================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 0-15661
AMCOL INTERNATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0724340
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1500 West Shure Drive, Suite 500, Arlington Heights, Illinois 60004-7803
------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 394-8730
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12(b)-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 22, 2005
- ------------------------------ -----------------------------
(Common stock, $.01 par value) 29,586,799 Shares
================================================================================
AMCOL INTERNATIONAL CORPORATION
INDEX
Page No.
--------
Part I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Operations -
three months ended March 31, 2005 and 2004 5
Condensed Consolidated Statements of Comprehensive Income -
three months ended March 31, 2005 and 2004 6
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 2005 and 2004 7
Notes to Condensed Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
Item 4 Controls and Procedures 23
Part II - Other Information
Item 2e Company Repurchases of Company Stock 24
Item 6 Exhibits and Reports on Form 8-K 24
2
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
- ------------------------------------------------------------ --------------- ---------------
(unaudited) *
Current assets:
Cash $ 19,501 $ 17,594
Accounts receivable, net 91,152 88,342
Inventories 68,909 63,882
Prepaid expenses 8,087 7,111
Income taxes receivable 8,394 9,126
Current deferred tax assets 4,477 4,293
Assets held for sale 543 752
--------------- ---------------
Total current assets 201,063 191,100
--------------- ---------------
Investment in and advances to joint ventures 15,875 15,023
--------------- ---------------
Property, plant, equipment, and mineral rights and reserves:
Land and mineral rights 11,833 12,019
Depreciable assets 243,482 247,280
--------------- ---------------
255,315 259,299
Less: accumulated depreciation 162,975 165,658
--------------- ---------------
92,340 93,641
--------------- ---------------
Other assets:
Goodwill 19,139 19,225
Intangible assets, net 3,517 3,802
Deferred tax assets 7,587 6,444
Other assets 9,110 7,207
--------------- ---------------
39,353 36,678
--------------- ---------------
$ 348,631 $ 336,442
=============== ===============
Continued...
3
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
- ------------------------------------------------------------ --------------- ---------------
(unaudited) *
Current liabilities:
Accounts payable 31,566 25,474
Accrued liabilities 29,760 36,207
--------------- ---------------
Total current liabilities 61,326 61,681
--------------- ---------------
Long-term debt 42,116 34,295
--------------- ---------------
Minority interests in subsidiaries 125 5
Deferred compensation 6,295 5,872
Other liabilities 11,981 12,655
--------------- ---------------
18,401 18,532
--------------- ---------------
Stockholders' equity:
Common stock 320 320
Additional paid in capital 70,791 69,763
Retained earnings 158,662 154,366
Accumulated other comprehensive income 13,521 14,905
--------------- ---------------
243,294 239,354
Less:
Treasury stock 16,506 17,420
--------------- ---------------
226,788 221,934
--------------- ---------------
$ 348,631 $ 336,442
=============== ===============
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
Net sales $ 122,050 $ 104,154
Cost of sales 92,370 77,431
--------------- ---------------
Gross profit 29,680 26,723
General, selling and administrative expenses 21,445 19,483
--------------- ---------------
Operating profit 8,235 7,240
--------------- ---------------
Other income (expense):
Interest expense, net (361) (79)
Other, net (105) 43
--------------- ---------------
(466) (36)
--------------- ---------------
Income before income taxes and equity in income of
joint ventures 7,769 7,204
Income tax expense 1,484 2,269
--------------- ---------------
Income before equity in income of joint ventures 6,285 4,935
Income from joint ventures 667 148
--------------- ---------------
Net income $ 6,952 $ 5,083
=============== ===============
Weighted average common shares outstanding 29,333,627 29,092,656
=============== ===============
Weighted average common and common equivalent shares
outstanding 30,769,482 30,986,319
=============== ===============
Basic earnings per share $ 0.24 $ 0.17
=============== ===============
Diluted earnings per share $ 0.23 $ 0.16
=============== ===============
Dividends declared per share $ 0.090 $ 0.070
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
Net income $ 6,952 $ 5,083
Other comprehensive income (loss):
Minimum pension liability 114 (410)
Foreign currency translation adjustment (1,498) 1,341
--------------- ---------------
Comprehensive income $ 5,568 $ 6,014
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
Cash flow from operating activities:
Net income $ 6,952 $ 5,083
Adjustments to reconcile from net income to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 4,885 5,279
Changes in assets and liabilities, net of effects of
