10-Q 1 v074027_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2007 ------------------------------------------------- or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ---------------------------- Commission file number 0-15661 -------------------------------------------------------- AMCOL INTERNATIONAL CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-0724340 -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1500 West Shure Drive, Suite 500, Arlington Heights, Illinois 60004-7803 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (847) 394-8730 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 23, 2007 ------------------------------------- ------------------------------------ (Common stock, $.01 par value) 30,114,686 Shares 1 AMCOL INTERNATIONAL CORPORATION INDEX Page No. Part I - Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets - March 31, 2007 and December 31, 2006 3 Condensed Consolidated Statements of Operations - three months ended March 31, 2007 and 2006 5 Condensed Consolidated Statements of Comprehensive Income - three months ended March 31, 2007 and 2006 6 Condensed Consolidated Statements of Cash Flows - three months ended March 31, 2007 and 2006 7 Notes to Condensed Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 Quantitative and Qualitative Disclosures About Market Risk 24 Item 4 Controls and Procedures 24 Part II - Other Information Item 1A Risk Factors 25 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 25 Item 6 Exhibits 25 2 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) Item 1. Financial Statements
March 31, December 31, ASSETS 2007 2006 --------------------------------------------------------------- ----------- ----------- (unaudited) * Current assets: Cash and cash equivalents $ 23,844 $ 17,805 Accounts receivable, net 141,850 133,432 Inventories 87,219 84,612 Prepaid expenses 10,159 10,142 Deferred income taxes 4,551 4,648 Other 761 1,045 ----------- ----------- Total current assets 268,384 251,684 ----------- ----------- Investment in and advances to affiliates and joint ventures 35,512 31,049 ----------- ----------- Property, plant, equipment, and mineral rights and reserves: Land and mineral rights 17,895 17,428 Depreciable assets 315,787 305,013 ----------- ----------- 333,682 322,441 Less: accumulated depreciation 187,311 181,669 ----------- ----------- 146,371 140,772 ----------- ----------- Other assets: Goodwill 50,607 40,341 Intangible assets, net 39,190 25,611 Deferred income taxes 7,999 6,643 Other assets 17,472 15,124 ----------- ----------- 115,268 87,719 ----------- ----------- $ 565,535 $ 511,224 =========== ===========
Continued... 3 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2007 2006 (unaudited) * -------------------------------------------------- ----------- ----------- Current liabilities: Accounts payable $ 28,993 $ 26,107 Accrued income taxes 1,298 4,844 Accrued liabilities 40,817 47,432 ----------- ----------- Total current liabilities 71,108 78,383 ----------- ----------- Long-term debt 155,641 112,448 ----------- ----------- Minority interests in subsidiaries 276 276 Pension liabilities 12,676 13,209 Other liabilities 20,415 12,090 ----------- ----------- 33,367 25,575 ----------- ----------- Stockholders' equity: Common stock 320 320 Additional paid in capital 77,848 76,686 Retained earnings 226,177 219,690 Accumulated other comprehensive income 18,148 16,658 ----------- ----------- 322,493 313,354 Less: Treasury stock 17,074 18,536 ----------- ----------- 305,419 294,818 ----------- ----------- $ 565,535 $ 511,224 =========== ===========
*Condensed from audited financial statements. The accompanying notes are an integral part of these condensed consolidated financial statements. 4 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
Three Months Ended March 31, 2007 2006 ----------------------------------------------------- ----------- ----------- Net sales $ 163,728 $ 142,764 Cost of sales 120,229 107,035 ----------- ----------- Gross profit 43,499 35,729 General, selling and administrative expenses 28,805 23,682 ----------- ----------- Operating profit 14,694 12,047 ----------- ----------- Other income (expense): Interest expense, net (1,942) (477) Other, net (167) 212 ----------- ----------- (2,109) (265) ----------- ----------- Income before income taxes and income from affiliates and joint ventures 12,585 11,782 Income tax expense 3,311 3,408 ----------- ----------- Income before income from affiliates and joint ventures 9,274 8,374 Income from affiliates and joint ventures 1,566 1,337 ----------- ----------- Net income $ 10,840 $ 9,711 =========== =========== Weighted average common shares outstanding 30,153 29,774 Weighted average common and common equivalent shares outstanding 31,017 30,894 Basic earnings per share $ 0.36 $ 0.33 Diluted earnings per share $ 0.35 $ 0.31 Dividends declared per share $ 0.14 $ 0.11
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands)
Three Months Ended March 31, 2007 2006 ------------------------------------------------------- ---------- ---------- Net income $ 10,840 $ 9,711 Other comprehensive income (loss): Foreign currency translation adjustment 1,405 931 Other 85 -- ---------- ---------- Comprehensive income $ 12,330 $ 10,642 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three Months Ended March 31, 2007 2006 ---------------------------------------------------------------- ----------- ----------- Cash flow from operating activities: Net income $ 10,840 $ 9,711 Adjustments to reconcile from net income to net cash provided by (used in) operating activities: Depreciation, depletion, and amortization 6,714 4,907 Changes in assets and liabilities, net of effects of acquisitions: Decrease (increase) in current assets (7,091) (7,873) Decrease (increase) in noncurrent assets (954) (2,610) Increase (decrease) in current liabilities (6,634) (7,946) Increase (decrease) in noncurrent liabilities (133) (276) Other 3,513 (10) ----------- ----------- Net cash provided by (used in) operating activities 6,255 (4,097) ----------- ----------- Cash flow from investing activities: Capital expenditures (10,876) (9,311) Acquisitions, net of cash (27,204) (1,289) Investments in and