ITEM 1. BUSINESS
INTRODUCTION
AMCOL International Corporation was originally incorporated in South Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was changed to American Colloid Company in 1927, and in 1959, the Company was reincorporated in Delaware. In 1995, its name was changed to AMCOL International Corporation. Except as otherwise noted or indicated by context, the term "Company" refers to AMCOL International Corporation and its subsidiaries.
The Company operates in two major industry segments: minerals and environmental. The Company also operates a transportation business. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The transportation segment includes a long-haul trucking business and a freight brokerage business, which provide services to both the Company's plants and unrelated customers.
The following table sets forth the percentage contributions to net sales of the Company attributable to its minerals, environmental and transportation segments as well as intersegment shipping amounts for the last three calendar years.
Percentage of Sales -------------------------- 2004 2003 2002 ------ ------ ------ Minerals 58% 58% 57% Environmental 37% 35% 36% Transportation 9% 10% 11% Intersegment Shipping -4% -3% -4% ------ ------ ------ 100% 100% 100% ====== ====== ======
Net revenues, operating profit, assets, depreciation, depletion and amortization, capital expenditures and research and development expenditures attributable to each of the Company's business segments are set forth in Note 4 of the Company's Notes to Consolidated Financial Statements included elsewhere herein.
MINERALS
The Company's minerals business is principally conducted through its wholly-owned subsidiaries and subsidiaries consolidated in the financial statements: American Colloid Company in the United States and Canada; Colin Stewart Minchem Limited in the United Kingdom; Volclay Siam Ltd. in Thailand; Volclay Korea Ltd. in South Korea; Volclay Pty., Ltd. in Australia; Volclay MinChem Co. Ltd. and Volclay DongMing Industrial Minerals Co., Ltd. in China; and through its joint venture companies: Volclay de Mexico S.A. & C.V. in Mexico; Ashapura Volclay Limited in India; Egypt Mining & Drilling Chemicals Company in Egypt; and Volclay Japan Co. Ltd. in Japan. The Company also has a 20% equity interest in Ashapura Minechem Ltd., a publicly traded Indian bentonite producer.
Commercially produced bentonite is a type of montmorillonite clay found in beds ranging in thickness from two to 50 feet under overburden of up to 60 feet. There are two basic types of bentonite, each having different chemical and physical properties. These are commonly known as sodium bentonite and calcium bentonite. Sodium bentonite is generally referred to as Western bentonite because it predominately occurs in the Western United States. Sodium bentonites of lesser purity occur outside the United States. Calcium bentonite is sometimes referred to as Southern bentonite in the United States and as fuller's earth outside the United States. Calcium bentonites mined outside the United States are commonly activated with sodium carbonate to produce properties similar to natural sodium bentonite.
The Company's principal bentonite products are marketed under various internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R), PREMIUM GEL(R) and ADDITROL(R). The Company's cat litter is sold under various trade names and private labels. Trade names include NATURAL SELECT(R), CAREFREE KITTY(R), PREMIUM CHOICE(R) and CAT TAILS(R).
PRINCIPAL PRODUCTS AND MARKETS
Metalcasting. In the formation of sand molds for metal castings, sand is bonded with bentonite and various other additives to yield desired casting form and surface finish. The Company serves the foundry and casting industry throughout North America, Asia and Australia with custom-blended bentonite and allied non-bentonite products to strengthen sand molds for cast auto parts, farm implements, railcars, home appliances and metallurgical products. The blended mineral binders containing sodium bentonite, calcium bentonite, seacoal and other ingredients are sold under the trade name ADDITROL(R).
Cat Litter. The Company produces and markets sodium bentonite-based, scoopable (clumping), traditional and alternative cat litters as well as specialty pet products to grocery and drug stores, mass merchandisers, wholesale clubs and pet specialty stores throughout the U.S. The Company's scoopable products' clump-forming capability traps urine, allowing for easy removal of the odor-producing elements from the litter box. The Company's products are marketed under various trade names.
Specialty Minerals. This category includes several business units that are major suppliers of gelling, binding, thickening, plasticizing and emulsifying agents for cosmetics, pharmaceuticals, drilling fluids or household products. The Company is also a global supplier of nanoclays.
Detergents. The Company supplies high-grade agglomerated bentonite to the detergent industry.
Health and Beauty. The Company manufactures adsorbent polymers and purified grades of bentonite ingredients for sale to manufacturers of personal care products. The adsorbent polymers are used to deliver high-value actives in skin-care products. Bentonite-based materials act as thickening, suspension and dispersion agent emollients.
Iron Ore Pelletizing. The Company supplies sodium bentonite for use as a pelletizing aid in the production of taconite pellets.
Well Drilling. Sodium bentonite and leonardite, a form of oxidized lignite mined and processed by the Company in North Dakota, are components of drilling fluids used in oil and gas well drilling. Bentonite imparts thickening and suspension properties, which facilitate the transport of rock cuttings to the surface during the drilling process. Drilling fluids lubricate the drilling bit and coat the underground formations to prevent hole collapse and drill bit seizing. The Company's primary trademark for this application is PREMIUM GEL(R).
Other Industrial. The Company produces bentonite and bentonite blends for the construction industry, which are used as a plasticizing agent in cement, plaster and bricks, and as an emulsifier in asphalt.
Agricultural. Sodium bentonite and calcium bentonite are sold as pelletizing aids in livestock feed and as anti-caking agents for livestock feed in storage or during transit.
SALES AND DISTRIBUTION
In 2004, the top five customers of the minerals segment accounted for approximately 31% of the segment sales worldwide.
The Company has established industry-specialized sales groups staffed with technically oriented salespersons serving each of the Company's major markets. Certain groups have networks of distributors and representatives, including companies that warehouse products at strategic locations.
Most customers in the metalcasting industry are served on a direct basis by teams of Company sales, technical and manufacturing personnel. The Company also provides training courses and laboratory testing for customers who use the Company's products in the metalcasting process.
Sales to the oil and gas well drilling industry are primarily made directly to oil and gas well drilling fluid service companies, both under the Company's trade name and under private label. Because bentonite is a major component of drilling fluids, two service companies have captive bentonite operations. The Company's potential market, therefore, generally is limited to those service organizations that are not vertically integrated or do not have long-term supply arrangements with other bentonite producers.
Detergent sales and marketing activities are performed on a direct basis and primarily focused in Europe. Sales and marketing of health and beauty care products is performed direct and through agents on a global basis.
Sales to the cat litter market are made on a direct basis and through industry brokers. All sales to the iron ore pelletizing industry are made directly to the end user. Sales to the Company's remaining markets are made primarily through independent distributors and representatives.
COMPETITION
The Company is one of the largest producers of bentonite products globally. There is substantial domestic and international competition, which is essentially a matter of product quality, price, logistics, service and technical support. There are at least 15 other major sodium bentonite or sodium activated calcium bentonite producers throughout the world including several importers into the U.S. market. There are also numerous major producers of calcium bentonite as well as various regional suppliers in the areas the Company serves. Some of the producers are companies primarily in other lines of business with substantially greater financial resources than the Company.
SEASONALITY
Although business activities in certain portions of the industries in which the Company's mineral products are sold, e.g. oil and gas well drilling and construction, are subject to seasonal factors such as weather, the Company does not consider its minerals business, as a whole, to be seasonal.
ENVIRONMENTAL
PRINCIPAL PRODUCTS AND MARKETS
Through its wholly-owned subsidiaries, Colloid Environmental Technologies Company (CETCO) CETCO Oilfield Services, Inc. and Lafayette Well Testing, Inc. in the United States and Canada, CETCO Korea Ltd. in South Korea, CETCO Poland Sp. z o.o. in Poland, CETCO Technologies(Suzhou) Co. Ltd. in China, Commercializadora y Exportadora Cetco Latino America Limited in Chile, Linteco GmbH and Linteco Iberia S.L. in Spain, and CETCO (Europe) Ltd. in the United Kingdom, the Company sells sodium bentonite, products containing sodium bentonite, and other products, services and equipment for use in environmental and construction applications.
Lining Technologies. CETCO sells bentonite in its geosynthetic clay liner products under the BENTOMAT(R) and CLAYMAX(R) trade names for lining and capping landfills and for containment in tank farms, storm water containment systems, waste stabilization lagoons, slurry walls, sewage lagoons and mine site and wetlands reclamation applications.
Building Materials. The Company's VOLCLAY(R) Waterproofing System is sold to the non-residential construction industry. This line includes VOLTEX(R), a waterproofing composite comprised of two polypropylene geotextiles filled with sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground foundation walls and slabs. The following products round out the principal components of the product line: VOLCLAY PANELS(R), also used for below-grade waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and plaza areas. The Company also manufactures and sells asphalt emulsion based waterproofing systems for residential and non-residential waterproofing applications. In addition, the Company's STRONGSEAL(TM) and DUCKSBACK(TM) roofing underlayment systems are sold to the residential and non-residential roofing industry.
