ITEM 1. BUSINESS
INTRODUCTION
AMCOL International Corporation was originally incorporated in South Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was changed to American Colloid Company in 1927, and in 1959, the Company was reincorporated in Delaware. In 1995, its name was changed to AMCOL International Corporation. Except as otherwise noted or indicated by context, the term "Company" refers to AMCOL International Corporation and its subsidiaries.
We operate in five segments: minerals, environmental, oilfield services, transportation and corporate. Our minerals segment mines, processes and distributes clays and products with similar applications for use in various industrial and consumer markets. Our environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and a variety of other industrial and commercial applications. Our oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, and well testing services for the oil and gas industry. Our transportation segment includes both a long-haul trucking business and a freight brokerage business for our domestic subsidiaries as well as third parties. Intersegment shipping revenues are eliminated in our corporate segment.
Prior to the third quarter of 2006, we did not report our oilfield services business as a separate segment. This business was included as part of our environmental segment. In the third quarter of 2006, we reorganized how we view and manage our business. We began capturing discrete financial information for our oilfield services business and reporting it separately to management. As a result, commencing in the third quarter of 2006, we recognized oilfield services as a stand-along segment, separate from our environmental segment. We have revised the segment information for prior periods to conform to this new presentation.
The following table sets forth the percentage contributions of our operating segments to our net sales for the last three years.
PERCENTAGE OF NET SALES ---------------------------------------------- 2006 2005 2004 ------------ ------------ ------------ Minerals 52% 55% 57% Environmental 33% 32% 32% Oilfield services 10% 7% 5% Transportation 8% 9% 9% Intersegment shipping -3% -3% -3% ------------ ------------ ------------ 100% 100% 100% ============ ============ ============
Net revenues, operating profit, assets, depreciation, depletion and amortization, capital expenditures and research and development expenditures attributable to each of our business segments are set forth in our Notes to Consolidated Financial Statements included later herein.
MINERALS SEGMENT
The business is principally conducted through wholly-owned subsidiaries and investments in affiliates and joint ventures throughout the world. Our principal bentonite products are marketed under various internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R), PREMIUM GEL(R) and ADDITROL(R).
Commercially produced bentonite is a type of montmorillonite clay found in beds ranging in thickness from two to 50 feet beneath overburden of up to 60 feet. There are two basic types of bentonite, each having different chemical and physical properties. These are commonly known as sodium bentonite and calcium bentonite. Sodium bentonite is generally referred to as Western bentonite because it predominately exists in the Western United States. Sodium bentonites of lesser purity exist outside the United States. Calcium bentonite is sometimes referred to as Southern bentonite in the United States and as Fuller's Earth outside the United States. Calcium bentonites mined outside the United States are sometimes activated with sodium carbonate or similar compounds to produce properties similar to natural sodium bentonite.
PRINCIPAL PRODUCTS AND MARKETS
Metalcasting. In the formation of sand molds for metalcastings, sand is bonded with bentonite and various other additives to yield desired casting form and surface finish. We serve the foundry and casting industry throughout the North America and the Asia-Pacific region with custom-blended bentonite and allied non-bentonite products to strengthen sand molds for cast auto parts, farm implements, railcars, home appliances and metallurgical products. The blended mineral binders containing sodium bentonite, calcium bentonite, seacoal and other ingredients are sold under the trade name ADDITROL(R). We also have a line of formulated additives that are used to introduce silicon and carbon in the melt phase of the casting process.
Pet Products. We produce and market sodium bentonite-based scoopable (clumping), traditional and alternative cat litters as well as specialty pet products to grocery and drug stores, mass merchandisers, wholesale clubs and pet specialty stores throughout the U.S. Our scoopable products' clump-forming capability traps urine, allowing for easy removal of the odor-producing elements from the litter box. Our products are marketed under various trade names.
Specialty Minerals. Our products are sold in markets with generally lower volume applications where our material acts as a performance additive. The following are the major markets for such mineral applications:
o Detergents. We supply high-grade agglomerated bentonite to the detergent industry. Bentonite performs as a softening agent in certain powdered-detergent formulations. It can also act as a carrier for colorants and fragrances.
o Health and Beauty. We manufacture adsorbent polymers and purified grades of bentonite ingredients for sale to manufacturers of personal skin care products. The adsorbent polymers are used to deliver high-value actives in skin-care products. Bentonite-based materials act as thickening, suspension and dispersion agent emollients.
o Nanocomposites. We determined that nanoclays which are surface-modified could improve physical properties of certain polymers. Depending on the product requirements, we source or purchase bentonite from third-party suppliers. Surface-treatment chemicals are added in the production process to enable the bentonite to properly function within the polymer. The surface-treatment compounds are readily available on the market. Our production facility is located in Aberdeen, Mississippi.
o Petroleum Products. Sodium bentonite and leonardite, a form of oxidized lignite mined and processed by us in North Dakota, are components of drilling fluids used in oil and gas well drilling. Bentonite imparts thickening and suspension properties, which facilitate the transport of rock cuttings to the surface during the drilling process. Drilling fluids lubricate the drilling bit and coat the underground formations to prevent hole collapse and drill-bit seizing. Our primary trademark for this application is sold under the trade name PREMIUM GEL(R).
o Other Industrial. We produce bentonite and bentonite blends for the construction industry, which are used as a plasticizing agent in cement, plaster and bricks, and as an emulsifier in asphalt. We also supply grades of bentonite used for pellitizing other materials for ease of use. Examples of this application are iron ore and livestock feed.
SALES AND DISTRIBUTION
In 2006, the top five customers of the minerals segment accounted for approximately 34% of the segment's sales worldwide. Approximately 73% of our sales in this segment are to customers in North and South America. Metalcasting is our largest market in the Americas and all of our pet products sales are in this region. Our sales in Europe represent approximately 16% of sales and are principally to detergent producers. The Asia-Pacific region represents approximately 11% of sales with metalcasting being our largest market.
A large majority of our sales and distribution is conducted by our own personnel and facilities. We have established industry-specialized sales groups staffed with technically oriented salespersons serving each of our major markets. Certain businesses will have networks of distributors and representatives, including companies that warehouse products at strategic locations.
We believe our strong global market position in the metalcasting market is largely due to our technical service capabilities and our distribution network. We provide training courses and laboratory testing for customers who use our products in the metalcasting process. Our technical sales personnel provide expertise to not only educate our customers on the bentonite blend properties but also aid them in producing castings efficiently and productively.
For cat litter, we are primarily a private-label producer, and have three principal sites from where we package and distribute finished goods. Our transportation segment provides logistics services for the cat litter business, and is a key component of our capability in supplying customers on a national basis.
Certain specialty mineral markets require considerable technical expertise. Our detergent additives market position requires an ability to not only supply cost-effective products but also provide product development capabilities to adapt to our customers' product requirements. We experience a similar requirement for our health and beauty business, which makes use of several patents with various durations that we believe are collectively important to that business.
Petroleum products are sold under our own and private-label trade names. Bentonite is a major component of drilling fluids. At least two drilling fluid service companies have captive bentonite operations and others are party to long-term bentonite supply agreements. Our potential market, therefore, is generally limited to those service organizations that are not vertically integrated or do not have long-term supply arrangements with other bentonite producers.
COMPETITION
We are one of the largest producers of bentonite products globally. There is substantial domestic and international competition, which is essentially a matter of product quality, price, logistics, service and technical support. There are at least 15 other major sodium bentonite or sodium activated calcium bentonite producers throughout the world including several importers into the U.S. market. There are also numerous major producers of calcium bentonite and various regional suppliers in the areas we serve. Some of the producers are companies primarily in other lines of business with substantially greater financial resources than ours.
SEASONALITY
We do not consider our minerals segment to be seasonal in nature.
ENVIRONMENTAL SEGMENT
PRINCIPAL PRODUCTS AND MARKETS
The business is principally conducted through wholly-owned subsidiaries, including Colloid Environmental Technologies Company ("CETCO"), and joint ventures throughout the world. The following are our three principal markets and a description of the products we produce for them:
Lining Technologies. CETCO sells geosynthetic clay liner products containing bentonite under the BENTOMAT(R) and CLAYMAX(R) trade names for lining and capping landfills and for containment in tank farms, storm water containment systems, waste stabilization lagoons, sewage lagoons and mine site and wetlands reclamation applications. Additionally, we provide contracting services in the application of certain geosynthetic materials, including our clay liners, for a number of civil infrastructure projects.