acquisitions:
Increase in current assets (7,290) (16,380)
Increase in noncurrent assets (3,059) (1,408)
Increase (decrease) in current liabilities 1,624 2,783
Increase (decrease) in noncurrent liabilities (251) 824
Other (184) 799
--------------- ---------------
Net cash provided by (used in) operating
activities 2,677 (3,020)
--------------- ---------------
Cash flow from investing activities:
Acquisition of land, mineral rights, and depreciable assets (5,157) (3,242)
Acquisitions, net of cash (1,632) (13,221)
Other 1,129 582
--------------- ---------------
Net cash used in investing activities (5,660) (15,881)
--------------- ---------------
Cash flow from financing activities:
Net change in outstanding debt 7,821 17,138
Proceeds from sales of treasury stock 550 504
Purchases of treasury stock - (196)
Dividends paid (2,656) (2,047)
--------------- ---------------
Net cash provided by financing activities 5,715 15,399
--------------- ---------------
Effect of foreign currency rate changes on cash (825) 396
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,907 (3,106)
--------------- ---------------
Cash and cash equivalents at beginning of period 17,594 13,525
--------------- ---------------
Cash and cash equivalents at end of period $ 19,501 $ 10,419
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 327 $ 85
=============== ===============
Income taxes $ 1,243 $ 1,056
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Operations
Amcol International Corporation (the Company) operates in two principal
areas of activity: minerals and environmental. The Company also operates a
transportation business which includes delivery of its own products. For the
quarter ended March 31, 2005, the Company's revenues were derived 60% from
minerals, 35% from environmental, and 9% from transportation operations, all
reduced by 4% from the elimination of intersegment shipping revenues. For the
quarter ended March 31, 2004, the Company's revenues were derived 62% from
minerals, 32% from environmental, and 9% from transportation operations, all
reduced by 3% from the elimination of intersegment shipping revenues. Further
descriptions of the Company's products, it principal markets and the relative
significance of its operations are included in Note 5, "Business Segment
Information."
Basis of Presentation
The financial information included herein has been prepared by
management and, other than the condensed consolidated balance sheet as of
December 31, 2004, is unaudited. The condensed consolidated balance sheet as of
December 31, 2004 has been derived from, but does not include all of the
disclosures contained in, the audited consolidated financial statements for the
year ended December 31, 2004. The information furnished herein includes all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of operations and cash flows for the interim periods
ended March 31, 2005 and 2004, and the financial position of the Company as of
March 31, 2005, and all such adjustments are of a normal recurring nature.
Management recommends that the accompanying condensed consolidated financial
information be read in conjunction with the consolidated financial statements
and related notes included in the Company's 2004 Annual Report on Form 10-K, as
amended.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full years.
Reclassifications
8
Certain items in the condensed consolidated financial statements
contained herein and notes thereto have been reclassified to conform with the
consolidated financial statement presentation followed by the Company when it
prepared the consolidated financial statements included in its annual report on
Form 10-K, as amended, for the year ended December 31, 2004; these
reclassifications relate to commissions, intangible assets, reclamation
liabilities, and income taxes payable.
In addition, net sales in periods prior to the quarter ended March 31,
2005 were reported net of certain deductions relating to product liability,
warranty and royalty expenses. Effective for the quarter ended March 31, 2005,
these deductions are included in general, selling, and administrative expenses.
Thus, for all periods prior to the quarter ended March 31, 2005 presented
herein, these deductions have been reclassified to conform to the current year
presentation. This reclassification did not impact net income or earnings per
share.
New Accounting Standards
In 2003, the Company adopted FASB Statement No. 143, Accounting for
Asset Retirement Obligations, which addresses financial accounting and reporting
for legal obligations associated with the retirement of tangible along-lived
assets and the related asset retirement costs. In March 2005, the FASB issued
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement No. 143 ("FIN 47"). FIN 47
clarifies both the definition of the term "conditional asset retirement
obligation" as that term is used in FASB Statement No. 143 and when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The Company's adoption of FIN 47 in March 2005 did
not have a material impact on the Company's condensed consolidated financial
statements.