Industrial Water Treatment. Bentonite-based flocculants and customized equipment are used to remove emulsified oils and heavy metals from wastewater. Bentonite-based products are formulated to solidify liquid waste for proper disposal in landfills. These products are sold primarily under the SYSTEM-AC(TM), RM-10(R) and SORBOND(R) trade names.
Oilfield Services. CETCO's oilfield services group employs CRUDESORB(R) and CRUDESEP(R) filtration technology, used primarily on offshore oil production platforms. CETCO employs several technologies to allow platform operators to maintain compliance with regulatory requirements governing discharge of waste water generated during oil production. CETCO's filtration technology is marketed with all necessary equipment, proprietary filter media and trained professional service personnel. The Company is also actively involved in providing wastewater treatment solutions to pipeline operators to enable them to meet wastewater discharge requirements. Well testing services are also provided by the Company as a result of the acquisition of Lafayette Well Testing, Inc., completed in early 2004. The Company provides equipment and personnel for production well control, clean-up, unload, separation, measure of component flow and disposal of fluids from oil and gas wells.
Drilling Products. CETCO's drilling products are used in environmental and geotechnical drilling applications, horizontal directional drilling, mineral exploration and foundation construction. The products are used to install monitoring wells, facilitate horizontal drilling and water wells, rehabilitate existing water wells and seal abandoned exploration drill holes. VOLCLAY(R) GROUT, HYDRAUL-EZ(R), BENTOGROUT(R) and VOLCLAY(R) TABLETS are among the trade names for products used in these applications. Geothermal grouting applications utilizing GEOTHERMAL GROUT(TM) represent a developing area for CETCO drilling products. VOLCLAY(R) SHORE PAC is used in special foundation drilling applications.
COMPETITION
CETCO principally competes with seven regional geosynthetic clay liner manufacturers worldwide and several suppliers of alternative technologies. The construction and wastewater treatment product lines are specialized businesses that compete primarily with alternative technologies. The groundwater monitoring, well drilling and sealants products compete with the Company's traditional rivals in the sodium bentonite business. The oilfield services group competes with several larger oil services companies using different technology. Competition is based on product quality, service, price, technical support and availability of product. Historically, the competition has been vigorous.
SALES AND DISTRIBUTION
CETCO products are sold domestically and internationally. CETCO sells most of its products through direct sales and marketing personnel specializing in the Company's major product lines. CETCO employs technically oriented marketing personnel to support its network of distributors and representatives for several other product lines. Oilfield Services customers are primarily major oil companies to which products are sold on a direct basis.
SEASONALITY
Much of the business in the environmental sector is impacted by weather and soil conditions. Many of the products cannot be applied in harsh weather conditions and, as such, sales and profits tend to be stronger during the period from April through October. As a result, the Company considers the business of this segment to be seasonal.
MINERALS/ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS
MINERAL RESERVES
The Company has reserves of sodium and calcium bentonite at various locations in North America, including Wyoming, South Dakota, Montana and Alabama, and in China. The Company, indirectly through its joint venture companies, has access to bentonite deposits in Egypt, India and Mexico. At 2004 consumption rates and product mix, the Company estimates its proven, assigned reserves of commercially usable sodium bentonite at approximately 18 years. The Company estimates its proven, assigned reserves of calcium bentonite at approximately 26 years in North America. While the Company, based upon its experience, believes that its reserve estimates are reasonable and its title and mining rights to its reserves are valid, the Company has not obtained any independent verification of such reserve estimates or such title or mining rights. The Company owns or controls the properties on which its reserves are located through long-term leases, royalty agreements and patented and unpatented mining claims. A majority of the Company's bentonite reserves are owned. All of the properties on which the Company's reserves are located are either physically accessible for the purposes of mining and hauling or the cost of obtaining physical access would not be material.
To retain possessory rights in unpatented mining claims in North America, a fee of $100 per year for each unpatented mining claim is required. The validity of title to unpatented mining claims is dependent upon numerous factual matters. The Company believes that the unpatented mining claims that it owns have been located in compliance with all applicable federal, state and local mining laws, rules and regulations. The Company is not aware of any material conflicts with other parties concerning its claims. From time to time, members of Congress and members of the executive branch of the federal government have proposed amendments to existing federal mining laws. The various amendments would have had a prospective effect on mining operations on federal lands and include, among other things, the imposition of royalty fees on the mining of unpatented claims, the elimination or restructuring of the patent system and an increase in fees for the maintenance of unpatented claims. To the extent that future proposals may result in the imposition of royalty fees on unpatented lands, the mining of the Company's unpatented claims may become uneconomic and royalty rates for privately leased lands may be affected. The Company cannot predict the form that any amendments might ultimately take or whether or when any such amendments might be adopted.
The Company maintains a continuous program of worldwide exploration for additional reserves and attempts to acquire reserves sufficient to replenish its consumption each year, but it cannot assure that additional reserves will continue to become available.
The Company oversees all of its mining operations, including its exploration activity and securing the necessary state and federal mining permits.
The following table shows a summary of minerals sold by the Company from active mining areas for the last 3 years in short tons, as well as mineral reserves by major mineral category.
** Quantity of reserves that would be owned if patent was granted.
Assigned reserves means reserves which could be reasonably expected to be processed in existing plants. Unassigned reserves means reserves which will require additional expenditures for processing facilities. Conversion factor means the percentage of reserves that will be available for sale after processing.
The Company estimates that available supplies of other materials utilized in its minerals business are sufficient to meet its production requirements for the foreseeable future.
MINING AND PROCESSING
Bentonite is surface mined, generally with large earthmoving scrapers, and then loaded into trucks and off-highway-haul wagons for movement to processing plants. The mining and hauling of the Company's clay is done both by the Company and by independent contractors.
At the processing plants, bentonite is dried, crushed and sent through grinding mills, where it is sized to customer requirements, then chemically modified where needed and transferred to silos for automatic bagging or bulk shipment. Virtually all production is shipped as processed rather than stored for inventory.
PRODUCT DEVELOPMENT AND PATENTS
The Company works actively with customers in each of its major markets to develop commercial applications of specialized grades of bentonite. It maintains a bentonite research center and laboratory testing facility adjacent to its corporate headquarters. When a need for a product that will accomplish a particular goal is perceived, the Company works to develop the product, research its marketability and study the feasibility of its production. The Company also co-develops products with customers, or others, as needs arise. The Company's development efforts emphasize markets with which it is familiar and products for which it believes there is a viable market.
The Company holds a number of U.S. and international patents covering the use of bentonite and products containing bentonite. The Company follows the practice of obtaining patents on new developments whenever feasible. The Company, however, does not consider that any one or any combination of such patents is material to its minerals and environmental businesses as a whole.
RESEARCH AND DEVELOPMENT
All Company business segments share research and laboratory facilities adjacent to the corporate headquarters. Technological developments are shared among the companies, subject to license agreements where appropriate. Notes 1 and 4 of the Notes to Consolidated Financial Statements include further information on research and development activities.
REGULATION AND ENVIRONMENTAL
The Company believes it is in material compliance with applicable regulations now in effect for surface mining. Since reclamation of exhausted mining sites has been a regular part of the Company's surface mining operations for the past 35 years, maintaining compliance with current regulations has not had a material effect on mining costs. Reclamation costs are reflected in the prices of the bentonite sold.
The grinding and handling of dried clay is part of the production process and because it generates dust, the Company's mineral processing plants are subject to applicable clean air standards (including Title V of the Clean Air Act). All of the Company's plants are equipped with dust collection systems. The Company has not had, and does not presently anticipate, any significant regulatory problems in connection with its dust emission, though it expects ongoing expenditures for the maintenance of its dust collection systems and required annual fees.
The Company's mineral operations are also subject to other federal, state, local and foreign laws and regulations relating to the environment and to health and safety matters. Certain of these laws and regulations provide for the imposition of substantial penalties for noncompliance. While the costs of compliance with, and penalties imposed under, these laws and regulations have not had a material adverse effect on the Company, future events, such as changes in or modified interpretations of existing laws and regulations, enforcement policies, and further investigation or evaluation of potential health hazards of certain products, may give rise to additional compliance and other costs that could have a material adverse effect on the Company.
TRANSPORTATION
The Company operates a long-haul trucking business and a freight brokerage business primarily for delivery of finished products throughout the continental United States. These services are provided to the Company's subsidiaries as well as third party customers. Through its transportation operation, the Company is better able to control costs, maintain delivery schedules and assure equipment availability for delivery of its products. In 2004, approximately 39% of the revenues of this operation involved services provided to the Company's domestic minerals and environmental segments.