advances to affiliates and joint ventures (2,466) (110) Investments in restricted cash (957) -- Other 489 272 ----------- ----------- Net cash used in investing activities (41,014) 10,438) ----------- ----------- Cash flow from financing activities: Net change in outstanding debt 42,800 12,491 Proceeds from sales of treasury stock 886 1,513 Purchases of treasury stock -- (1,119) Dividends declared (4,204) (3,291) Excess tax benefits from stock-based compensation 927 1,650 ----------- ----------- Net cash provided by (used in) financing activities 40,409 11,244 ----------- ----------- Effect of foreign currency rate changes on cash 389 743 ----------- ----------- Net increase (decrease) in cash and cash equivalents 6,039 (2,548) ----------- ----------- Cash and cash equivalents at beginning of period 17,805 15,997 ----------- ----------- Cash and cash equivalents at end of period $ 23,844 $ 13,449 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 7 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share amounts) Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Company Operations AMCOL International Corporation (the Company) operates in five segments: Minerals, Environmental, Oilfield services, Transportation and Corporate. 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 onshore and offshore water treatment filtration, pipeline separation, waste fluid treatment, rental tools 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, which provide services to our other segments as well as third-party customers. Intersegment sales are insignificant, other than intersegment shipping, which is eliminated in the Corporate segment. The composition of our revenues by segment is as follows: Three Months Ended March 31, 2007 2006 ---------------------------------------------------- --------- --------- Minerals 52% 56% Environmental 30% 28% Oilfield services 13% 10% Transportation 7% 9% Intersegment shipping -2% -3% --------- --------- 100% 100% ========= ========= Further discussion of segment information is included in Note 4, "Business Segment Information." Basis of Presentation The financial information included herein has been prepared by management and, other than the condensed consolidated balance sheet as of December 31, 2006, is unaudited. The condensed consolidated balance sheet as of December 31, 2006 has been derived from, but does not include all of the disclosures contained in, the audited consolidated financial statements for the year ended December 31, 2006. The information furnished herein includes all adjustments that are, in the opinion of management, necessary for a fair presentation of the results of operations and cash flows for the interim periods ended March 31, 2007 and 2006, and the financial position of the Company as of March 31, 2007, and all such adjustments are of a normal recurring nature. The accompanying condensed consolidated financial information should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2006. 8 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share amounts) The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Reclassifications In addition to segment disclosures contained in Note 4, certain prior year amounts have been reclassified to conform to the current year's presentation. Note 2: EARNINGS PER SHARE The table below provides further share information used in computing our earnings per share for the periods presented herein. Basic earnings per share was computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share was computed by dividing net income by the weighted average common shares outstanding after consideration of the dilutive effect of stock options outstanding during each period.
Three Months Ended March 31, 2007 2006 ------------------------------------------------------------------- ----------- ----------- Weighted average number of common shares outstanding 30,152,857 29,773,953 Dilutive impact of stock options 863,954 1,120,281 ----------- ----------- Weighted average number of common and common equivalent shares for the period 31,016,811 30,894,234 =========== =========== Number of common shares outstanding at the end of the period 30,100,384 29,933,271 =========== =========== Weighted average number of anti-dilutive shares excluded from the computation of diluted earnings per share 187,388 146,225 =========== ===========
9 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share amounts) Note 3: ADDITIONAL BALANCE SHEET INFORMATION Inventories at March 31, 2007 have been valued using the same methods as at December 31, 2006. Our inventories are comprised of the following components:
March 31, December 31, 2007 2006 ------------------------------------------------------- ----------- ----------- Crude stockpile inventories $ 22,412 $ 26,390 In-process inventories 36,432 32,640 Other raw material, container, and supplies inventories 28,375 25,582 ----------- ----------- $ 87,219 $ 84,612 =========== ===========
We mine various minerals using a surface mining process that requires the removal of overburden. Under various governmental regulations, we are obligated to restore the land comprising each mining site to its original condition at the completion of mining activity. The obligation is adjusted to reflect the passage of time and changes in estimated future cash outflows. A reconciliation of the activity within our reclamation obligation is as follows: Three Months Ended March 31, 2007 ------------------------------------------ -------------------- Balance at beginning of period $ 5,715 Settlement of obligations (399) Liabilities incurred and accretion expense 626 -------------------- Balance at end of period $ 5,942 ==================== A reconciliation of the activity within our accrued warranty obligation is as follows: Three Months Ended March 31, 2007 ------------------------------ -------------------- Balance at beginning of period $ 911 Charged to costs and expenses 113 Net settlements (160) Foreign currency translation 1 -------------------- Balance at end of period $ 865 ==================== Note 4: BUSINESS SEGMENT INFORMATION As previously mentioned, we operate in five business segments. We identify segments based on management responsibility and the nature of the business activities of each component of the Company. We measure segment performance based on operating profit, which is defined as net sales less cost of sales and general, selling and administrative expenses related to a segment's operations. The costs deducted to arrive at operating profit do not include interest or income taxes. Segment assets are those assets used in the operations of that segment. Corporate assets include cash and cash equivalents, corporate leasehold improvements, and other miscellaneous equipment. 