-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VQmm4BIAvwcmcpz1aXSNq7pWrNEHAVVr+jbQ+Cz51PQU6LDJW8mD7o5Zpv7hujSr rz5YP+2eISQDN/dgvac7cg== 0001275287-06-001442.txt : 20060316 0001275287-06-001442.hdr.sgml : 20060316 20060316172104 ACCESSION NUMBER: 0001275287-06-001442 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060316 DATE AS OF CHANGE: 20060316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMCOL INTERNATIONAL CORP CENTRAL INDEX KEY: 0000813621 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 360724340 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14447 FILM NUMBER: 06693126 BUSINESS ADDRESS: STREET 1: 1500 W SHURE DR CITY: ARLINGTON HEIGHTS STATE: IL ZIP: 60004-7803 BUSINESS PHONE: 8473948730 MAIL ADDRESS: STREET 1: 1500 W SHURE DR CITY: ARLINGTON HEIGHTS STATE: IL ZIP: 60004-7803 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN COLLOID CO DATE OF NAME CHANGE: 19920703 10-K 1 ac5147.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO _________ COMMISSION FILE NUMBER: 0-15661 AMCOL INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-0724340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One North Arlington, 1500 West Shure Drive, Suite 500 Arlington Heights, Illinois 60004-7803 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 394-8730 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: $.01 par value Common Stock Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the registrant's $.01 par value Common Stock held by non-affiliates of the registrant (based upon the per share closing price of $18.79 per share on June 30, 2005, and, for the purpose of this calculation only, the assumption that all of the registrant's directors and executive officers are affiliates) was approximately $421.2 million. Registrant had 29,888,634 shares of $.01 par value Common Stock outstanding as of February 28, 2006. 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. ================================================================================ PART I ITEM 1. BUSINESS INTRODUCTION AMCOL International Corporation was originally incorporated in South Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was changed to American Colloid Company in 1927, and in 1959, the Company was reincorporated in Delaware. In 1995, its name was changed to AMCOL International Corporation. Except as otherwise noted or indicated by context, the term "Company" refers to AMCOL International Corporation and its subsidiaries. We operate in two major industry segments: minerals and environmental. We also operate a transportation business. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications, such as oilfield services. The transportation segment includes both a long-haul trucking business and a freight brokerage business that service our plants and third-party customers. The following table sets forth the percentage contributions to our net sales from the minerals, environmental and transportation segments as well as intersegment shipping for the last three years. PERCENTAGE OF SALES -------------------------------------- 2005 2004 2003 ---------- ---------- ---------- Minerals 55% 57% 58% Environmental 39% 37% 36% Transportation 9% 9% 10% Intersegment Shipping -3% -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 our business segments are set forth in Note 3 of our Notes to Consolidated Financial Statements included elsewhere herein. MINERALS Our minerals business is principally conducted through wholly-owned subsidiaries and investments in affiliates and joint ventures throughout the world. Our principal bentonite products are marketed under various internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R), PREMIUM GEL(R) and ADDITROL(R). Our 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). Commercially produced bentonite is a type of montmorillonite clay found in beds ranging in thickness from two to 50 feet beneath overburden of up to 60 feet. There are two basic types of bentonite, each having different chemical and physical properties. These are commonly known as sodium bentonite and calcium bentonite. Sodium bentonite is generally referred to as Western bentonite because it predominately exists in the Western United States. Sodium bentonites of lesser purity exist outside the United States. Calcium bentonite is sometimes referred to as Southern bentonite in the United States and as fuller's earth outside the United States. Calcium bentonites mined outside the United States are sometimes activated with sodium carbonate or similar compounds to produce properties similar to natural sodium bentonite. 2 PRINCIPAL PRODUCTS AND MARKETS Metalcasting. In the formation of sand molds for metalcastings, sand is bonded with bentonite and various other additives to yield desired casting form and surface finish. We serve the foundry and casting industry throughout the North America and Asia Pacific regions with custom-blended bentonite and allied non-bentonite products to strengthen sand molds for cast auto parts, farm implements, railcars, home appliances and metallurgical products. The blended mineral binders containing sodium bentonite, calcium bentonite, seacoal and other ingredients are sold under the trade name ADDITROL(R). We also have a line of formulated additives that are used to introduce silicon and carbon in the melt phase of the casting process. Pet Products. We produce and market sodium bentonite-based scoopable (clumping), traditional and alternative cat litters as well as specialty pet products to grocery and drug stores, mass merchandisers, wholesale clubs and pet specialty stores throughout the U.S. Our scoopable products' clump-forming capability traps urine, allowing for easy removal of the odor-producing elements from the litter box. Our products are marketed under various trade names. Specialty Minerals. Our products are sold in markets with generally lower volume applications where our material acts as a performance additive. The following are the major markets for such mineral applications: o Detergents. We supply high-grade agglomerated bentonite to the detergent industry. Bentonite performs as a softening agent in certain powdered-detergent formulations. It can also act as a carrier for colorants and fragrances. o Health and Beauty. We manufacture adsorbent polymers and purified grades of bentonite ingredients for sale to manufacturers of personal care products. The adsorbent polymers are used to deliver high-value actives in skin-care products. Bentonite-based materials act as thickening, suspension and dispersion agent emollients. o Petroleum Products. Sodium bentonite and leonardite, a form of oxidized lignite mined and processed by us in North Dakota, are components of drilling fluids used in oil and gas well drilling. Bentonite imparts thickening and suspension properties, which facilitate the transport of rock cuttings to the surface during the drilling process. Drilling fluids lubricate the drilling bit and coat the underground formations to prevent hole collapse and drill bit seizing. Our primary trademark for this application is sold under the trade name PREMIUM GEL(R). o Other Industrial. We produce bentonite and bentonite blends for the construction industry, which are used as a plasticizing agent in cement, plaster and bricks, and as an emulsifier in asphalt. We also supply grades of bentonite used for pellitizing other materials for ease of use. Examples of this application are iron ore and livestock feed. 3 SALES AND DISTRIBUTION In 2005, the top five customers of the minerals segment accounted for approximately 27% of the segment sales worldwide. Approximately 70% of our sales in this segment are to customers in North and South America. Metalcasting is our largest market in the Americas and all of our pet products sales are in this region. Our sales in Europe represent approximately 17% of sales and are principally to detergent producers. The Asia-Pacific region represents approximately 13% of sales with metalcasting being our largest market. A large majority of our sales and distribution is conducted by our own personnel and facilities. We have established industry-specialized sales groups staffed with technically oriented salespersons serving each of our major markets. Certain businesses will have networks of distributors and representatives, including companies that warehouse products at strategic locations. Our strong global market position in the metalcasting market is largely due to our technical service capabilities and our distribution network. We provide training courses and laboratory testing for customers who use our products in the metalcasting process. Our technical sales personnel provide expertise to not only educate our customers on the bentonite blend properties but also aid them in producing castings efficiently and productively. For cat litter, we are primarily a private-label producer, and have three principal sites from where we package and distribute finished goods. Our transportation segment provides logistics services for the cat litter business, and is a key component of our capability in supplying customers on a national basis. Certain specialty mineral markets require considerable technical expertise. Our detergent additives market position requires an ability to not only supply cost-effective products but also provide product development capabilities to adapt to our customers' product requirements. We experience a similar requirement for our health and beauty business, which makes use of several patents with various durations that we believe are collectively important to that business. Petroleum products are sold under our own and private label trade names. Because bentonite is a major component of drilling fluids, two service companies have captive bentonite operations. Our potential market, therefore, is generally limited to those service organizations that are not vertically integrated or do not have long-term supply arrangements with other bentonite producers. COMPETITION We are one of the largest producers of bentonite products globally. There is substantial domestic and international competition, which is essentially a matter of product quality, price, logistics, service and technical support. There are at least 15 other major sodium bentonite or sodium activated calcium bentonite producers throughout the world including several importers into the U.S. market. There are also numerous major producers of calcium bentonite and various regional suppliers in the areas we serve. Some of the producers are companies primarily in other lines of business with substantially greater financial resources than ours. SEASONALITY We do not consider our minerals segment to be seasonal in nature. 4 ENVIRONMENTAL PRINCIPAL PRODUCTS AND MARKETS We sell products, including those containing sodium bentonite, services and equipment for use in environmental and construction applications through the following 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 Limitada in Chile, and Linteco Iberia S.L. in Spain, and CETCO (Europe) Ltd. in the United Kingdom. The following are our three principal markets and a description of the products we produce for them: Lining Technologies. CETCO sells geosynthetic clay liner products containing bentonite under the BENTOMAT(R) and CLAYMAX(R) trade names for lining and capping landfills and for containment in tank farms, storm water containment systems, waste stabilization lagoons, sewage lagoons and mine site and wetlands reclamation applications. Building Materials. Our VOLCLAY(R) Waterproofing System is sold to the non-residential construction industry. This line includes VOLTEX(R), a waterproofing composite comprised of two polypropylene geotextiles filled with sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground foundation walls and slabs. The following products round out the principal components of the product line: VOLCLAY PANELS(R), also used for below-grade waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and plaza areas. We also manufacture and sell asphalt emulsion based waterproofing systems for residential and non-residential waterproofing applications. In addition, our STRONGSEAL(TM) and DUCKSBACK(TM) roofing underlayment systems are sold to the residential and non-residential roofing industry. Waste-Water Treatment. Bentonite can be used to extract contaminants within effluents generated by various processes. Following are market applications for bentonite and, in some cases equipment used to house bentonite, for the treatment of waste waster. o Oilfield Services. CETCO's oilfield services group employs filtration technology used primarily on offshore oil production platforms and pipelines. CETCO employs several technologies allowing platform operators to maintain compliance with regulatory requirements governing the discharge of waste water generated during oil production. We also provide well testing services. We provide equipment and personnel for production well control, clean-up, unload, separation, measure of component flow and disposal of fluids from oil and gas wells. o Industrial. 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-ACTM, RM-10(R) and SORBOND(R) trade names. o Drilling Products. CETCO's drilling products are used in environmental and geotechnical drilling applications, horizontal directional drilling, mineral exploration and foundation construction. The products are used to install monitoring wells, facilitate horizontal and water well drilling, rehabilitate existing water wells and seal abandoned exploration drill holes. VOLCLAY(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 at least 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 our traditional rivals in the 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 product availability. Historically, competition has been vigorous. SALES AND DISTRIBUTION The top five customers in our environmental segment accounted for less than 10% of the segment sales worldwide. Approximately 57% of sales are in North and South America. The United States is our largest geographical market for all product lines. Approximately, 37% of sales are in Europe and the remaining 6% in the Asia-Pacific region. Sales and distribution of the lining technologies are primarily performed through our own personnel and facilities. Our staff includes engineers who assist with specifying products for topographical conditions that liners will endure. The building materials products are primarily sold through distribution and dealer networks. The end customers are generally building sub-contractors who are responsible for installing the products. The filtration business of Oilfield Services primarily sells and distributes products and services on a direct basis. Our principal customers are oil companies who maintain substantial offshore drilling and production platforms. The well testing business of Oilfield Services also sells and distributes services to customers on a direct basis. Our customer base is comprised of onshore and offshore oil and gas production firms. For the industrial and drilling product lines, we generally sell through distribution networks. The end customers for the industrial product lines include metal plating and finishing plants and corrugated cardboard operations. Drilling products are also sold through distributors who are overseen by our regional managers. SEASONALITY Much of the business in the environmental sector is impacted by weather and soil conditions. Many of the products cannot be applied in harsh weather conditions and, as such, sales and profits tend to be stronger during the period from April through October. As a result, we consider the business of this segment to be seasonal. MINERALS/ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS MINERAL RESERVES We have reserves of sodium and calcium bentonite at various locations in North America, including Wyoming, South Dakota, Montana and Alabama, and in China. Through our investments in affiliates and joint ventures, we also have access to bentonite deposits in Egypt, India and Mexico. At 2005 consumption rates and product mix, we estimate the proven, assigned reserves of commercially usable sodium bentonite at approximately 17 years. We estimate the proven, assigned reserves of calcium bentonite at approximately 22 years in North America. While we believe, based upon our experience, that our reserve estimates are reasonable and our title and mining rights to our reserves are valid, we have not obtained any independent verification of such reserve estimates or such title or mining rights. We own or control the properties on which reserves are located through long-term leases, royalty agreements and patented and unpatented mining claims. A majority of our bentonite reserves are owned. All of the properties on which our reserves are located are either physically accessible for the purposes of mining and hauling or the cost of obtaining physical access would not be material. 6 To retain possessory rights in unpatented mining claims in North America, a fee of $100 per year for each unpatented mining claim is required. The validity of title to unpatented mining claims is dependent upon numerous factual matters. We believe that the unpatented mining claims that we own are in compliance with all applicable federal, state and local mining laws, rules and regulations. We are not aware of any material conflicts with other parties concerning our claims. From time to time, members of Congress and members of the executive branch of the federal government have proposed amendments to existing federal mining laws. The various amendments would have had a prospective effect on mining operations on federal lands and include, among other things, the imposition of royalty fees on the mining of unpatented claims, the elimination or restructuring of the patent system and an increase in fees for the maintenance of unpatented claims. To the extent that future proposals may result in the imposition of royalty fees on unpatented lands, the mining of our unpatented claims may become uneconomic and royalty rates for privately leased lands may be affected. We cannot predict the effect of any potential amendments may have or whether or when any such amendments might be adopted. We maintain a continuous program of worldwide exploration for additional reserves and attempt to acquire reserves sufficient to replenish our consumption each year, but we cannot assure that additional reserves will continue to become available. We oversee all of our mining operations, including our exploration activity and securing the necessary state and federal mining permits. The following table shows a summary of minerals sold by the Company from active mining areas for the last 3 years in short tons, as well as mineral reserves by major mineral category.
