diluted earnings per share (B) $ 0.10 $ 0.19 $ 0.22 $ 0.45
============ ============ ============ ============
(A) Commencing in the fourth quarter of 2004, the Company has classified
commissions paid to external sales representatives as general, selling and
administrative expenses. Commissions paid in prior quarters had been
classified as a reduction of net sales, but have now been reclassified to
conform to current presentation. Such reclassifications increased net sales
and gross profits in the minerals and environmental segments and had no
impact on operating profit presented for those quarters.
(B) Earnings per share (EPS) for each quarter is computed using the
weighted-average number of shares outstanding during the quarter, while EPS
for the year is computed using the weighted-average number of shares
outstanding during the year. Thus, the sum of the EPS for each of the four
quarters may not equal the EPS for the year.
A reconciliation of the amounts presented above for the third quarter of
2004 to the amounts previously reported in the Form 10-Q report for the quarter
ended September 30, 2004 is as follows:
2004 THIRD QUARTER RESTATEMENT
-------------------------------
AS REPORTED AS RESTATED
------------- -------------
Minerals $ 67,116 $ 67,430 A
Environmental 47,771 49,983 A
Transportation 10,979 10,979
Intersegment shipping (4,326) (4,326)
------------- -------------
Net sales $ 121,540 $ 124,066
============= =============
Minerals $ 13,909 $ 14,223 A
Environmental 14,915 16,985 A, B
Transportation 1,214 1,214
------------- -------------
Gross profit $ 30,038 $ 32,422
============= =============
Minerals $ 8,098 $ 8,098
Environmental 6,964 6,820 B
Transportation 523 523
Corporate (3,961) (5,166) C
------------- -------------
Operating profit $ 11,624 $ 10,275
============= =============
Income from continuing operations $ 8,317 $ 12,469 D
============= =============
Net income $ 8,317 $ 12,469 D
============= =============
Basic earnings per share (B) $ 0.29 $ 0.43 D
============= =============
Diluted earnings per share (B) $ 0.27 $ 0.41 D
============= =============
(A) See Note (A) to the preceding table regarding reclassifications of
commissions paid to independent sales representatives.
(B) Gives effect to an adjustment of $144 attributable to a revision of
depreciation expense related to an asset that is to be disposed.
(C) Gives effect to an adjustment of $1,205 to record professional fees
associated with amended federal income tax returns dating from 1999 to 2002,
which resulted in refund claims.
(D) In addition to the matters described in (B) and (C) above, gives effect to
reduced income taxes attributable to (i) the adjustment of foreign income
taxes ($1,111) at a UK subsidiary due to non-recognition of deferred tax
assets and (ii) federal income tax refunds ($3,968). Also gives effect to
income tax benefits ($422) attributable to the matters described in (B) and
(C) above. EPS amounts have been recalculated to give effect to the
aforementioned items.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
ADDITIONS
--------------------------
CHARGED BALANCE
BALANCE AT CHARGED TO (credited) AT END
BEGINNING COSTS AND TO OTHER OTHER CHARGES OF
YEAR DESCRIPTION OF YEAR EXPENSES ACCOUNT ADD (deduct)(1) YEAR
- ---------- --------------------------------- ----------- ----------- ------------ --------------- ------------
2004 Allowance for doubtful accounts $ 3,455 $ 2,467 $ - $ (1,285) $ 4,637
=========== =========== ============ ============= ============
2003 Allowance for doubtful accounts $ 2,642 $ 1,082 $ - $ (269) $ 3,455
=========== =========== ============ ============= ============
2002 Allowance for doubtful accounts $ 2,127 $ 1,287 $ - $ (772) $ 2,642
=========== =========== ============ ============= ============
(1) Bad debts written off.