10 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share amounts) Effective beginning in the first quarter of 2007, we included our nanocomposite business within the Minerals segment. Those expenses were previously included within the Corporate segment. The 2006 segment results also reflect the change in reporting. Operating results and profit margins for both reporting periods were not materially impacted by the change. The following summaries set forth certain financial information by business segment: Three Months Ended March 31, 2007 2006 ---------------------------------------- ------------- ------------- Net sales: Minerals $ 85,813 $ 80,071 Environmental 48,698 40,158 Oilfield services 21,964 14,972 Transportation 10,893 12,471 Intersegment shipping (3,640) (4,908) ------------- ------------- Total $ 163,728 $ 142,764 ============= ============= Operating profit (loss): Minerals $ 9,257 $ 7,888 Environmental 6,243 4,786 Oilfield services 3,166 2,945 Transportation 540 683 Corporate (4,512) (4,255) ------------- ------------- Total $ 14,694 $ 12,047 ============= ============= As of Mar. 31, As of Dec. 31, 2007 2006 ---------------------------------------- ------------- ------------- Assets: Minerals $ 271,250 $ 245,417 Environmental 166,868 145,884 Oilfield services 86,985 84,917 Transportation 3,871 3,722 Corporate 36,561 31,284 ------------- ------------- Total $ 565,535 $ 511,224 ============= ============= 11 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share amounts) Note 5: EMPLOYEE BENEFIT PLANS Our net periodic benefit cost for our defined benefit pension plan was as follows: Three Months Ended March 31, 2007 2006 ---------------------------------------- ---------- ---------- Service cost $ 415 $ 434 Interest cost 552 497 Expected return on plan assets (674) (630) Amortization of prior service cost 17 8 ---------- ---------- Net periodic benefit cost $ 310 $ 309 ========== ========== We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006 that we expected to contribute $1,000 to our pension plan in 2007. That full contribution was made in the first quarter of 2007. Note 6: INCOME TAXES Our effective tax rate for the three months ended March 31, 2007 was 26.3%, which differs from the U.S. Federal statutory rate of 35% largely due to depletion deductions and differences in local tax rates on the income from our foreign subsidiaries. Additionally, the 26.3% includes an increase to income tax expense of $143 for changes in estimates related to provision to return differences. Excluding the $143, the effective tax rate would have been 25.2%. Our effective tax rate for the three months ended March 31, 2006 was 28.9%, which varies from the U.S. Federal statutory rate of 35% for the same depletion and foreign tax rates mentioned above. Additionally, the 28.9% includes an increase to income tax expense of $157 for changes in estimates related to provision to return differences. Excluding the $157, the effective tax rate would have been 27.7%. In the normal course of business, we are subject to examination by taxing authorities throughout the world. With few exceptions, we are no longer subject to U.S. federal, state, local, or non-US income tax examinations by tax authorities for years prior to 2001. The Internal Revenue Service ("IRS") has examined our U.S. federal income tax returns for all years through 2002. Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). Our adoption of FIN 48 resulted in a $252 decrease in retained earnings and an increase to income taxes payable of $2,065 due to additional deferred tax assets of $1,876 and additional income tax receivables of $189. In addition, we reclassified $4,379 of income tax liabilities from current liabilities to non-current liabilities as we do not anticipate settling these liabilities within the next twelve months. 12 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share amounts) At January 1, 2007, our worldwide liability for uncertain tax positions was $4,846. Unrecognized tax benefits of $2,778 would affect our effective tax rate if recognized. There were no significant changes in components of the liability in the three months ending March 31, 2007. We record penalties and interest relating to uncertain tax positions in the income tax expense line item within our consolidated statement of operations. At January 1, 2007, approximately $2,064 was included in the liability for uncertain tax positions for the possible payment of interest and penalties. Approximately $1,575 of unrecognized tax benefits relate to items that are affected by expiring statute of limitations within the next 12 months. Of this amount, $754 could have an impact on our effective tax rate. Note 7: ACQUISITIONS We made payments of $1,531 in the three months ended March 31, 2007 to former owners of businesses we acquired pursuant to contingent payment arrangements associated with those acquisitions. These payments had the effect of increasing the amount of goodwill by $313 and decreasing accrued liabilities by $1,218. In January 2007, our Environmental segment acquired the business assets of LBI Techonologies, Inc., whose product, Liquid Boot (R), is a spray-applied, asphalt based coating used under slabs and / or backfilled walls as part of a barrier system to prevent the intrusion of gas or organic vapors into occupied structures or buildings. We paid approximately $17,738 for the business and recognized $6,352 of goodwill and $8,570 of intangible assets. The allocation of this purchase price has not been finalized as we are in the process of determining the fair values of the assets acquired and liabilities assumed. The