TONS SOLD MINING CLAIMS ----------------------- ------------------------------ ALL AMOUNTS ARE IN WET TONS ASSIGNED UNASSIGNED CONVERSION UNPATENTED THOUSANDS OF TONS 2005 2004 2003 OF RESERVES RESERVES RESERVES FACTOR OWNED ** LEASED - -------------------------- ------- ------- ------- ----------- -------- ---------- ---------- -------- ---------- -------- SODIUM BENTONITE ASSIGNED Belle/Colony, WY/SD 1,295 1,227 1,088 19,829 19,829 - 77.61% 885 380 18,564 Lovell, WY 609 564 477 22,729 22,729 - 77.61% 12,781 9,625 323 TOTAL ASSIGNED 1,904 1,791 1,565 42,558 42,558 - 13,666 10,005 18,887 OTHER / UNASSIGNED (SD, WY, MT, NV) 2 2 1 65,517 40 65,477 77.61% 55,453 4,001 6,063 TOTAL OTHER / UNASSIGNED 2 2 1 65,517 40 65,477 55,453 4,001 6,063 TOTAL SODIUM BENTONITE 1,906 1,793 1,566 108,075 42,598 65,477 - 69,119 14,006 24,950 39% 61% 64% 13% 23% CALCIUM BENTONITE ASSIGNED Sandy Ridge, AL 120 132 132 3,920 3,920 - 73.75% 1,789 - 2,131 Chao Yang, Liaoning, China 89 88 57 2,282 2,282 - 78.00% - - 2,282 TOTAL ASSIGNED 209 220 189 6,202 6,202 - 1,789 - 4,413 Other / Unassigned - - 2,646 - 2,646 77.31% - - 2,646 TOTAL OTHER / UNASSIGNED - - - 2,646 - 2,646 - - 2,646 TOTAL CALCIUM BENTONITE 209 220 189 8,848 6,202 2,646 1,789 - 7,059 70% 30% 20% 80% LEONARDITE Gascoyne, ND 50 41 34 486 486 - 66.55% - - 486 TOTAL LEONARDITE 50 41 34 486 486 - - - 486 100% 100% GRAND TOTALS 2,165 2,054 1,789 117,409 49,286 68,123 70,908 14,006 32,495 42% 58% 60% 12% 28%
** Quantity of reserves that would be owned if patent was granted. 7 Assigned reserves are reserves which could be reasonably expected to be processed in existing plants. Unassigned reserves are reserves which will require additional expenditures for processing facilities. Conversion factor is the percentage of reserves that will be available for sale after processing. We estimate that available supplies of other materials utilized in our minerals business are sufficient to meet our production requirements for the foreseeable future. MINING AND PROCESSING Bentonite is surface mined, generally with large earthmoving scrapers, and then loaded into trucks and off-highway-haul wagons for movement to processing plants. The mining and hauling of our clay is done by us and by independent contractors. At the processing plants, bentonite is dried, crushed and sent through grinding mills, where it is sized to customer requirements, then chemically modified where needed and transferred to silos for automatic bagging or bulk shipment. Virtually all production is shipped as processed rather than stored for inventory. PRODUCT DEVELOPMENT AND PATENTS We work actively with customers in each of our major markets to develop commercial applications of specialized grades of bentonite. We maintain a research center and laboratory testing facilities in Arlington Heights, Illinois, and Birkenhead, England. When we perceive a need for a product that will accomplish a particular goal, we work to develop the product, research its marketability and study the feasibility of its production. We also co-develop products with customers, or others, as needs arise. Our development efforts emphasize markets with which we are familiar and products for which we believe there is a viable market. We hold a number of U.S. and international patents covering the use of bentonite and products containing bentonite. We follow the practice of obtaining patents on new developments whenever feasible. However, we do not consider that any one or any combination of such patents is material to our minerals and environmental businesses as a whole. RESEARCH AND DEVELOPMENT Our business segments share research and laboratory facilities adjacent to our corporate headquarters. Technological developments are shared among our subsidiaries, subject to license agreements where appropriate. Notes 1 and 3 of the Notes to Consolidated Financial Statements include further information on research and development activities. REGULATION AND ENVIRONMENTAL We believe we are in material compliance with current, applicable regulations for surface mining. Since reclamation of exhausted mining sites has been a regular part of our surface mining operations for the past 35 years, maintaining compliance with current regulations has not had a material effect on mining costs. Reclamation costs are reflected in the prices of the bentonite sold. The grinding and handling of dried clay is part of the production process, and, because these processes generate dust, our mineral processing plants are subject to applicable clean air standards (including Title V of the Clean Air Act). All of our plants are equipped with dust collection systems. We have not had, and do not presently anticipate, any significant regulatory problems in connection with our dust emission, though we expect ongoing expenditures for the maintenance of our dust collection systems and required annual fees. 8 Our operations are also subject to other federal, state, local and foreign laws and regulations relating to the environment and to health and safety matters. Certain of these laws and regulations provide for the imposition of substantial penalties for noncompliance. While the costs of compliance with, and penalties imposed under, these laws and regulations have historically not had a material adverse effect on us, future events, such as changes in or modified interpretations of existing laws and regulations, enforcement policies, or further investigation or evaluation of potential health hazards of certain products, may give rise to additional compliance and other costs that could have a material adverse effect on us. TRANSPORTATION We operate a long-haul trucking business and a freight brokerage business primarily for delivery of finished products throughout the continental United States. These services are provided to our subsidiaries as well as third party customers. Through our transportation business, we are better able to control costs, maintain delivery schedules and assure equipment availability in the delivery of our products. In 2005, approximately 41% of the revenues of this operation involved services provided to our domestic minerals and environmental segments. CORPORATE ACTIVITIES - NANOCOMPOSITE PRODUCT DEVELOPMENT We continue to research and attempt to develop broader-based technologies that may use bentonite for new, value-added applications. As a result of our efforts, we established a subsidiary to develop surface-modified bentonites, which we refer to as nanoclays, which would be suitable for the emerging nanocomposite market. We determined that our nanoclays could improve physical properties of certain polymers. Over the last ten years we have been granted over forty U.S. and international patents involving our nanoclays and related technology. The primary raw material in the nanoclay is bentonite, which is either sourced from our own mineral reserves or purchased from third-party suppliers, depending upon the product requirements. Surface-treatment chemicals are added in the production process to enable the bentonite to properly function within the polymer. The surface-treatment compounds are readily available on the merchant market. Our production facility is located in Aberdeen, Mississippi. All costs, in excess of sales, associated with the development, production and sales of nanoclays are included in corporate costs. Sales and distribution of our product lines have been executed through alliance relationships and on a direct basis. As disclosed in prior reports, we have had alliance agreements with two companies to market and distribute nanocomposites that incorporate our nanoclays for certain applications. On January 13, 2006, we announced a number of changes in the marketing and management of this business including the termination of both alliance agreements. We further noted that an agreement was reached with ColorMatrix Corporation and its affiliates, whereby they are now the exclusive, world-wide distributor of our nanocomposite product line, Imperm(R), which will be marketed to the food and beverage container market. Additionally, PolyOne Corporation, one of the former alliance partners, will continue to market certain nanocomposite materials utilizing our nanoclays under a non-exclusive relationship for applications involving polyolefin compounds. We are also marketing our products on a direct basis for certain engineered nylon applications. Through 2005, sales have been minimal. We continue to expend funds necessary to market and manufacture the nanoclay product lines. We also continue to invest in technical development activities in order to support market development of the technology. Our executive management will continue to evaluate the prospects for this business on a periodic basis to determine its future value to the Company as a whole. 9 FOREIGN OPERATIONS AND EXPORT SALES Approximately 33% of our 2005 net sales were to customers in countries outside North America. To enhance our overseas market presence, we maintain mineral processing plants in the United Kingdom, China, Australia, South Korea, Poland and Thailand, as well as a blending plant in Canada. Chartered vessels deliver large quantities of our bulk, dried sodium bentonite to the plants in the United Kingdom, Poland, Australia, Thailand and South Korea where it is processed and mixed with other clays and distributed throughout Europe and the Asia-Pacific region. In addition, we maintain a worldwide network of independent dealers, distributors and representatives to support sales and distribution. We manufacture geosynthetic clay liners in the United Kingdom, Poland, China and South Korea, primarily for the European and Asia-Pacific markets. Our international operations are subject to the usual risks of doing business abroad, such as currency fluctuations and devaluation, restrictions on the transfer of funds, and import and export duties. Note 3 of the Notes to Consolidated Financial Statements included in Item 8 of this report presents further details on our sales by geographic region. This Note is incorporated by reference for sales attributed to foreign operations and export sales from the United States. EMPLOYEES As of December 31, 2005, we employed 1,542 people in our global organization, 624 of whom were employed outside of the United States. Operating plants are adequately staffed, and no significant labor shortages are presently foreseen. Labor relations have been satisfactory. AVAILABLE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any reports, statements and other information filed by the Company at the SEC's Public Reference Room at 100 F. Street N.E., Washington, D.C., 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our filings are also available to the public at the website maintained by the SEC, www.sec.gov. Our principal Internet address is www.amcol.com. Our annual, quarterly and current reports, and amendments to those reports are available free of charge on www.amcol.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. CERTIFICATIONS As required by the rules and regulations of the New York Stock Exchange (the "NYSE"), we delivered to the NYSE a certification executed by our Chief Executive Officer, Lawrence E. Washow, certifying that Mr. Washow was not aware of any violation by the Company of the NYSE's corporate governance listing standards as of June 1, 2005. As required by the rules and regulations of the SEC, the Sarbanes-Oxley Act Section 302 certifications regarding the quality of our public disclosures are filed as exhibits to this Annual Report on Form 10-K. 10 ITEM 1A. RISK FACTORS Certain statements we make from time to time, including statements in the Management's Discussion and Analysis of Financial Condition and Results of Operation section 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 Our businesses are very competitive. We believe competition is essentially a matter of product quality, price, delivery, service and technical support. Several of our competitors in the 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. RELIANCE ON METALCASTING AND CONSTRUCTION INDUSTRIES Approximately 47% of our minerals segment's sales and 26% of our environmental segment's sales in 2005 were to the metalcasting and construction markets, respectively. The metalcasting and construction markets depend heavily upon the strength of the domestic and international economies. If these economies weaken, demand for products by the metalcasting and construction markets may decline and our business or future financial results may be adversely affected. REGULATORY AND LEGAL MATTERS Our operations are subject to various federal, state, local and foreign laws and regulations relating to the environmental and to health and safety matters. Substantial penalties may be imposed if we violate certain of these laws and regulations even if the violation was inadvertent or unintentional. If these laws or regulations are changed or interpreted differently in the future, it may become more difficult or expensive for us to comply. In addition, investigations or evaluations of our products by government agencies may require us to adopt additional safety measures or precautions. If our costs to comply with such laws and regulations in the future materially increase, our business and future financial results could be materially and adversely affected. We may also be subject to adverse litigation results in addition to increased compliance costs arising from future changes in laws and regulations that may negatively impact our operations and profits. RISKS OF INTERNATIONAL EXPANSION An important part of our business strategy is to expand internationally. We intend to seek acquisitions, joint ventures and strategic alliances globally. Sales and earnings from our overseas operations have increased considerably in recent years. In 2005, approximately 24% and 9% of consolidated net sales were from Europe and the Asia-Pacific regions, respectively. Approximately 52% of operating profit in 2005 was earned by our overseas businesses. We also recorded approximately $0.09 per diluted share for earnings, under the equity method of accounting, from investments in affiliate businesses. As we expand internationally, we will be subject to increased risks, which may include the following: 11 o currency exchange or price control laws; o currency translation adjustments; o political and economic instability; o unexpected changes in regulatory requirements; o tariffs and other trade barriers; o longer accounts receivable collection cycles; and o adverse tax consequences. The above listed events could result in sudden, and potentially prolonged, changes in demand for our products. Also, we may have difficulty enforcing agreements and collecting accounts receivable through a foreign country's legal system. OCEAN SHIPPING AND LOGISTICS Bulk cargo shipping costs have been rising significantly due to greater demand from China. We rely on shipping bulk cargos of bentonite from the United States and China to customers, as well as our own subsidiaries. We may need to offset additional shipping costs with price increases to customers in order to maintain our profitability. Other factors in the United States that will potentially impact us are escalating costs of purchased raw materials derived from petrochemical stocks and increases in rail and long-haul freight rates. While we have been successful in attaining price increases in certain markets to offset some of these rising costs, there can be no assurance that we will be successful in continuing to achieve these price increases. VOLATILITY OF STOCK PRICE The stock market has been extremely volatile in recent years. These broad market fluctuations may adversely affect the market price of our common stock. In addition, factors such as the following may have a significant effect on the market price of our common stock: o fluctuations in our financial results; o our introduction of new services or products; o announcements of acquisitions, strategic alliances or joint ventures by us, our customers or our competitors; o changes in analysts' recommendations regarding our common stock; and o general economic conditions. There can be no assurance that the price of our common stock will increase in the future or be maintained at its recent levels. 12 ITEM 2. PROPERTIES We operate the following principal plants, mines and other facilities, all of which are owned, except as noted below. We also have numerous other facilities which blend Additrol (R), package cat litter and chromite sand, warehouse products and serve as sales offices. LOCATION PRINCIPAL FUNCTION - ------------------------------ ---------------------------------------------- MINERALS Belle Fourche, SD Mine and process sodium bentonite Colony, WY (two plants) Mine and process sodium bentonite, package cat litter Gascoyne, ND Mine and process leonardite Lovell, WY (1) Mine and process sodium bentonite Sandy Ridge, AL Mine and process calcium bentonite; blend ADDITROL(R) Chao Yang, Liaoning, China Mine and process calcium bentonite Geelong, Victoria, Australia Process sodium and calcium bentonite; blend (1)(2) ADDITROL(R) Rayong, Thailand Process sodium and calcium bentonite Winsford, Cheshire, U.K. Process bentonite and other minerals Kyungju Kyung-Buk, South Korea Process sodium and calcium bentonite ENVIRONMENTAL Broussard, LA Environmental Offshore operations and distribution Cartersville, GA 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 Philadelphia, PA Provider of services for the design and installation of geosynthetic systems Birkenhead, Merseyside, U.K. Manufacture Bentomat(R) geosynthetic (1)(2) 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 (2) 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) Certain offices and facilities are leased. ITEM 3. LEGAL PROCEEDINGS We are party to a number of lawsuits arising in the normal course of our business. We do not believe that any pending litigation will have a material adverse effect on our consolidated financial position or results of operations. Our processing operations require permits from various governmental authorities. From time to time, we have been contacted by government agencies with respect to required permits or compliance with existing permits. While we have been notified of certain situations of non-compliance, management does not expect the fines or the cost of becoming compliant, if any, to be significant. We have neither been nor expect to be assessed any tax shelter penalties by the United States Internal Revenue Service for tax shelter transactions that either the IRS deems abusive or have significant tax avoidance penalties. 13 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 44 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 56 Vice President of the Company since 1993 and President of Nanocor, Inc. since 1995. Mr. Maul is retiring from the Company effective March 31, 2006. Ryan F. McKendrick 54 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 50 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 63 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 52 Chief Executive Officer since May 2000; President of the Company since May 1998; Chief Operating Officer of the Company since 1997; a Director since February, 1998. All executive officers of the Company are elected annually by the Board of Directors for a term expiring at the annual meeting of directors following their election or when their respective successors are elected and shall have qualified. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock trades on the New York Stock Exchange under the symbol "ACO." The following table sets forth, for the periods indicated, the high and low closing sale prices of the common stock, as reported by the New York Stock Exchange, and cash dividends declared per share.