Building Materials. Our VOLCLAY(R) Waterproofing System is sold to the non-residential construction industry. This line includes VOLTEX(R), a waterproofing composite comprised of two polypropylene geotextiles filled with sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground foundation walls and slabs. The following products round out the principal components of the product line: VOLCLAY PANELS(R), also used for below-grade waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and plaza areas. We also manufacture and sell asphalt emulsion-based waterproofing systems for residential and non-residential waterproofing applications. In addition, our STRONGSEAL(TM) and DUCKSBACK(TM) roofing underlayment systems are sold to the residential and non-residential roofing industry.
Drilling Products. CETCO's drilling products are used in environmental and geotechnical drilling applications, horizontal directional drilling, mineral exploration and foundation construction. The products are used to install monitoring wells, facilitate horizontal and water well drilling, rehabilitate existing water wells and seal abandoned exploration drill holes. VOLCLAY GROUT(R), HYDRAUL-EZ(R), BENTOGROUT(R) and VOLCLAY TABLETS(R) are among the trade names for products used in these applications. Geothermal grouting applications utilizing GEOTHERMAL GROUT(TM) represent a developing area for CETCO drilling products. VOLCLAY SHORE PAC(R) is used in special foundation drilling applications.
COMPETITION
CETCO principally competes with at least seven regional geosynthetic clay liner manufacturers worldwide and several suppliers of alternative technologies. The building materials product lines are specialized businesses that compete primarily with alternative technologies. A number of integrated bentonite companies compete against us in the drilling products business. Competition is based on product quality, service, price, technical support and product availability.
SALES AND DISTRIBUTION
The top five customers in our environmental segment accounted for less than 10% of the segment sales worldwide. Approximately 54% of sales are in North and South America. The United States is our largest geographical market for all product lines. Approximately 40% of sales are in Europe and the remaining 6% in the Asia-Pacific region.
Sales and distribution of the lining technologies are primarily performed through our own personnel and facilities. Our staff includes engineers who assist with specifying products for topographical conditions that liners will endure.
The building materials products are primarily sold through distributor and dealer networks. The end customers are generally building sub-contractors who are responsible for installing the products.
For drilling product lines, we generally sell through distribution networks. The end customers for the industrial product lines include metal plating and finishing plants and corrugated cardboard operations. Drilling products are also sold through distributors who are overseen by our regional managers.
SEASONALITY
Much of the business in the environmental sector is impacted by weather and soil conditions. Many of the products cannot be applied in harsh weather conditions and, as such, sales and profits tend to be stronger during the period from April through October. As a result, we consider the business of this segment to be seasonal.
OILFIELD SERVICES SEGMENT
PRINCIPAL PRODUCTS AND MARKETS
Our oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, and well testing services for the oil and gas industry. We sell products and services through wholly-owned subsidiaries located in Australia; Brazil; Nigeria; the United Kingdom; and the United States. The following are our principal markets and a description of the products and services we provide:
Water Treatment. We employ several technologies allowing offshore oil drilling and production platform operators to maintain compliance with regulatory requirements governing the discharge of waste water generated during oil production as well as refineries.
Well Testing. We provide equipment and personnel for production well control, clean up, unload, separation, measure of component flow and disposal of fluids from oil and gas wells.
Pipeline. Our personnel utilize engineered equipment that separates and allows treatment of effluents arising from pipeline testing and maintenance activities.
Other products and services. We rent specialized equipment such as high-pressure pumps to oil and gas production platform operators. We also provide liquid nitrogen with our personnel and mobile equipment to the same production platforms, pipeline operators, and refineries. Liquid nitrogen is commonly used to purge atmospheric conditions that will allow safe performance of maintenance activities at these operations.
COMPETITION
Our oilfield services group competes with several larger oil services companies using different technologies.
SALES AND DISTRIBUTION
The top five customers in our oilfield services segment accounted for 28% of the segment sales worldwide. Approximately 82% of sales are in North and South America. The United States is our largest geographical market for all product lines. The remaining 18% of sales primarily originate in Europe and Africa.
Our filtration business primarily sells and distributes products and services on a direct basis. Our principal customers are oil companies who maintain substantial offshore drilling and production platforms. The well testing business also sells and distributes services to customers on a direct basis. Our customer base is comprised of onshore and offshore oil and gas production firms.
SEASONALITY
Much of the business in the oilfield services sector is impacted by weather conditions given that a significant portion of our customers' oil and gas production facilities are subject to natural disasters, such as hurricanes.
MINERALS & ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS
MINERAL RESERVES
We have reserves of sodium and calcium bentonite at various locations in the United States, including Wyoming, South Dakota, Montana and Alabama, and also in Australia and China. Through our investments in affiliates and joint ventures, we also have access to bentonite deposits in Egypt, India and Mexico. At 2005 consumption rates and product mix, we estimate the proven, assigned reserves of commercially usable sodium bentonite at approximately 17 years. We estimate the proven, assigned reserves of calcium bentonite at approximately 22 years in North America. While we believe, based upon our experience, that our reserve estimates are reasonable and our title and mining rights to our reserves are valid, we have not obtained any independent verification of such reserve estimates or such title or mining rights. We own or control the properties on which reserves are located through long-term leases, royalty agreements and patented and unpatented mining claims. A majority of our bentonite reserves are owned. All of the properties on which our reserves are located are either physically accessible for the purposes of mining and hauling or the cost of obtaining physical access would not be material.
To retain possessory rights in unpatented mining claims in North America, a fee of $100 per year for each unpatented mining claim is required. The validity of title to unpatented mining claims is dependent upon numerous factual matters. We believe that the unpatented mining claims that we own are in compliance with all applicable federal, state and local mining laws, rules and regulations. We are not aware of any material conflicts with other parties concerning our claims. From time to time, members of Congress and members of the executive branch of the federal government have proposed amendments to existing federal mining laws. The various amendments would have had a prospective effect on mining operations on federal lands and include, among other things, the imposition of royalty fees on the mining of unpatented claims, the elimination or restructuring of the patent system and an increase in fees for the maintenance of unpatented claims. To the extent that future proposals may result in the imposition of royalty fees on unpatented lands, the mining of our unpatented claims may become uneconomic and royalty rates for privately leased lands may be affected. We cannot predict the effect any potential amendments may have or whether or when any such amendments might be adopted.
We maintain a continuous program of worldwide exploration for additional reserves and attempt to acquire reserves sufficient to replenish our consumption each year, but we cannot assure that additional reserves will continue to become available.
We oversee all of our mining operations, including our exploration activity and securing the necessary state and federal mining permits.
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 are reserves which could be reasonably expected to be processed in existing plants. Unassigned reserves are reserves which will require additional expenditures for processing facilities. Conversion factor is the percentage of reserves that will be available for sale after processing.
We estimate that available supplies of other materials utilized in our minerals business are sufficient to meet our production requirements for the foreseeable future.
MINING AND PROCESSING
Bentonite is surface mined, generally with large earthmoving scrapers, and then loaded into trucks and off-highway-haul wagons for movement to processing plants. The mining and hauling of our clay is done by us and by independent contractors.
At the processing plants, bentonite is dried, crushed and sent through grinding mills, where it is sized to customer requirements, then chemically modified where needed and transferred to silos for automatic bagging or bulk shipment. Virtually all production is shipped as processed rather than stored for inventory.
PRODUCT DEVELOPMENT AND PATENTS
We work actively with customers in each of our major markets to develop commercial applications of specialized grades of bentonite. We maintain a research center and laboratory testing facilities in Arlington Heights, Illinois, and Birkenhead, England. When we perceive a need for a product that will accomplish a particular goal, we work to develop the product, research its marketability and study the feasibility of its production. We also co-develop products with customers, or others, as needs arise. Our development efforts emphasize markets with which we are familiar and products for which we believe there is a viable market.