acquisition agreement provides for contingent consideration which, if the consideration is recognized, would result in additional goodwill. In March 2007, our Minerals segment acquired the Microsponge (R) technology and all related assets, including an existing customer base and patent portfolio. Microsponge (R) is a system of biologically inert particles that is used to deliver active ingredients in dermatological products such as lotions and ointments. We paid approximately $7,970 for the business and recognized $6,000 of goodwill and $4,119 of intangible assets for this acquisition as of March 31, 2007. The allocation of this purchase price has not been finalized as we are in the process of determining the fair values of the assets acquired and liabilities assumed. The acquisition agreement provides for contingent consideration which, if the consideration is recognized, would result in additional goodwill. Note 8: DEBT On March 9, 2007, we amended our 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. 13 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share amounts) On April 2, 2007, we issued and sold $75,000 of senior notes (the "Notes") to a qualified institutional buyer which are payable at maturity on April 2, 2017, subject to certain acceleration features upon default. The Notes are comprised of (a) $45,000 aggregate principal amount of Series 2007-A Adjustable Fixed Rate Guaranteed Senior Notes, Tranche 1, due April 2, 2017 (the "Tranche 1" notes) and (b) $30,000 aggregate principal amount of Series 2007-A Adjustable Floating Rate Guaranteed Senior Notes, Tranche 2 (the "Tranche 2" notes). Tranche 1 bears interest at 5.78%, payable semi-annually in arrears on April 2nd and October 2nd of each year, beginning October 2, 2007. Tranche 2 bears interest at an annual rate of 0.55% plus LIBOR in effect from time to time, adjusted quarterly, and is payable in arrears beginning July 2, 2007. No amounts relating to these Notes are reflected in our financial statements as of March 31, 2007. In conjunction with the issuance of the Notes, we also entered into an interest rate swap agreement with Wells Fargo Bank, N.A. (the "Interest Rate Swap Agreement") which has the effect of converting the Tranche 2 floating interest rate into a fixed rate of 5.6% per annum over the term of the Tranche 2 notes. No amounts regarding the Interest Rate Swap Agreement are reflected in the financial statements as of March 31, 2007. Note 9: CONTINGENCIES We are party to a number of lawsuits arising in the normal course of business. We do not believe that any pending litigation will have a material adverse effect on our consolidated financial statements. 14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements From time to time, certain statements we make, including statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations section, constitute "forward-looking statements" made in reliance upon the safe harbor contained in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements relating to our Company or our operations that are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions, and statements relating to anticipated growth and levels of capital expenditures. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our actual results, performance or achievements could differ materially from the results, performance or achievements expressed in, or implied by, these forward-looking statements as a result of various factors, including without limitation the following: actual performance in our various markets; conditions in the metalcasting and construction industries; operating costs; competition; currency exchange rates and devaluations; delays in development, production and marketing of new products; integration of acquired businesses; and other factors set forth from time to time in our reports filed with the Securities and Exchange Commission. We undertake no duty to update any forward looking statements to actual results or changes in our expectations. Overview We are a global, specialty minerals company and earn our revenues and profits from a diverse group of industrial and consumer product lines. Our principal operations are located in North America, Europe and the Asia-Pacific region. We operate in five segments: Minerals, Environmental, Oilfield services, Transportation and Corporate. Our Minerals segment operates in three principal markets: metalcasting, pet products and specialty minerals. The Environmental segment's principal markets include lining technologies, building materials and water treatment. Our Oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, and well testing data services for the oil and gas industry. Our Transportation segment provides trucking services for our domestic businesses as well as third parties. Intersegment shipping revenues are eliminated in our Corporate segment. The principal mineral that we utilize to generate revenues is bentonite. We own or lease bentonite reserves in the United States, China and Australia. 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. Our customers are engaged in various 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 Environmental segments' lining technologies and building materials products are predominantly engineering contractors. The Oilfield services customer base is primarily comprised of oil service or exploration companies. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year. 15 The majority of our revenues are generated in North America; consequently, the state of the United States economy impacts our revenues. Our fastest growing markets are in the Asia-Pacific and Central European regions, which have continued to outpace the United States in economic growth in recent years. 