CASH STOCK PRICE DIVIDENDS ------------------------- DECLARED PER HIGH LOW SHARE ----------- -------- ------------ Fiscal Year Ended December 31, 2005: 1st Quarter $ 23.09 $ 18.11 $ 0.09 2nd Quarter 21.27 16.90 0.09 3rd Quarter 20.75 18.20 0.10 4th Quarter 21.65 16.35 0.10 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
We have paid cash dividends every year for 68 years. As of March 3, 2006, there were 1,423 holders of record of the common stock, excluding shares held in street name. 14 PURCHASES OF EQUITY SECURITIES On May 13, 2004, we announced a share repurchase program for the repurchase of $10 million of our common stock in the open market. We have not set an expiration date for this program. The following table summarizes the repurchases made under this program and the remaining amount of repurchases authorized:
MAXIMUM VALUE TOTAL NUMBER OF OF SHARES SHARES REPURCHASED AVERAGE THAT MAY YET BE AS PART OF THE STOCK PRICE PAID REPURCHASED UNDER REPURCHASE PROGRAM PER SHARE THE PROGRAM -------------------- ------------ ------------------ Amount of authorization outstanding at December 31, 2004 $ 10,000,000 Activity in 2005: January 1 - January 31 Shares repurchased - $ - $ 10,000,000 February 1 - February 28 Shares repurchased - $ - $ 10,000,000 March 1 - March 31 Shares repurchased - $ - $ 10,000,000 April 1 - April 30 Shares repurchased - $ - $ 10,000,000 May 1 - May 31 Shares repurchased - $ - $ 10,000,000 June 1 - June 30 Shares repurchased - $ - $ 10,000,000 July 1 - July 31 Shares repurchased - $ - $ 10,000,000 August 1 - August 31 Shares repurchased - $ - $ 10,000,000 September 1 -September 30 Shares repurchased 104,100 $ 18.70 $ 8,053,330 October 1 - October 31 Shares repurchased - $ - $ 8,053,330 November 1 - November 30 Shares repurchased - $ - $ 8,053,330 December 1 - December 31 900 $ 20.05 $ 8,035,285 Shares repurchased -------------------- ------------ Total 105,000 $ 18.71 $ 8,035,285 ==================== ============
15 ITEM 6. SELECTED FINANCIAL DATA The following is selected financial data for the Company as of and for the five years ended December 31, 2005. SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ OPERATIONS DATA Net sales (1) $ 535,924 461,778 $ 374,483 $ 307,422 $ 285,322 Gross profit (1) 138,023 118,568 100,068 80,417 76,339 General, selling and administrative expenses (1) 90,947 82,584 71,053 60,764 57,448 Business realignment and other charges - - - - - Operating profit 47,076 35,984 29,015 19,653 18,891 Investment income - - - - 3,015 Change in value of interest rate swap - - - - (401) Net interest expense (1,660) (826) (280) (512) (2,196) Net other income (expense) (393) (86) 526 48 (103) Pretax income 45,023 35,072 29,261 19,189 19,206 Income taxes (benefit) 11,645 4,687 9,946 6,916 5,149 Income from affiliates and joint ventures 2,912 1,180 600 531 28 Minority interest in net loss of subsidiary - - - 164 59 Income from continuing operations 36,290 31,565 19,915 12,968 14,144 Income (loss) from discontinued operations - - - - (879) Gain on disposal of discontinued operations 4,755 - 8,950 - 1,154 Cumulative effect of change in accounting principle (net of tax) - - - - (182) Net income 41,045 31,565 28,865 12,968 14,237 PER SHARE DATA Basic earnings (loss) per share Continuing operations 1.23 1.08 0.70 0.46 0.50 Discontinued operations 0.16 - 0.32 - 0.01 Cumulative effect of change in accounting principle (net of tax) - - - - (0.01) Net income 1.39 1.08 1.02 0.46 0.50 Diluted earnings (loss) per share Continuing operations 1.18 1.03 0.67 0.43 0.46 Discontinued operations 0.15 - 0.30 - 0.01 Cumulative effect of change in accounting principle (net of tax) - - - - (0.01) Net income 1.33 1.03 0.97 0.43 0.46 Stockholders' equity (2) 8.36 7.55 6.58 5.66 5.21 Dividends 0.38 0.32 0.16 0.10 0.06
Continued... 16 SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ SHARES OUTSTANDING DATA End of period 29,783,639 29,395,755 29,107,746 27,881,903 28,256,389 Weighted average for the period-basic 29,525,033 29,140,892 28,357,009 28,133,795 28,193,234 Incremental impact of stock options 1,278,105 1,561,969 1,492,569 2,014,725 2,412,826 Weighted average for the period-diluted 30,803,138 30,702,861 29,849,578 30,148,520 30,606,060 BALANCE SHEET DATA (AT END OF PERIOD) Current assets $ 211,209 $ 192,724 $ 143,574 $ 116,935 $ 106,979 Cash equivalents included in current - - - - - assets Net current assets of discontinued operations included in current assets - - - - 798 Net property and equipment 100,064 93,641 86,996 81,847 72,348 Other long-term assets 57,256 50,077 34,759 29,598 23,555 Net long-term assets of discontinued operations included in long-term assets - - - - 311 Total assets 368,529 336,442 265,329 228,380 202,882 Current liabilities 63,269 61,681 47,708 52,639 31,083 Long-term debt 34,838 34,295 9,006 5,573 13,245 Other long-term liabilities 21,566 18,532 17,165 12,233 11,275 Stockholders' equity 248,856 221,934 191,450 157,935 147,279 OTHER STATISTICS FOR CONTINUING OPERATIONS Depreciation, depletion and amortization $ 19,558 $ 20,124 $ 18,910 $ 20,759 $ 18,552 Capital expenditures 28,626 21,627 15,795 16,223 14,730 Gross profit margin (1) 25.8% 25.7% 26.7% 26.2% 26.8% Operating profit margin (1) 8.8% 7.8% 7.7% 6.4% 6.6% Pretax profit margin (1) 8.4% 7.6% 7.8% 6.2% 6.7% Effective tax rate 25.9% 13.4% 34.0% 36.0% 26.8% Net profit from continuing operations 6.8% 6.8% 5.3% 4.2% 5.0% margin (1) Return on average equity 15.4% 15.3% 11.4% 8.5% 9.8%
(1) Amounts for 2001 through 2004 include reclassifications for product liability and warranty expenses. See Note 1 of Notes to Consolidated Financial Statements for further information. (2) Based on the number of common shares outstanding at the end of each year rather than a weighted average. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a global, specialty minerals company and earn our revenues and profits from a diverse group of industrial and consumer product lines. Our minerals segment operates manufacturing facilities in North America, Europe, and Asia-Pacific regions and has three principal market applications: metalcasting, pet products and specialty minerals. Our environmental segment also operates manufacturing facilities in those same regions. The environmental segment's principal markets are lining technologies, building materials and water treatment. Additionally, we have a transportation segment that performs trucking services for our domestic minerals and environmental businesses as well as third parties. 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 affiliates and joint ventures, we have access to bentonite reserves in Egypt, India and Mexico. Bentonite deposits have varying physical properties which requires us to identify which markets our reserves can serve. We believe that our understanding of bentonite properties, mining methods, processing and application to markets are the core components of our longevity and future prospects. Our customers are engaged in varied end-markets and geographies. Customers in the minerals segment range from foundries that produce castings for automotive, industrial, and transportation equipment , including heavy-duty trucks and railroad cars, to producers of consumer goods, including cat box filler, cosmetics and detergents. The customers for our lining technologies and building materials products are predominantly engineering contractors. The oilfield services customer base is primarily comprised of oil service or exploration companies. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year. Approximately 67% of our revenue is generated in North America; consequently, the state of the U.S. economy impacts our revenues. Our fastest growing markets are in the Asia-Pacific and Central European regions, which have continued to outpace the United States in economic growth. Sustainable, long-term profit growth is our primary objective. We employ number of strategic initiatives to achieve this goal: o Organic growth: The central component of our growth strategy is expansion of our product lines and market presence. We have a history of commitment to research and development and using this resource to bring innovative products to market. We believe this approach to growth offers the best probability of achieving our long-term goals at the lowest risk. o Globalization: We have expanded our manufacturing and marketing organizations into Europe and Asia-Pacific over the last 40 years. This operating experience enables us to expand further into emerging markets. We see the significant opportunities in the Asia-Pacific region for expanding our revenues and earnings over the long-term as a number of markets we serve, such as metalcasting and lining technologies, are expected to grow. We expect to take advantage of these growth areas either through our wholly owned subsidiaries or investments in affiliates and joint ventures. o Mineral development: Bentonite is a component in a majority of the products we produce. Since it is a natural material, we must continually expand our reserve base to maintain a long-term business. Our goal is to add new reserves to replace the bentonite mined each year. Furthermore, we need to assure new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization is committed to developing its global reserve base to meet these requirements. o Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products. Over the last four years, we have acquired a number of businesses for a total cost of approximately $39 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. 18 There can be no assurance that we will achieve success in implementing any one or more of the strategic initiatives described above. A number of risks will challenge us in meeting our long-term objectives. We describe certain risks, such as competition and our reliance on economically sensitive markets, under "Item 1A. Risk Factors" and "Item 7A. Quantitive and Qualitative Disclosures About Market Risk". In general, the significance of these risks has not changed over the past year. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations describes relevant aspects of our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to select accounting policies that are appropriate for our business, and to make certain estimates, judgments and assumptions about matters that are inherently uncertain in applying those policies. On an ongoing basis, we re-evaluate these estimates, judgments and assumptions for reasonableness because of the critical impact that these factors have on the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates. Our 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. We believe these critical accounting policies have resulted in past actual results approximating the estimated amounts in each respective area. 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. 19 INVENTORY VALUATION Inventories are recorded at the lower of actual manufactured or purchased cost, or estimated net realizable value. In order to determine net realizable value, management regularly reviews inventory quantities on hand and evaluates significant items to determine whether they are excess or obsolete. We record the value of estimated excess or obsolete inventory as a reduction of inventory and as an expense which is included in cost of sales in the period it is identified. Our estimate of excess and obsolete inventory is a critical accounting estimate because it is susceptible to change from period to period. In addition, it requires management to make judgments about the future demand for inventory. 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 at year-end at the reporting unit level (or more frequently if impairment indicators arise). 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 United States employees hired on or before December 31, 2003. In order to measure the expense and obligations associated with these retirement benefits, we must make a variety of estimates including discount rates used to value certain liabilities, expected return on plan assets set aside to fund these liabilities, rate of compensation increase, employee turnover rates, retirement rates, mortality rates and other factors. Our benefit plan committee determines the key assumptions related to the discount rate, expected investment rate of return and compensation increases after consulting with the actuarial firm that performs the calculations. Other assumptions are also set based on consultation with our actuaries. 20 To determine our net accrued benefit and net periodic benefit cost, we form judgments about the best estimate for each assumption used in the actuarial computation. The most important assumptions that affect the computations are the discount rate and the expected long-term rate of return on plan assets. Our discount rate assumption is intended to reflect the rate at which the retirement benefits could be effectively settled based upon the assumed timing of the benefit payments. In determining the discount rate, we utilize the yield of a standardized benchmark, the Moody's Aa Corporate Bond Index, which consists of high quality fixed income investments, and round it to the nearest 25 basis points. The discount rate used to determine our retirement pension benefit obligation at September 30, 2005, was 5.25%. In 2005, a 50 basis point decrease in this discount rate would have increased the benefit obligation by $3.5 million and increased the net cost by 29%, or $364 thousand. Likewise in 2005, a 50 basis point increase in the discount rate would have decreased the benefit obligation by $3.08 million and decreased the net cost by 13%, or $168 thousand. The expected long-term rate of return on plan assets was based on our current asset allocations and the historical long-term performance, as adjusted for existing market conditions. Information regarding our asset allocations is included in the Notes to Consolidated Financial Statements in "Item 8 Financial Statements and Supplementary Data." We assumed a weighted-average expected long-term rate of return on pension plan assets of 8.50% to determine our net benefit cost in 2005. A 50 basis point decrease in the expected return would have increased the net cost by approximately 12%, or $148 thousand, in 2005. Likewise, a 50 basis point increase in the expected return would have decreased the net cost by $148 thousand. 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 our positions may be overturned. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our effective tax rate includes the impact of changes to reserves that we consider appropriate. 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. 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. 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 long-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 consolidated financial statements. 21 In May 2005, the FASB issued Statement No. 154 ("SFAS 154"), "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of changing to the new accounting principle. SFAS 154 also requires that a change in method of depreciating, amortizing or depleting a long-lived nonfinancial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed a restatement. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005; as such, the Company's adoption of this standard in fiscal 2006 is not expected to have a material impact on the Company's consolidated financial statements. In December 2004, the FASB amended FAS 123 ("SFAS 123(R)"), and the guidance contained therein was to become effective for the first interim or annual reporting period beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission delayed mandatory compliance with this standard starting with the first interim or annual reporting period of the first fiscal year that begins after December 15, 2005. Since the Company's next fiscal year will begin January 1, 2006, the Company intends to adopt SFAS 123 (R) in the first quarter of 2006, and such adoption is not anticipated to have a material effect on the Company's financial statements as the majority of our options issued prior to January 1, 2003, the date we adopted SFAS No. 123, have already vested. In June 2005, the FASB's Emerging Issues Task Force reached a consensus on Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements" ("EITF 05-6"). The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005; adoption of this EITF 05-6 in the third quarter of 2005 did not have a material impact on the Company's consolidated financial statements. RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2005 The discussion below references the consolidated statement of operations included in "Item 8 - Financial Statements and Supplementary Data." Net sales for the year ended December 31, 2005 were $535.9 million, compared with $461.8 million for 2004 and $374.5 million for 2003, which were increases of 16% and 23% in 2005 and 2004, respectively. Minerals contributed approximately 43% of the increase in net sales over 2004. The environmental and transportation segments contributed 51% and 12%, respectively, to the increase in net sales; intersegment shipping revenue increased by 6% over 2004. Approximately 4% of the growth in net sales for 2005 was attributed to acquisitions and fluctuations in foreign currency translation combined. In comparing 2004 with 2003, minerals accounted for approximately 54% of the increase, while environmental and transportation contributed 45% and 1%, respectively. Acquisitions and fluctuations in foreign currency translation accounted for approximately 32% and 14%, respectively, of the 2004 over 2003 increase. Gross profit was $138.0 million for the year ended December 31, 2005, compared with $118.6 million for 2004 and $100.1 million in 2003. The 16% increase in gross profit in 2005 over 2004 was generated by the growth in net sales. On a segment basis, minerals contributed approximately 30% of the increase over 2004, while environmental and transportation accounted for 63% and 7%, respectively. Relative to the comparison of 2004 with 2003, the 19% increase in gross profit followed sales growth. Minerals contributed approximately 53% of the growth in gross profit, while environmental and transportation accounted for 45% and 2%, respectively. 22 Gross margin was 25.8% in 2005, 25.7% in 2004 and 26.7% in 2003. We did not realize an improvement in gross margin in 2005 over 2004 due to higher raw material, transportation and energy-related costs. These higher costs depressed gross margins in both the minerals and environmental segments in 2005. The 100 basis point decline in 2004 from 2003 was also primarily influenced by higher production and transportation costs. Additionally, the environmental segment gross margins declined in 2004, due to a greater proportion of lower-margin product sales in that year. General, selling and administrative expenses were $90.9 million for the year ended December 31, 2005, compared with $82.6 million in 2004 and $71.1 million in 2003. The increase in 2005 over 2004 was primarily attributable to greater employee benefit and compensation costs, Sarbanes-Oxley compliance-related costs, and audit fees. The increase in 2004 over 2003 was attributed to a number of expenses including higher compensation, employee benefits and professional and consulting fees associated with Section 404 of the Sarbanes-Oxley Act. Included in the 2004 professional fees was $1.2 million for assistance in filing amended U.S. income tax returns. Operating profit was $47.1 million for the year ended December 31, 2005, compared with $36.0 million in 2004 and $29.0 million in 2003. The improvement in operating profit 2005 and 2004 resulted from the increase in sales and gross profit. Operating margin for 2005 was 8.8%, compared with 7.8% in 2004 and 7.7% in 2003. On a segment basis, minerals, environmental and transportation operating margins improved in 2005 over 2004 due to the relatively modest increases in general, selling and administrative expenses as compared with the increase in gross profit. In comparing 2004 with 2003, the minerals segment's operating margin increased; however, a decline in the environmental segment's margin offset the improvement. A review of sales, gross profit, general, selling and administrative expenses and operating profit by segment follows. MINERALS SEGMENT
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------------- MINERALS 2005 2004 2003 2005 vs. 2004 2004 vs. 2003 - ------------------------ ------------------- ------------------- ------------------- -------------------- ------------------- (Dollars in Thousands) Net sales $ 295,686 100.0% $ 264,167 100.0% $ 217,203 100.0% 31,519 11.9% 46,964 21.6% Cost of sales 236,916 80.1% 211,228 80.0% 174,048 80.1% --------- --------- --------- --------- --------- --------- Gross profit 58,770 19.9% 52,939 20.0% 43,155 19.9% 5,831 11.0% 9,784 22.7% General, selling and administrative expenses 22,268 7.5% 22,307 8.4% 19,693 9.1% (39) -0.2% 2,614 13.3% --------- --------- --------- --------- --------- --------- Operating profit 36,502 12.4% 30,632 11.6% 23,462 10.8% 5,870 19.2% 7,170 30.6%
2005 vs. 2004 Base businesses (those businesses owned for greater than one year) accounted for all of the growth over the prior year. Metalcasting and pet products revenues accounted for a large majority of the increase. Domestic metalcasting revenue growth was primarily attributed to selling price increases that were implemented to offset increases in raw materials, transportation and energy-related costs. Metalcasting revenue also improved due to higher sales volumes in China and Thailand. Higher volumes and selling price increases led to the improvement in pet products revenues. Specialty minerals revenues were relatively flat in comparison with the prior year. Detergent additives volumes declined in 2005 but were offset by increases in volumes and selling prices in the oil and gas drilling fluids product lines. Gross profit improved with the increase in net sales; however, gross margin declined by 10 basis points. Additionally, gross profit in 2005 benefited from a $2.1 million one-time reduction in mining-related taxes owed to the State of Montana. Excluding this benefit, gross profit would have improved over 2004 by approximately 7% and gross margin would have been 19.2%. Selling price increases were not large enough to offset the actual increase in raw materials, transportation and energy-related costs. 23 General, selling and administrative expenses declined slightly in 2005 partly because 2004 included a charge for $0.9 million related to increased bad debt reserves. Also, 2005 included a benefit of $0.6 million related to a $0.5 million greater benefit from gains on the disposals of certain assets. Operating margin improved by 80 basis points due to flat general, selling and administrative expenses. 2004 vs. 2003 The 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 result of rising raw material and transportation costs. The detergent 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 10 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 80 basis points as a result of greater volume in the metalcasting and specialty minerals businesses. ENVIRONMENTAL SEGMENT