We hold a number of U.S. and international patents covering the use of bentonite and products containing bentonite. We follow the practice of obtaining patents on new developments whenever feasible. However, we do not consider that any one or any combination of such patents is material to our businesses as a whole.
RESEARCH AND DEVELOPMENT
Our business segments share research and laboratory facilities adjacent to our corporate headquarters. Technological developments are shared among our subsidiaries, subject to license agreements where appropriate. Further information on research and development activities is included in our Notes to Consolidated Financial Statements contained in Item 8 of this report.
REGULATION AND ENVIRONMENTAL
We believe we are in material compliance with current, applicable regulations for surface mining. Since reclamation of exhausted mining sites has been a regular part of our surface mining operations for the past 35 years, maintaining compliance with current regulations has not had a material effect on mining costs. Reclamation costs are reflected in the prices of the bentonite sold.
The grinding and handling of dried clay is part of the production process, and, because these processes generate dust, our mineral processing plants are subject to applicable clean air standards (including Title V of the Clean Air Act). All of our plants are equipped with dust collection systems. We have not had, and do not presently anticipate, any significant regulatory problems in connection with our dust emission, though we expect ongoing expenditures for the maintenance of our dust collection systems and required annual fees.
Our operations are also subject to other federal, state, local and foreign laws and regulations relating to the environment and to health and safety matters. Certain of these laws and regulations provide for the imposition of substantial penalties for noncompliance. While the costs of compliance with, and penalties imposed under, these laws and regulations have historically not had a material adverse effect on us, future events, such as changes in or modified interpretations of existing laws and regulations, enforcement policies, or further investigation or evaluation of potential health hazards of certain products, may give rise to additional compliance and other costs that could have a material adverse effect on us.
TRANSPORTATION SEGMENT
We operate a long-haul trucking business and a freight brokerage business primarily for delivery of finished products throughout the continental United States. These services are provided to our subsidiaries as well as third-party customers. Through our transportation business, we are better able to control costs, maintain delivery schedules and assure equipment availability in the delivery of our products. In 2006, approximately 41% of the revenues of this operation involved services provided to our domestic minerals and environmental segments.
FOREIGN OPERATIONS AND EXPORT SALES
Approximately 31% of our 2006 net sales were to customers in countries outside North America. To enhance our overseas market presence, we maintain mineral processing plants in the United Kingdom, Spain, China, Australia, South Korea, Poland and Thailand, as well as a blending plant in Canada. Chartered vessels deliver large quantities of our bulk, dried sodium bentonite to the plants in the United Kingdom, Poland, Australia, Thailand and South Korea where it is processed and mixed with other clays and distributed throughout Europe and the Asia-Pacific region. In addition, we maintain a worldwide network of independent dealers, distributors and representatives to support sales and distribution.
We manufacture geosynthetic clay liners in the United Kingdom, Poland, China, South Korea, and India through our joint venture company Ashapura Volclay Limited. These international operations provide a cost-effective means of supplying the European and Asia-Pacific markets.
Our international operations are subject to the usual risks of doing business abroad, such as currency fluctuations and devaluation, restrictions on the transfer of funds, and import and export duties.
The Notes to Consolidated Financial Statements included in Item 8 of this report presents further details on our sales by geographic region. This Note is incorporated by reference for sales attributed to foreign operations and export sales from the United States.
EMPLOYEES
As of December 31, 2006, we employed 1,759 people in our global organization, 706 of whom were employed outside of the United States. Operating plants are adequately staffed, and no significant labor shortages are presently foreseen. Labor relations have been satisfactory.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any reports, statements and other information filed by the Company at the SEC's Public Reference Room at 100 F. Street N.E., Washington, D.C., 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains a website that contains reports, proxy and information statements and the operations of other information regarding issuers that file electronically with the SEC. Our filings are also available to the public at the website maintained by the SEC, www.sec.gov.
Our principal Internet address is www.amcol.com. Our annual, quarterly and current reports, and amendments to those reports, are available free of charge on www.amcol.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
CERTIFICATIONS
As required by the rules and regulations of the New York Stock Exchange (the "NYSE"), we delivered to the NYSE a certification executed by our Chief Executive Officer, Lawrence E. Washow, certifying that Mr. Washow was not aware of any violation by the Company of the NYSE's corporate governance listing standards as of May 12, 2006.
As required by the rules and regulations of the SEC, the Sarbanes-Oxley Act Section 302 certifications regarding the quality of our public disclosures are filed as exhibits to this Annual Report on Form 10-K.
ITEM 1A.
ITEM 1A. RISK FACTORS
Certain statements we make from time to time, including statements in the Management's Discussion and Analysis of Financial Condition and Results of Operation section hereafter, constitute "forward-looking statements" made in reliance upon the safe harbor contained in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements relating to our company or our operations that are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions, and statements relating to anticipated growth, acquisitions, levels of capital expenditures, future dividends, expansion into global markets and the development of new products. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our actual results, performance or achievements could differ materially from the results, performance or achievements expressed in, or implied by, these forward-looking statements as a result of various factors, including without limitation the following:
COMPETITION
Our businesses are very competitive. We believe competition is essentially a matter of product quality, price, delivery, service and technical support. Several of our competitors in the world market are larger and have substantially greater financial resources. If we fail to compete successfully based on these or other factors, we may lose customers or fail to recruit new customers and our business and future financial results could be materially and adversely affected.
RELIANCE ON METALCASTING AND CONSTRUCTION INDUSTRIES
Approximately 44% of our minerals segment's sales and 34% of our environmental segment's sales in 2006 were to the metalcasting and construction markets, respectively. The metalcasting and construction markets depend heavily upon the strength of the domestic and international economies. If these economies weaken, demand for products by the metalcasting and construction markets may decline and our business or future financial results may be adversely affected.
RELIANCE ON THE OIL AND GAS ACTIVITIES
Our oilfield services segment now represents in excess of 10% of consolidated revenues and approximately 19% of consolidated operating income. Oil and gas production activities are heavily influenced by the benchmark price of these commodities. In turn, both economic and political events can influence the benchmark price which may ultimately affect the revenue potential of our business.
INTEGRATION OF ACQUIRED BUSINESSES
We completed three business acquisitions in 2006 and another in January 2007. Acquisitions may continue to be an element of our growth strategy in the future. If actual integration costs are higher than amounts assumed, the profitability of acquired businesses is lower than amounts assumed, or we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, our future earnings may be lower than anticipated.
REGULATORY AND LEGAL MATTERS
Our operations are subject to various federal, state, local and foreign laws and regulations relating to the environmental and to health and safety matters. Substantial penalties may be imposed if we violate certain of these laws and regulations even if the violation was inadvertent or unintentional. If these laws or regulations are changed or interpreted differently in the future, it may become more difficult or expensive for us to comply. In addition, investigations or evaluations of our products by government agencies may require us to adopt additional safety measures or precautions. If our costs to comply with such laws and regulations in the future materially increase, our business and future financial results could be materially and adversely affected. We may also be subject to adverse litigation results in addition to increased compliance costs arising from future changes in laws and regulations that may negatively impact our operations and profits.
RISKS OF INTERNATIONAL EXPANSION
An important part of our business strategy is to expand internationally. We intend to seek acquisitions, joint ventures and strategic alliances globally. Sales and earnings from our overseas operations have increased considerably in recent years. In 2006, approximately 23% and 8% of consolidated net sales were from Europe and the Asia-Pacific regions, respectively. Approximately 43% of operating profit in 2006 was earned by our overseas businesses. We also recorded approximately $0.17 per diluted share for earnings, under the equity method of accounting, from investments in affiliate businesses. As we expand internationally, we will be subject to increased risks, which may include the following:
o currency exchange or price control laws; o currency translation adjustments; o political and economic instability; o unexpected changes in regulatory requirements; o tariffs and other trade barriers; o longer accounts receivable collection cycles; and o adverse tax consequences.
The above listed events could result in sudden, and potentially prolonged, changes in demand for our products. Also, we may have difficulty enforcing agreements and collecting accounts receivable through a foreign country's legal system.