CORPORATE ACTIVITIES - NANOCOMPOSITE PRODUCT DEVELOPMENT
The Company is always seeking to develop broader-based technologies that may use bentonite for new, value-added applications. One such technology is nanocomposites for the plastics industry. In the mid-90's, the Company established its Nanocor subsidiary to develop surface-modified bentonites suitable for the emerging nanocomposite market. The primary raw material is bentonite. For some applications, material will be purchased from third-party suppliers. Surface-treatment chemicals, added in the production process, are readily available on the merchant market.
The Company has a nanocomposite production facility in Aberdeen, Mississippi. All costs, in excess of sales, associated with the development, production and sales of nanocomposites are included in corporate costs.
Although the Company is developing sales opportunities through multiple supply channels, its primary business model centers around two commercial alliances (discussed below), each intended to serve a major consumption sector.
In 2003, an agreement was reached with Mitsubishi Gas Chemical Company, Inc. (MGC) which involves the manufacture and sale of high-barrier plastics that will combine the Company's patented nanocomposite technology and MXD6, a form of nylon. MGC is the world's largest producer of MXD6, which is an established product used in consumer and industrial packaging. A MXD6-nanocomposite has significantly higher gas-barrier properties, which could greatly improve sales potential in the packaging market. Two products are commercially available under the Imperm(R) brand. Imperm(R) is being evaluated for packaging of carbonated soft drinks, beers and soft food products. Additional new product variations may be introduced over the next 18 months. In addition to the sale of Nanomer(R) products to MGC for use in the production of Imperm(R), the Company intends to earn profits generated by sales to MGC's customers.
The Company has a similar agreement with PolyOne Corporation (PolyOne) involving sales, marketing and development of polyolefin nanocomposite concentrates and compounds. PolyOne is the world's largest polymer services company which includes the production of plastic compounds. The alliance is focused on improving strength, dimensional stability and fire-resistant properties of plastics used in a wide variety of consumer and industrial products, especially in the automotive sector. The Company's Nanomer (R) Products and technology are included in two PolyOne product lines, Nanoblend(R) and Maxxam(R) LST. These products are supplied commercially to customers, which include automotive applications. Similar to its alliance agreement with MGC, the Company profits from supply of Nanomer (R) Products to PolyOne and earns added revenue from profits generated by sales to its customers.
Sales to date from these alliances have been minimal.
FOREIGN OPERATIONS AND EXPORT SALES
Approximately 37% of the Company's 2004 net sales were to customers in countries outside North America. To enhance its overseas market penetration, the Company maintains mineral processing plants in the United Kingdom, China, Australia, South Korea, Poland and Thailand, as well as a blending plant in Canada. Through joint ventures, the Company also has the capability to process minerals in Japan, Egypt, India and Mexico. Chartered vessels deliver large quantities of the Company's bulk, dried sodium bentonite to the plants in the United Kingdom, Australia, Thailand and South Korea where it is processed and mixed with other clays and distributed throughout Europe, Australia and Southeast Asia. In addition, the Company maintains a worldwide network of independent dealers, distributors and representatives.
The Company manufactures geosynthetic clay liners in the United Kingdom, Poland, China and South Korea, primarily for the European and Asian markets.
The Company's international operations are subject to the usual risks of doing business abroad, such as currency fluctuations and devaluation, restrictions on the transfer of funds, and import and export duties.
See Note 4 of the Company's Notes to Consolidated Financial Statements included elsewhere herein. This Note is incorporated by reference for sales attributed to foreign operations and export sales from the United States.
EMPLOYEES
As of December 31, 2004, the Company employed 1,427 persons, 591 of whom were employed outside of the United States. At December 31, 2004, there were approximately 826, 515, and 29 persons employed in the Company's minerals, environmental and transportation segments, respectively, along with 57 corporate employees. The corporate employees include personnel engaged in the nanocomposite research and development effort. Operating plants are adequately staffed, and no significant labor shortages are presently foreseen.
AVAILABLE INFORMATION
The Company files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any reports, statements and other information filed by the Company at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The Company's filings are also available to the public at the website maintained by the SEC, www.sec.gov.
The Company's principal Internet address is www.amcol.com. The Company's annual, quarterly and current reports, and amendments to those reports are available free of charge on www.amcol.com, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.
CERTIFICATIONS
As required by the rules and regulations of the New York Stock Exchange (the "NYSE"), the Company delivered to the NYSE a certification executed by the Company's Chief Executive Officer, Lawrence E. Washow, certifying that Mr. Washow was not aware of any violation by the Company of the NYSE's corporate governance listing standards as of June 11, 2004.
As required by the rules and regulations of the SEC, the Sarbanes-Oxley Act Section 302 certifications regarding the quality of the Company's public disclosure are filed as exhibits to this Annual Report on Form 10-K.
ITEM 2.
ITEM 2. PROPERTIES
The Company and its subsidiaries operate the following principal plants, mines and other facilities, all of which are owned, except as noted below. The Company also has numerous other facilities which blend Additrol (R), package cat litter and chromite sand, warehouse products and serve as sales offices.
(1) Shared facilities between minerals and environmental segments. (2) This facility was acquired in October 2004 and was not yet operational at December 31, 2004. (3) Certain offices and facilities are leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial position.
The Company's processing operations require permits from various governmental authorities. From time to time, the Company has been contacted by government agencies with respect to required permits or compliance with existing permits. While the Company has been notified of certain situations of non-compliance, management does not expect the fines or the cost of compliance, if any, to be significant.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF REGISTRANT
NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS - -------------------- ----- ------------------------------------------------ Gary L. Castagna 43 Senior Vice President, Chief Financial Officer and Treasurer of the Company since February 2001; prior thereto, a consultant to AMCOL since June 2000; prior thereto, Vice President of the Company and President of Chemdal International Corporation (this business is a former subsidiary of AMCOL, and consisted of the absorbent polymers business that was sold to BASF AG in June 2000) since August 1997; since January 2000, Director of M~Wave Incorporated, a manufacturer and distributor of printed circuit boards.
Peter L. Maul 55 Vice President of the Company since 1993 and President of Nanocor, Inc. since 1995.
Ryan F. McKendrick 53 Vice President of the Company and President of Colloid Environmental Technologies Company since November 1998; President of Volclay International Corporation since 2002; prior thereto, Vice President of Colloid Environmental Technologies Company since 1994.
Gary Morrison 49 Vice President of the Company and President of American Colloid Company since February 2000; prior thereto, Executive Vice President of American Colloid Company since 1998.
Clarence O. Redman 62 Secretary of the Company since 1982. Clarence O. Redman is of counsel to the law firm of Lord, Bissell & Brook LLP, the law firm that serves as Corporate Counsel to the Company, since October 1997.
Lawrence E. Washow 51 Chief Executive Officer since May 2000; President of the Company since May 1998; Chief Operating Officer of the Company since 1997; a Director since February, 1998.
All executive officers of the Company are elected annually by the Board of Directors for a term expiring at the annual meeting of directors following their election or when their respective successors are elected and shall have qualified.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange under the symbol "ACO." The following table sets forth, for the periods indicated, the high and low closing sale prices of the common stock, as reported by the New York Stock Exchange, and cash dividends declared per share.
The Company has paid cash dividends every year for 68 years.
As of March 3, 2005 there were 1,380 holders of record of the common stock, excluding shares held in street name.
PURCHASES OF EQUITY SECURITIES
The Company has a program to repurchase its common stock in the open market. The following table summarizes the repurchases made and the remaining amount of repurchases authorized:
(1) On May 16, 2002, the Company announced a share repurchase program for the repurchase of $10 million of its common stock during the following 24 months. The Company terminated this program on May 13, 2004.
(2) On May 13, 2004, the Company announced a share repurchase program for the repurchase of $10 million of its common stock. The Company has not set an expiration date for this program.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following is selected financial data for the Company as of and for the five years ended December 31, 2004.
SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
(1) Based on the number of common shares outstanding at the end of each year rather than a weighted average. (2) The amount for 2000 includes a prior period adjustment identified in 2004 to correct an error in the computation of taxes owed in 2000 on the gain on the sale of a business. See Note 2 of Notes to Consolidated Financial Statements for further information. (3) The amount for 2001 includes a prior period adjustment identified in 2004 for adjustments to the computation of income taxes owed in 2001 to foreign jurisdictions. See Note 2 of Notes to Consolidated Financial Statements for further information. (4) Amounts for 2000 through 2003 include reclassifications for commissions. See Note 1 of Notes to Consolidated Financial Statements for further information. (5) Amounts in years 2000 through 2003 include the effect of adjustments noted above in (2) and (3) above. (6) Historical amounts include the reclassification of intangible assets and prior period adjustments. See Note 1 and Note 2 of Notes to Consolidated Financial Statements for further information. (7) The amount discussed in note (2) above is included within taxes payable in 2000 as the Company had a net liability in 2000. In later years, the amount was reclassified to current assets as the Company had a net tax receivable. (8) Amount includes a reclassification for of certain reclamation liabilities. See Note 1 of Notes to Consolidated Financial Statements for further information. (9) Amount in 2001 through 2003 includes the effect of the adjustment in note (3) above. (10) Amounts in 2000 through 2003 include adjustments related to the reclassification of intangible assets. See Note 1 of Notes to Consolidated Financial Statements for further information.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a global, specialty minerals company and earn our revenues and profits from seven product lines. Our minerals segment operates manufacturing facilities in North America, Europe, and Asia/Pacific regions and has three business units: metalcasting, pet products and specialty minerals. Our environmental segment operates seven manufacturing facilities in six countries and has three business units: lining technologies, building materials and water treatment. Additionally, we have a transportation segment that performs trucking services for the minerals and environmental segments as well as unrelated parties. We are also developing a nanocomposite business that is reported within our corporate segment.
The principal mineral that we utilize to generate revenues is bentonite. We own or lease bentonite reserves in the United States and China. Additionally, through our joint ventures and minority interests, we have access to bentonite reserves in Egypt, India and Mexico. Bentonite deposits have varying physical properties which require us to characterize which markets our reserves can serve. We believe that our understanding of bentonite properties, mining methods, processing and application to markets are the core components of the longevity of our Company and our future prospects.
Our customer base is diverse in regard to their end-markets and geography. They range from foundries that produce castings for automotive and transportation products--heavy-duty trucks and railroad cars--to producers of consumer goods--cat box filler, cosmetics and detergents. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year.
Approximately 63% of our revenue is generated in North America, consequently, the state of the U.S. economy impacts our revenues. Our fastest growing markets are in Central Europe and Asia, which have continued to outpace the U.S. in economic growth. The weakening of the U.S. dollar has been a benefit to our revenues and profits over the past year; however, our operating results may be affected in the future by changes in the euro, British pound, and Polish zloty compared to the U.S. dollar.
Sustainable, long-term profit growth is our primary objective. We are undertaking a number of strategic initiatives to achieve this goal:
. Organic growth: The central component of our growth strategy is expansion of our product lines and market presence. We have had a history of commitment to research and development and using this resource to bring innovative products to market. We believe this approach to growth offers the best probability of achieving our long-term goals at the lowest risk.
. Globalization: We have expanded our manufacturing and marketing organizations into Europe and Asia-Pacific over the last 40 years. This operating experience enables us to expand further into emerging markets. We see China and India as significant opportunities for expanding our revenues and earnings over the long-term as a number of markets we serve, such as metalcasting and lining technologies, are expected to grow.
. Mineral development: Bentonite is a component in over 90% of the products we produce. Since it is a natural material, we must continually expand our reserve base to maintain a long-term business. Our goal is to add new reserves to replace the bentonite mined each year. Furthermore, we need to assure new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization that is committed to developing its global reserve base to meet these requirements.
. Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products. Over the last three years, we have acquired seven businesses for a total cost of approximately $37 million. A strong financial position will enable us to continue to acquire businesses which, in our assessment, are valued fairly and fit with our growth strategy.
There can be no assurance that we will achieve success in implementing any one or more of the strategic initiatives described above.
A number of risks will challenge us in meeting our long-term objectives. We describe certain risks, such as competition and our reliance on economically sensitive markets, under "Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational corporation that manufactures and markets products in countries throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and does not use them for trading or speculative purposes.
EXCHANGE RATE SENSITIVITY
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the euro, the British pound, and the Polish zloty. We also have significant exposure to changes in exchange rates between the British pound and the euro and the Polish zloty and the euro.
Our various currency exposures often offset each other, providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2004, we had no material outstanding foreign currency contracts.
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.
We periodically use interest rate swaps to manage interest rate risk on debt securities. These instruments allow us to change the characteristics of variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2004 and 2003, there were no interest rate swaps outstanding.
CREDIT RISK
We are exposed to credit risk on certain assets, primarily accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks. Our accounts receivable financial instruments are carried at amounts that approximate fair value.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Financial Statement Schedule on Page. Such financial statements and schedule are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of December 31, 2004. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, solely as a result of the material weakness in our internal control over financial reporting discussed below under "Management's Report on Internal Control Over Financial Reporting," our disclosure controls and procedures were not effective as of December 31, 2004 to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act are recorded, processed, summarized and reported as and when required. Notwithstanding the foregoing, management believes that the financial statements included within this report fairly present in all material respects the financial position and results of operations of the Company, in conformity with generally accepted accounting principles in the United States, for the periods presented.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time.
As permitted by an exemptive order issued by the SEC on November 30, 2004 (SEC Release No. 34-50754), management's annual report on internal control over financial reporting, required by Item 308(a) of Regulation S-K, and the related attestation report of our registered independent auditors required by Item 308(b) of Regulation S-K, may be filed by amendment to our Annual Report on Form 10-K within forty five days after the original filing period for such Annual Report on Form 10-K (the "Extension Order").
Because our management continues to assess the effectiveness of it's internal control over financial reporting, we will take advantage of the extension provided by the Extension Order and file management's annual report on internal control over financial reporting and the related attestation report of our independent registered public accounting firm by amendment to this Annual Report on Form 10-K prior to the expiration of such extension on May 2, 2005.
Although we are relying upon the Extension Order, management of the Company will report a material weakness in internal control over financial reporting as of December 31, 2004 with respect to controls over accounting for income taxes, when it completes the assessment required by Section 404 of the Sarbanes-Oxley Act. Therefore, management will be required to conclude that the Company's internal control over financial reporting was ineffective as of December 31, 2004. In making this assessment, our management will use the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In conducting the aforementioned evaluation and assessment, management identified a material weakness in internal control over financial reporting relative to our accounting for income taxes. In particular, our design of internal controls did not address the accounting considerations arising from the filing of tax returns or the timing of recording of changes in accounting estimates relating to income taxes of foreign subsidiaries. This control weakness resulted in errors in our accounting for income taxes, which were identified during the course of our 2004 audit, and resulted in (i) restatement of our financial results for the quarter ended September 30, 2004 to both increase net income reported in such financial statements to recognize expected federal income tax refunds relating to certain deductions and credits claimed in amended tax returns filed in September 2004 and to make certain adjustments to deferred income tax assets and income taxes payable by a wholly-owned Company subsidiary in the United Kingdom and (ii) increase retained earnings to reflect its estimate of the refund resulting from such certain state tax deductions claimed in amended tax returns filed in September 2004.
Our management is in the process of further assessing the effectiveness of our internal controls over financial reporting. Additional testing may cause management to identify additional deficiencies in our internal controls over financial reporting as of December 31, 2004.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934) during the fourth quarter of 2004 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
We are working to design and implement appropriate procedures in order to remediate the deficiencies in our internal control over financial reporting concerning accounting for income taxes. After the discovery, in the first quarter of 2005, of the errors resulting in the restatement of our financial statements for the quarter ended September 30, 2004, we implemented changes to our design of internal control with respect to accounting for income taxes. Specifically, we will formalize procedures relating to determination of appropriate accounting treatment for certain deduction and credit positions taken in filing income tax returns, both amended and original. Our Tax Manager will be responsible to report to the Controller and Chief Financial Officer each quarter changes in such tax positions that may have a material effect on the financial statements. The Controller and Chief Financial Officer will review the positions and document conclusions as to the accounting treatment. Additionally, we will enhance controls over financial reporting of our foreign subsidiaries to assure the consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles and changes in accounting estimates are recorded in the appropriate reporting period.
PART III
ITEM 10.
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.
ITEM 11.
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.
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.
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.
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.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
ITEM 15(a) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders AMCOL International Corporation:
We have audited the consolidated financial statements of AMCOL International Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMCOL International Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As described in Note 2 to the consolidated financial statements, the Company's consolidated balance sheet as of December 31, 2003 and the related consolidated statements of stockholders' equity for the years ended December 31, 2003 and 2002 have been restated.
As described in Note 1 to the consolidated financial statements, the Company changed its method of accounting for stock based compensation effective January 1, 2003, and its method of accounting for goodwill as of January 1, 2002.