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------------- ENVIRONMENTAL 2005 2004 2003 2005 vs. 2004 2004 vs. 2003 - ------------------------ ------------------- ------------------- ------------------- -------------------- ------------------- (Dollars in Thousands) Net sales $ 210,846 100.0% $ 172,723 100.0% $ 133,769 100.0% 38,123 22.1% 38,954 29.1% Cost of sales 137,526 65.2% 111,565 64.6% 80,897 60.5% --------- --------- --------- --------- --------- --------- Gross profit 73,320 34.8% 61,158 35.4% 52,872 39.5% 12,162 19.9% 8,286 15.7% General, selling and administrative expenses 44,652 21.2% 40,636 23.5% 34,993 26.2% 4,016 9.9% 5,643 16.1% --------- --------- --------- --------- --------- --------- Operating profit 28,668 13.6% 20,522 11.9% 17,879 13.3% 8,146 39.7% 2,643 14.8%
2005 vs. 2004 Base businesses accounted for approximately 94% of the growth in net sales, while favorable foreign currency translation and acquisitions represented the remainder. Lining technologies and water treatment product line revenues accounted for a large majority of the increase. Higher volumes in all three regions, Americas, Europe/Middle East and Asia-Pacific, led to the increase in lining technologies revenues. We also benefited from higher average selling prices in the United States Water treatment revenues improved principally due to higher volumes and service activity in the oilfield services business. Gross profit increased in conjunction with sales. Gross margin decreased by 60 basis points due to a greater proportion of revenues generated from lower profit product lines. Certain lining technologies and oilfield service product/service lines have lower gross margins. General, selling and administrative expenses grew at more modest rates as employee headcount levels remained fairly stable compared with 2004. 24 Operating profit improved inconjunction with the increase in gross profit. Operating margin improved by 170 basis points which largely resulted from the increase in general, selling and administrative expenses. 2004 vs. 2003 The $39.0 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 11 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 410 basis points. Lower relative profitability on sales generated by the acquired businesses was the primary reason for the gross margin decline. The domestic businesses also experienced gross 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 140 basis points. As referenced in the explanation for the gross margin decline, acquisitions had the primary detrimental impact on operating margin. TRANSPORTATION SEGMENT
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------------- TRANSPORTATION 2005 2004 2003 2005 vs. 2004 2004 vs. 2003 - ------------------------ ------------------- ------------------- ------------------- -------------------- ------------------- (Dollars in Thousands) Net sales $ 49,708 100.0% $ 40,650 100.0% $ 37,549 100.0% 9,058 22.3% 3,101 8.3% Cost of sales 43,775 88.1% 36,179 89.0% 33,508 89.2% --------- --------- --------- --------- --------- --------- Gross profit 5,933 11.9% 4,471 11.0% 4,041 10.8% 1,462 32.7% 430 10.6% General, selling and administrative expenses 3,216 6.5% 2,751 6.8% 2,494 6.6% 465 16.9% 257 10.3% --------- --------- --------- --------- --------- --------- Operating profit 2,717 5.4% 1,720 4.2% 1,547 4.2% 997 58.0% 173 11.2%
2005 vs. 2004 Revenues grew due to higher business levels, equipment utilization rates, and average rates charged to customers. Approximately 41% of the segment's revenues were generated from services provided to certain domestic subsidiaries within our minerals and environmental segments. Gross profit improved commensurate with the increase in revenues. Gross margin benefited from improved equipment utilization and higher revenue rates. Diesel fuel surcharges negatively impacted gross margin; however, the segment was able to offset a majority of the cost by passing-through those charges to customers. 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. 25 CORPORATE SEGMENT
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- CORPORATE 2005 2004 2003 2005 VS. 2004 2004 VS. 2003 - -------------------------------------- ---------- ---------- ---------- ----------------------- ------------------------ (Dollars in Thousands) Intersegment shipping sales $ (20,316) $ (15,762) $ (14,038) Intersegment shipping costs (20,316) (15,762) (14,038) ---------- ---------- ---------- Gross profit - - - Corporate general, selling and administrative expenses 17,190 13,244 10,077 $ 3,946 29.8% $ 3,167 31.4% Nanocomposite business development expenses 3,621 3,646 3,796 (25) -0.7% (150) -4.0% ---------- ---------- ---------- Operating loss $ (20,811) $ (16,890) $ (13,873) $ (3,921) 23.2% $ (3,017) 21.7%
2005 vs. 2004 Intersegment shipping sales and costs are related to billings from the transportation segment to the domestic minerals and environmental segments for services. These services are invoiced to the minerals and environmental segments at arms-length rates and those costs are subsequently charged to customers. Intersegment sales and costs reported above reflect the elimination of these transactions. Corporate costs include management information systems, human resources, investor relations, corporate communications and finance. Additionally, marketing, research and development and operating costs related to the development of the nanocomposite business are included in this segment. As described in the comparison of 2004 with 2003 expenses, 2004 included $1.2 million of professional service fees, which are considered non-recurring in nature. Excluding these fees from our results in 2004, segment expenses in 2005 would have increased by approximately $5.1 million, or 39%. Contributing to the increase were greater expensese associated with stock-based compensation, corporate development activities, professional service fees related to Sarbanes-Oxley compliance, independent registered accountant services and tax services. Nanocomposite business development expenses were comparable to the prior-year. No material changes occurred in 2005 related to new customers or product introductions. 2004 vs. 2003 We recorded approximately $1.2 million of tax consulting fees in 2004 in connection with the filing of amended federal income tax returns to claim 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. Other operating expenses that impacted the segment were increased stock compensation costs and higher professional and consulting fees associated with Section 404 of the Sarbanes-Oxley Act compliance. Nanocomposite expenses declined slightly due lower net spending on business development expenses. NET INTEREST EXPENSE Net interest expense was $1.7 million, $0.8 million, and $0.3 million in 2005, 2004, and 2003, respectively. Average debt levels were $34.6 million and $21.7 million in 2005 and 2004, respectively. Debt increased in 2005 principally due to higher average working capital and greater capital expenditures. In 2004, debt increased due to acquisitions and higher average working capital. Average interest rates on our funded debt were 4.7%, 2.8% and 2.0% in 2005, 2004 and 2003, respectively. A majority of the interest on our debt is based upon LIBOR rates. 26 OTHER INCOME (EXPENSE), NET Net other expense in 2005 was approximately $0.4 million and $0.1 million in 2005 and 2004, respectively. In 2003, we recognized net other income of $0.6 million. Other income is composed of a number of miscellaneous transactions, primarily foreign currency transaction gains and losses. INCOME TAXES The effective income tax rate for 2005 was 25.9%, compared with 13.4% in 2004 and 34.0% in 2003. A schedule is included in Note 9, Income Taxes, as part of the Notes to Consolidated Financial Statements which reconciles the federal statutory income tax rate to our effective rate. The largest benefit to the tax rate in 2005 was higher depletions deductions, lower average foreign tax rates and reductions in estimates of 2004 taxes payable which were determined in conjunction with preparation of the income tax returns in 2005. In 2004, we recorded a reduction to income tax expense of $4.8 million associated with depletion deductions and research and development credits available in computing income tax expense. Approximately $0.8 million of this amount relates to changes in estimates resulting from the finalization, in 2004, of the tax return for the 2003 tax year. The remaining $4.0 million relates to the filing of amended federal income tax returns dating from 1999 through 2002. Regarding the amended income tax returns, after consultation with tax advisors, we recomputed our federal income tax liability for these periods after determining that we could increase certain deductions and credits as allowed under the Internal Revenue Code. The total refund claimed on the returns was $5.2 million; however, we determined that a contingency reserve was necessary to reflect potential reduction of the refund after examination of the returns by the IRS. No adjustments were recorded in 2005 to the contingency reserve established for these refund claims. We also recorded, in 2004, a $1.1 million credit to income tax expense for the adjustment of deferred income tax assets and income taxes payable at a U.K. subsidiary. A portion of this adjustment related to prior reporting periods, but was considered immaterial to those periods; therefore, the entire amount was reflected in 2004. If the $1.1 million and $4.8 million reductions had not been recorded, the effective income tax rate for 2004 would have been approximately 30%. No adjustments were recorded in 2005 to reflect a change in the estimates for these items. INCOME FROM AFFILIATES AND JOINT VENTURES We reported income from affiliates and joint ventures of $2.9 million, $1.2 million and $0.6 million for 2005, 2004 and 2003, respectively. The major component of the increase for each of the last two years was largely related to our investments in two businesses based in India. One business has substantial bauxite and bentonite operations. Bauxite is used to produce alumina, which is then used to produce aluminum. The bauxite business had particularly strong earnings in the current year period. The second business in India is engaged in manufacturing, marketing and distributing a specialized bentonite application involving clarification of edible oils. That business, in which we own 50% of the equity, has increased its revenues substantially over the last two years and is now a leading supplier in the Indian market. Additionally, we increased our ownership percentage in our Japanese joint venture in August 2004 to 50% from 19%, and we began accounting for the income from that venture under the equity method. 27 DISCONTINUED OPERATIONS In September 2004, we filed an amended income tax return in the State of Mississippi requesting a refund of approximately $12.5 million of taxes paid relating to the gain on the sale of our absorbent polymer segment. The sale of the segment was reported as a discontinued operation in the second quarter of 2000. With the assistance of a professional accounting firm, we concluded that a gain on the sale of a business under these circumstances was not taxable in Mississippi according to its laws. After negotiations and hearings with officials, the Board of Review of the Mississippi State Tax Commission accepted our settlement offer of $7.8 million in June 2005, and we received payment of this refund in July 2005. Discontinued operations reported in 2003 reflected the recording of a tax benefit associated with the disposal of our 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 2005 was $41.0 million compared with $31.6 million and $28.9 million 2004 and 2003, respectively. In 2005 and 2003, net income included $4.8 million and $9.0 million, respectively, of a benefit from discontinued operations as previously discussed. The increase in income from continuing operations in both comparison periods (2005 vs. 2004 and 2004 vs. 2003) 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 30.8 million in 2005, 30.7 million in 2004 and 29.8 million in 2003. There were 29.5 million shares outstanding, excluding common share equivalents, at December 31, 2005, compared with 29.1 million and 28.4 million at December 31, 2004 and December 31, 2003, respectively. The increase in shares in 2004 was due to exercise of stock options which was partially offset by stock repurchases. The 0.4 million share increase in 2005 was related to the issuance of shares of treasury stock to employees in connection with the exercise of stock options. This increase was partially offset by the repurchase of 105,000 shares of common stock on the open market. Diluted earnings per share from continuing operations in 2005 were $1.18 compared with $1.03 and $0.67 in 2004 and 2003, respectively. The improvement for both 2005 and 2004 was commensurate with the increase in net income from continuing operations previously described. Also benefiting 2004, was a reduction of income tax expense, described above, which contributed approximately $0.14 per share. Net income per diluted share was $1.33, $1.03, and $0.97 in 2005, 2004 and 2003, respectively. Both 2005 and 2003 were positively impacted by discontinued operations. 28 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operations, borrowings from a revolving credit facility and proceeds from the exercise of stock options by employees have been our sources of funds to purchase property, plant and equipment; acquire businesses; repurchase common stock; and pay dividends to shareholders. We believe cash flows from operations and borrowings from an unused and committed revolving credit facility will be adequate to support our operating plans for the foreseeable future. Following is a discussion and analysis of our cash flow activities as presented in the Consolidated Statements of Cash Flows within Item 8 of this report. Cash provided by operating activities of continuing operations was $36.3 million, compared with $17.4 million in 2004 and $28.6 million in 2003. In 2005, our cash flows benefited from higher income from continuing operations and slower growth in working capital. The decline in 2004 was primarily attributed to cash used for working capital. Accounts receivable and inventories in 2005 increased by $24.6 million over 2004; they increased in 2004 by $38.9 million over 2003. The increases were commensurate with our sales growth. Net cash used in investing activities in 2004 was $22.3 million, compared with $26.1 million and $22.8 million in 2004 and 2003, respectively. Capital expenditures totaled $28.6 million in 2005, compared with $21.7 and $15.8 million in 2004 and 2003, respectively. Tax refunds provided by discontinued operations were $4.8 million and $8.6 million in 2005 and 2004, respectively. The increase in capital expenditures in 2005 over 2004 was due to a number of new investment sites including a metalcasting products plant in the United States and a lining technologies manufacturing plant in Spain. Capital expenditures increased in 2004 over 2003 primarily due to an acquisition of a vacant facility in the United States for $4.4 million that we plan to use for consolidating certain manufacturing operations for our environmental segment. The remaining portion of the increase in 2004 was due to further expansion of operations in Asia. Acquisitions were $2.1 million, $13.3 million and $7.1 million in 2005, 2004 and 2003, respectively. In 2004, we acquired two businesses related to our environmental segment. Cash used in financing activities was $11.8 million in 2005 and $11.6 million in 2003. Financing activities provided cash totaling $9.3 million in 2004. Financing cash flows are primarily affected by borrowings from our revolving credit facility. We had net borrowings of debt from the revolving credit facility totaling $20.5 million in 2004 and net repayments of $8.3 million in 2003. Net borrowings were negligible in 2005. 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. As noted in Item 5 of this Form 10-K, we repurchased approximately $2.0 million of our common stock in 2005 compared with $2.9 million in 2004 and $1.6 million in 2003. Approximately $8.0 million remains in funds authorized by our Board of Directors for stock repurchases. We elect to repurchase our common stock in the open market from time to time when we believe utilizing funds in this manner will provide a good return to our shareholders. Dividends on our common stock were $11.3 million in 2005, compared with $9.4 million in 2004 and $4.6 million in 2003. Declared dividends were $0.38 per share in 2005, compared with $0.32 per share in 2004 to $0.16 per share in 2003. The increases reflected the improvement in our earnings and cash flows from 2003 through 2005. As of December 31, 2005, we had outstanding debt of $34.8 million and cash of $16.0 million, compared with $34.3 million of outstanding debt and $17.6 million of cash at December 31, 2004. Total funded debt represented 12% of total capitalization at December 31, 2005, compared with 13% at December 31, 2004. 29 We had a current ratio of 3.3-to-1 and working capital of approximately $148.2 million as of December 31, 2005, compared with 3.1-to-1 and $131.0 million, respectively, as of December 31, 2004. The current ratio and working capital increased due to the growth in sales we experienced in 2005. Since the mid-1980s, we and/or our subsidiaries have been named as one of a number of defendants in product liability lawsuits relating to the minor free-silica content of our bentonite products used in the metalcasting industry. The plaintiffs in these lawsuits are primarily employees of our foundry customers. To date, we have not incurred significant costs in defending these matters. We believe we have adequate insurance coverage and do not believe the litigation will have a material adverse impact on our financial condition, liquidity or results of the operations. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS The following schedule sets forth details of our long-term contractual obligations at December 31, 2005:
PAYMENTS DUE BY PERIOD -------------------------------------------------------------- LESS THAN 1 2-3 4-5 AFTER 5 TOTAL YEAR YEARS YEARS YEARS ---------- ---------- ---------- ---------- ---------- (in millions) Bank debt 34.8 $ - $ 1.8 $ 28.3 $ 4.8 Lease obligations 13.9 4.8 6.7 1.6 0.8 Capital expenditures 1.3 1.3 - - - ---------- ---------- ---------- ---------- ---------- Total contractual cash obligations $ 48.7 $ 4.8 $ 8.5 $ 29.9 $ 5.6 ========== ========== ========== ========== ==========
Bank debt includes approximately $25.8 million due under a revolving credit agreement, which provides for a commitment of $120 million in borrowing capacity and matures on October 31, 2010. The agreement is a multi-currency arrangement that allows us to borrow certain foreign currencies at rates that can range from 0.50% to 1.125% above the London Inter Bank Offered Rate (LIBOR), depending upon the amount of the credit line used and certain capitalization ratios. The facility requires us to meet certain covenants, such as specific amounts of net worth, and limits our ability to make additional borrowings and guarantees. We were in compliance with these covenants at December 31, 2005. 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 14 of Notes to the Consolidated Financial Statements included in Part IV of this report. The Company occasionally enters into unconditional purchase obligations which contemplate future, irrevocable payments under enforceable contracts which can not be cancelled without penalty. Such payments are excluded from the above table as they are entered into in the ordinary course of business, and we believe the anticipated expenditures associated with them are not material. We have recorded $5 million of liabilities to satisfy the land reclamation obligations discussed in Note 1 of our Notes to Consolidated Financial Statements. Expenditures to satisfy these liabilities are excluded from the above table of contractual obligations as the timing of these payments are not contractually due until the expiration of individual mining permits, which are frequently renewed. We anticipate our funding obligation for our defined benefit pension plan will approximate $1 million in 2006. That amount principally represents contributions required by regulations or laws. We have not presented this obligation or the obligation for future years in the table above as the funding can vary from year to year based on changes in fair value of pension plan assets and actuarial assumptions. 30 At December 31, 2005 and 2004, we had outstanding standby letters of credit of $14.2 million and $13.9 million, respectively, which are not included in the obligations in the table above. These letters of credit typically serve to guarantee the Company's performance of its obligations related to land reclamation and workers' compensation claims. We have recognized the estimated costs of our obligations related to land reclamation and workers' compensation claims in our consolidated balance sheets as of December 31, 2005 and 2004. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a multinational corporation that manufactures and markets products in countries throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and do not use them for trading or speculative purposes. EXCHANGE RATE SENSITIVITY We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the euro, the British pound, and the Polish zloty. We also have significant exposure to changes in exchange rates between the British pound and the euro and the Polish zloty and the euro. Our various currency exposures often offset each other, providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2005, we did not have any material foreign currency contracts outstanding. INTEREST RATE SENSITIVITY The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates for debt obligations. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The instruments' actual cash flows are denominated in U.S. dollars.