9
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
Note 2: INVENTORIES
Inventories at March 31, 2005 have been valued using the same methods as
at December 31, 2004. The composition of inventories at March 31, 2005 and
December 31, 2004 was as follows:
MARCH 31, DECEMBER 31,
2004 2004
--------------- ---------------
Advance mining $ 2,592 $ 2,277
Crude stockpile inventories 25,831 25,159
In-process inventories 23,245 18,123
Other raw material, container, and supplies inventories 17,241 18,323
--------------- ---------------
$ 68,909 $ 63,882
=============== ===============
Note 3: LAND RECLAMATION
The Company mines various minerals using a surface mining process that
requires the removal of overburden. Under various governmental regulations, the
Company is obligated to restore the land comprising each mining site to its
original condition at the completion of mining activity. The obligation is
adjusted to reflect the passage of time and changes in estimated future cash
outflows. A reconciliation of the activity within the Company's reclamation
obligation from December 31, 2004 to March 31, 2005 is as follows:
THREE MONTHS
ENDED
MARCH 31, 2005
---------------
Balance at beginning of period $ 4,850
Settlement of obligations (570)
Liabilities incurred and accretion expense 545
---------------
Balance at end of period $ 4,825
===============
10
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
Note 4: EARNINGS PER SHARE
Basic earnings per share was computed by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
earnings per share was computed by dividing net income by the weighted average
common shares outstanding after consideration of the dilutive effect of stock
options outstanding during each period. For the quarter ended March 31, 2005,
the exercise price of all the outstanding stock options was below the average
market price and therefore the impact of these options was included in the
computation of diluted earnings per share.
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
Weighted average of common shares outstanding 29,333,627 29,092,656
Dilutive impact of stock options 1,435,855 1,893,663
--------------- ---------------
Weighted average of common and common equivalent
shares for the period 30,769,482 30,986,319
=============== ===============
Common shares outstanding 29,474,627 29,281,608
=============== ===============
Note 5: BUSINESS SEGMENT INFORMATION
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 both to 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 performance 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 and cash equivalents, corporate leasehold
improvements, the nanocomposite plant investment and other miscellaneous
equipment.
11
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
The following summaries set forth certain financial information by
business segment for the three months ended March 31, 2005 and 2004 and as of
March 31, 2005 and December 31, 2004.
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
Business Segment:
Revenues:
Minerals $ 73,448 $ 64,337
Environmental 42,304 33,672
Transportation 10,985 9,332
Intersegment shipping (4,687) (3,187)
--------------- ---------------
Total $ 122,050 $ 104,154
=============== ===============
Operating profit (loss):
Minerals $ 7,795 $ 7,435
Environmental 5,137 3,079
Transportation 573 386
Corporate (5,270) (3,660)
--------------- ---------------
Total $ 8,235 $ 7,240
=============== ===============
MAR. 31, 2005 DEC. 31, 2004
--------------- ---------------
Assets:
Minerals $ 178,646 $ 172,972
Environmental 131,130 128,154
Transportation 3,204 3,122
Corporate 35,651 32,194
--------------- ---------------
Total $ 348,631 $ 336,442
=============== ===============
At March 31, 2005 and December 31, 2004, goodwill for the minerals
segment was $5,856 and $5,773; for the environmental segment, it was $13,283 and
$13,452, respectively.
Note 6: 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. No stock-based employee compensation cost was reflected in net
income prior to 2003, as all options granted under those plans had an exercise
price equal to the market
12
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
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, and has elected to apply those
provisions prospectively, in accordance with SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123,, to all employee awards granted, modified, or settled after
January 1, 2003. Beginning in 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 2004 and 2005 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 Statement No. 123.
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:
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
Net income, as reported $ 6,952 $ 5,083
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 368 332
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (403) (406)
--------------- ---------------
Pro forma net income $ 6,917 $ 5,009
=============== ===============
Earnings per share:
Basic - as reported $ 0.24 $ 0.17
Basic - pro forma $ 0.24 $ 0.17
Diluted - as reported $ 0.23 $ 0.16
Diluted - pro forma $ 0.22 $ 0.16
13
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
Note 7: COMPONENTS OF PENSION AND OTHER RETIREMENT BENEFIT COST
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
Service cost $ 463 $ 362
Interest cost 493 457
Expected return on plan assets (568) (484)
Amortization of transition (asset) / obligation (22) (34)
Amortization of prior service cost 8 7
Amortization of net (gain) loss - -
--------------- ---------------
Net periodic benefit cost $ 374 $ 308
=============== ===============
EMPLOYER CONTRIBUTIONS
The Company previously disclosed in its financial statements for the
year ended December 31, 2004, that it expected to contribute $862 to its pension
plan in 2005. As of March 31, 2005, that full contribution has been made.