KPMG LLP
Chicago, Illinois March 30, 2005
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
DECEMBER 31, ----------------------------- Restated ASSETS 2004 (Note 2) - ---------------------------------------------- ------------ ------------ Current assets: Cash $ 17,594 $ 13,525 Accounts receivable: Trade, less allowance for doubtful accounts of $4,637 and $3,455 in 2004 and 2003, respectively 86,128 58,385 Other 2,214 2,612 Inventories 63,882 46,182 Prepaid expenses 7,111 5,108 Current deferred tax assets 4,293 3,639 Income taxes receivable 9,126 14,123 Assets held for sale 752 - ------------ ------------ Total current assets 191,100 143,574 ------------ ------------ Investment in and advances to joint ventures 15,023 13,068 ------------ ------------ Property, plant, equipment, and mineral rights and reserves: Land and mineral rights 12,019 10,275 Depreciable assets 247,280 226,221 ------------ ------------ 259,299 236,496 Less: accumulated depreciation 165,658 149,500 ------------ ------------ 93,641 86,996 ------------ ------------ Other assets: Goodwill 19,225 5,633 Intangible assets, less accumulated amortization of $4,953 and $3,872 in 2004 and 2003, respectively 3,802 4,345 Deferred tax assets 6,444 5,314 Other assets 7,207 6,399 ------------ ------------ 36,678 21,691 ------------ ------------ $ 336,442 $ 265,329 ============ ============
DECEMBER 31, ----------------------------- Restated LIABILITIES AND STOCKHOLDERS' EQUITY 2004 (Note 2) - ---------------------------------------------- ------------ ------------ Current liabilities: Current maturities of long-term debt and notes payable $ - $ 844 Accounts payable 25,474 20,365 Accrued liabilities 36,207 26,499 ------------ ------------ Total current liabilities 61,681 47,708 ------------ ------------ Long-term debt 34,295 9,006 ------------ ------------ Minority interests in subsidiaries 5 116 Deferred compensation 5,872 4,583 Other liabilities 12,655 12,466 ------------ ------------ 18,532 17,165 ------------ ------------ Stockholders' equity: Common stock, par value $.01 per share. Authorized 100,000,000 shares; issued 32,015,771 shares in 2004 and 2003 320 320 Additional paid in capital 69,763 67,513 Retained earnings 154,366 132,179 Accumulated other comprehensive income 14,905 8,372 ------------ ------------ 239,354 208,384 Less: Treasury stock (2,620,016 and 2,908,025 shares in 2004 and 2003, respectively) 17,420 16,934 ------------ ------------ 221,934 191,450 ------------ ------------ $ 336,442 $ 265,329 ============ ============
See accompanying notes to consolidated financial statements.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
Continued...
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
See accompanying notes to consolidated financial statements.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Operations
AMCOL International Corporation (the Company) operates in two principal areas of activity: minerals and environmental. The Company also operates a transportation business which includes delivery of its own products. In 2004, the Company's revenues were derived 58% from minerals, 37% from environmental, and 9% from transportation operations, all reduced by 4% from the elimination of intersegment shipping revenues. The Company's sales in 2004 were approximately 63% from North America and 37% outside of North America. Further descriptions of the Company's products, its principal markets and the relative significance of its operations are included in Note 4, "Business Segment and Geographic Area Information."
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its foreign and domestic subsidiaries. All subsidiaries greater than 50% owned by the Company are consolidated. The Company's ownership interests in the U.K., Mexican, Indian, and Egyptian ventures range between 20% and 50%. Accordingly, these investments are accounted for using the equity method. The Company's ownership interest in the Japanese investment is recorded at cost. All material intercompany balances and transactions between wholly-owned subsidiaries, including profits on inventories, have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Translation of Foreign Currencies
The assets and liabilities of subsidiaries located outside of the United States are translated into U.S. dollars at the rates of exchange at the balance sheet dates. The statements of operations are translated at the weighted average rates during the periods. Foreign exchange translation adjustments are accumulated as a separate component of stockholders' equity, while foreign currency transaction gains or losses are included in income.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) or moving average methods. Exploration costs are expensed as incurred. Costs incurred in removing overburden and mining bentonite are capitalized as advance mining costs until the bentonite from such mining area is transported to the plant site, at which point the costs are included in crude bentonite stockpile inventory.
Property, Plant, Equipment, and Mineral Rights and Reserves
Property, plant, equipment, and mineral rights and reserves are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method for substantially all of the assets. Certain other assets, primarily field equipment, are depreciated on the units-of-production method. Mineral rights and reserves are depleted using the units-of-production method.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", goodwill is tested annually (or more frequently if impairment indicators arise) for impairment. Other intangibles, including trademarks and non-compete agreements, are amortized on the straight-line method over the expected periods to be benefited, which extend up to 10 years.
The adoption of the provisions within SFAS 142 relating to goodwill amortization resulted in the Company discontinuing the amortization of goodwill effective January 1, 2002. At the date of adoption, the Company's goodwill balance was not significant.
Impairment of Long-Lived Assets
The Company reviews the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs of disposal.
Income Taxes
The Company and its U.S. subsidiaries file a consolidated tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Revenue Recognition
Product revenue is recognized when products are shipped to customers. Allowances for discounts, rebates, and estimated returns are recorded at the time of sale and are reported as a reduction in revenue. The Company generates some sales through independent, third-party representatives. These sales are recorded in revenues and the commission compensation paid to the representatives is recorded in general, selling and administrative expenses.
Transportation segment revenue for freight delivery services is recognized upon receipt of signed proof of delivery documents. Amounts payable for purchased transportation, commissions and insurance are accrued when the related revenue is recognized.
Service revenues, primarily earned by the environmental segment, represent less than 10% of consolidated net sales. Revenue for services performed are recognized in the period such services are performed and customer acceptance is obtained.
Shipping Revenues and Costs
The Company reports shipping and handling costs that are passed on to customers as sales revenue and cost of sales in the consolidated statements of operations.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Land Reclamation
The Company mines various minerals using a surface-mining process which requires the removal of overburden. The Company is obligated to restore the land comprising each mining site to its original condition at the completion of mining activity. The Company recognizes the liability for land reclamation based on the estimated fair value of the obligation. The obligation is adjusted to reflect the passage of time and changes in estimated future cash outflows. At December 31, 2004 the Company's recorded reclamation obligation was $4,850. During the year ended December 31, 2004, the obligation was reduced by $1,325 due to payments made in connection with ongoing reclamation activities offset by accretion of $97 and recognition of additional obligations resulting from normal mining activities of $1,018.
Research and Development
Research and development costs are included in general, selling and administrative expenses and amounted to approximately $5,349, $5,018, and $5,953 for the years ended December 31, 2004, 2003 and 2002, respectively.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding after consideration of the dilutive effect of stock options. A reconciliation between the number of shares used to compute basic and diluted earnings per share follows:
Stock-Based Compensation
Prior to 2003, the Company accounted for its fixed plan stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in operations prior to 2003, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and has elected to apply these provisions prospectively, in accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123, to all employee awards granted, modified, or settled after January 1, 2003. Awards under the Company's plans vest over three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 and 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS 123.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Results for prior years have not been adjusted to reflect the use of the fair value based method of accounting for employee awards. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period:
Derivative Instruments and Hedging Activities
The Company occasionally uses derivative financial instruments (principally interest rate swaps or options) to manage its exposure to changes in interest rates. The Company does not use derivative instruments for trading or other speculative purposes. The Company had no derivative financial instruments outstanding at December 31, 2004 and 2003.
Reclassifications
Certain items in the consolidated financial statements contained herein and notes thereto have been reclassified to conform with the consolidated financial statement presentation for 2004; these reclassifications relate to commissions, intangible assets and reclamation liabilities.
Commissions paid to external sales representatives have been reclassified, resulting in increases in net sales, gross profit, and operating expenses. The amounts reclassified for 2002 and 2003 are $6,227 and $8,000, respectively.
An intangible asset for the environmental segment have been reclassified to reduce prepaid expenses and other long term assets and increase intangible assets; the $750 amortization expense each year relating to the intangible asset within the statement of cash flows has also been reclassified to amortization expense. The reduction in prepaid expenses in 2002 and 2003 was $750 each year; the reduction in other assets in 2002 and 2003 was $3,000 and $2,250, respectively.
The portion of the reclamation liability expected to be paid within one year for the minerals segment has been reclassified to accrued liabilities in 2003; the amount was $1,337.
(2) RESTATEMENT
During 2004, the Company recorded an adjustment of $5,546 to increase retained earnings and income taxes receivable to reflect the correction of an accounting error that occurred in 2000. Commensurate with the sale of its absorbent polymer segment in June 2000, the Company recorded an income tax accrual for the gain on the sale of the segment. In connection with the filing of amended income tax returns in 2004 that, in part, reduced the 2000 income tax liability, the Company discovered an error in the computation of the income tax accrual associated with the sale of the segment.