EXPECTED MATURITY DATE ------------------------------------------------------------------------------------------------ 2006 2007 2008 2009 2010 THEREAFTER TOTAL FAIR VALUE --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (US$ equivalent in thousands) Short-term debt: Fixed rate $ - $ - $ - $ - $ - $ - $ - $ - Interest rate - - - - - - Long-term debt: Variable rate (US$) - 1,768 - - 9,000 4,800 15,568 15,568 Average interest rate - 5.02% - - 5.15% 3.60% Fixed rate (THB) - - - - 2,511 - 2,511 2,511 Interest rate - - - - 6.69% - Variable rate (UK(pound)) - - - - 10,839 - 10,839 10,839 Average interest rate - - - - 5.14% - Variable rate ((euro)) - - - - 5,920 - 5,920 5,920 Average interest rate - - - - 2.94% - --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $ - $ 1,768 $ - $ - $ 28,270 $ 4,800 $ 34,838 $ 34,838 ========= ========== ========== ========== ========== ========== ========== ==========
31 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 2005 and 2004, 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. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information we are required to disclose in the reports we file or submit under the Exchange Act. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we concluded that our internal control over financial reporting was effective as of the end of the period covered by this report. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Our independent registered public accounting firm has audited our assessment of the effectiveness of our internal control over financial reporting as of the end of the period covered by this report as stated in their report, which appears in Part IV of this Form 10-K. 32 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING 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 internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. As described in our annual report on Form 10-K for the year ended December 31, 2004, as amended, we identified a material weakness in internal control over financial reporting relative to our accounting for income taxes. In particular, our design of internal control did not address the accounting considerations arising from the filing of tax returns or the timing of recording changes in accounting estimates relating to income taxes of foreign subsidiaries. As a result of the foregoing and in the fiscal quarter ended March 31, 2005, we began implementing changes in our internal control over financial reporting that materially affected or were reasonably likely to materially affect our internal control over financial reporting. Specifically, these changes included restructuring the responsibility for income taxes, formalizing our oversight relating to accounting for income taxes by developing procedures to both monitor significant income tax events and determine appropriate accounting treatment for certain deduction and credit positions taken in income tax returns, both amended and original, and developing a program to provide increased training to improve our accounting for income taxes. Additionally, we enhanced our internal control over financial reporting of our foreign subsidiaries to assure that the consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States and that changes in accounting estimates are recorded in the proper reporting period. We also revised the process of how we calculate and report our tax expense and related balance sheet accounts, and we retained a professional accounting firm to assist us in the preparation of these tax accounts for each financial reporting period. Lastly, the Chief Financial Officer conducted an annual assessment of our staff's knowledge of accounting principles generally accepted in the United States and provided additional training where necessary. In order to conclude on the effectiveness of our remediation activities, we were required to test the effectiveness of the changes in our internal control over financial reporting over successive quarters to prove their operating effectiveness. Given that our remedial efforts continued through the year ended December 31, 2005, it is only as of the fourth quarter in 2005 that we are able to conclude on our remediation activities and our changes in internal control over financial reporting. Accordingly, we have determined that the material weakness in our internal control over financial reporting as described in our annual report on Form 10-K, for the year ended December 31, 2004, as amended, was remediated. 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, 2005 and 2004 F-4 Consolidated Statements of Operations, Years ended December 31, 2005, 2004 and 2003 F-6 Consolidated Statements of Comprehensive Income, Years ended December 31, 2005, 2004 and 2003 F-7 Consolidated Statements of Stockholders' Equity, Years ended December 31, 2005, 2004 and 2003 F-8 Consolidated Statements of Cash Flows, Years ended December 31, 2005, 2004 and 2003 F-9 Notes to Consolidated Financial Statements F-10 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. We also have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that AMCOL International Corporation and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). AMCOL International Corporation's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management's assessment, and an opinion on the effectiveness of the Company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and signifcant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. F-2 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMCOL International Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, management's assessment that AMCOL International Corporation and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Interal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, AMCOL International Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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. KPMG LLP Chicago, Illinois March 16, 2006 F-3 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
DECEMBER 31, ----------------------- ASSETS 2005 2004 - ---------------------------------------------------------- ---------- ---------- Current assets: Cash $ 15,997 $ 17,594 Accounts receivable: Trade, less allowance for doubtful accounts of $2,350 and $4,637 in 2005 and 2004, respectively 98,824 86,128 Other 2,901 2,214 Inventories 77,928 63,882 Prepaid expenses 6,595 7,111 Current deferred tax assets 3,698 4,293 Income taxes receivable 4,864 10,750 Assets held for sale 402 752 ---------- ---------- Total current assets 211,209 192,724 ---------- ---------- Investment in and advances to joint ventures 19,730 16,133 ---------- ---------- Property, plant, equipment, and mineral rights and reserves: Land and mineral rights 12,761 12,019 Depreciable assets 252,430 247,280 ---------- ---------- 265,191 259,299 Less: accumulated depreciation 165,127 165,658 ---------- ---------- 100,064 93,641 ---------- ---------- Other assets: Goodwill 20,644 19,225 Intangible assets, less accumulated amortization of $5,479 and $4,629 in 2005 and 2004, respectively 3,009 3,802 Deferred tax assets 4,579 3,710 Other assets 9,294 7,207 ---------- ---------- 37,526 33,944 ---------- ---------- $ 368,529 $ 336,442 ========== ==========
Continued... F-4 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
DECEMBER 31, ----------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004 - ---------------------------------------------------------- ---------- ---------- Current liabilities: Accounts payable 24,722 $ 25,474 Accrued liabilities 38,547 36,207 ---------- ---------- Total current liabilities 63,269 61,681 ---------- ---------- Long-term debt 34,838 34,295 ---------- ---------- Minority interests in subsidiaries 259 5 Deferred compensation 7,045 5,872 Other liabilities 14,262 12,655 ---------- ---------- 21,566 18,532 ---------- ---------- Stockholders' equity: Common stock, par value $.01 per share. Authorized 100,000,000 shares; issued 32,015,771 shares in 2005 and 2004 320 320 Additional paid in capital 72,194 69,763 Retained earnings 184,125 154,366 Accumulated other comprehensive income 8,644 14,905 ---------- ---------- 265,548 239,354 Less: Treasury stock (2,232,132 and 2,620,016 shares in 2005 and 2004, respectively) 16,427 17,420 ---------- ---------- 248,856 221,934 ---------- ---------- $ 368,529 $ 336,442 ========== ==========
See accompanying notes to consolidated financial statements. F-5 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31, ------------------------------------- 2005 2004 2003 ---------- ---------- ---------- CONTINUING OPERATIONS Net sales $ 535,924 $ 461,778 $ 374,483 Cost of sales 397,901 343,210 274,415 ---------- ---------- ---------- Gross profit 138,023 118,568 100,068 General, selling and administrative expenses 90,947 82,584 71,053 ---------- ---------- ---------- Operating profit 47,076 35,984 29,015 ---------- ---------- ---------- Other income (expense): Interest expense, net (1,660) (826) (280) Other, net (393) (86) 526 ---------- ---------- ---------- (2,053) (912) 246 ---------- ---------- ---------- Income before income taxes, income from affiliates and joint ventures 45,023 35,072 29,261 Income tax expense 11,645 4,687 9,946 ---------- ---------- ---------- Income before income from affiliates and joint ventures 33,378 30,385 19,315 Income from affiliates and joint ventures 2,912 1,180 600 ---------- ---------- ---------- Income from continuing operations 36,290 31,565 19,915 ---------- ---------- ---------- DISCONTINUED OPERATIONS Gain on 2001 disposal (including income tax benefits of $5,255 and $8,741 in 2005 and 2003, respectively) 4,755 - 8,950 ---------- ---------- ---------- Income from discontinued operations 4,755 - 8,950 ---------- ---------- ---------- Net income $ 41,045 $ 31,565 $ 28,865 ========== ========== ==========
See accompanying notes to consolidated financial statements. Continued... F-6 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31, ------------------------------------- 2005 2004 2003 ---------- ---------- ---------- EARNINGS PER SHARE Basic earnings per share: Continuing operations $ 1.23 $ 1.08 $ 0.70 ---------- ---------- ---------- Discontinued operations: Gain on disposal 0.16 - 0.32 ---------- ---------- ---------- 0.16 - 0.32 ---------- ---------- ---------- Net income $ 1.39 $ 1.08 $ 1.02 ========== ========== ========== Diluted earnings per share: Continuing operations $ 1.18 $ 1.03 $ 0.67 ---------- ---------- ---------- Discontinued operations: Gain on disposal 0.15 - 0.30 ---------- ---------- ---------- 0.15 - 0.30 ---------- ---------- ---------- Net income $ 1.33 $ 1.03 $ 0.97 ========== ========== ==========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
YEAR ENDED DECEMBER 31, ------------------------------------- 2005 2004 2003 ---------- ---------- ---------- Net income $ 41,045 $ 31,565 $ 28,865 Other comprehensive income (loss) - Minimum pension liability (net of $169 tax benefit in 2005 and $0 in 2004) 154 (457) - Foreign currency translation adjustment (6,415) 6,990 6,367 ---------- ---------- ---------- Comprehensive income $ 34,784 $ 38,098 $ 35,232 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-7 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
COMMON STOCK ACCUMULATED ------------------------ OTHER NUMBER ADDITIONAL COMPREHENSIVE OF PAID-IN RETAINED INCOME TREASURY SHARES AMOUNT CAPITAL EARNINGS (LOSS) STOCK TOTAL ------------ ---------- ---------- ---------- ------------- ---------- ---------- Balance at December 31, 2002 32,015,771 $ 320 $ 69,850 $ 107,874 $ 2,005 $ (22,114) $ 157,935 Net income - - - 28,865 - - 28,865 Cash dividends ($0.16 per share) - - - (4,560) - - (4,560) Currency 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 - - (5,145) - 7,273 2,128 Tax benefit from employee stock plans - - 2,195 - - - 2,195 Vesting of common stock in connection with employee stock plans - - 613 - - 760 1,373 ------------ ---------- ---------- ---------- ------------- ---------- ---------- Balance at December 31, 2003 32,015,771 320 67,513 132,179 8,372 (16,934) 191,450 Net income 31,565 31,565 Cash dividends ($0.32 per share) (9,378) (9,378) Currency translation adjustment 6,990 6,990 Purchase of 189,800 treasury shares (3,243) (3,243) Sales of 477,809 treasury shares pursuant to options (1,551) 2,757 1,206 Tax benefit from employee stock plans 2,027 2,027 Vesting of common stock in connection with employee stock plans 1,774 1,774 Minimum pension liability (457) (457) ------------ ---------- ---------- ---------- ------------- ---------- ---------- Balance at December 31, 2004 32,015,771 320 69,763 154,366 14,905 (17,420) 221,934 Net income 41,045 41,045 Cash dividends ($0.38 per share) (11,286) (11,286) Currency translation adjustment (6,415) (6,415) Purchase of 109,629 treasury shares (2,058) (2,058) Sales of 497,513 treasury shares pursuant to options (1,561) 3,051 1,490 Tax benefit from employee stock plans 1,601 1,601 Vesting of common stock in connection with employee stock plans 2,391 2,391 Minimum pension liability 154 154 ------------ ---------- ---------- ---------- ------------- ---------- ---------- Balance at December 31, 2005 32,015,771 320 72,194 184,125 8,644 (16,427) 248,856 ============ ========== ========== ========== ============= ========== ==========
See accompanying notes to consolidated financial statements. F-8 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, -------------------------------------- 2005 2004 2003 ---------- ---------- ---------- (revised)* (revised)* Cash flow from operating activities: Net income $ 41,045 $ 31,565 $ 28,865 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash items: Gain on the disposal of discontinued operations (4,755) - (8,950) Depreciation, depletion, and amortization 19,558 20,124 18,910 Undistributed earnings from affiliates and joint ventures (3,156) (867) (403) Minority interest in income of subsidiaries 42 7 - Increase (decrease) in allowance for doubtful accounts (2,381) 1,063 813 Decrease (increase) in deferred income taxes (1,139) (995) (2,663) Tax benefit from employee stock plans 1,601 2,027 2,195 Gain on sale of depreciable assets (1,433) (311) (73) Stock compensation expense 2,391 1,772 613 Other non-cash charges (457) - (Increase) decrease in current assets, net of effects of acquisitions: Accounts receivable (10,172) (22,040) (12,615) Income taxes receivable 5,886 (3,869) 777 Inventories (14,046) (16,817) (6,721) Prepaid expenses 508 (2,003) (1,588) Increase (decrease) in current liabilities, net of effects of acquisitions: Accounts payable (1,109) 2,897 2,447 Accrued liabilities 2,878 5,975 8,841 Increase in other noncurrent assets (2,362) (1,893) (1,345) Increase (decrease) in other noncurrent liabilities 2,934 1,209 (457) ---------- ---------- ---------- Net cash provided by operating activities of continuing operations 36,290 17,387 28,646 ---------- ---------- ---------- Cash flow from investing activities: Proceeds from sale of depreciable assets 3,574 739 195 Capital expenditures for land, mineral reserves, and depreciable assets (28,626) (21,627) (15,795) (Increase) decrease in investments in and advances to affiliates and joint ventures (901) (775) (49) Acquisitions (2,118) (13,333) (7,144) Net tax refunds from the sale of discontinued operations 4,755 8,625 - Receipts from (payments to) minority interest partners 259 (111) (499) Decrease (increase) in other assets 735 427 505 ---------- ---------- ---------- Net cash used in investing activities (22,322) (26,055) (22,787) ---------- ---------- ---------- Cash flow from financing activities: Proceeds from issuance of debt 55,785 88,208 17,145 Principal payments of debt (55,764) (67,718) (25,469) Proceeds from sales of treasury stock 1,397 1,090 2,888 Purchases of treasury stock (1,965) (2,879) (1,593) Dividends paid (11,286) (9,377) (4,560) ---------- ---------- ---------- Net cash provided by (used in) financing activities (11,833) 9,324 (11,589) ---------- ---------- ---------- Effect of foreign currency rate changes on cash (3,732) 3,413 3,658 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (1,597) 4,069 (2,072) Cash and cash equivalents at beginning of year 17,594 13,525 15,597 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 15,997 $ 17,594 $ 13,525 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid for: Interest, net $ 1,755 $ 537 $ 415 ========== ========== ========== Net income taxes paid (refunded) $ 1,451 $ (706) $ 12,808 ========== ========== ==========