OCEAN SHIPPING AND LOGISTICS
Bulk cargo shipping costs have been rising significantly due to greater demand from China. We rely on shipping bulk cargos of bentonite from the United States and China to customers, as well as our own subsidiaries. We may need to offset additional shipping costs with price increases to customers in order to maintain our profitability. Other factors in the United States that will potentially impact us are escalating costs of purchased raw materials derived from petrochemical stocks and increases in rail and long-haul freight rates. While we have been successful in attaining price increases in certain markets to offset some of these rising costs, there can be no assurance that we will be successful in continuing to achieve these price increases.
VOLATILITY OF STOCK PRICE
The stock market has been extremely volatile in recent years. These broad market fluctuations may adversely affect the market price of our common stock. In addition, factors such as the following may have a significant effect on the market price of our common stock:
o quarterly fluctuations in our financial results; o our introduction of new services or products; o announcements of acquisitions, strategic alliances or joint ventures by us, our customers or our competitors; o changes in analysts' recommendations regarding our common stock; and o general economic conditions.
There can be no assurance that the price of our common stock will increase in the future or be maintained at its recent levels.
ITEM 2.
ITEM 2. PROPERTIES
We operate the following principal plants, mines and other facilities, all of which are owned, except as noted below. We also have numerous other facilities which blend ADDITROL (R), package cat litter and chromite sand, warehouse products and serve as sales offices.
(1) Shared facilities between minerals and environmental segments. (2) Certain offices and facilities are leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are party to a number of lawsuits arising in the normal course of our business. We do not believe that any pending litigation will have a material adverse effect on our consolidated financial position or results of operations.
Our processing operations require permits from various governmental authorities. From time to time, we have been contacted by government agencies with respect to required permits or compliance with existing permits. While we have been notified of certain situations of non-compliance, management does not expect the fines or the cost of becoming compliant, if any, to be significant.
We have neither been nor expect to be assessed any tax shelter penalties by the United States Internal Revenue Service for tax shelter transactions that either the IRS deems abusive or have significant tax avoidance penalties.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF REGISTRANT
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
Our common stock trades on the New York Stock Exchange under the symbol "ACO." The following table sets forth, for the periods indicated, the high and low closing sale prices of the common stock, as reported by the New York Stock Exchange, and cash dividends declared per share.
We have paid cash dividends every year for 69 years. As of March 5, 2007, there were 7,225 holders of record of the common stock, including shares held in street name.
PURCHASES OF EQUITY SECURITIES
On May 13, 2004, we announced a share repurchase program for the repurchase of $10 million of our common stock in the open market. This program terminated on September 30, 2006 and was replaced with a share repurchase program that provides for the repurchase of up to $15 million of our common stock on the open market or in privately negotiated transactions. This new program terminates on November 10, 2008. The following table summarizes the repurchases made during the year under the terminated 2004 stock repurchase program. In 2006, we did not purchase any of our common stock under the currently authorized stock repurchase program.
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, 2006.
SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
Continued
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.
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 a diverse group of industrial and consumer product lines. The principal mineral that we utilize to generate revenues is bentonite. We own or lease bentonite reserves in the United States, Australia and China. Additionally, through our affiliates and joint ventures, we have access to bentonite reserves in Egypt, India and Mexico. Bentonite deposits have varying physical properties which require us to identify which markets our reserves can serve. We believe that our understanding of bentonite properties, mining methods, processing and application to markets are the core components of our longevity and future prospects.
We operate in five segments: minerals, environmental, oilfield services, transportation and corporate. Prior to the third quarter of 2006, we did not report our oilfield services business as a separate segment. This business was included as part of our environmental segment. In the third quarter of 2006, we reorganized how we view and manage our business. We began capturing discrete financial information for our oilfield services business and reporting it separately to management. As a result, commencing in the third quarter of 2006, we recognized oilfield services as a stand-alone segment, separate from our environmental segment. We have revised the segment information for prior periods to conform to this new presentation.
Both our minerals and environmental segments operate manufacturing facilities in North America, Europe, and Asia-Pacific regions. Our oilfield services segment operates principally in North America, Europe and Africa. Additionally, we have a transportation segment that performs trucking services for our domestic minerals and environmental businesses as well as third parties.
Our customers are engaged in varied end-markets and geographies. Customers in the minerals segment range from foundries that produce castings for automotive, industrial, and transportation equipment, including heavy-duty trucks and railroad cars, to producers of consumer goods, including cat box filler, cosmetics and detergents. The customers for our lining technologies and building materials products are predominantly engineering contractors. The oilfield services customer base is primarily comprised of oil and gas service or exploration companies. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year.
Approximately 69% of our revenue is generated in North America; consequently, the state of the U.S. economy impacts our revenues. Our fastest growing markets are in the Asia-Pacific and European regions, which have continued to outpace the United States in economic growth.
Sustainable, long-term profit growth is our primary objective. We employ a number of strategic initiatives to achieve this goal:
o Organic growth: The central component of our growth strategy is expansion of our product lines and market presence. We have a history of commitment to research and development and using this resource to bring innovative products to market. We believe this approach to growth offers the best probability of achieving our long-term goals at the lowest risk.
o Globalization: We have expanded our manufacturing and marketing organizations into Europe and Asia-Pacific over the last 40 years. This operating experience enables us to expand further into emerging markets. We see the significant opportunities in the Asia-Pacific region for expanding our revenues and earnings over the long-term as a number of markets we serve, such as metalcasting and lining technologies, are expected to grow. We expect to take advantage of these growth areas either through our wholly-owned subsidiaries or investments in affiliates and joint ventures.
o Mineral development: Bentonite is a component in a majority of the products we produce. Since it is a natural material, we must continually expand our reserve base to maintain a long-term business. Our goal is to add new reserves to replace the bentonite mined each year. Furthermore, we need to assure that new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization is committed to developing its global reserve base to meet these requirements.
o Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products. In 2006, we acquired a number of businesses for a total cost of approximately $63 million. A strong financial position will enable us to continue to acquire businesses which, in our assessment, are valued fairly and fit with our growth strategy.
There can be no assurance that we will achieve success in implementing any one or more of the strategic initiatives described above.
A number of risks will challenge us in meeting our long-term objectives. We describe certain risks, such as competition and our reliance on economically sensitive markets, under "Item 1A. Risk Factors" and "Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational corporation that manufactures and markets products in countries throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and do not use them for trading or speculative purposes.
EXCHANGE RATE SENSITIVITY
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the Euro, the British pound, and the Polish zloty. We also have significant exposure to changes in exchange rates between the British pound and the Euro and the Polish zloty and the Euro.
Our various currency exposures often offset each other, providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2006, we did not have any material foreign currency contracts outstanding.
INTEREST RATE SENSITIVITY
The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates for debt obligations. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The instruments' actual cash flows are denominated in U.S. dollars.
We periodically use interest rate swaps to manage interest rate risk on debt securities. These instruments allow us to change the characteristics of variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2006 and 2005, there were no interest rate swaps outstanding.
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
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information we are required to disclose in the reports we file or submit under the Exchange Act.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As provided for by current regulation, our evaluation did not include an assessment of the internal control over financial reporting of the three businesses we acquired in 2006. Based on this evaluation, we concluded that our internal control over financial reporting was effective as of December 31, 2006.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our independent registered public accounting firm has audited our assessment of the effectiveness of our internal control over financial reporting as of the end of the period covered by this report as stated in their report, which appears in Part IV of this Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting during the year ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference.
Information regarding our executive officers is included under a separate caption in Part I hereof in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
We have adopted a Code of Business Conduct and Ethics (the "Code") that applies to our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions, as well as other employees. The Code, our Corporate Governance Guidelines and the charters of our Audit Committee, Compensation Committee and Nominating and Governance Committee are publicly available on our website at www.amcol.com and are available in print, free of charge, to any shareholder upon request to our Corporate Secretary at AMCOL International Corporation, One North Arlington, 1500 West Shure Drive, Suite 500, Arlington Heights, Illinois 60004-7803. If we make any substantive amendments to the Code or grant any waiver, including any implicit waiver, from a provision of the Code to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K in accordance with applicable rules and regulations.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the above is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference.
Information regarding our securities authorized for issuance under equity compensation plans is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the above is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) 1. See Index to Financial Statements and Financial Statement Schedule below.