Also during 2004, the Company recorded an adjustment of $1,006 to increase retained earnings resulting from a $524 increase in long-term deferred income tax assets, a $350 increase in short-term deferred tax assets and a $132 reduction in income tax accrual to reflect the correction of an accounting error that occurred in 2001.
The aforementioned adjustments of $1,006 and $5,546 have been recorded as adjustments to retained earnings in the Consolidated Statement of Stockholders' Equity as of January 1, 2002.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(3) DISCONTINUED OPERATIONS
In 2003, the Internal Revenue Service concluded audits which resulted in a reduction of the Company's income taxes payable and the recording of an income tax receivable of approximately $8.9 million related to the sale of the Company's U.K. metalcasting business in 2001 and closure of the U.K. cat litter business in 2000. Those audits resulted in an actual tax liability that was lower than the estimate of taxes payable related to those periods. Therefore, the Company adjusted its estimate of taxes payable to reflect the actual amount due as of December 31, 2003 and recorded $8.9 million of income from discontinued operations.
(4) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in two principal business segments: minerals and environmental. The Company also operates a transportation business. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The transportation segment includes a long-haul trucking business and a freight brokerage business, which provide services to both the Company's plants and outside customers.
The Company identifies segments based on management responsibility and the nature of the business activities of each component of the Company. Intersegment sales are insignificant, other than intersegment shipping, which is disclosed in the following table. The Company measures segment profit based on operating profit. Operating profit is defined as sales less cost of sales and general, selling and administrative expenses related to a segment's operations. The costs deducted to arrive at operating profit do not include interest or income taxes.
Segment assets are those assets used in the Company's operations in that segment. Corporate assets include cash, corporate leasehold improvements, the nanocomposite plant investment and other miscellaneous equipment.
The following summaries set forth certain financial information by business segment and geographic area as of and for the years ended December 31, 2004, 2003 and 2002; the amounts in the prior years have been restated as a result of the prior period adjustments detailed in Note 2.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Continued...
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
The Company reported revenues for the following product lines:
(5) INVENTORIES
Inventories at December 31 consisted of:
2004 2003 ------------ ------------ Advance mining $ 2,277 $ 2,605 Crude stockpile inventories 25,159 14,410 In-process inventories 18,123 14,190 Other raw material, container, and supplies inventories 18,323 14,977 ------------ ------------ $ 63,882 $ 46,182 ============ ============
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(6) PROPERTY, PLANT, EQUIPMENT, AND MINERAL RIGHTS AND RESERVES
Property, plant, equipment and mineral rights and reserves consisted of the following:
Depreciation and depletion were charged to income as follows:
(7) GOODWILL AND INTANGIBLE ASSETS
As of December 31, goodwill and other intangible assets consisted of:
DECEMBER 31, ----------------------------- 2004 2003 ------------ ------------ Goodwill $ 19,225 $ 5,633 Intangible assets, at cost 8,755 8,217 Less: accumulated amortization 4,953 3,872 ------------ ------------ Intangible assets, net 3,802 4,345 ------------ ------------ Goodwill and intangible assets, net $ 23,027 $ 9,978 ============ ============
The Company's increases in goodwill are primarily attributable to acquisitions as detailed in Note 10. The carrying values of goodwill and intangible assets (net) as of December 31, by segment are as follows:
DECEMBER 31, ----------------------------- 2004 2003 ------------ ------------ Goodwill Minerals $ 5,773 $ 5,394 Environmental 13,452 239 Intangible assets, net Minerals 425 494 Environmental 2,926 3,504 Corporate 451 347 ------------ ------------ Goodwill and intangible assets, net $ 23,027 $ 9,978 ============ ============
In accordance with SFAS 142, the Company evaluated the goodwill attributable to each reporting unit for impairment, and concluded that there was no indication of goodwill impairment. If indicators of impairment are deemed to be present, and future cash flows are not expected to be sufficient to recover the assets and carrying amounts, an
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
impairment loss would be charged to expense in the period identified.
The Company reviewed the intangible assets, net book values and estimated useful lives by class. As of December 31, 2004, there was no impairment related to the intangible assets. The Company will continue to amortize the remaining net book values of intangible assets over their remaining useful lives.
(8) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 2004, 2003 and 2002 was allocated as follows:
Domestic and foreign components of income from continuing operations before income taxes, equity in income of joint ventures and minority interest are shown below:
The components of the provision for income taxes attributable to income from continuing operations before income taxes, equity in income of joint ventures and minority interest for the years ended December 31, 2004, 2003 and 2002 consisted of:
The Company believes it is more likely than not that the deferred tax assets above will be realized in the normal course of business.
The Company's federal income tax returns have been audited through 2001.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of December 31, 2004 and 2003 were as follows:
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:
In 2004, the Company recorded a reduction to income tax expense of $4,789 associated with depletion deductions and research and experimentation credits available in computing income tax expense. Approximately $821 of this amount relates to changes in estimates resulting from the finalization, in 2004, of the tax return for the 2003 tax year. The remaining $3,968 relates to the filing of amended federal income tax returns dating from 1999 through 2002.
Regarding the $4,789 mentioned above, the Company recomputed its federal income tax liability for these periods after determining that it could increase certain deductions and credits as allowed under the Internal Revenue Code. The total refund claimed on the returns was $5.2 million; however, the Company determined that a contingency reserve was necessary to reflect a potential reduction of the refund after examination of the returns by the IRS. The Company also recorded, in 2004, a $1.1 million income tax benefit for the adjustment of deferred income tax assets and income tax payable at a U.K. subsidiary. If these two adjustments had not been recorded, the effective income tax rate for 2004 would have been 30%.
The Company has not provided for U.S. federal income and foreign withholding taxes on approximately $31.1 million of undistributed earnings from international subsidiaries as of December 31, 2004 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
may become available under current law to reduce or eliminate the resulting U.S. income tax liability.
In October 2004, the American Jobs Creation Act (the "Act") was enacted which allowed for a temporary 85% dividends received deduction on certain foreign earnings repatriated into the U.S. The portion of the dividend that qualifies for the 85% deduction is that amount which exceeds an average of past years' foreign dividends. Additionally, certain criteria must be met when the funds are repatriated and may ultimately qualify for an effective tax rate as low as 5.25%.
The Company is in process of evaluating whether it will repatriate foreign earnings under the Act. The range of amounts that are reasonably under consideration for repatriation are from $0 to $26.9 million. The Company will evaluate the merits of repatriating foreign earnings in 2005 and report the tax impact, if any, of an envisioned repatriation upon the finalization of a repatriation plan. The Company has not recognized any income tax effect relating to the Act as we are currently not in a position to reasonably estimate the tax impact of any repatriation.
(9) LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, ----------------------------- 2004 2003 ------------ ------------ Borrowings under revolving credit agreement $ 29,325 $ 4,000 Industrial revenue bond 4,800 4,800 Other notes payable 170 1,050 ------------ ------------ 34,295 9,850 Less: current portion - 844 ------------ ------------ $ 34,295 $ 9,006 ============ ============
The Company has a committed $100,000 revolving credit agreement, which matures October 31, 2006. As of December 31, 2004, there was $70,675 in borrowing capacity available under the line of credit. The revolving credit agreement is a multi-currency arrangement, which allows the Company to borrow at an adjusted LIBOR rate plus .625% to 1.20%, depending upon the amount of the credit line used and certain capitalization ratios. The facility requires certain covenants to be met including specific amounts of net worth and also limits the Company's ability to make additional borrowings and guarantees. The Company was in compliance with these covenants at December 31, 2004. The interest rate at December 31, 2004 was 3.019%.
The Company has a short-term credit facility with maximum borrowings of $7,000, of which $844 was outstanding as of December 31, 2003. No amounts were outstanding under this facility as of December 31, 2004. The interest rate at December 31, 2003 was 4%.
At December 31, 2004 and 2003, the Company had outstanding standby letters of credit of $13.9 million and $13.7 million, respectively. These letters of credit typically serve to guarantee the Company's performance of its obligations related to land reclamation and workers' compensation claims. The Company has recognized the estimated costs of its obligations related to land reclamation and workers' compensation claims in the accompanying consolidated balance sheets as of December 31, 2004 and 2003.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Maturities of long-term debt outstanding at December 31, 2004, were as follows:
The estimated fair value of the above borrowings at December 31, 2004, was approximately equal to their carrying amounts based on discounting future cash payments using current market interest rates for loans with similar terms and maturities.
(10) ACQUISITIONS
On May 1, 2002, the Company acquired all of the outstanding stock of Colin Stewart Minchem Limited (CSM), a specialty minerals and chemical company located in the United Kingdom, in exchange for cash. The aggregate purchase price was $15,507. The purchase was financed utilizing the Company's revolving credit facility.