*See Note 1 of the notes to consolidated financial statements. See accompanying notes to consolidated financial statements. F-9 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Segments We operate in two principal areas of activity: minerals and environmental. We also operate a transportation business which includes delivery of our own products. The composition of consolidated revenues by segment is as follows: PERCENTAGE OF SALES -------------------------------- 2005 2004 2003 -------- -------- -------- Minerals 55% 57% 58% Environmental 39% 37% 36% Transportation 9% 9% 10% Intersegment Shipping -3% -3% -4% -------- -------- -------- 100% 100% 100% ======== ======== ======== Further descriptions of our products, principal markets and the relative significance of segement operations within AMCOL International Corporation (the Company) are included in Note 3, "Business Segment and Geographic Area Information." Principles of Consolidation The consolidated financial statements include the accounts of our domestic and foreign subsidiaries. We consolidate all subsidiaries which are greater than 50% owned by us. Our ownership interests in the Mexican, Indian, and Egyptian ventures range between 20% and 50%. Accordingly, these investments are accounted for using the equity method. Our ownership interest in the Japanese investment is recorded at cost. All material intercompany balances and transactions including profits on inventories, have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Translation of Foreign Currencies The assets and liabilities of subsidiaries located outside of the United States are translated into U.S. dollars at the rates of exchange at the balance sheet dates. The statements of operations are translated at the weighted average rates during the periods. Foreign exchange translation adjustments are accumulated as a separate component of stockholders' equity, while foreign currency transaction gains or losses are included in income. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) or moving average methods. Exploration costs are expensed as incurred. Costs incurred in removing overburden and mining bentonite are capitalized as advance mining costs until the bentonite from the mining area is transported to the plant site, at which point the costs are included in crude bentonite stockpile inventory. F-10 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Property, Plant, Equipment, and Mineral Rights and Reserves Property, plant, equipment, and mineral rights and reserves are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method for substantially all of the assets. Certain other assets, primarily field equipment, are depreciated on the units-of-production method. Mineral rights and reserves are depleted using the units-of-production method. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. 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. Impairment of Long-Lived Assets We review the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs of disposal. Income Taxes We file a consolidated tax return for our U.S. based subsidiaries. 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. We generate some sales through independent, third-party representatives. These sales are recorded in revenues, and the commission compensation paid to the representatives is recorded in general, selling and administrative expenses. Transportation segment revenue for freight delivery services is recognized when the service is provided. Amounts payable for purchased transportation, commissions and insurance are accrued when the related revenue is recognized. Service 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. F-11 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Shipping Revenues and Costs We report shipping and handling costs that are passed on to customers as sales revenue and cost of sales in the consolidated statements of operations. Product Liability & Warranty Expenses We report expenses incurred for warranty and product costs in general, selling and administrative expenses in the consolidated statements of operations. Our warranty accrual is based on known warranty issues as of the balance sheet date as well as a reserve for unidentified claims based on historical experience. Land Reclamation We mine various minerals using a surface-mining process that requires the removal of overburden. We are obligated to restore the land comprising each mining site upon completion of mining activity. We recognize this liability for land reclamation based on the estimated fair value of the obligation. The obligation is adjusted to reflect the passage of time and changes in estimated future cash outflows. The following table presents our reclamation liability and changes therein for 2005 and 2004: 2005 2004 ---------- ---------- Balance at beginning of the year $ 4,850 $ 5,060 Settlement of obligations (1,403) (1,325) Liabilities incurred and accretion expense 1,519 1,115 ---------- ---------- Balance at the end of the period $ 4,966 $ 4,850 ========== ========== Research and Development Research and development costs are included in general, selling and administrative expenses. Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average 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:
2005 2004 2003 ------------ ------------ ------------ Weighted average of common shares outstanding for the year 29,525,033 29,140,892 28,357,009 Dilutive impact of stock equivalents 1,278,105 1,561,969 1,492,569 ------------ ------------ ------------ Weighted average of common and common equivalent shares for the year 30,803,138 30,702,861 29,849,578 ============ ============ ============ Common shares outstanding at December 31 29,783,639 29,395,755 29,107,746 ============ ============ ============ Weighted average anti-dilutive shares excluded from the computation of diluted earnings per share 248,685 234,970 - ============ ============ ============
F-12 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Stock-Based Compensation Prior to 2003, we accounted for fixed plan stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in operations prior to 2003, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and elected to apply these provisions prospectively, in accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123, to all employee awards granted, modified, or settled after January 1, 2003. Awards under our plans vest over three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income in 2003 and each year thereafter 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. 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, ------------------------------------------ 2005 2004 2003 ------------ ------------ ------------ Net income, as reported $ 41,045 $ 31,565 $ 28,865 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 1,470 1,090 405 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,612) (1,348) (962) ------------ ------------ ------------ Pro forma net income $ 40,903 $ 31,307 $ 28,308 ============ ============ ============ Earnings per share: Basic - as reported $ 1.39 $ 1.08 $ 1.02 Basic - pro forma $ 1.39 $ 1.07 $ 1.00 Diluted - as reported $ 1.33 $ 1.03 $ 0.97 Diluted - pro forma $ 1.33 $ 1.02 $ 0.95
Derivative Instruments and Hedging Activities Occasionally, we use derivative financial instruments (principally interest rate swaps or options) to manage exposure to changes in interest rates. We do not use derivative instruments for trading or other speculative purposes, and we did not have any derivative financial instruments outstanding at either December 31, 2005 or 2004. Reclassifications and Revisions Certain items in the consolidated financial statements contained herein and notes thereto have been reclassified to conform with the consolidated financial statement presentation for 2005. These reclassifications did not have a material impact on our financial statements. Beginning in the quarter ended March 31, 2005 and for all periods thereafter, we began reporting certain expenses related to product liability, warranty and royalty expenses in general, selling and administrative expenses rather than as deductions within net sales. For the 2004 and 2003 periods presented herein, these deductions have been reclassified to conform to the current year financial statement presentation. This change in financial statement presentation did not impact reported net income or earnings per share. We have revised the 2004 and 2003 consolidated statement of cash flows presented herein to include the effect of discontinued operations within the operating and investing portions of those statements as opposed to showing these cash flows as a separate category within the consolidated statement of cash flows. In 2004, this revision has the effect of decreasing cash used in investing activities by $8,625 to $26,055 versus the $34,680 previously reported. In 2003, this revision did not affect either the total cash flows provided from operating activities or the total cash flows used in investing activities. F-13 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (2) DISCONTINUED OPERATIONS In 2004, we filed an amended tax return seeking a refund of state taxes paid on the sale of our absorbent polymers segment that occurred in 2000. No amounts for this refund were reflected in the financial statements in 2004. In June 2005, we successfully settled this claim for $7,800 and recorded a net income tax receivable of $5,255, accrued professional fees of $500 and a gain on the sale of discontinued operations of $4,755. In 2003, the Internal Revenue Service concluded audits which resulted in an actual tax liability that was lower than the amounts previously estimated. Consequently in 2003, we recorded $8.9 million of income from discontinued operations 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. (3) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION We operate in two principal business segments: minerals and environmental. We 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 that provides services to our subsidiaries as well as third-party customers. We identify segments based on management responsibility and the nature of the business activities of each component of the Company. Intersegment sales are insignificant, other than intersegment shipping, which is disclosed in this Note. We measures segment profit based on operating profit, which 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 operations of that segment. Corporate assets include cash, corporate leasehold improvements, the nanocomposite investment and other miscellaneous equipment. F-14 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The following summaries set forth certain financial information by business segment and geographic area as of and for the years ended December 31, 2005, 2004 and 2003:
2005 2004 2003 ------------ ------------ ------------ Business Segment: Revenues: Minerals $ 295,686 $ 264,167 $ 217,203 Environmental 210,846 172,723 133,769 Transportation 49,708 40,650 37,549 Intersegment shipping (20,316) (15,762) (14,038) ------------ ------------ ------------ Total $ 535,924 $ 461,778 $ 374,483 ============ ============ ============ Operating profit (loss): Minerals $ 36,502 $ 30,632 $ 23,462 Environmental 28,668 20,522 17,879 Transportation 2,717 1,720 1,547 Corporate (20,811) (16,890) (13,873) ------------ ------------ ------------ Total $ 47,076 $ 35,984 $ 29,015 ============ ============ ============ Assets: Minerals $ 186,718 $ 172,972 $ 144,973 Environmental 146,588 128,154 83,459 Transportation 3,027 3,122 1,891 Corporate 32,196 32,194 35,006 ------------ ------------ ------------ Total $ 368,529 $ 336,442 $ 265,329 ============ ============ ============ Depreciation, depletion and amortization: Minerals $ 10,295 $ 10,546 $ 10,334 Environmental 6,316 6,751 6,002 Transportation 97 108 88 Corporate 2,850 2,719 2,486 ------------ ------------ ------------ Total $ 19,558 $ 20,124 $ 18,910 ============ ============ ============ Capital expenditures: Minerals $ 13,751 $ 9,860 $ 6,464 Environmental 13,198 10,647 7,660 Transportation 29 101 80 Corporate 1,648 1,019 1,591 ------------ ------------ ------------ Total $ 28,626 $ 21,627 $ 15,795 ============ ============ ============ Research and development expenses: Minerals $ 2,715 $ 2,517 $ 2,184 Environmental 1,865 1,921 1,873 Corporate 1,665 911 961 ------------ ------------ ------------ Total $ 6,245 $ 5,349 $ 5,018 ============ ============ ============
Continued... F-15 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2005 2004 2003 ------------ ------------ ------------ Geographic area: Sales to unaffiliated customers shipped to: Americas $ 356,777 $ 296,897 $ 252,797 Europe 127,987 124,260 90,719 Asia Pacific 51,160 40,621 30,967 ------------ ------------ ------------ Total $ 535,924 $ 461,778 $ 374,483 ============ ============ ============ Operating profit from sales to: Americas $ 22,443 $ 17,853 $ 16,244 Europe 15,905 12,679 8,658 Asia Pacific 8,728 5,452 4,113 ------------ ------------ ------------ Total $ 47,431 $ 35,984 $ 29,015 ============ ============ ============ Identifiable assets in: Americas $ 227,923 $ 202,766 $ 170,797 Europe 94,165 97,777 70,114 Asia Pacific 46,441 35,899 24,418 ------------ ------------ ------------ Total $ 368,529 $ 336,442 $ 265,329 ============ ============ ============
Revenues by product line for each fiscal year are as follows:
2005 2004 2003 ------------ ------------ ------------ Metalcasting $ 139,427 $ 117,755 $ 91,866 Lining technologies 94,942 78,688 56,392 Specialty minerals 91,519 89,863 77,017 Water treatment 62,085 42,664 35,326 Pet products 60,177 53,370 48,319 Building materials 58,382 54,550 42,052 Transportation 49,708 40,650 37,549 Intersegment shipping revenue (20,316) (15,762) (14,038) ------------ ------------ ------------ Total $ 535,924 $ 461,778 $ 374,483 ============ ============ ============
(4) ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts as of and the activity for the years ended December 31 was as follows:
2005 2004 2003 ------------ ------------ ------------ Balance at the beginning of the year $ 4,637 $ 3,455 $ 2,642 Charged to expense (income) (731) 2,467 1,082 Acquistions 94 - - Write-offs and currency translation adjustments (1,650) (1,285) (269) ------------ ------------ ------------ Balance at the end of the year 2,350 4,637 3,455 ============ ============ ============
As mentioned in Item 7 of this form 10-K, the above allowance is based on historical bad debt experience, an analysis of aged accounts and a consideration of specific accounts. F-16 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (5) INVENTORIES Inventories at December 31 consisted of:
2005 2004 ---------- ---------- Advance mining $ 4,429 $ 2,277 Crude stockpile inventories 18,877 25,159 In-process inventories 25,935 18,123 Other raw material, container, and supplies inventories 28,687 18,323 ---------- ---------- $ 77,928 $ 63,882 ========== ==========
Included within Other raw material, container and supplies inventories in the table above is the Company's reserve for slow moving and obsolete inventory. The balance of this reserve as of and the activity for the years ended December 31 was as follows:
2005 2004 2003 ------------ ------------ ------------ Balance at the beginning of the year $ 1,574 $ 1,747 $ 1,313 Charged to costs and expenses 872 784 1,497 Acquisitions - 277 64 Disposals and currency translation adjustments (461) (1,234) (1,127) ------------ ------------ ------------ Balance at the end of the year 1,985 1,574 1,747 ============ ============ ============
(6) PROPERTY, PLANT, EQUIPMENT AND MINERAL RIGHTS AND RESERVES Property, plant, equipment and mineral rights and reserves consisted of the following: DECEMBER 31, ----------------------- 2005 2004 ---------- ---------- Mineral rights and reserves $ 3,770 $ 4,169 Other land 8,991 7,850 Buildings and improvements 63,105 61,987 Machinery and equipment 180,181 178,640 Construction in progress 9,144 6,653 ---------- ---------- $ 265,191 $ 259,299 ========== ========== The range of useful lives to depreciate plant and equipment is as follows: Buildings and improvements 9-45 years Machinery and equipment 1-20 years Depreciation and depletion were charged to income as follows:
2005 2004 2003 ------------ ------------ ------------ Depreciation expense $ 18,197 $ 18,895 $ 17,759 Depletion expense 108 149 232 ------------ ------------ ------------ $ 18,305 $ 19,044 $ 17,991 ============ ============ ============
F-17 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (7) GOODWILL AND INTANGIBLE ASSETS The balance of goodwill by segment at and the activity occurring in the past two fiscal years is as follows:
MINERALS ENVIRONMENTAL CONSOLIDATED ------------ ------------- ------------ Balance at December 31, 2003 $ 5,394 $ 239 $ 5,633 Change in goodwill relating to: Acquisitions 72 12,742 12,814 Foreign exchange translation 307 471 778 ------------ ------------- ------------ Total changes 379 13,213 13,592 ------------ ------------- ------------ Balance at December 31, 2004 5,773 13,452 19,225 Change in goodwill relating to: Acquisitions 1,024 1,632 2,656 Foreign exchange translation (414) (823) (1,237) ------------ ------------- ------------ Total changes 610 809 1,419 ------------ ------------- ------------ Balance at December 31, 2005 6,383 14,261 20,644 ============ ============= ============
At each year-end, we evaluate the goodwill attributable to each reporting unit for impairment. For the years above, we 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 impairment loss would be charged to expense in the period identified. Intangible assets were as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004 ------------------------------------------- ------------------------------------------- GROSS NET GROSS NET CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE ------------ ------------ ------------ ------------ ------------ ------------ Intangtibles subject to amortization: Trademarks $ 477 $ (108) $ 369 $ 477 $ (43) $ 434 Patents 642 (178) 464 642 (67) 575 License agreements 6,250 (4,750) 1,500 6,250 (4,000) 2,250 Other 914 (443) 471 835 (519) 316 ------------ ------------ ------------ ------------ ------------ ------------ Subtotal 8,283 (5,479) 2,804 8,204 (4,629) 3,575 Intangibles not subject to amortization: Pension related intangibles 205 - 205 227 - 227 ------------ ------------ ------------ ------------ ------------ ------------ Total 8,488 (5,479) 3,009 8,431 (4,629) 3,802 ============ ============ ============ ============ ============ ============