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 European and Asia-Pacific regions over the last 40 years. This operating experience enables us to expand further into emerging markets. We see significant opportunities in the Asia-Pacific region for expanding our revenues and earnings over the long-term as a number of markets we serve, such as metalcasting and lining technologies, are expected to grow. We expect to take advantage of these growth areas either through our wholly owned subsidiaries or investments in affiliates and joint ventures. o Mineral development: Bentonite is a component in a majority of the products we produce. Since it is a natural material, we must continually expand our reserve base to maintain a long-term business. Our goal is to add new reserves to replace the bentonite mined each year. Furthermore, we need to assure new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization is committed to developing its global reserve base to meet these requirements. o Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products. Over the last four years, we have acquired a number of businesses. A strong financial position will enable us to continue to acquire businesses which, in our assessment, are fairly valued and fit with our growth strategy. A number of risks will challenge us in meeting these long-term objectives, and there can be no assurance that we will achieve success in implementing any one or more of them. We describe certain risks under "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosure About Market Risk" within our Annual Report on Form 10-K for the year ended December 31, 2006. In general, the significance of these risks has not materially changed over the past year. 16 Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. We evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis. We consider the accounting policies used in preparing our financial statements to be critical accounting policies when they are both important to the portrayal of our financial condition and results of operations, and require us to make estimates, complex judgments, and assumptions, including with respect to events which are inherently uncertain. As a result, actual results could differ from these estimates. For more information on our critical accounting policies, one should also read our Annual Report on Form 10-K for the year ended December 31, 2006. Analysis of Results of Operations Following is a discussion and analysis that describes certain factors that have affected, and may continue to affect, our financial position and operating results. This discussion should be read with the accompanying condensed consolidated financial statements. In addition, as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements in Item 1, we have reclassified certain prior year amounts to conform to the current year's presentation. The following discussion and analysis of results of operations and financial condition are based upon such reclassified financial data. Three months ended March 31, 2007 vs. March 31, 2006 Results of operations (in millions): Net sales: 2007 2006 % Change --------- --------- --------- $ 163.7 $ 142.8 15% Net sales from base businesses (those operations owned for greater than one year) accounted for approximately 18% of the growth, or 2.7 percentage points, over the prior year period. Acquisitions and foreign exchange contributed 60% and 22% of the growth, respectively. On an operating segment basis, the Environmental segment contributed approximately 41% of the growth while the Minerals and Oilfield services segments contributed 27% and 33% of the growth, respectively. The Transportation segment accounted for a 1% decline in sales over the 2006 period. Gross profit: 2007 2006 % Change --------- --------- --------- $ 43.5 $ 35.7 22% Margin 26.6% 25.0% N/A Increased sales were responsible for the increase in gross profit in the period. Gross margin improved by 160 basis points due to favorable segment sales distribution. Our higher growth segments, Environmental and Oilfield Services, have the highest gross margins. 17 General, selling & administrative expenses: 2007 2006 % Change --------- --------- --------- $ 28.8 $ 23.7 22% The Oilfield Services segment accounted for approximately one-half of the increase over the 2006 period principally due to amortization of intangible assets and personnel-related costs. The amortization expense was associated with acquisitions completed in the second half of 2006. Operating expenses associated with acquired businesses also led to the increase in the Minerals and Environmental segments; our Environmental segment also experienced increased personnel and sales related expenses. Operating profit: 2007 2006 % Change --------- --------- --------- $ 14.7 $ 12.0 22% Margin 9.0% 8.4% N/A Operating profit increased with the higher gross profit reported in the 2007 period. The 60 basis point increase in operating margin reflected greater contribution by the Environmental and Oilfield Services segments which have the highest operating margins. Interest expense, net: 2007 2006 % Change --------- --------- --------- $ 1.9 $ 0.5 307% Interest expense in the current-year quarter increased due both to greater average long-term debt compared with the prior-year period and increased interest rates. The increase in long-term debt was attributed to increased capital expenditures, acquisitions and working capital funding in the current-year period. The majority of our long-term debt has a variable rate of interest which is primarily influenced by the changes in LIBOR. Other income / (expense): 2007 2006 % Change --------- --------- --------- $ (0.2) $ 0.2 N/A In the current reporting period, we recognized foreign exchange losses primarily resulting from transactions originated at our international subsidiaries. Conversely, we recognized foreign exchange gains in the prior-year reporting period. Fluctuation between the Polish Zloty to Euro exchange rates was the primary contributor to the losses in the current-year period. We do not actively hedge our exposures to foreign currencies. Income tax expense: 2007 2006 % Change --------- --------- --------- $ 3.3 $ 3.4 (3%) Effective tax rate 26.3% 28.9% N/A Our effective tax rate in both reporting periods continues to differ from the U.S. Federal statutory 35% rate due to depletion deductions and differences in local tax rates on the income of our foreign subsidiaries which are generally lower than the U.S. rates. The 2006 quarter included additional expense for adjustments related to previously recorded tax liabilities. 18 Income from affiliates 2007 2006 % Change --------- --------- --------- & joint ventures $ 1.6 $ 1.3 17% Our India-based investments contributed the increase in income from joint ventures and affiliates in the current period. Those investments also accounted for a large majority of the income reported in both periods. Net income 2007 2006 % Change --------- --------- --------- $ 10.8 $ 9.7 12% Margin 6.6% 6.8% N/A Current-period net income improved due to higher operating profit and a lower effective tax rate. Diluted earnings per share: 2007 2006 % Change --------- --------- --------- $ 0.35 $ 0.31 13% Earnings per share improved commensurate with greater net income. Weighted average common and common equivalent shares outstanding remained relatively constant compared to the 2006 period. Segment analysis: Following is a review of operating results for each of our five reporting segments:
Minerals Three Months Ended March 31, 2007 2006 2007 vs. 2006 (Dollars in Thousands) ------------------------- ------------------------------------------------------------------------------ Net sales $ 85,813 100.0% $ 80,071 100.0% $ 5,742 7.2% Cost of sales 69,014 80.4% 65,179 81.4% ---------- ---------- ---------- ---------- Gross profit 16,799 19.6% 14,892 18.6% 1,907 12.8% General, selling and administrative expenses 7,542 8.8% 7,004 8.7% 538 7.7% ---------- ---------- ---------- ---------- ---------- Operating profit 9,257 10.8% 7,888 9.9% 1,369 17.4%
Base businesses, on a constant currency basis, declined by 5% from the prior-year period. Lower sales volume in the domestic metalcasting market accounted for reduced base business revenue offsetting higher sales in the specialty minerals and pet products areas. An acquisition and favorable exchange rates accounted for approximately 71% and 34% of sales growth, respectively. The acquired business was purchased in October 2006 and is a part of our metalcasting product line. Favorable exchange rates provided the growth due to strengthening of the British Pound and Asian currencies against the US dollar. 19 Gross profit margin improved by 100 basis points due to favorable product mix. Higher transportation, energy and raw material costs negatively impacted the 2006 period more so than the current-year quarter. General, selling and administrative expenses increased mainly due to amortization related to intangible assets. Those assets were recorded as part of the purchase accounting for the acquisition of a metalcasting business in October 2006. Operating margin improved by 90 basis points over the 2006 period in conjunction with the gross margin improvement. Effective beginning in the first quarter of 2007, we included our nanocomposite business within the Minerals segment. Those expenses were previously included within the Corporate segment. The 2006 segment results also reflect the change in reporting. Operating results and profit margins for both reporting periods were not materially impacted by the change.
Environmental Three Months Ended March 31, 2007 2006 2007 vs. 2006 (Dollars in Thousands) --------------------------- ----------------------------------------------------------------------------- Net sales $ 48,698 100.0% $ 40,158 100.0% $ 8,540 21.3% Cost of sales 31,163 64.0% 25,879 64.4% ---------- ---------- ---------- ---------- Gross profit 17,535 36.0% 14,279 35.6% 3,256 22.8% General, selling and administrative expenses 11,292 23.2% 9,493 23.6% 1,799 19.0% ---------- ---------- ---------- ---------- ---------- Operating profit 6,243 12.8% 4,786 12.0% 1,457 30.4%
Base businesses, on a constant currency basis, accounted for approximately 53% of the growth over the prior-year period. Acquired businesses and favorable foreign currencies contributed 21% and 26%, respectively, to the growth in sales. Relative strengthening of the Polish Zloty, British Pound and the Asian currencies against the US dollar led to the foreign currency-based growth. On a product line basis, higher building materials shipments throughout Europe represented the largest improvement in base business sales. Lining technologies sales increased primarily due to contracting services revenues. Gross profit improved in conjunction with sales. The 40 basis point improvement in gross margin was due to product mix and lower manufacturing costs in the U.S. operations. G, S & A increased due to additional expenses associated with acquired businesses and higher personnel-related costs. Operating margin improved by 80 basis points due to the expanded gross margin and a lower relative increase in G, S & A expenses in the current-year quarter. 20
Oilfield Services Three Months Ended March 31, 2007 2006 2007 vs. 2006 (Dollars in Thousands) --------------------------- ----------------------------------------------------------------------------- Net sales $ 21,964 100.0% $ 14,972 100.0% $ 6,992 46.7% Cost of sales 14,077 64.1% 9,896 66.1% ---------- ---------- ---------- ---------- Gross profit 7,887 35.9% 5,076 33.9% 2,811 55.4% General, selling and administrative expenses 4,721 21.5% 2,131 14.2% 2,590 121.5% ---------- ---------- ---------- ---------- ---------- Operating profit 3,166 14.4% 2,945 19.7% 221 7.5%
Acquired businesses represented approximately 91% of the growth in revenues. Base business revenues and favorable foreign currency translation equally contributed the remainder of the growth over the 2006 quarter. Base business growth was suppressed by a slowdown in filtration and pipeline service activity late in the quarter. On a regional basis, domestic markets saw a large majority of the increased business activity. Additionally, the prior-year quarter benefited from pipeline filtration services for customers with operations in the Gulf of Mexico after damage inflicted by hurricanes in 2005. Gross margin improved by 200 basis points primarily due to revenue mix. The two acquired businesses - Nitrogen Services and Rental Tools and Equipment - both generate higher margins than our base businesses. G, S&A expenses increased due to amortization and operating expenses associated with acquired businesses as well as higher personnel-related costs. Operating margin declined 530 basis points due to the high relative increase in G, S & A expenses over the prior-year period.