CSM supplies intermediate products, industrial minerals, inorganic chemicals, and additives to customers operating in the laundry detergent, packaging, oil exploration and water treatment markets. The acquisition of CSM provides an additional platform for the Company to expand its global operations and presence. The results of CSM's operations have been included in the consolidated financial statements from the acquisition date.
The following tables summarize the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition and unaudited pro forma combined results of continuing operations as if the acquisition of CSM had occurred at the beginning of each year presented. The unaudited pro forma combined information is not necessarily indicative of the combined results that would have occurred had the acquisition taken place at the beginning of the periods presented, nor is it necessarily indicative of future results.
AT APRIL 30, ------------ Current assets $ 6,263 Fixed assets 10,520 Goodwill 4,172 ------------ Total assets acquired $ 20,955 ------------ Current liabilities $ 3,023 Other liabilities 2,425 ------------ Total liabilities assumed $ 5,448 ------------ Net assets acquired $ 15,507 ============
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
PRO FORMA Twelve Months Ended December 31, ------------------ Net sales $ 315,759 Income from continuing operations 13,683 Net income 13,683 Basic earnings per share 0.49 Diluted earnings per share 0.45
The Company also completed several less significant acquisitions during 2004, 2003 and 2002. The acquisitions in these years, individually and in aggregate, did not materially affect the Company's operating results or financial position in the years presented. Summarized information related to these acquisitions is as follows:
(11) MARKET RISKS AND FINANCIAL INSTRUMENTS
As a multinational corporation that manufactures and markets products in countries throughout the world, the Company is subject to certain market risks, including those related to foreign currency, interest rates and government actions. The Company uses a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. The Company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes.
Exchange Rate Sensitivity
The Company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The Company's primary exposures are to changes in exchange rates for the U.S. dollar versus the euro, the British pound and the Polish zloty. The Company also has significant exposure to changes in exchange rates between the British pound and the euro as well as between the Polish zloty and the euro.
The Company's various currency exposures often offset each other, providing natural hedges against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2004, the Company did not have any material outstanding foreign currency contracts.
Interest Rate Sensitivity
The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates for debt obligations. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The instruments' actual cash flows are denominated in U.S. dollars.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
The Company periodically uses interest rate swaps to manage interest rate risk on debt securities. These instruments allow the Company to change variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2004 and 2003, there were no interest rate swaps outstanding.
The Company is exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by the Company's policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings.
The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. The Company believes its allowance for doubtful accounts is sufficient to cover customer credit risks. The Company's accounts receivable financial instruments are carried at amounts that approximate fair value.
(12) LEASES
The Company has several noncancelable leases for railroad cars, trailers, computer software, office equipment, certain automobiles, and office and plant facilities. Total rent expense under operating lease agreements was approximately $3,945, $4,208, and $4,099 in 2004, 2003 and 2002, respectively. Additionally, the Company has three domestic facilities that are being subleased.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
The following is a schedule of future minimum lease payments for operating leases (with initial terms in excess of one year) and related sublease income as of December 31, 2004:
(13) EMPLOYEE BENEFIT PLANS
The Company has a noncontributory pension plan covering substantially all of its domestic employees. The benefits are based upon years of service and qualifying compensation. The Company's funding is calculated using the actuarially determined unit credit cost method. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future.
The following tables set forth pension obligations included in the Company's balance sheet at December 31, 2004 and 2003:
PENSION BENEFITS ----------------------------- 2004 2003 ------------ ------------ Change in benefit obligations: Beginning benefit obligation $ 29,732 $ 26,392 Service cost 1,449 1,325 Interest cost 1,827 1,751 Actuarial loss 2,819 1,267 Benefits paid (1,020) (1,003) ------------ ------------ Ending benefit obligation $ 34,807 $ 29,732
Change in plan assets: Beginning fair value $ 22,682 $ 17,912 Actual return 4,021 4,661 Company contribution 1,000 1,112 Benefits paid (1,020) (1,003) ------------ ------------ Ending fair value $ 26,683 $ 22,682
Funded status of the plan $ (8,124) $ (7,050)
Unrecognized actuarial and investment (gain) loss, net 2,620 1,884 Prior service cost 379 410 Transition asset (87) (224) ------------ ------------ Accrued pension cost liability includeded in the consolidated financial statements $ (5,212) $ (4,980) ============ ============
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Pension cost was comprised of:
The following table summarizes the assumptions used in determining the pension obligation:
2004 2003 ------------ ------------ Discount rate 5.75% 6.25% Rate of compensation increase 5.75% 5.75% Long-term rate of return 8.50% 8.75%
The valuation of the Company's pension benefit plan was performed as of October 1, 2004 and 2003. The Company expects to contribute $862 to the Plan in 2005. The accumulated benefit obligation (ABO) was $25,704 and $23,148 at December 31, 2004 and 2003, respectively.
The Company's Plan assets, by asset category, are as follows:
2004 2003 ------------ ------------ U.S. equity securities 63% 65% International equity securities 4% 4% Fixed income securities and bonds 33% 31% Real estate and Other 0% 0%
The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. The investment objectives emphasize maximizing returns consistent with ensuring that sufficient assets are available to meet liabilities, and minimizing corporate cash contributions. The Plan's assets are managed so as to include investments that balance income and capital appreciation.
The Plan has a target range for equity securities of between 60% and 75%. This allocation takes into account factors such as the average age of employees covered by the Plan (benefit obligations) as well as overall market conditions. Interim portfolio reviews result in investment allocations being evaluated at least twice a year by the Pension Committee and rebalancing takes place as needed. Equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalizations. Debt securities include both government and corporate investment vehicles. These include a series of laddered debt securities as well as bond funds. Although real estate investments have been employed in the past, none are being used at the present.
AMCOL employs a building block approach in determining the long-term rate of return for plan assets.
Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. The average long-term rate of return on the Plan's assets since 1994 has been approximately 10.2%.
The estimated future benefit payments from the defined benefit plan, reflecting expected future service, as appropriate, are presented in the following table:
PER YEAR ----------- 2005 1,061 2006 1,139 2007 1,205 2008 1,284 2009 1,358 2010 through 2014 8,987 ----------- Total $ 15,034 ===========
In addition to the qualified plan outlined above, the Company sponsors a supplementary pension plan that provides benefits in excess of qualified plan limitations for certain employees. The unfunded accrued liability for this plan was $3,406 and $2,911 at December 31, 2004 and 2003, respectively. However, the Company has invested assets for the benefit of the employees covered by the supplemental pension plan in the event that there is a change in control. The Company has a minimum pension liability of $457 at December 31, 2004.
The Company also has a savings plan for its U.S. personnel. In 2004, the Company made a contribution in an amount equal to an employee's contributions up to a maximum of 4% of the employee's annual earnings. Company contributions are made using Company stock purchased on the open market. Company contributions under the savings plan were $1,440 in 2004, $1,202 in 2003 and $1,251 in 2002.
Employees hired after December 31, 2003 do not participate in the Company's defined benefit plan. Instead, they participate in a defined contribution plan whereby the Company makes a retirement contribution into their savings plan equal to 3% of the individual's compensation. Under this defined contribution plan, the Company made a total cash contribution of $148 into employees' savings accounts in 2004.
The Company also has a deferred compensation plan and a 401(k) restoration plan for its executives.
The foreign pension plans, which are not subject to United States pension funding laws, are funded using individual annuity contracts and, therefore, are not included in the information reflected above.
(14) STOCK OPTION PLANS
Prior to 2003, the Company accounted for its fixed plan stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and has elected to apply these provisions prospectively, in accordance with SFAS No. 148, to all employee awards granted, modified, or settled after January 1, 2003. Beginning in 2003, awards granted under the Company's plans vest over three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 and 2004 are less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement No. 123. Had compensation cost for the Company's stock option plans been determined using the fair value method of accounting described in SFAS 123 for years prior to 2003, the Company's net income would have been changed to the pro forma amounts indicated in note 1 of Notes to Consolidated Financial Statements.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
For purposes of calculating the compensation cost consistent with SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2004, 2003 and 2002:
The 1983, 1987 and 1993 Plans
The Company has reserved shares of its common stock for issuance of incentive and nonqualified stock options to its directors, officers and key employees under its 1983 Incentive Stock Option Plan, 1993 Stock Plan and 1987 Nonqualified Stock Option Plan. Options awarded under these plans, which entitle the optionee to one share of common stock, may be exercised at a price equal to the fair market value of the underlying common stock at the time of grant. Options awarded under these plans generally vest 40% after two years and continue to vest at the rate of 20% per year for each year thereafter, until they are fully vested. Options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee, or a change in control of the Company.