Note 8: TAXES
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 $30.7 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.
In the three month period ending March 31, 2005, the Company decreased
its provision for taxes owed by $574 largely as a result of changes to estimated
depletion deductions.
14
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
(Continued)
Note 9: ACQUISITIONS
The Company did not make any acquisitions in the three months ended
March 31, 2005. As of December 31, 2004, the Company provided for $1,632 of
payments to be made to former owners of acquired businesses because the
operating performance of the acquired businesses met profit targets included in
earn-out provisions of the related purchase agreements. During the three months
ended March 31, 2005, those amounts were paid.
Note 10: SUBSEQUENT EVENT
In April 2005, the Company sold one of its manufacturing facilities for
$808 of cash proceeds, resulting in a pre-tax gain of $627 on the sale of
assets. This transaction is not reflected in the financial results for the three
month period ended March 31, 2005, but will be reflected in the financial
results reported for the second quarter of 2005.
15
ITEM 2: AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
From time to time, certain statements we make, including statements in this
Management's Discussion and Analysis of Financial Condition and Results of
Operation section, constitute "forward-looking statements" made in reliance upon
the safe harbor contained in Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements include statements relating to our
Company or our operations that are preceded by terms such as "expects,"
"believes," "anticipates," "intends" and similar expressions, and statements
relating to anticipated growth and levels of capital expenditures. Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Our actual results, performance or achievements could
differ materially from the results, performance or achievements expressed in, or
implied by, these forward-looking statements as a result of various factors,
including without limitation the following: actual performance in our various
markets; conditions in the metalcasting and construction industries; operating
costs; competition; currency exchange rates and devaluations; delays in
development, production and marketing of new products; and other factors set
forth from time to time in our reports filed with the Securities and Exchange
Commission.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States.
We evaluate the accounting policies and estimates used to prepare the financial
statements on an ongoing basis. We consider the accounting policies used in
preparing our financial statements to be critical accounting policies when they
are both important to the portrayal of our financial condition and results of
operation, and require us to make estimates, complex judgments and assumptions,
including with respect to events which are inherently uncertain. As a result,
actual results could differ from these estimates. For more information on our
critical accounting policies, one should also read our Annual Report on Form
10-K, as amended, for the year ended December 31, 2004.
ANALYSIS OF RESULTS OF OPERATIONS
Following is a discussion and analysis that describes certain factors that have
affected, and may continue to affect, our financial position and operating
results. This discussion should be read with the accompanying condensed
consolidated financial statements. In addition, as discussed in Note 1 of the
Notes to Condensed Consolidated Financial Statements in Item 1, the Company has
reclassified certain financial data as of and for the three month period ended
March 31, 2005. The following discussion and analysis of results of operations
and financial condition are based upon such reclassified financial data.
16
THREE MONTHS ENDED MARCH 31, 2005 VS. MARCH 31, 2004:
RESULTS OF OPERATIONS (IN MILLIONS):
NET SALES:
2005 2004 % Change
-------- -------- --------
$ 122.1 $ 104.2 17%
Favorable foreign currency changes accounted for approximately 9% of the
$17.9 million increase in net sales over the 2004 period. On an operating
segment basis, minerals accounted for approximately 51% of the increase in net
sales while environmental contributed approximately 48% of the growth. Our
transportation segment, after factoring out the impact of intersegment revenues,
accounted for approximately 1% of the sales growth over the first quarter of
2004.
GROSS PROFIT:
2005 2004 % Change
-------- -------- --------
$ 29.7 $ 26.7 11%
Margin 24.3% 25.7% N/A
Gross profit improved in the first quarter of 2005 in conjunction with
the increase in net sales. Gross margin declined by 140 basis points due to
relatively lower gross profit earned from the minerals and environmental
segments. Higher transportation, raw materials and energy-related costs were the
primary causes for the decline in gross margins in both segments.