Transportation Three Months Ended March 31, 2007 2006 2007 vs. 2006 (Dollars in Thousands) ------------------------- ------------------------------------------------------------------------------ Net sales $ 10,893 100.0% $ 12,471 100.0% $ (1,578) -12.7% Cost of sales 9,615 88.3% 10,989 88.1% ---------- ---------- ---------- ---------- Gross profit 1,278 11.7% 1,482 11.9% (204) -13.8% General, selling and administrative expenses 738 6.8% 799 6.4% (61) -7.6% ---------- ---------- ---------- ---------- ---------- Operating profit 540 4.9% 683 5.5% (143) -20.9%
Traffic levels declined in the current-year quarter. Transportation services for the Environmental segment primarily led to the decline. Pricing was relatively constant compared with the prior-year period. Gross profit and margins were negatively impacted by the lower traffic levels. G, S & A spending declined over the 2006 quarter in several categories. 21 Corporate Three Months Ended March 31, 2007 2006 2007 vs. 2006 (Dollars in Thousands) ------------------------ ----------------------------------------------------- Intersegment shipping sales $ (3,640) $ (4,908) Intersegment shipping costs (3,640) (4,908) ---------- ---------- Gross profit -- -- Corporate general, selling and administrative expenses 4,512 4,255 257 6.0% ---------- ---------- Operating loss 4,512 4,255 257 6.0% Intersegment shipping revenues and costs are related to billings from the Transportation segment to the domestic Minerals and Environmental segments for services. These services are invoiced to the Minerals and Environmental segments at arms-length rates and those costs are subsequently charged to customers. Intersegment sales and costs reported above reflect the elimination of these transactions. Corporate G, S & A expenses increased primarily due to greater professional fees. Liquidity and capital resources Cash flows from operations, borrowings from a revolving credit facility and proceeds from the exercise of stock options by employees have been our sources of funds to purchase property, plant and equipment; acquire businesses; repurchase common stock; and pay dividends to shareholders. We believe cash flows from operations and borrowings from an unused and committed revolving credit facility will be adequate to support our operating plans for the foreseeable future. Following is a discussion and analysis of our cash flow activities as presented in the Condensed Consolidated Statement of Cash Flows presented within Part 1 of this report. Three Months Ended Cash Flows March 31, ($ in millions) 2007 2006 --------------------------------------------------- ---------- ---------- Net cash provided by (used in) operating activities $ 6.3 $ (4.1) Net cash provided by (used in) investing activities $ (41.0) $ (10.4) Net cash provided by (used in) financing activities $ 40.4 $ 11.2 Cash flows from operating activities improved largely due to higher current-year net income, non-cash charges such as depreciation and amortization, and less of an increase in working capital needs. Historically, cash flows from operations have increased over the course of the year and we anticipate this pattern will continue for the remainder of 2007. Cash flows used in investing activities increased in the 2007 period due to acquisitions. We acquired two businesses in the current-year period, Liquid Boot Technologies, included in our Environmental segment, and the Microsponge(R) business of Cardinal Health Care Company, included in our Minerals segment. Capital expenditures totaled $10.9 million for the 2007 period compared with $9.3 million in the prior-year period. Expenditures related to Corporate segment projects accounted for the increase. Capital expenditures for 2007 are estimated to be in the range of $35 million to $40 million. Investments and advances to affiliates and joint ventures increased primarily due to funding for a new investment in Antwerp, Belgium. The venture, in which we own 50% of the shares, will be engaged in processing, marketing and selling specialty minerals to the European market. Our partner is Ashapura Minechem Limited, an industrial minerals company based in India, in which we own approximately 21% of the outstanding shares. 22 Cash flows provided by financing activities increased in the 2007 period primarily due to additional debt borrowings to fund acquisitions. We filed a current reports, on Form 8-K, in March 2007 which described principal terms of a new bank credit agreement. The agreement increased our borrowing capability to $150 million and extended the term to April 2, 2012. Financial covenants and interest rate pricing remained the same as the prior agreement. We also filed a current report, on form 8-K, in April 2007 describing our $75 million private debt placement with Metlife Insurance Company. The debt is payable in a lump-sum on April 2, 2017. The purpose of the transaction was to fix the interest cost of a portion of our debt. The proceeds from the placement were used to pay an equivalent amount of revolving credit notes outstanding under the bank credit facility mentioned above. We also entered into an interest rate swap agreement with Wells Fargo Bank to convert the variable interest rate on $30 million of the private placement debt into a fixed interest rate. Dividends declared increased to $0.14 per share from $0.11 per share in the prior- year quarter, consequently increasing the financing needs this year. We did not repurchase any