2. See Financial Statements and Index to Financial Statement Schedule below.
Such Financial Statements and Schedule are incorporated herein by reference.
3. See Index to Exhibits immediately following the signature page.
(b) See Index to Exhibits immediately following the signature page.
(c) See Index to Financial Statements and Financial Statement Schedule below.
ITEM 15(a) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
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 of AMCOL International Corporation
We have audited the accompanying consolidated balance sheet of AMCOL International Corporation and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMCOL International Corporation at December 31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 13 to the consolidated financial statements, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of AMCOL International Corporation's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2007 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP - ---------------------- Chicago, Illinois March 16, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------
The Board of Directors and Stockholders of AMCOL International Corporation
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that AMCOL International Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AMCOL International Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the three businesses acquired during the year ended December 31, 2006, which are included in the 2006 consolidated financial statements of AMCOL International Corporation and subsidiaries and constituted $64,052 and $62,063 of total and net assets, respectively, as of December 31, 2006 and $8,536 and $1,737 of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of AMCOL International Corporation also did not include an evaluation of the internal control over financial reporting of these businesses.
In our opinion, management's assessment that AMCOL International Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, AMCOL International Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2006 consolidated financial statements of AMCOL International Corporation and subsidiaries and our report dated March 16, 2007, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP - ---------------------- Chicago, Illinois March 16, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------
The Board of Directors and Stockholders AMCOL International Corporation:
We have audited the accompanying consolidated balance sheet of AMCOL International Corporation and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMCOL International Corporation and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
KPMG LLP
Chicago, Illinois March 16, 2007
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
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
New Accounting Standards
As discussed later in this Note, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share Based Payment effective January 1, 2006.
We adopted Emerging Issues Task Force ("EITF") Issue No. 04-6, Accounting for Stripping Costs Incurred during Production in the Mining Industry, effective January 1, 2006. This guidance requires that, once production has commenced from a mine, production-related stripping costs be accounted for as a current cost of production. It also requires that these costs be included within inventories to the extent that minerals extracted from the mine are still on hand at each period end. Issue No. 04-6 does not address the accounting for stripping costs incurred in the pre-production phase of a mine site. These costs are deferred and amortized on a units-of-production basis over the estimated life of each mine site. Our adoption of this guidance did not have a material impact on our consolidated financial statements. Deferred stripping costs, which had been reported within inventory in periods prior to January 1, 2006, have been reclassified into prepaid expenses.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15, 2006 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are currently evaluating the impact this standard may have on our financial statements when we adopt it for our fiscal year beginning January 1, 2007.
In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not change existing guidance as to whether or not an instrument be carried at fair value but rather eliminates inconsistencies found in various prior accounting guidance. The provisions of SFAS 157 are effective for our fiscal year beginning January 1, 2008 with earlier adoption permitted for our fiscal year beginning January 1, 2007. We do not believe our adoption of this standard in 2007 will have a material impact on our financial statements.
In September 2006, the FASB issued SFAS 158, Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires the recognition, in our December 2006 balance sheet, of the underfunded status of our defined benefit and supplemental pension plans as a liability, measured as the difference between the fair value of the plan assets and the projected benefit obligation. Upon adoption, SFAS 158 also requires the recognition of previously unrecognized actuarial gains and losses and prior service costs within Accumulated other comprehensive income, net of tax. Our Notes to Consolidated Financial Statements include a table illustrating the effect the adoption of this standard had on our balance sheet as of December 31, 2006. SFAS 158 also requires that we measure the funded status of our plans as of our year-end balance sheet date (i.e. December 31st); however, this requirement is not mandatory until December 31, 2008. Thus, we continue to measure our plan's funded status as of October 1st of each year.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. SAB 108 is effective as of the end of our 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. Our adoption of SAB 108 in 2006 did not have an impact on our financial statements.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Segments
We operate in four principal segments with intersegment shipping revenues being eliminated in the corporate segment. The composition of consolidated revenues by segment is as follows:
PERCENTAGE OF NET SALES -------------------------------------- 2006 2005 2004 ---------- ---------- ---------- Minerals 52% 55% 57% Environmental 33% 32% 32% Oilfield services 10% 7% 5% Transportation 8% 9% 9% Intersegment shipping -3% -3% -3% ---------- ---------- ---------- 100% 100% 100% ========== ========== ==========
Further descriptions of our products, principal markets and the relative significance of segment operations within AMCOL International Corporation (the Company) are included in Note 3.
Principles of Consolidation
The consolidated financial statements include the accounts of our domestic and foreign subsidiaries. We consolidate all subsidiaries which are greater than 50% owned by us. Our ownership interests in the Mexican, Indian, Japanese and Egyptian ventures range between 20% and 50%. Accordingly, these investments are accounted for using the equity method. All intercompany balances and transactions, including profits on inventories, have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Translation of Foreign Currencies
The assets and liabilities of subsidiaries located outside of the United States are translated into U.S. dollars at the rates of exchange at the balance sheet dates. The statements of operations are translated at the weighted average rates during the periods. Foreign exchange translation adjustments are accumulated as a separate component of stockholders' equity, while foreign currency transaction gains or losses are included in income.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) or moving average methods. Exploration costs are expensed as incurred.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Property, Plant, Equipment, and Mineral Rights and Reserves
Property, plant, equipment, and mineral rights and reserves are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method for substantially all of the assets. Certain other assets, primarily field equipment, are depreciated on the units-of-production method. Mineral rights and reserves are depleted using the units-of-production method.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Goodwill is tested annually (or more frequently if impairment indicators arise) for impairment as of October 1st of each year. Other intangibles, including trademarks and non-compete agreements, are amortized on the straight-line method over the expected periods to be benefited, which extend up to 10 years.
Impairment of Long-Lived Assets
We review the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs of disposal.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We classify interest and penalties associated with income taxes within the income tax line item of our consolidated statement of operations.
Revenue Recognition
Product revenue is recognized when products are shipped to customers. Allowances for discounts, rebates, and estimated returns are recorded at the time of sale and are reported as a reduction in revenue. We generate some sales through independent, third-party representatives. These sales are recorded in revenues, and the commission compensation paid to the representatives is recorded in general, selling and administrative expenses.
Transportation segment revenue for freight delivery services is recognized when the service is provided. Amounts payable for purchased transportation, commissions and insurance are accrued when the related revenue is recognized.
Service and rental revenues, primarily earned by the environmental and oilfield services segments, respectively, each comprise less than 10% of consolidated net sales. Service and rental revenues are recognized in the period such services are performed or the period in which customers utilize the rented assets.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Freight and sales taxes
We report amounts charged to customers for shipping and handling fees as revenues and we report amounts incurred for these costs within cost of sales in the consolidated statements of operations (i.e. gross presentation with revenues and cost of sales). Also, we report amounts charged to customers for sales taxes and the related costs incurred for sales tax remittances to governmental agencies within net sales in the consolidated statement of operations (i.e. net presentation within revenues).
Product Liability & Warranty Expenses
We report expenses incurred for warranty and product costs in general, selling and administrative expenses in the consolidated statements of operations. Our warranty accrual is based on known warranty issues as of the balance sheet date as well as a reserve for unidentified claims based on historical experience.
Land Reclamation
We mine various minerals using a surface-mining process that requires the removal of overburden. We are obligated to restore the land comprising each mining site upon completion of mining activity. We recognize this liability for land reclamation based on the estimated fair value of the obligation. The obligation is adjusted to reflect the passage of time and changes in estimated future cash outflows.
Research and Development
Research and development costs are included in general, selling and administrative expenses.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding after consideration of the dilutive effect of stock options and restricted stock. A reconciliation between the shares used to compute basic and diluted earnings per share follows:
Stock-Based Compensation
Prior to 2003, we accounted for fixed plan stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in operations prior to 2003, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.
Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and elected to apply these provisions prospectively, in accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123, to all employee awards granted, modified, or settled after January 1, 2003. Awards granted after 2002 vest over three years.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Effective January 1, 2006, we adopted SFAS 123(R), Share Based Payment, under the modified prospective transition method. This adoption did not significantly affect our statement of operations, balance sheet or statement of comprehensive income for 2006. SFAS 123(R) does require, however, that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow rather than as an operating cash flow in the statements of cash flows as required prior to January 1, 2006; this has the effect of reducing net operating cash flows and increasing net financing cash flows for all periods after December 31, 2005. For the year ended December 31, 2006, this amount was $1,955. While we cannot estimate what those amounts will be in the future (because they depend on, amongst other factors, when employees exercise options), the amount of operating cash flows recognized for such tax deductions in each year ending December 31, 2005 and 2004 (and hence the amount that would have been reclassified as a cash inflow from financing activities if SFAS 123(R) had been applicable in each prior period) was $1,586 and $1,887, respectively.
Derivative Instruments and Hedging Activities
Occasionally, we use derivative financial instruments (principally interest rate swaps or options) to manage exposure to changes in interest rates. We do not use derivative instruments for trading or other speculative purposes, and we did not have any material derivative financial instruments outstanding at either December 31, 2006 or 2005.
Reclassifications and Revisions
Certain items in the prior years consolidated financial statements contained herein and notes thereto have been reclassified to conform with the consolidated financial statement presentation for 2006. These reclassifications did not have a material impact on our financial statements.
(2) DISCONTINUED OPERATIONS
In 2004, we filed an amended tax return seeking a refund of state taxes paid on the sale of our absorbent polymers segment that occurred in 2000. No amounts for this refund were reflected in the financial statements in 2004. In June 2005, we successfully settled this claim for $7,800 and recorded a net income tax receivable of $5,255, accrued professional fees of $500 and a gain on the sale of discontinued operations of $4,755.
(3) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
We operate in five business segments. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, and well testing data services for the oil and gas industry. The transportation segment includes a long-haul trucking business and a freight brokerage business that provides services to our subsidiaries as well as third-party customers. Intersegment shipping revenues are eliminated in our corporate segment.
We identify segments based on management responsibility and the nature of the business activities of each component of the Company. Intersegment sales are insignificant, other than intersegment shipping. We measure segment profit based on operating profit, and the costs deducted to arrive at operating profit do not include interest or income taxes.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Segment assets are those assets used in the operations of that segment. Corporate assets include cash, corporate leasehold improvements, the nanocomposite investment and other miscellaneous equipment.
The following table sets forth certain financial information by business segment as of and for the years ended December 31, 2006, 2005 and 2004:
Continued...
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
The following table sets forth certain geographic financial information by business segment as of and for the years ended December 31, 2006, 2005 and 2004. Geographic revenues and operating profit are determined based on origin rather than destination:
Revenues by product line for each fiscal year are as follows:
(4) BALANCE SHEET RELATED INFORMATION
The allowance for doubtful accounts as of and the activity for the years ended December 31 was as follows:
The above allowance is based on historical bad debt experience, an analysis of aged accounts and a consideration of specific accounts.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Inventories at December 31 consisted of:
Included within Other raw material, container and supplies inventories in the table above is our reserve for slow moving and obsolete inventory. The balance of this reserve as of and the activity for the years ended December 31 was as follows:
The following table presents our reclamation liability at the end of and changes during each of the years presented:
Accrued liabilities at December 31 consisted of:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
The following table presents our warranty liability at the end of and changes during each of the years presented:
Accumulated other comprehensive income at December 31 was comprised of the following components:
(5) PROPERTY, PLANT, EQUIPMENT AND MINERAL RIGHTS AND RESERVES
Property, plant, equipment and mineral rights and reserves consisted of the following:
The range of useful lives to depreciate plant and equipment is as follows:
Buildings and improvements 5-45 years Machinery and equipment 1-20 years
Depreciation and depletion were charged to income as follows:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(6) GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill by segment and the activity occurring in the past two fiscal years is as follows:
Annually, we evaluate the goodwill attributable to each reporting unit for impairment. In 2006, we changed this annual testing date to October 1st from December 31st in order for us to complete the required testing prior to our year-end closing activities. This change did not delay, accelerate or avoid an impairment charge. Accordingly, we believe that this accounting change is preferable in our circumstances. This change had no impact on our consolidated financial statements for any period presented. For the years above, we concluded that there was no goodwill impairment. If indicators of impairment are deemed to be present, we would perform an interim impairment test and any resulting impairment loss would be charged to expense in the period identified.
Intangible assets were as follows:
Intangible assets are being amortized primarily on a straight-line basis over their estimated useful lives of 3 to 20 years. For the years above, there was no impairment related to the intangible assets. Amortization expense on intangible assets for each of the years ending December 31, 2006 and 2005 was $1,469 and $1,253, respectively. We estimate amortization expense of intangible assets for the future years ending December 31 will approximate the following amounts:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
AMOUNT -------- 2007 $ 3,294 2008 2,513 2009 2,379 2010 1,850 2011 1,633
(7) INVESTMENTS IN JOINT VENTURES
Information about our investments in affiliates and joint ventures at December 31, 2006 is as follows:
Only our investment in Ashapura Minechem Limited is publicly traded on the Bombay Stock Exchange Limited. In 2006, our ownership percentage in this investment experienced a net decrease from 22% to 21% due to the investee's issuance of additional stock offset by additional shares that we purchased. Significant information regarding each investee's financial and operating performance is in the following table.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
We record the majority of our equity in the earnings of our investments in affiliates and joint ventures on a one quarter lag. However, the amounts for Ashapura Minechem Limited's assets and liabilities in the above table are as at March 31, 2005 for 2005 as this was the latest information available for that fiscal year.
(8) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31 was comprised of the following:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
For each of the years ended December 31 in the table below, domestic and foreign components of income from continuing operations before income taxes and equity in income of affiliates and joint ventures are:
The components of the provision for income taxes attributable to income from continuing operations before income taxes and income from affiliates and of joint ventures for the years ended December 31 consisted of:
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of December 31 were as follows:
We believe it is more likely than not that the deferred tax assets above will be realized in the normal course of business.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
The following analysis reconciles the U.S. statutory federal income tax rate to the effective tax rates related to income from continuing operations before income taxes and equity income of affiliates and joint ventures:
Tax on reinvested earnings
We have not provided for the United States federal income and foreign income withholding taxes on approximately $69,970 of undistributed earnings from international subsidiaries as of December 31, 2006 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce or eliminate the resulting income tax liability in the United States.
Tax holidays
We benefit from tax holidays in both Poland and Thailand as a result of our locating and investing in special economic zones in each country. In 2006, these tax holidays resulted in a $1,508 reduction in income tax expense and a $0.05 benefit to diluted earnings per share.
Our agreement with the Polish tax authorities makes us eligible, based on certain terms and conditions, for a tax holiday exemption for all income tax activities through 2009 and a 50% exemption in 2010, and we have enjoyed tax holidays through 2006. Based on recent events and circumstances, we are evaluating whether we will be able to take advantage of these tax holidays in future years and have not yet concluded on our ability to do so. We continue to seek tax concessions when applicable.
Our agreement with the Thai tax authorities provides for tax holidays on several investments. The most significant tax exemption is on all income from manufacturing operations (distributed goods are still subject to taxation) related to our initial investment. These initial manufacturing activities were exempt through December 31, 2005 and are taxable at 50% in years 2006 through 2010. We attempt to modify and obtain tax concessions when applicable.
Results of recent IRS audits
In July 2006, the United States Internal Revenue Service (IRS) concluded its audit of amended tax returns we filed in 2004, resulting in refunds and interest of $12,636, which we collected in September 2006. As a result of the conclusion of this audit, we recognized additional tax benefits which were not recorded in our financial statements prior to July 2006. Specifically, we recorded the following: a benefit from discontinued operations of $585, a reduction to our income tax expense of $3,412, and $661 of general, selling and administrative expense for professional advisor fees that were contingent upon settlement of the amended tax returns.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
NOLs and credit carryforwards
We have recorded deferred tax assets related to U.S. foreign tax credit carryforwards of approximately $1,021 which expire beginning 2016.
Adoption of FIN 48
As previously mentioned, the FASB issued FIN 48 in 2006 to clarify the accounting for uncertainty in income taxes. The provisions of FIN 48 are effective for our calendar year beginning January 1, 2007. We are currently evaluating the provisions of FIN 48 and can not yet estimate the impact it will have on our financial statements.