GENERAL, SELLING &
ADMINISTRATION EXPENSES:
2005 2004 % Change
-------- -------- --------
$ 21.5 $ 19.5 10%
Higher corporate segment expenses accounted for approximately 82% of the
increase over the first quarter of 2004. Within the corporate segment, higher
audit and Sarbanes-Oxley compliance costs represented the largest component of
the increased corporate segment expenses. Research and development expenses were
approximately $1.7 million in the first quarter of 2005 compared with $1.3
million in last year's period.
OPERATING PROFIT:
2005 2004 % Change
-------- -------- --------
$ 8.2 $ 7.2 14%
Margin 6.7% 7.0% N/A
Favorable foreign currency exchange rates accounted for approximately 9%
of the increase in operating profit over the 2004 first quarter, or 1.3
percentage points of growth. The 20 basis point decline in operating margin was
attributed to the decrease in gross margin described above.
INTEREST EXPENSE, NET:
2005 2004 % Change
-------- -------- --------
$ 0.4 $ 0.1 357%
Interest expense in the first quarter of 2005 increased primarily due to
higher average long-term debt compared with the prior year period. The increase
in long-term debt was attributed to acquisitions completed in 2004 and an
increase in working capital funding.
17
INCOME TAXES:
2005 2004 % Change
-------- -------- --------
$ 1.5 $ 2.3 (35)%
Effective tax
rate 19.1% 31.5% N/A
The effective tax rate was favorably impacted by lower foreign tax rates
in comparison with the 2004 period. Additionally, the 2005 period was positively
impacted by a change in estimate of 2004 income taxes payable, which was
approximately $574,000. After factoring out this adjustment, the effective tax
rate would have been 26.5%, and management believes this rate is indicative of
the expected rate for the fiscal year ending December 31, 2005.
INCOME FROM JOINT VENTURES AND MINORITY INTERESTS:
2005 2004 % Change
-------- -------- --------
$ 0.7 $ 0.1 351%
The primary reason for the increase in income recorded in this category
was improved profitability of two investments in Indian entities: one comprised
of a 20% interest in a bentonite company and the other being a 50% interest in a
joint venture that manufactures and distributes treated clays used for
clarifying edible oils. We also recorded income from our 50% interest in a
Japanese bentonite company. In the third quarter of 2004, we increased our
interest from 19% in this venture and, therefore, began to account for it under
the equity method instead of recording income when dividends were received as
required under the cost method of accounting.
NET INCOME:
2005 2004 % Change
-------- -------- --------
$ 7.0 $ 5.1 37%
Margin 5.7% 4.9% N/A
Net margin in the 2005 period increased primarily due to the increase
in operating profit, the lower effective tax rate and the improvement in income
from joint ventures and minority interests.
DILUTED EARNINGS PER SHARE:
2005 2004 % Change
-------- -------- --------
$ 0.23 $ 0.16 44%
Growth in base-business sales and operating profit contributed
approximately $0.02 per share of the increase over the first quarter of 2004. A
lower effective income tax rate accounted for $0.03 per share of the increase
over the prior-year period. Income from joint ventures and minority interests
contributed approximately $0.02 of the increase. Weighted average common and
common equivalent shares outstanding decreased by less than 1% over the 2004
quarter.
SEGMENT ANALYSIS:
Following is a review of operating results for each of our four
reporting segments:
18
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
MINERALS 2005 2004 2005 vs. 2004
- -------------------------- ------------------- ------------------- -------------------
(Dollars in Thousands)
Net sales $ 73,448 100.0% $ 64,337 100.0% $ 9,111 14.2%
Cost of sales 59,974 81.7% 51,452 80.0%
-------- -------- -------- --------
Gross profit 13,474 18.3% 12,885 20.0% 589 4.6%
General, selling and
administrative expenses 5,679 7.7% 5,450 8.5% 229 4.2%
-------- -------- -------- -------- --------
Operating profit 7,795 10.6% 7,435 11.5% 360 4.8%
Favorable foreign currency translation rates accounted for approximately
7.0% of the sales growth over the 2004 period. Domestic metalcasting sales were
positively impacted by higher demand and price increases that were implemented
to offset rising transportation, raw materials and energy-related costs. The
metalcasting markets in the Asia/Pacific region also continued to benefit from
strong demand from automotive and transportation equipment component
manufacturers. Pet products sales increased due to higher volume in comparison
with the prior-year period. Specialty minerals revenues were flat.