F-28
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 31, 2005
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 31, 2005
- --------------------------------------------------
John Hughes
Chairman of the Board and Director
/s/ Lawrence E. Washow March 31, 2005
- --------------------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
and Director
/s/ Gary L. Castagna March 31, 2005
- --------------------------------------------------
Gary L. Castagna
Senior Vice President and Chief Financial Officer;
Treasurer and Chief Accounting Officer
/s/ Arthur Brown March 31, 2005
- --------------------------------------------------
Arthur Brown
Director
/s/ Daniel P. Casey March 31, 2005
- --------------------------------------------------
Daniel P. Casey
Director
/s/ Robert E. Driscoll, III March 31, 2005
- --------------------------------------------------
Robert E. Driscoll, III
Director
/s/ Jay D. Proops March 31, 2005
- --------------------------------------------------
Jay D. Proops
Director
/s/ Clarence O. Redman March 31, 2005
- --------------------------------------------------
Clarence O. Redman
Director
/s/ Dale E. Stahl March 31, 2005
- --------------------------------------------------
Dale E. Stahl
Director
/s/ Audrey L. Weaver March 31, 2005
- --------------------------------------------------
Audrey L. Weaver
Director
/s/ Paul C. Weaver March 31, 2005
- --------------------------------------------------
Paul C. Weaver
Director
58
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- --------
3.1 Restated Certificate of Incorporation of the Company (5), as amended
(10), as amended (16)
3.2 Bylaws of the Company (10)
4 Article Four of the Company's Restated Certificate of Incorporation
(5), as amended (16)
10.3 Lease Agreement for office space dated September 29, 1986, between
the Company and American National Bank and Trust Company of Chicago;
(1) First Amendment dated June 2, 1994 (8); Second Amendment dated
June 2, 1997 (13)
10.4 AMCOL International Corporation 1987 Non-Qualified Stock Option Plan
(2); as amended (6)
10.9 AMCOL International Corporation Dividend Reinvestment and Stock
Purchase Plan (4); as amended (6)
10.10 AMCOL International Corporation 1993 Stock Plan, as amended and
restated (10)
10.15 AMCOL International Corporation 1998 Long-Term Incentive Plan (15),
as amended (21)
10.26 Employment Agreement dated March 15, 2002 by and between Registrant
and Gary D. Morrison (22)*
10.27 Employment Agreement dated March 15, 2002 by and between Registrant
and Peter M. Maul (22)*
10.28 Employment Agreement dated March 15, 2002 by and between Registrant
and Gary Castagna (22)*
10.29 Employment Agreement dated March 15, 2002 by and between Registrant
and Ryan F. McKendrick (22)*
10.30 Employment Agreement dated March 15, 2002 by and between Registrant
and Lawrence E. Washow (22)*
10.31 Credit Agreement by and among AMCOL International Corporation and
Harris 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 (23)
10.32 A written description of compensation for the Board of Directors of
the Company is set forth under the caption "Director Compensation"
in the definitive Proxy Statement to be filed with the Securities
and Exchange Commission and delivered to the Company's shareholders
in connection with the Annual Meeting of Shareholders to be held on
May 12, 2005, and is hereby incorporated by reference.*
21 AMCOL International Corporation Subsidiary Listing
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350
- ----------
(1) Exhibit is incorporated by reference to the Registrant's Form 10
filed with the Securities and Exchange Commission on July 27, 1987.
(2) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1988.
(4) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1992.
(5) Exhibit is incorporated by reference to the Registrant's Form S-3
filed with the Securities and Exchange Commission on September 15,
1993.
(6) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1993.
(8) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1994.
(10) Exhibit is incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1995.
(13) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter
ended June 30, 1997.
(15) Exhibit is incorporated by reference to the Registrant's Form S-8
(File 333-56017) filed with the Securities and Exchange Commission
on June 4, 1998.
(16) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter
ended June 30, 1998.
(21) Exhibit is incorporated by reference to the Registrant's Form S-8
(File 333-68664) filed with the Securities and Exchange Commission
on August 30, 2001.
59
(22) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter
ended March 31, 2002.
(23) Exhibit is incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission for the quarter
ended September 30, 2003.
*Management compensatory plan or arrangement
60