Intangible assets are being amortized primarily on a straight-line basis over their estimated useful lives of 3 to 10 years. We reviewed the intangible assets, net book values and estimated useful lives by class. For the years above, there was no impairment related to the intangible assets. We will continue to amortize the remaining net book values of intangible assets over their remaining useful lives. Amortization expense on intangible assets for each of the years ending December 31, 2005 and 2004 was $1,253 and $1,081, respectively. We estimate amortization expense of intangible assets for the future years ending December 31 will approximate the following amounts: AMOUNT --------- 2006 $ 1,038 2007 1,007 2008 227 2009 194 2010 177 F-18 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (8) INVESTMENTS IN JOINT VENTURES Information about our investments in affiliates and joint ventures at December 31, 2005 is as follows:
AMOUNT OF OUR INVESTMENT LESS THE UNDERLYING OWNERSHIP ACCOUNTING NET EQUITY OF VALUE AT QUOTED INTEREST POLICY THE INVESTEE MARKET PRICE --------------- ----------------- ---------------- --------------- Ashapura Minechem Limited 22% Equity Method $ 6,274 $ 29,705 Ashapura Volclay Limited 50% Equity Method 37 N/A Volclay Japan Co., Ltd. 50% Equity Method 454 N/A Egypt Mining & Drilling Co. and Egypt Bentoninte & Derivatives Co. 25% Equity Method 1,371 N/A Egypt -Nano Technology Company 27% Equity Method (21) N/A Volclay de Mexico, S.A. de C.V. 49% Equity Method (37) N/A
Only our investment in Ashapura Minechem Limited is publicly traded on the Bombay Stock Exchange Limited. In 2005, we increased our ownership percentage in this affiliate from 20% to 22%. Significant information regarding each investee's financial and operating performance for the year ending and at December 31, 2005 is in the following table. F-19 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2005 2004 ---------- ---------- Ashapura Minechem Limited: Net Sales $ 175,286 $ 91,243 Operating income 16,903 7,011 Affiliate income as reported 11,379 3,706 Earnings recorded 1,985 623 Current assets 63,906 45,221 Non-current assets 15,332 14,920 Total assets 79,238 60,141 Current liabilities 12,170 11,042 Non-current liabilities 51,534 38,582 Total liabilities 63,704 49,624 Ashapura Volclay Limited: Net Sales 6,096 4,402 Operating income 1,731 1,204 Affiliate income as reported 1,146 705 Earnings recorded 407 245 Current assets 3,718 2,725 Non-current assets 8,637 8,651 Total assets 12,355 11,376 Current liabilities 1,746 925 Non-current liabilities 5,516 6,344 Total liabilities 7,262 7,269 All other affliates and joint ventures: Net Sales 30,617 8,376 Operating income 2,729 1,610 Affiliate income as reported 2,081 1,568 Earnings recorded 562 319 Current assets 20,621 7,280 Non-current assets 3,793 2,241 Total assets 24,414 9,521 Current liabilities 11,867 3,147 Non-current liabilities 1,154 213 Total liabilities 13,021 3,360
We record the majority of our equity in the earnings of our investments in affiliates and joint ventures on a one quarter lag. However, the amounts for Ashapura Minechem Limited's assets and liabilities in the above table are as at March 31, 2005 as this is the latest information available. (9) INCOME TAXES Total income tax expense (benefit) for the years ended December 31 was allocated as follows:
2005 2004 2003 ------------ ------------- ------------ Income from continuing operations $ 11,645 $ 4,687 $ 9,946 Discontinued operations (5,255) - (8,741) ------------ ------------- ------------ $ 6,390 $ 4,687 $ 1,205 ============ ============= ============
For each of the years ended December 31 in the table below, domestic and foreign components of income from continuing operations before income taxes, equity in income of joint ventures and minority interest are: F-20 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2005 2004 2003 ------------ ------------- ------------ Income from continuing operations before income taxes, income from affiliates and joint ventures: Domestic $ 22,485 $ 20,662 $ 18,972 Foreign 22,538 14,410 10,289 ------------ ------------- ------------ $ 45,023 $ 35,072 $ 29,261 ============ ============= ============
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 in the below table consisted of:
2005 2004 2003 ------------ ------------- ------------ Provision (benefit) for income taxes: Federal: Current $ 6,257 $ 1,170 $ 8,921 Deferred 210 (95) (2,296) State: Current 1,719 1,404 1,265 Deferred 341 (9) (230) Foreign: Current 1,192 3,890 2,345 Deferred 1,926 (1,673) (59) ------------ ------------- ------------ $ 11,645 $ 4,687 $ 9,946 ============ ============= ============
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of December 31, 2005 and 2004 were as follows:
2005 2004 ------------ ------------ Deferred tax assets attributable to: Accounts receivable, due to allowance for doubtful accounts $ 324 $ 938 Inventories 1,734 1,638 Employee benefit plans 6,584 5,660 Intangible assets 2,733 2,384 Accrued liabilities 1,301 2,024 Other 1,516 583 ------------ ------------ Total deferred tax assets 14,192 13,227 Deferred tax liabilities attributable to: Plant and equipment, due to differences in depreciation (1,793) (2,007) Land and mineral reserves, due to differences in depletion (1,187) (1,171) Joint venture deferred tax (1,591) (1,110) Other (1,344) (936) ------------ ------------ Total deferred tax liabilities (5,915) (5,224) ------------ ------------ Net deferred tax assets $ 8,277 $ 8,003 ============ ============
We believe it is more likely than not that the deferred tax assets above will be realized in the normal course of business. F-21 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 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:
2005 2004 2003 --------------------------- --------------------------- ---------------------------- PERCENT PERCENT PERCENT OF PRETAX OF PRETAX OF PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------------ ------------ ------------ ------------ ------------ ------------ Provision for income taxes at U.S. statutory rates $ 15,791 35.0% $ 12,275 35.0% $ 10,241 35.0% Increase (decrease) in taxes resulting from: Percentage depletion (2,173) -4.8% (1,832) -5.2% (1,040) -3.6% State taxes, net of federal benefit 1,177 2.6% 913 2.6% 824 2.8% Foreign tax rates (4,308) -9.5% (1,445) -4.1% (738) -2.5% Foreign tax adjustments - - (1,119) -3.2% - - Depletion and research and experimentation adjustments - - (4,789) -13.7% - - Dividend pursuant to American Jobs Creation Act of 2004 665 1.5% - - - - Tax receivable write-off 1,448 3.1% - - - - Other (955) -2.0% 684 2.0% 659 2.3% ------------ ------------ ------------ ------------ ------------ ------------ $ 11,645 25.9% $ 4,687 13.4% $ 9,946 34.0% ============ ============ ============ ============ ============ ============
In 2005, we repatriated $16,461 of earnings from various foreign subsidiaries in accordance with the Jobs Creation Act of 2002, and recorded a tax expense of $665 on these repatriated earnings. Also in 2005, we determined it unlikely that we would recover costs incurred for the benefit of our foreign controlled corporations. As a result, we wrote-off the $1,448 tax receivable related to these costs. We have not provided for the United States federal income and foreign income withholding taxes on approximately $45,000 of undistributed earnings from international subsidiaries as of December 31, 2005 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce or eliminate the resulting income tax liability in the United States. We benefit from tax holidays in both Poland and Thailand as a result of our locating and investing in special economic zones in each country. In 2005, these tax holidays resulted in a $1,544 reduction in income tax expense and a $0.05 benefit to diluted earnings per share. Our agreement with the Polish tax authorities provides for a tax holiday exemption for all income tax activities through 2008, and then changes to a 50% exemption for all tax activities through 2017. Recent changes due to membership in the European Union could cause the 50% exemption to expire in 2010 rather than 2019. However, as 2010 approaches, we will investigate methods available to preserve that tax holiday. Our agreement with the Thai tax authorities provides for a tax holidays on several investments. The most significant tax exemption is on all income from manufacturing operations (distributed goods are still subject to taxation) related to our initial investment. These initial manufacturing activities were exempt through December 31, 2005 and will be taxable at 50% in years 2006 through 2010. We attempt to modify and obtain tax concessions when applicable. F-22 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (10) LONG-TERM DEBT Long-term debt consisted of the following:
DECEMBER 31, ---------------------------- 2005 2004 ------------ ------------ Borrowings under revolving credit agreement $ 25,759 $ 29,325 Industrial revenue bond 4,800 4,800 Other notes payable 4,279 170 ------------ ------------ 34,838 34,295 Less: current portion - - ------------ ------------ $ 34,838 $ 34,295 ============ ============
In November 2005, we refinanced our previous committed revolving credit agreement that was to expire on October 31, 2006. The new agreement provides a committed $120,000 revolving line of credit that matures October 31, 2010. As of December 31, 2005, there was $94,241 in borrowing capacity available under the line of credit. The revolving credit agreement is a multi-currency arrangement that allows us to borrow certain foreign currencies at an adjusted LIBOR rate plus .50% to 1.125%, depending upon the amount of the credit line used and certain capitalization ratios. The facility requires certain covenants to be met, such as specific amounts of net worth, and limits our ability to make additional borrowings and guarantees. We were in compliance with these covenants at December 31, 2005. The borrowings under this revolving credit line at December 31, 2005 carried an average interest rate of 4.64%. We also refinanced our uncommitted, short-term credit facility as of September 2005. The new facility allows for maximum borrowings of $12,000, of which $1,768 was outstanding as of December 31, 2005 at an interest rate of 5.0%. Maturities of long-term debt outstanding at December 31, 2005, were as follows:
2006 2007 2008 2009 2010 THEREAFTER ------------ ------------ ------------ ------------ ------------ ------------ Borrowings under revolving credit agreement - - - - 25,759 - Industrial revenue bond and other notes payable - 1,768 - - 2,511 4,800 ------------ ------------ ------------ ------------ ------------ ------------ $ - $ 1,768 $ - $ - $ 28,270 $ 4,800 ============ ============ ============ ============ ============ ============
The estimated fair value of the above borrowings at December 31, 2005, was approximately equal to their carrying amounts based on discounting future cash payments using current market interest rates for loans with similar terms and maturities. At December 31, 2005 and 2004, we had outstanding standby letters of credit of $14.2 million and $13.9 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 accompanying consolidated balance sheets as of December 31, 2005 and 2004 include amounts accrued for the estimated costs of obligations related to land reclamation and workers' compensation claims. F-23 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (11) ACQUISITIONS We completed several acquisitions during 2005, 2004 and 2003. The acquisitions in these years, individually and in aggregate, did not materially affect our operating results or financial position. Summarized information related to these acquisitions is as follows:
2005 2004 2003 ------------ ------------- ------------ Number of acquisitions 1 2 3 Net cash paid $ 527 $ 13,333 $ 7,144 Goodwill and intangible assets recorded 628 12,742 1,118
(12) MARKET RISKS AND FINANCIAL INSTRUMENTS As a multinational corporation that manufactures and markets products in countries throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and not for trading or speculative purposes. 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 as well as between the Polish zloty and the euro. Our various currency exposures often offset each other, providing natural hedges against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2005, we did not have any material foreign currency contracts outstanding. F-24 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 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, Thai baht (THB), British pounds (UK(pound)), and euro ((euro)).
EXPECTED MATURITY DATE ----------------------------------------------------------------------------------------------- FAIR 2006 2007 2008 2009 2010 THEREAFTER TOTAL VALUE ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (US$ equivalent in thousands) Short-term debt: Fixed rate $ - $ - $ - $ - $ - $ - $ - $ - Interest rate - - - - - - Long-term debt: Variable rate (US$) - 1,768 - - 9,000 4,800 15,568 15,568 Average interest rate - 5.02% - - 5.15% 3.60% Fixed rate (THB) - - - - 2,511 - 2,511 2,511 Interest rate - - - - 6.69% - Variable rate (UK(pound)) - - - - 10,839 - 10,839 10,839 Average interest rate - - - - 5.14% - Variable rate ((euro)) - - - - 5,920 - 5,920 5,920 Average interest rate - - - - 2.94% - ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $ - $ 1,768 $ - $ - $ 28,270 $ 4,800 $ 34,838 $ 34,838 ========== ========== ========== ========== ========== ========== ========== ==========
We periodically use interest rate swaps to manage interest rate risk on debt securities. These instruments allow us to change variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2005 and 2004, there were no interest rate swaps outstanding. We are exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by our policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising our customer base. We believe our allowance for doubtful accounts is sufficient to cover customer credit risks. Our accounts receivable financial instruments are carried at amounts that approximate fair value. (13) ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income at December 31 was comprised of the following components:
2005 2004 ------------ ------------ Cumulative foreign currency translation $ 8,947 $ 15,362 Minimum pension liability, net of $169 tax benefit in 2005 and $0 in 2004 (303) (457) ------------ ------------ $ 8,644 $ 14,905 ============ ============
F-25 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (14) LEASES We have 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 $4,540, $3,945, and $4,208 in 2005, 2004 and 2003, respectively. Additionally, we have three domestic facilities that are subleased. 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, 2005:
MINIMUM LEASE PAYMENTS SUBLEASE ------------------------------------ RENTAL DOMESTIC FOREIGN TOTAL INCOME ---------- ---------- ---------- ---------- Year ending December 31: 2006 $ 4,437 $ 404 $ 4,841 $ 538 2007 3,793 357 4,150 565 2008 2,232 287 2,519 336 2009 789 201 990 - 2010 472 151 623 - Thereafter 139 707 846 - ---------- ---------- ---------- ---------- Total $ 11,862 $ 2,107 $ 13,969 $ 1,439 ========== ========== ========== ==========
(15) EMPLOYEE BENEFIT PLANS We have a noncontributory pension plan covering substantially all of our domestic employees. The benefits are based upon years of service and qualifying compensation. Our funding is calculated using the actuarially determined unit credit cost method. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. The following tables set forth our pension obligations at December 31:
PENSION BENEFITS -------------------- 2005 2004 -------- -------- Change in benefit obligations: Beginning benefit obligation $ 34,807 $ 29,732 Service cost 1,850 1,449 Interest cost 1,973 1,827 Actuarial loss 748 2,819 Benefits paid (1,008) (1,020) -------- -------- Ending benefit obligation $ 38,370 $ 34,807 Change in plan assets: Beginning fair value $ 26,683 $ 22,682 Actual return 3,004 4,021 Company contribution 862 1,000 Benefits paid (1,008) (1,020) -------- -------- Ending fair value $ 29,541 $ 26,683 Funded status of the plan $ (8,829) $ (8,124) Unrecognized actuarial and investment (gain) loss, net 2,636 2,620 Prior service cost 349 379 Transition asset (87) -------- -------- Accrued pension cost liability includeded in the consolidated financial statements $ (5,844) $ (5,212) ======== ========
F-26 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Pension cost for each of the following years was comprised of:
2005 2004 2003 -------- -------- -------- Service cost - benefits earned during the year $ 1,850 $ 1,449 $ 1,325 Interest cost on accumulated benefit obligation 1,973 1,827 1,751 Expected return on plan assets (2,272) (1,938) (1,576) Net amortization and deferral (56) (106) (36) -------- -------- -------- Net periodic pension cost $ 1,495 $ 1,232 $ 1,464 ======== ======== ========