Gross profit rose in conjunction with the increase in sales albeit at a
slower rate. Gross margin declined by 170 basis points in comparison with the
prior-year period due to the rising costs of the metalcasting and pet products
business mentioned above.
General, selling and administrative costs increased modestly primarily
due to higher expenses associated with the health and beauty business.
Operating profit improved due to the increase in sales and gross profit.
Operating margin decreased by 90 basis points due to the decline in gross
margin. The domestic metalcasting and pet products businesses continue to see
rising manufacturing costs. Our ability to obtain price increases is necessary
to restore gross margin to historical levels.
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
ENVIRONMENTAL 2005 2004 2005 vs. 2004
- -------------------------- ------------------- ------------------- -------------------
(Dollars in Thousands)
Net sales $ 42,304 100.0% $ 33,672 100.0% $ 8,632 25.6%
Cost of sales 27,444 64.9% 20,871 62.0%
-------- -------- -------- --------
Gross profit 14,860 35.1% 12,801 38.0% 2,059 16.1%
General, selling and
administrative expenses 9,723 23.0% 9,722 28.9% 1 0.0%
-------- -------- -------- -------- --------
Operating profit 5,137 12.1% 3,079 9.1% 2,058 66.8%
Favorable currency exchange rates accounted for approximately 11% of the
increase in sales. Strong demand in the domestic lining technologies, building
materials and water treatment businesses led to the increase in sales over the
2004 first quarter. Growth in lining technologies product demand in Europe and
Asia also contributed to the increase. The water treatment increase arose from
higher demand for products and services from our oilfield services businesses.
Price increases had a minimal impact on revenue growth in the quarter.
19
Gross profit grew in conjunction with the increase in net sales;
however, gross margin declined by 290 basis points from the first quarter of
2004. Gross margins on lining technologies sales declined due to the mix of
product sales to lower profit items. This was especially evident in Europe.
Also, higher transportation, raw materials and energy-related costs negatively
impacted manufacturing costs in comparison with the prior-year period.
General, selling and administrative expenses were flat due to spending
controls implemented throughout the segment.
Operating profit improved due to the increase in sales and gross profit
and the flat general, selling and administrative expenses. Consequently,
operating margin improved by 300 basis points. The outlook for the segment
appears favorable as it enters the period in which the lining technologies and
building materials businesses generate most of their revenue and profits. Water
treatment prospects continue to appear positive due to the demand for oilfield
services and products.
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
TRANSPORTATION 2005 2004 2005 vs. 2004
- -------------------------- ------------------- ------------------- -------------------
(Dollars in Thousands)
Net sales $ 10,985 100.0% $ 9,332 100.0% $ 1,653 17.7%
Cost of sales 9,639 87.7% 8,295 88.9%
-------- -------- -------- --------
Gross profit 1,346 12.3% 1,037 11.1% 309 29.8%
General, selling and
administrative expenses 773 7.0% 651 7.0% 122 18.7%
-------- -------- -------- -------- --------
Operating profit 573 5.3% 386 4.1% 187 48.4%
Net sales improved due to higher traffic levels and increased pricing.
Gross margin improved by 120 basis points over the first quarter of 2004 due to
the increase in sales. General, selling and administrative expenses increased
due to higher personnel costs.
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
CORPORATE 2005 2004 2005 vs. 2004
- -------------------------- ------------------- ------------------- -------------------
(Dollars in Thousands)
Intersegment shipping sales $ (4,687) $ (3,187)
Intersegment shipping costs (4,687) (3,187)
---------- ----------
Gross profit - -
Corporate general, selling
and administrative expenses 4,361 2,746 1,615 58.8%
Nanocomposite business
development expenses 909 914 (5) -0.5%
---------- ---------- --------
Operating loss (5,270) (3,660) (1,610) 44.0%
Intersegment shipping revenues and costs are related to billings from
the transportation segment to the domestic minerals and environmental segments
for services. These services are invoiced to the minerals and environmental
segments at arms-length rates and those costs are subsequently charged to
customers. Intersegment sales and costs reported above reflect the elimination
of these transactions.
Corporate general, selling and administrative expenses increased
primarily due to higher audit and compliance costs related to the Sarbanes-Oxley
Act of 2002. Additionally, we incurred higher
20
corporate development costs related to new business ventures in the first
quarter of 2005. We expect corporate segment expenses to exceed prior-year
spending due to higher regulatory compliance costs.