These plans expired as of December 31, 2000, though options that were granted prior to expiration of the plans continue to be valid until the individual option grants expire. Changes in options outstanding are summarized as follows:
1998 Long-Term Incentive Plan
The Company reserved 3,900,000 shares of its common stock for issuance to its officers, directors and key employees. This plan provides for the award of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and phantom stock. Different terms and conditions apply to each form of award made under the plan. Awards granted in 2003 vested ratably over a three year period and expire 6 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Options previously awarded under these plans generally vested 40% after two years and continued to vest at the rate of 20% per year for each year thereafter, until they are fully vested. These options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Changes in options outstanding are summarized as follows:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Restricted stock awards are independent of option grants and are subject to restrictions considered appropriate by the Compensation Committee of the Board of Directors. The shares of restricted stock outstanding at December 31, 2003 are subject to forfeiture if employment terminates prior to six years from the date of the grant. If certain performance criteria are satisfied, the forfeiture period may be shortened to three years for a portion of, or the entire award. During the remaining period through the sixth anniversary of a grant, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The cost of the awards, determined to be the fair market value of the shares at the date of the grant, is expensed ratably over the period the restrictions lapse. On May 22, 2003, AMCOL awarded 141,000 shares of restricted stock to six officers, and these same shares were outstanding at December 31, 2004. Total compensation expense related to this grant of $921 will be recorded over the three year period.
All Stock Option Plans
The following table summarizes information about stock options outstanding and exercisable at December 31, 2004:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(15) ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of:
2004 2003 ------------ ------------ Accrued severance taxes $ 2,726 $ 2,588 Accrued employee costs 1,972 1,813 Accrued vacation pay 1,650 1,650 Accrued bonus 5,131 5,139 Accrued product liability 632 1,060 Accrued commissions 2,092 2,217 Accrued reclamation costs 1,626 1,337 Other 20,378 10,695 ------------ ------------ $ 36,207 $ 26,499 ============ ============
(16) CONTINGENCIES
The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial statements.
(17) QUARTERLY RESULTS (Unaudited)
Unaudited summarized results for each quarter in 2004 and 2003 are as follows; the amounts for the third quarter of 2004 have been restated as detailed in the table following the 2003 quarterly results:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(A) Commencing in the fourth quarter of 2004, the Company has classified commissions paid to external sales representatives as general, selling and administrative expenses. Commissions paid in prior quarters had been classified as a reduction of net sales, but have now been reclassified to conform to current presentation. Such reclassifications increased net sales and gross profits in the minerals and environmental segments and had no impact on operating profit presented for those quarters.
(B) Earnings per share (EPS) for each quarter is computed using the weighted-average number of shares outstanding during the quarter, while EPS for the year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the EPS for each of the four quarters may not equal the EPS for the year.
A reconciliation of the amounts presented above for the third quarter of 2004 to the amounts previously reported in the Form 10-Q report for the quarter ended September 30, 2004 is as follows:
2004 THIRD QUARTER RESTATEMENT ------------------------------- AS REPORTED AS RESTATED ------------- ------------- Minerals $ 67,116 $ 67,430 A Environmental 47,771 49,983 A Transportation 10,979 10,979 Intersegment shipping (4,326) (4,326) ------------- ------------- Net sales $ 121,540 $ 124,066 ============= ============= Minerals $ 13,909 $ 14,223 A Environmental 14,915 16,985 A, B Transportation 1,214 1,214 ------------- ------------- Gross profit $ 30,038 $ 32,422 ============= ============= Minerals $ 8,098 $ 8,098 Environmental 6,964 6,820 B Transportation 523 523 Corporate (3,961) (5,166) C ------------- ------------- Operating profit $ 11,624 $ 10,275 ============= ============= Income from continuing operations $ 8,317 $ 12,469 D ============= ============= Net income $ 8,317 $ 12,469 D ============= ============= Basic earnings per share (B) $ 0.29 $ 0.43 D ============= ============= Diluted earnings per share (B) $ 0.27 $ 0.41 D ============= =============
(A) See Note (A) to the preceding table regarding reclassifications of commissions paid to independent sales representatives. (B) Gives effect to an adjustment of $144 attributable to a revision of depreciation expense related to an asset that is to be disposed. (C) Gives effect to an adjustment of $1,205 to record professional fees associated with amended federal income tax returns dating from 1999 to 2002, which resulted in refund claims. (D) In addition to the matters described in (B) and (C) above, gives effect to reduced income taxes attributable to (i) the adjustment of foreign income taxes ($1,111) at a UK subsidiary due to non-recognition of deferred tax assets and (ii) federal income tax refunds ($3,968). Also gives effect to income tax benefits ($422) attributable to the matters described in (B) and (C) above. EPS amounts have been recalculated to give effect to the aforementioned items.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
(1) Bad debts written off.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2005
AMCOL INTERNATIONAL CORPORATION
By: /s/ Lawrence E. Washow ------------------------------------- Lawrence E. Washow President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ John Hughes March 31, 2005 - -------------------------------------------------- John Hughes Chairman of the Board and Director
/s/ Lawrence E. Washow March 31, 2005 - -------------------------------------------------- Lawrence E. Washow President and Chief Executive Officer and Director
/s/ Gary L. Castagna March 31, 2005 - -------------------------------------------------- Gary L. Castagna Senior Vice President and Chief Financial Officer; Treasurer and Chief Accounting Officer
/s/ Arthur Brown March 31, 2005 - -------------------------------------------------- Arthur Brown Director
/s/ Daniel P. Casey March 31, 2005 - -------------------------------------------------- Daniel P. Casey Director
/s/ Robert E. Driscoll, III March 31, 2005 - -------------------------------------------------- Robert E. Driscoll, III Director
/s/ Jay D. Proops March 31, 2005 - -------------------------------------------------- Jay D. Proops Director
/s/ Clarence O. Redman March 31, 2005 - -------------------------------------------------- Clarence O. Redman Director
/s/ Dale E. Stahl March 31, 2005 - -------------------------------------------------- Dale E. Stahl Director
/s/ Audrey L. Weaver March 31, 2005 - -------------------------------------------------- Audrey L. Weaver Director
/s/ Paul C. Weaver March 31, 2005 - -------------------------------------------------- Paul C. Weaver Director
INDEX TO EXHIBITS
EXHIBIT NUMBER - --------
3.1 Restated Certificate of Incorporation of the Company (5), as amended (10), as amended (16) 3.2 Bylaws of the Company (10) 4 Article Four of the Company's Restated Certificate of Incorporation (5), as amended (16) 10.3 Lease Agreement for office space dated September 29, 1986, between the Company and American National Bank and Trust Company of Chicago; (1) First Amendment dated June 2, 1994 (8); Second Amendment dated June 2, 1997 (13) 10.4 AMCOL International Corporation 1987 Non-Qualified Stock Option Plan (2); as amended (6) 10.9 AMCOL International Corporation Dividend Reinvestment and Stock Purchase Plan (4); as amended (6) 10.10 AMCOL International Corporation 1993 Stock Plan, as amended and restated (10) 10.15 AMCOL International Corporation 1998 Long-Term Incentive Plan (15), as amended (21) 10.26 Employment Agreement dated March 15, 2002 by and between Registrant and Gary D. Morrison (22)* 10.27 Employment Agreement dated March 15, 2002 by and between Registrant and Peter M. Maul (22)* 10.28 Employment Agreement dated March 15, 2002 by and between Registrant and Gary Castagna (22)* 10.29 Employment Agreement dated March 15, 2002 by and between Registrant and Ryan F. McKendrick (22)* 10.30 Employment Agreement dated March 15, 2002 by and between Registrant and Lawrence E. Washow (22)* 10.31 Credit Agreement by and among AMCOL International Corporation and Harris Trust and Savings Bank, individually and as agent, Wells Fargo Bank, N.A., Bank of America N.A. and the Northern Trust Company dated October 31, 2003 (23) 10.32 A written description of compensation for the Board of Directors of the Company is set forth under the caption "Director Compensation" in the definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to the Company's shareholders in connection with the Annual Meeting of Shareholders to be held on May 12, 2005, and is hereby incorporated by reference.* 21 AMCOL International Corporation Subsidiary Listing 23 Consent of Independent Registered Public Accounting Firm 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350
- ---------- (1) Exhibit is incorporated by reference to the Registrant's Form 10 filed with the Securities and Exchange Commission on July 27, 1987. (2) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1988. (4) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1992. (5) Exhibit is incorporated by reference to the Registrant's Form S-3 filed with the Securities and Exchange Commission on September 15, 1993. (6) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1993. (8) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1994. (10) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1995. (13) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1997. (15) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-56017) filed with the Securities and Exchange Commission on June 4, 1998. (16) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1998. (21) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-68664) filed with the Securities and Exchange Commission on August 30, 2001.
(22) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended March 31, 2002. (23) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended September 30, 2003. *Management compensatory plan or arrangement