The following table summarizes the assumptions used in determining the pension obligation at December 31: 2005 2004 -------- -------- Discount rate 5.25% 5.75% Rate of compensation increase 5.75% 5.75% Long-term rate of return 8.50% 8.50% Each year, we conduct our valuation of the pension benefit plan as of October 1st. We expect to contribute $1,000 to the Plan in 2006. The accumulated benefit obligation (ABO) was $29,887 and $25,704 at December 31, 2005 and 2004, respectively. Our Plan assets at December 31 for each year below, by asset category, are as follows: 2005 2004 -------- -------- U.S. equity securities 54% 56% AMCOL International common stock 7% 7% International equity securities 5% 4% Fixed income securities and bonds 30% 33% Real estate and other 4% 0% We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. The investment objectives emphasize maximizing returns consistent with ensuring that sufficient assets are available to meet liabilities, and minimizing corporate cash contributions. The Plan's assets are managed so as to include investments that balance income and capital appreciation. The Plan has a target range for equity securities of between 60% and 75%. This allocation takes into account factors such as the average age of employees covered by the Plan (benefit obligations) as well as overall market conditions. Interim portfolio reviews result in investment allocations being evaluated at least twice a year by the Pension Committee and rebalancing takes place as needed. Equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalizations. Debt securities include both government and corporate investment vehicles. These include a series of laddered debt securities as well as bond funds. Although real estate investments have been employed in the past, none are being used at the present. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term rate of return for plan assets is established via a building block approach with proper consideration of diversification and rebalancing. The average long-term rate of return on our Plan's assets since 1994 has been approximately 10.3%. F-27 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The estimated future benefit payments from the defined benefit plan, reflecting expected future service, as appropriate, are presented in the following table: PER YEAR -------- 2006 1,081 2007 1,147 2008 1,229 2009 1,305 2010 1,408 2011 through 2015 9,626 -------- Total $ 15,796 ======== In addition to the qualified plan outlined above, we sponsor a supplementary pension plan that provides benefits in excess of qualified plan limitations for certain employees. The unfunded accrued liability for this plan was $3,989 and $3,406 at December 31, 2005 and 2004, respectively. Also, we have invested assets for the benefit of the employees covered by the supplemental pension plan in the event that there is a change in control. Our minimum pension liability at December 31, 2005 was $472. We also have a savings plan for its U.S. personnel. In 2005, we made a contribution in an amount equal to an employee's contributions up to a maximum of 4% of the employee's annual earnings. Company contributions are made using Company stock purchased in the open market. Our contributions under the savings plan were $1,529 in 2005, $1,440 in 2004 and $1,202 in 2003. Employees hired after December 31, 2003 do not participate in our defined benefit plan. Instead, they participate in a defined contribution plan whereby we make a retirement contribution into the employee's savings plan equal to 3% of their compensation. Under this defined contribution plan, we made a total cash contribution of $312 and $148 into employees' savings accounts in 2005 and 2004, respectively. Also, we have a deferred compensation plan and a 401(k) restoration plan for our 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. (16) STOCK OPTION PLANS Prior to 2003, we accounted for our fixed plan stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and have 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 our plans vest over three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 and each year thereafter 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. Had the compensation cost for the stock option plans been determined using the fair value method of accounting described in SFAS 123 for years prior to 2003, our net income would have been changed to the pro forma amounts indicated in Note 1 of notes to consolidated financial statements. F-28 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. The fair value calculation included the following weighted average assumptions for grants made in each of the following years:
2005 2004 2003 -------- -------- -------- Risk-free interest rate 3.5% 3.0% 3.0% Expected life of option in years 4 5 5 Expected dividend yield of stock 1.7% 1.5% 2.1% Expected volatility of stock price 52.7% 53.3% 54.9% Weighted-average fair value of options granted $ 6,143 $ 5,333 $ 1,763
The 1983, 1987 and 1993 Plans We reserved shares of our common stock for the issuance of incentive and nonqualified stock options to our directors, officers and key employees under the 1983 Incentive Stock Option Plan, 1993 Stock Plan and 1987 Nonqualified Stock Option Plan. Options awarded under these plans, 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, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXPIRED STOCK OPTION PLANS SHARES PRICE SHARES PRICE SHARES PRICE - ------------------------------------------------ ---------- -------- ---------- -------- ---------- -------- Options outstanding at January 1 472,743 $ 2.10 709,279 $ 2.07 1,884,421 $ 2.07 Exercised (250,086) 2.06 (236,536) 2.01 (1,169,816) 2.07 Cancelled - - - - (5,326) 1.97 ---------- ---------- ---------- Options outstanding at December 31 222,657 2.14 472,743 2.10 709,279 2.07 ========== ========== ========== Options exercisable at December 31 222,657 472,743 709,279 ========== ========== ========== Shares available for future grant at December 31 - - - ========== ========== ==========
1998 Long-Term Incentive Plan We reserved 3,900,000 shares of our common stock for issuance to our officers, directors and key employees. This plan provides for the award of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and phantom stock. Different terms and conditions apply to each form of award made under the plan. Awards granted since 2003 vest ratably over a three year period and expire 6 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Options awarded under these plans prior to 2003 generally vest 40% after two years and continued to vest at the rate of 20% per year for each year thereafter, until they are fully vested. These options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Changes in options outstanding are summarized as follows: F-29 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------------- ----------------------- ----------------------- 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 1,627,144 $ 6.78 1,611,318 $ 4.11 1,731,194 $ 3.46 Granted 293,900 20.90 294,650 18.10 310,950 5.67 Exercised (247,427) 3.95 (258,491) 2.94 (355,334) 2.46 Cancelled (287) 1.57 (20,333) 7.97 (75,492) 3.32 ----------- ----------- ----------- Options outstanding at December 31 1,673,330 9.68 1,627,144 6.78 1,611,318 4.11 =========== =========== =========== Options exercisable at December 31 924,673 826,121 634,547 =========== =========== =========== Shares available for future grant at December 31 882,695 1,176,308 1,450,625 =========== =========== ===========
On May 22, 2003, we awarded 141,000 shares of restricted stock to six officers. These same shares were outstanding at December 31, 2005, but were subsequently distributed in 2006. Restricted stock awards are independent of option grants and are subject to restrictions considered appropriate by the Compensation Committee of the Board of Directors. Restricted stock has the same cash dividend and voting rights as other common stock 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. 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, 2005:
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 - $ 2.290 483,326 2.43 $ 1.92 483,326 $ 1.92 $ 2.370 - $ 5.670 606,032 4.10 4.78 455,194 4.57 $ 5.98 - $ 6.65 224,452 6.12 6.62 114,452 6.62 $ 18.10 - $ 18.10 288,650 4.11 18.10 94,731 18.10 $ 20.900 - $ 20.900 293,900 5.11 20.90 - - --------------- ----------- Total 1,896,360 4.07 8.79 1,147,703 4.77 =============== ===========
F-30 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (17) ACCRUED LIABILITIES Accrued liabilities at December 31 consisted of: 2005 2004 ---------- ---------- Accrued severance taxes $ 1,419 $ 2,726 Accrued employee costs 2,951 1,972 Accrued vacation pay 2,077 1,650 Accrued bonus 6,976 5,131 Accrued dividends payable 2,978 2,647 Accrued warranties 1,823 2,037 Accrued commissions 2,352 2,092 Accrued reclamation costs 1,004 1,626 Other 16,967 16,326 ---------- ---------- $ 38,547 $ 36,207 ========== ========== The changes in accrued warranties during 2005 and 2004 were as follows: 2005 2004 ---------- ---------- Balance at the beginning of the year $ 2,037 $ 1,147 Charged to costs and expenses 1,159 1,327 Net settlements (1,299) (534) Foreign currency translation (74) 97 ---------- ---------- Balance at the end of the year 1,823 2,037 ========== ========== (18) 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. F-31 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (19) QUARTERLY RESULTS (UNAUDITED) Unaudited summarized results for each quarter of the last two years are as follows:
2005 QUARTER --------------------------------------------------- FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- Minerals $ 73,448 $ 74,877 $ 74,318 $ 73,043 Environmental 42,304 53,834 61,077 53,631 Transportation 10,985 12,595 13,224 12,904 Intersegment shipping (4,687) (4,962) (5,691) (4,976) ---------- ---------- ---------- ---------- Net sales $ 122,050 $ 136,344 $ 142,928 $ 134,602 ========== ========== ========== ========== Minerals $ 13,474 $ 16,783 $ 15,043 $ 13,470 Environmental 14,860 18,249 21,473 18,738 Transportation 1,346 1,536 1,581 1,470 ---------- ---------- ---------- ---------- Gross profit $ 29,680 $ 36,568 $ 38,097 $ 33,678 ========== ========== ========== ========== Minerals $ 7,795 $ 10,665 $ 9,799 $ 8,243 Environmental 5,137 7,507 10,118 5,906 Transportation 573 720 751 673 Corporate (5,270) (5,431) (4,709) (5,401) ---------- ---------- ---------- ---------- Operating profit $ 8,235 $ 13,461 $ 15,959 $ 9,421 ========== ========== ========== ========== Income from continuing operations $ 6,952 $ 9,518 $ 11,442 $ 8,378 ========== ========== ========== ========== Net income $ 6,952 $ 14,273 $ 11,442 $ 8,378 ========== ========== ========== ========== Basic earnings per share (B) $ 0.24 $ 0.48 $ 0.39 $ 0.28 ========== ========== ========== ========== Diluted earnings per share (B) $ 0.23 $ 0.46 $ 0.37 $ 0.27 ========== ========== ========== ==========
F-32 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2004 QUARTER --------------------------------------------------- FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- Minerals (A) $ 64,337 $ 66,710 $ 67,454 $ 65,666 Environmental (A) 33,672 47,199 50,539 41,313 Transportation 9,332 10,058 10,979 10,281 Intersegment shipping (3,187) (4,197) (4,326) (4,052) ---------- ---------- ---------- ---------- Net sales (A) $ 104,154 $ 119,770 $ 124,646 $ 113,208 ========== ========== ========== ========== Minerals (A) $ 12,885 $ 13,780 $ 14,247 $ 12,027 Environmental (A) 12,801 16,798 17,541 14,018 Transportation 1,037 1,112 1,214 1,108 ---------- ---------- ---------- ---------- Gross profit (A) $ 26,723 $ 31,690 $ 33,002 $ 27,153 ========== ========== ========== ========== Minerals $ 7,435 $ 8,253 $ 8,172 $ 6,772 Environmental 3,079 6,176 6,767 4,500 Transportation 386 451 523 360 Corporate (3,660) (3,724) (5,156) (4,350) ---------- ---------- ---------- ---------- Operating profit $ 7,240 $ 11,156 $ 10,306 $ 7,282 ========== ========== ========== ========== Income from continuing operations $ 5,083 $ 7,740 $ 12,469 $ 6,273 ========== ========== ========== ========== 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 ========== ========== ========== ==========
(A) Beginning in the quarter ended March 31, 2005 and for all periods thereafter, we began reporting certain expenses related to product liability, warranty and royalty expenses in general, selling and administrative expenses rather than as deductions within net sales. For the 2004 period presented herein, these deductions have been reclassified to conform to the current year financial statement presentation. This change in financial statement presentation did not impact reported net income or earnings per share. (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. F-33 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 16, 2006 AMCOL INTERNATIONAL CORPORATION By: /s/ Lawrence E. Washow ------------------------------------- Lawrence E. Washow President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ John Hughes March 16, 2006 - -------------------------------------------------- John Hughes Chairman of the Board and Director /s/ Lawrence E. Washow March 16, 2006 - -------------------------------------------------- Lawrence E. Washow President and Chief Executive Officer and Director /s/ Gary L. Castagna March 16, 2006 - -------------------------------------------------- Gary L. Castagna Senior Vice President and Chief Financial Officer; Treasurer and Chief Accounting Officer /s/ Arthur Brown March 16, 2006 - -------------------------------------------------- Arthur Brown Director /s/ Daniel P. Casey March 16, 2006 - -------------------------------------------------- Daniel P. Casey Director /s/ Robert E. Driscoll, III March 16, 2006 - -------------------------------------------------- Robert E. Driscoll, III Director /s/ Jay D. Proops March 16, 2006 - -------------------------------------------------- Jay D. Proops Director /s/ Clarence O. Redman March 16, 2006 - -------------------------------------------------- Clarence O. Redman Director /s/ Dale E. Stahl March 16, 2006 - -------------------------------------------------- Dale E. Stahl Director /s/ Audrey L. Weaver March 16, 2006 - -------------------------------------------------- Audrey L. Weaver Director /s/ Paul C. Weaver March 16, 2006 - -------------------------------------------------- Paul C. Weaver Director 35 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 N.A., Wells Fargo Bank, N.A., Bank of America N.A., and the Northern Trust Company dated November 10, 2005 (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. (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 8-K filed with the Securities and Exchange Commission on November 15, 2005. *Management compensatory plan or arrangement 36 EX-21 2 ac5147ex21.txt EXHIBIT 21 EXHIBIT 21 AMCOL INTERNATIONAL CORPORATION SUBSIDIARY LISTING
COMPANY NAME COUNTRY STATE OWNERSHIP % - ------------------------------------------------------------ --------------- ----------- ----------- AMCOL Egypt SAE 70 AMCOL Europe Limited England 100 AMCOL Health & Beauty Solutions, Incorporated USA DE 100 AMCOL International B.V. Netherlands 100 AMCOL (Holdings) Ltd. England 100 AMCOL Holdings Canada Ltd. Canada Ontario 100 AMCOL Specialties Holdings, Inc. USA DE 100 American Colloid Company USA DE 100 Ameri-Co Carriers, Inc. USA NE 100 Ameri-Co Logistics, Inc. USA NE 100 Ashapura Minechem Ltd. India 22 Ashapura Volclay Limited India 50 CETCO China Ltd. China 100 CETCO Contracting Services Company USA DE 100 CETCO (Europe) Limited England 100 CETCO Holdings B.V. Netherlands 100 CETCO Iberia S.L. Spain 100 CETCO Korea Ltd. Korea 100 Comercializadora y Exportadora Cetco Latino America Limitada Chile 100 CETCO Oilfield Services Company USA DE 100 CETCO-POLAND Sp. z o.o Poland 100 CETCO Technologies (Suzhou) Co. Ltd. China 100 Colin Stewart Minchem Limited England 100 Colloid Environmental Technologies Company USA DE 100 Egypt Bentonite & Derivatives Company Egypt 25 Egypt Mining & Drilling Chemicals Company Egypt 25 Egypt Nano Bentonite Co. Egypt 26.5 Inner Mongolia Tianyu Chemical Industry Co. Ltd. China 80 Intergeo Services LLC USA PA 100 Lafayette Well Testing, Inc. USA LA 100 Linteco Geotechnische Systeme GmbH Austria 100 Linteco Iberia S.L. Spain 100 Montana Minerals Development Company USA MT 100 Nanocor, Inc. USA DE 100 Nanocor, Ltd. England 100 Silgel Packaging Limited England 100 Volclay de Mexico, S.A. de C.V. Mexico 49 Volclay DongMing Industrial Minerals Co., Ltd. China 100 Volclay International Corporation USA DE 100 Volclay Japan Co. Ltd. Japan 50 Volclay Korea Ltd. Korea 100 Volclay MinChem (Jianping) Co. Ltd. China 100 Volclay Pty. Ltd. Australia 100 Volclay (Tianjin) Industrial Minerals Co., Ltd. China 100 Volclay Siam Ltd. Thailand 100
EX-23 3 ac5147ex23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders AMCOL International Corporation: We consent to incorporation by reference in the registration statements (Nos. 33-34109, 33-55540, 33-73350, 333-00581, 333-56017, 333-68664 and 333-110500) on Form S-8 of AMCOL International Corporation and subsidiaries of our report dated March 16, 2006, with respect to the consolidated balance sheets of AMCOL International Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, which report appears in the December 31, 2005 annual report on Form 10-K of AMCOL International Corporation KPMG LLP Chicago, Illinois March 16, 2006 EX-31.1 4 ac5147ex311.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Lawrence E. Washow, certify that: 1. I have reviewed this annual report on Form 10-K of AMCOL International Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-13(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2006 /s/ Lawrence E. Washow ------------------------------- Lawrence E. Washow Chief Executive Officer EX-31.2 5 ac5147ex312.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Gary L. Castagna, certify that: 1. I have reviewed this annual report on Form 10-K of AMCOL International Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-13(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2006 /s/ Gary L. Castagna ------------------------------- Gary L. Castagna Chief Financial Officer EX-32 6 ac5147ex32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO 18 U.S.C. SECTION 1350 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of AMCOL International Corporation (the "Company") certifies that the annual report on Form 10-K of the Company for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 16, 2006 /s/ Lawrence E. Washow ------------------------------- Lawrence E. Washow Chief Executive Officer Date: March 16, 2006 /s/ Gary L. Castagna ------------------------------- Gary L. Castagna Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----