Net nanocomposite operating expenses were relatively flat in comparison
with the 2004 first quarter. This business has alliance agreements with
Mitsubishi Gas Chemical Company and Poly One Corporation that focus on
developing certain markets for nanocomposites. We continue to see active
interest in our nanocomposite technologies through the market development
activities undertaken by our alliance partners.
LIQUIDITY AND CAPITAL RESOURCES (IN MILLIONS):
THREE MONTHS ENDED
March 31,
----------------------
CASH FLOWS 2005 2004
- --------------------------------------------------- --------- ---------
Net cash provided by (used in) operating activities $ 2.7 $ (3.0)
Net cash provided by (used in) investing activities $ (5.7) $ (15.9)
Net cash provided by (used in) financing activities $ 5.7 $ 15.4
Cash flows provided by operating activities improved over the 2004
period as a result of higher net income and slower growth in working capital.
Historically, cash flows from operations have increased over the course of the
fiscal year and we anticipate this pattern to continue for the remainder of
2005.
Cash flows used in investing activities decreased primarily due to
acquisitions completed in the first quarter of 2004. We acquired the shares of
Lafayette Well Testing, Inc. on January 7, 2004, and Linteco Geotechnische
Systeme GmbH on March 5, 2004. The aggregate purchase price for the two
companies was approximately $13.2 million. Capital expenditures to-date in 2005
totaled $5.2 million compared with $3.2 million in the prior-year period. We
anticipate capital expenditures to increase over the remainder of 2005 due to
investments in capacity expansion and productivity projects. Our investments in
Europe and Asia will focus on adding new production capacity to support growth
in lining technologies and metalcasting businesses, respectively. Our estimate
of 2005 capital expenditures is in the range of $22 million to $26 million.
Cash flows provided by financing activities decreased due to debt
funding for acquisitions completed in the 2004 first quarter. We used our
revolving credit facility to finance the acquisitions. Additionally, we assumed
approximately $4.1 million of funded debt as part of the consideration for the
Linteco acquisition. Dividends paid to-date in 2005 increased to $2.7 million
from $2.0 million in the prior-year period. We did not purchase any shares of
our common stock in the first quarter of 2005. We did purchase 12,400 shares of
our common stock on the open market during the first quarter of 2004 for a total
value of $196,300, or an average price per share of $15.83. On May 13, 2004, the
board of directors authorized funds to repurchase up to $10 million of our
common stock on the open market over a two-year period if we believe such a use
of our cash will enhance shareholder value. The entire $10 million remains
available to repurchase common stock as of March 31, 2005.
21
THREE MONTHS ENDED
-----------------------------------
March 31, December 31,
FINANCIAL POSITION 2005 2004
- ---------------------------------------- --------------- ---------------
Working capital $ 139.7 $ 129.4
Intangible assets $ 22.7 $ 23.0
Total assets $ 348.6 $ 336.4
Long-term debt $ 42.1 $ 34.3
Other long-term obligations $ 18.4 $ 18.5
Stockholder's equity $ 226.8 $ 221.9
Working capital at March 31, 2005 increased from December 31, 2004,
primarily due to growth in inventories and accounts receivable. The growth in
inventories was due to stocking our Asian locations earlier than normal to
economize on shipping costs. Inventory values at March 31, 2005 also reflect the
higher cost of raw materials and transportation costs. The current ratio was
3.3-to-1 and 3.1-to-1 at March 31, 2005, and December 31, 2004, respectively.
Intangible assets primarily represent goodwill associated with
acquisitions.
Long-term debt increased to 16% of total capitalization at March 31,
2005, compared with 13% at December 31, 2004. The increase in debt levels was
principally attributed to funding working capital. We have a $100 million
revolving credit facility with a consortium of U.S. banks that matures on
October 31, 2006. At March 31, 2005, we had approximately $63 million of
borrowing capacity remaining from the credit facility. The credit facility
stipulates that we must comply with a number of financial covenants. We are in
compliance with those covenants at March 31, 2005.
Other long-term obligations primarily represent liabilities associated
with our qualified and supplemental retirement plans and deferred income taxes.