(9) LONG-TERM DEBT
Long-term debt consisted of the following:
We have a revolving credit agreement that provides a committed $120,000 revolving line of credit maturing on October 31, 2010. Effective March 9, 2007 we amended this revolving credit agreement to increase the borrowing capacity from $120,000 to $150,000 and extend the maturity to April 1, 2012; all other substantive terms and conditions remained the same. As of December 31, 2006, there was $21,756 in borrowing capacity available under the line of credit. The revolving credit agreement is a multi-currency arrangement that allows us to borrow certain foreign currencies at an adjusted LIBOR rate plus .50% to 1.125%, depending upon the amount of the credit line used and certain capitalization ratios. The facility requires certain covenants to be met, such as specific amounts of net worth, and limits our ability to make additional borrowings and guarantees. We were in compliance with these covenants at December 31, 2006. The borrowings under this revolving credit line at December 31, 2006 carried an average interest rate of 5.85%.
We also have an uncommitted, short-term credit facility maturing on November 15, 2008 that allows for maximum borrowings of $12,000, of which $6,695 was outstanding as of December 31, 2006 at an interest rate of 6.09%.
Maturities of long-term debt outstanding at December 31, 2006, were as follows:
The estimated fair value of the above borrowings at December 31, 2006, was approximately equal to their carrying amounts based on discounting future cash payments using current market interest rates for loans with similar terms and maturities.
At December 31, 2006 and 2005, we had outstanding standby letters of credit of approximately $17,700 and $14,200, respectively. These letters of credit typically serve to guarantee the Company's performance of its obligations related to land reclamation and workers' compensation claims. The accompanying consolidated balance sheets as of December 31, 2006 and 2005 include amounts accrued for the estimated costs of obligations related to land reclamation and workers' compensation claims.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(10) ACQUISITIONS
On November 10, 2006, our subsidiary, CETCO Oilfield Services Company, acquired substantially all of the net assets of Nitrogen Specialty Company, LLC ("NSC") to complement the filtration, well testing and other services that our oilfield segment currently provides. NSC provides nitrogen pumping, nitrogen delivery and other related services in the oil and gas pipeline, petrochemical and refining industries. We purchased the business for $30,736 and have preliminary allocated the purchase price amongst the assets acquired and liabilities assumed as follows:
AT NOVEMBER 10, --------------- Cash $ 88 Other current assets 3,373 Property, plant and equipment 8,450 Intangible assets 12,500 Goodwill 7,120 Other long term assets 4 --------------- Total assets acquired 31,535 Current liabilities 799 --------------- Total liabilities assumed 799 --------------- Net assets acquired $ 30,736 ===============
We expect to deduct the full amount of goodwill from taxable income in accordance with tax regulations. The following table shows the intangible assets acquired and the weighted average amortization period for each class of intangible asset acquired:
AT NOVEMBER 10, AMORTIZATION 2006 PERIOD (YEARS) --------------- --------------- Customer related assets $ 10,700 12 Non-compete agreements 1,550 3 Trademarks 250 4 --------------- Total $ 12,500 11 ===============
The allocation of the purchase price has not been finalized as we are still determining the fair value of the assets acquired and liabilities assumed. Moreover, $3,706 of additional purchase price could be paid in the future, which would result in additional goodwill, as it is contingent upon the satisfaction of certain representations and warranties made by the former owners. These amounts have been deposited into an escrow account and are reflected as restricted cash, substantially all of which is classified within other assets in our consolidated balance sheet at December 31, 2006.
Our results of operations for the year ending December 31, 2006 include the results of NSC from the acquisition date. The table below presents our unaudited, pro forma, combined results of operations as if the acquisition of NSC had occurred at the beginning of each year presented. These results are not necessarily indicative of the combined results that would have occurred had the acquisition taken place at the beginning of the periods presented, nor are they necessarily indicative of future results.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
In addition, we completed several acquisitions during 2006, 2005 and 2004 which were immaterial to our financial statements. The acquisitions in these years, individually and in aggregate, did not materially affect our operating results or financial position. Summarized information related to these acquisitions is as follows:
(11) MARKET RISKS AND FINANCIAL INSTRUMENTS
As a multinational corporation that manufactures and markets products in countries throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and not for trading or speculative purposes.
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the Euro, the British pound and the Polish zloty. We also have significant exposure to changes in exchange rates between the British pound and the Euro as well as between the Polish zloty and the Euro.
Our various currency exposures often offset each other, providing natural hedges against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2006 and 2005, the notional amount and fair value foreign currency contracts outstanding was not material.
We periodically use interest rate swaps to manage interest rate risk on debt securities. These instruments allow us to change variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2006 and 2005, there were no interest rate swaps outstanding.
We are exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by our policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings.
We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising our customer base. We believe our allowance for doubtful accounts is sufficient to cover customer credit risks. Our accounts receivable financial instruments are carried at amounts that approximate fair value.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(12) LEASES
We have several noncancelable leases for railroad cars, trailers, computer software, office equipment, certain automobiles, and office and plant facilities, including three domestic facilities which are also sublet to third parties. Total rent expense under operating lease agreements was approximately $5,923, $4,540, and $3,945 in 2006, 2005 and 2004, respectively.
The following is a schedule of future minimum lease payments for operating leases (with initial terms in excess of one year) and related sublease income as of December 31, 2006:
(13) EMPLOYEE BENEFIT PLANS
Defined benefit pension plan
We have a noncontributory pension plan covering substantially all of our domestic employees for domestic employees hired before January 1, 2004. The benefits are based upon years of service and qualifying compensation. Our funding is calculated using the actuarially determined unit credit cost method. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
The following tables set forth our pension obligations at December 31:
Pension cost for each of the following years was comprised of:
The following table summarizes the assumptions used in determining the pension obligation at December 31:
Each year, we conduct our valuation of the pension benefit plan as of October 1st. We expect to contribute $1,000 to the Plan in 2007. The accumulated benefit obligation (ABO) was $29,790 and $29,887 at December 31, 2006 and 2005, respectively.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Our Plan assets at December 31 for each year below, by asset category, are as follows:
We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. The investment objectives emphasize maximizing returns consistent with ensuring that sufficient assets are available to meet liabilities, and minimizing corporate cash contributions. The Plan's assets are managed so as to include investments that balance income and capital appreciation.
The Plan has a target range for equity securities of between 60% and 75%. This allocation takes into account factors such as the average age of employees covered by the Plan (benefit obligations) as well as overall market conditions. Interim portfolio reviews result in investment allocations being evaluated at least twice a year by the Pension Committee and rebalancing takes place as needed. Equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalizations. Debt securities include both government and corporate investment vehicles. These include a series of laddered debt securities as well as bond funds.
Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term rate of return for plan assets is established via a building block approach with proper consideration of diversification and rebalancing.
The estimated future benefit payments from the defined benefit plan, reflecting expected future service, as appropriate, are presented in the following table:
PER YEAR ------------ 2007 $ 1,113 2008 1,239 2009 1,308 2010 1,415 2011 1,539 2012 through 2016 10,726 ------------ Total $ 17,340 ============
Supplemental pension plan
In addition to the qualified plan, we sponsor a supplementary pension plan (SERP) that provides benefits in excess of qualified plan limitations for certain employees. The projected benefit obligation for this plan was $6,887 and $7,155 at December 31, 2006 and 2005, respectively. Also, we have invested assets for the benefit of the employees covered by the supplemental pension plan in the event that there is a change in control.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Adoption of SFAS 158
As previously mentioned, the FASB issued SFAS 158 in September 2006. This pronouncement requires us to recognize the funded status of our benefit plans as measured by the difference between plan assets at fair value and the projected benefit obligation in the balance sheet. The offset of recognizing the funded status is recorded in accumulated other comprehensive income within stockholders' equity. The following table shows the effect, excluding taxes, of adopting SFAS 158 on our balance sheet at December 31, 2006 by individual balance sheet classification:
The following table shows the amounts included within accumulated other comprehensive income as of December 31, 2006 that have not yet been recognized as components of net periodic benefit cost and the amounts expected to be amortized in the next fiscal year:
Defined contribution plan
Employees hired after December 31, 2003 do not participate in our defined benefit plan. Instead, they participate in a defined contribution plan whereby we make a retirement contribution into the employee's savings plan equal to 3% of their compensation. Under this defined contribution plan, we made total cash contributions of $505, $312 and $148 into employees' savings accounts in 2006, 2005 and 2004, respectively.