We believe future cash flows from operations combined with borrowing
capacity from our revolving credit facility will be adequate to fund capital
expenditures and other investments approved by the board of directors.
Since the mid 1980's, the Company and/or its subsidiaries have been
named as one of a number of defendants in product liability lawsuits relating to
the minor free-silica content within the Company's bentonite products used in
the metalcasting industry. The plaintiffs in these lawsuits are primarily
employees of the Company's foundry customers. To date, the Company has not
incurred significant costs in defending these matters. The Company believes it
has adequate insurance coverage and does not believe the litigation will have a
material adverse impact on the financial condition, liquidity or results of the
operations of the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk during
the three months ended March 31, 2005. See disclosures as of December 31, 2004
in the Company's Annual Report on Form 10-K, as amended, Item 7A.
22
ITEM 4: CONTROLS AND PROCEDURES
An evaluation has been 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 March 31, 2005.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as a result of the material weakness in our
internal control over financial reporting discussed below and the fact that the
remedial efforts of the Company had not been completed as of March 31, 2005 as
discussed below, our disclosure controls and procedures were not effective as of
March 31, 2005 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, results of
operations, and cash flows of the Company, in conformity with generally accepted
accounting principles in the United States, for the periods presented.
The Securities and Exchange Commission, as directed by Section 404 of
the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to
include in their annual reports on Form 10-K an assessment by management of the
effectiveness of the Company's internal controls over financial reporting. As
described in the annual report on Form 10-K filed by the Company for the year
ended December 31, 2004, as amended, management identified a material weakness
in internal control over financial reporting relative to our accounting for
income taxes as of December 31, 2004. 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. As a result of the foregoing,
we began implementing 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 fiscal quarter ended March 31, 2005
that materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
Specifically, these changes include restructuring the responsibility for
accounting for income taxes, formalizing management's oversight relating to
accounting for income taxes by developing procedures to monitor significant
income tax events and the determination of appropriate accounting treatment for
certain deduction and credit positions taken in filing income tax returns, both
amended and original, and developing a program to provide increased training to
improve our accounting for income taxes. Our Tax Manager is now fully
responsible for the financial accounting for income taxes. In addition, the
Controller and Chief Financial Officer receive quarterly updates on tax matters,
including changes in tax positions that may have a material effect on the
financial statements and matters affecting income tax returns. The Controller
and Chief Financial Officer review these matters and document conclusions as to
the accounting treatment. Additionally, we are enhancing 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. Last, the Chief Financial Officer will conduct an annual
assessment of the accounting staff's knowledge of U.S. generally accepted
accounting principles and provide additional training where necessary.
Although remedial efforts were initiated in the first quarter of 2005,
the implementation of such changes had not been completed as of March 31, 2005.
Accordingly, management has determined that
23
the material weakness in the Company's internal control over financial reporting
relative to our accounting for income taxes as described in the annual report on
Form 10-K filed by the Company for the year ended December 31, 2004, as amended,
still existed as of March 31, 2005.
PART II - OTHER INFORMATION
ITEM 2(c) COMPANY REPURCHASES OF COMPANY STOCK
TOTAL NUMBER OF MAXIMUM VALUE OF
SHARES REPURCHASED AVERAGE SHARES THAT MAY YET BE
AS PART OF THE STOCK PRICE PAID REPURCHASED UNDER THE
REPURCHASE PROGRAM PER SHARE PROGRAM
-------------------- ---------- ----------------------
January 1, 2005 - January 31, 2005 - $ - $ 10,000,000
February 1, 2005 - February 29, 2005 - $ - $ 10,000,000
March 1, 2005 - March 31, 2005 - $ - $ 10,000,000
-------------------- ----------------------
Total - $ - $ -
==================== ======================
On May 13, 2004, the Board of Directors authorized a program to
repurchase up to $10 million of the Company's outstanding stock which will
expire September 30, 2006.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
See Index to Exhibits immediately following the signature page.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMCOL INTERNATIONAL CORPORATION
Date: May 10, 2005 /s/ Lawrence E. Washow
------------------------------------------------
Lawrence E. Washow
President and Chief Executive Officer
Date: May 10, 2005 /s/ Gary L. Castagna
------------------------------------------------
Gary L. Castagna
Senior Vice President and Chief Financial
Officer and Principal Accounting Officer
25
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- -------
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350
26