Savings plan
We also have a savings plan for our U.S. personnel. In 2006, we made a contribution in an amount equal to an employee's contributions up to a maximum of 4% of the employee's annual earnings. Company contributions are made using Company stock purchased in the open market. Our contributions under the savings plan were $1,937 in 2006, $1,529 in 2005 and $1,440 in 2004.
Other
We also have a deferred compensation plan and a 401(k) restoration plan for our executives.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(14) STOCK OPTION PLANS
For purposes of calculating compensation cost, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value calculation included the following weighted average assumptions for grants made in each of the following years:
The 1983, 1987 and 1993 Plans
We previously granted incentive and nonqualified stock options to our directors, officers and key employees under the 1983 Incentive Stock Option Plan, 1993 Stock Plan and 1987 Nonqualified Stock Option Plan. Options awarded under these plans were granted with an exercise price equal to the fair market value of the underlying common stock at the time of grant. The options expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee, or a change in control of the Company.
These plans expired as of December 31, 2000, though options that were granted prior to expiration of the plans continue to be valid until the individual option grants expire. Changes in options outstanding are summarized as follows:
1998 Long-Term Incentive Plan
We reserved 3,900,000 shares of our common stock for issuance to our officers, directors and key employees. This plan provides for the award of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and phantom stock. Different terms and conditions apply to each form of award made under the plan. Awards granted since 2003 vest ratably over a three year period and expire 6 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Options awarded under these plans prior to 2003 generally vest 40% after two years and continued to vest at the rate of 20% per year for each year thereafter, until they are fully vested. These options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company.
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Changes in options outstanding are summarized as follows:
Restricted Stock
On May 22, 2003, we awarded 141,000 shares of restricted stock to six officers. Restricted stock awards are independent of option grants and are subject to restrictions considered appropriate by the Compensation Committee of the Board of Directors. Restricted stock has the same cash dividend and voting rights as other common stock. The cost of the awards, determined to be the fair market value of the shares at the date of the grant, is expensed ratably over the period the restrictions lapse. Total compensation expense of $921 related to this grant was recorded over the three year period from the date of grant.
2006 Long-Term Incentive Plan
On May 11, 2006, our shareholders approved the AMCOL International Corporation 2006 Long-Term Incentive Plan. This plan permits a total of 1,500,000 shares of AMCOL common stock to be awarded to eligible directors and employees through the use of nonqualifed stock options, incentive stock options, restricted stock or restricted stock units, and stock appreciation rights. Different terms and conditions apply to each form of award made under the plan. Awards of stock options have a six year life from the date of grant and vest ratably over a three year period from the date of grant. The Board of Directors may amend the plan at any time. The plan will automatically terminate on May 12, 2016. During 2006, no awards under this plan were granted.
All Stock Option Plans
The following table summarizes information about stock options outstanding and exercisable at December 31, 2006:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(15) CONTINGENCIES
The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial statements.
(16) QUARTERLY RESULTS (UNAUDITED)
Unaudited summarized results for each quarter of the last two years are as follows:
AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
(A) Earnings per share (EPS) for each quarter is computed using the weighted-average number of shares outstanding during the quarter, while EPS for the year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the EPS for each of the four quarters may not equal the EPS for the year.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2007
AMCOL INTERNATIONAL CORPORATION
By: /s/ Lawrence E. Washow ------------------------------------- Lawrence E. Washow President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ John Hughes March 16, 2007 - ------------------------------------- John Hughes Chairman of the Board and Director
/s/ Lawrence E. Washow March 16, 2007 - ------------------------------------- Lawrence E. Washow President and Chief Executive Officer and Director
/s/ Gary L. Castagna March 16, 2007 - ------------------------------------- Gary L. Castagna Senior Vice President and Chief Financial Officer; Treasurer and Chief Accounting Officer
/s/ Arthur Brown March 16, 2007 - ------------------------------------- Arthur Brown Director
/s/ Daniel P. Casey March 16, 2007 - ------------------------------------- Daniel P. Casey Director
/s/ Jay D. Proops March 16, 2007 - ------------------------------------- Jay D. Proops Director
/s/ Clarence O. Redman March 16, 2007 - ------------------------------------- Clarence O. Redman Director
/s/ Dale E. Stahl March 16, 2007 - ------------------------------------- Dale E. Stahl Director
/s/ Audrey L. Weaver March 16, 2007 - ------------------------------------- Audrey L. Weaver Director
/s/ Paul C. Weaver March 16, 2007 - ------------------------------------- Paul C. Weaver Director
INDEX TO EXHIBITS
EXHIBIT NUMBER - ------- 3.1 Restated Certificate of Incorporation of the Company (1), as amended (2), as amended (3) 3.2 Bylaws of the Company (2) 4 Article Four of the Company's Restated Certificate of Incorporation (1), as amended (3) 10.1 Lease Agreement for office space dated September 29, 1986, between the Company and American National Bank and Trust Company of Chicago (4); First Amendment dated June 2, 1994 (5); Second Amendment dated June 2, 1997 (6) 10.2 AMCOL International Corporation 1987 Non-Qualified Stock Option Plan (7); as amended (8) 10.3 AMCOL International Corporation Dividend Reinvestment and Stock Purchase Plan (9); as amended (8) 10.4 AMCOL International Corporation 1993 Stock Plan, as amended and restated* (2) 10.5 AMCOL International Corporation 1998 Long-Term Incentive Plan (10), as amended* (11) 10.6 AMCOL International Corporation 2006 Long-Term Incentive Plan* (12) 10.7 AMCOL International Corporation Annual Cash Incentive Plan* (12) 10.8 AMCOL International Corporation Discretionary Cash Incentive Plan* (12) 10.9 Employment Agreement effective as of March 24, 2006 by and between Registrant and Gary D. Morrison* (13) 10.10 Employment Agreement effective as of March 24, 2006 by and between Registrant and Gary Castagna* (13) 10.11 Employment Agreement effective as of March 24, 2006 by and between Registrant and Ryan F. McKendrick* (13) 10.12 Employment Agreement effective as of March 24, 2006 by and between Registrant and Lawrence E. Washow* (13) 10.13 A written description of compensation for the Board of Directors of the Company is set forth under the caption "Director Compensation" in the definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to the Company's shareholders in connection with the Annual Meeting of Shareholders to be held on May 10, 2007, and is hereby incorporated by reference.* 10.14 Credit Agreement by and among AMCOL International Corporation and Harris Trust and Savings Bank, individually and as agent, Wells Fargo Bank, N.A., Bank of America N.A. and the Northern Trust Company dated October 31, 2003 (14), as amended (15) 10.15 Asset Purchase Agreement dated as of November 10, 2006 by and among CETCO Oilfield Services Company and Nitrogen Specialty Company, L.L.C., together with its members (16) 18 Letter regarding change in Accounting Principles 21 AMCOL International Corporation Subsidiary Listing 23.1 Consent of Independent Registered Public Accounting Firm 23.2 Consent of former Independent Registered Public Accounting Firm 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350
- ---------- (1) Exhibit is incorporated by reference to the Registrant's Form S-3 filed with the Securities and Exchange Commission on September 15, 1993. (2) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1995. (3) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1998. (4) Exhibit is incorporated by reference to the Registrant's Form 10 filed with the Securities and Exchange Commission on July 27, 1987. (5) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1994. (6) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1997. (7) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1988. (8) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1993. (9) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1992. (10) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-56017) filed with the Securities and Exchange Commission on June 4, 1998. (11) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-68664) filed with the Securities and Exchange Commission on August 30, 2001. (12) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on May 12, 2006. (13) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on March 29, 2006. (14) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on November 15, 2005. (15) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on June 19, 2006. (16) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on November 14, 2006.
*Management compensatory plan or arrangement