shares of our stock on the open market in the first quarter of this year. As of March 31, 2007, we have $15 million of funds available to repurchase shares. Our Board of Directors authorized these funds on November 10, 2006; the authorization will expire on November 10, 2008. As at Financial Position March 31, December 31, ($ in millions) 2007 2006 ------------------------------- ------------ ------------ Working capital $ 197.3 $ 173.3 Goodwill & intangible assets $ 89.8 $ 66.0 Total assets $ 565.5 $ 511.2 Long-term debt $ 155.6 $ 112.4 Other long-term obligations $ 33.4 $ 25.6 Stockholder's equity $ 305.4 $ 294.8 Working capital at March 31, 2007, increased over the amount at December 31, 2006 due to an increase in accounts receivable commensurate with the growth in sales. Current ratio was 3.8-to-1 and 3.2-to-1 at March 31, 2007, and December 31, 2006, respectively. Long-term debt increased commensurate with funding of the aforementioned acquisitions, greater working capital requirements and funding of capital expenditures. Consequently, long-term debt relative to total capitalization rose to 34% at March 31, 2007, compared with 28% at December 31, 2006. As described above, we renegotiated the bank credit agreement in the first quarter of 2007. We have approximately $81 million of borrowing capacity available from our revolving credit facility. We are in compliance with financial covenants related to the revolving credit facility as of March 31, 2007. We have evaluated the funding requirements of our defined benefit pension plan following passage of the Pension Reform Act of 2006. At this time, we do not anticipate any material funding requirement for our plan as a consequence of the Act. 23 We believe future cash flows from operations combined with financing capability from our revolving credit facility will be adequate to fund necessary investing activities planned in the future. Since the mid 1980's, we have been named as one of a number of defendants in product liability lawsuits relating to the minor free-silica content within our bentonite products used in the metalcasting industry. The plaintiffs in these lawsuits are primarily employees of our former and current customers. To date, we have not incurred significant costs in defending these matters. We believe we have adequate insurance coverage and do not believe the litigation will have a material adverse impact on our financial position, liquidity or results of operations. Contractual Obligations and Off-Balance Sheet Arrangements (in millions) Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006 discloses our contractual obligations and off-balance sheet arrangements. Other than the increase in our long-term bank debt as disclosed in our condensed consolidated financial statements herein and the contribution to our defined benefit plan as discussed in Note 5 of the Notes to Condensed Consolidated Financial Statements within this Form 10-Q, there were no material changes in our contractual obligations and off-balance sheet arrangements. Item 3: Quantitative and Qualitative Disclosures About Market Risk There were no material changes in our market risk from the disclosures made in our Annual Report on Form 10-K for the year ended December 31, 2006. Item 4: 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 were 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. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION 24 Item 1A: Risk Factors Information regarding risk factors appears in Part 1, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes from the risk factors disclosed therein. Item 2: Unregistered Sales of Equity Securities and Use of Proceeds In 2006, the Board of Directors announced a program to repurchase up to $15 million of our outstanding stock; this authorization expires November 10, 2008. We did not repurchase any stock in the three months ending March 31, 2007 and the full $15 million remains available. Item 6: Exhibits Exhibit Number 10.1 Additional Guarantor Supplement dated March 8, 2007, by CETCO Oilfield Services Company (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K Filed March 13, 2007) 10.2 Second Amendment to Credit Agreement dated as of March 9, 2007 among AMCOL International Corporation; CETCO Europe, Ltd.; AMCOL Minerals Europe, Ltd. (f/k/a Colin Steward Minchem Limited); CETCO Poland SP. Z.O.O; Volclay Pty. Ltd.; Ameri-Co Logistics, Inc.; American Colloid Company; Colloid Environmental Technologies Company; AMCOL Specialties Holdings, Inc.; CETCO Oilfield Services Company; Harris N.A.; Wells Fargo Bank, N.A.; Bank of America, N.A.; and The Northern Trust Company (incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K filed March 13, 2007) 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)* 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)* 32 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350* * Filed herewith. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMCOL INTERNATIONAL CORPORATION Date: May 8, 2007 /s/ Lawrence E. Washow Lawrence E. Washow President and Chief Executive Officer Date: May 8, 2007 /s/ Gary L. Castagna Gary L. Castagna Senior Vice President and Chief Financial Officer and Principal Accounting Officer 26 INDEX TO EXHIBITS 10.1 Additional Guarantor Supplement dated March 8, 2007, by CETCO Oilfield Services Company (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K Filed March 13, 2007) 10.2 Second Amendment to Credit Agreement dated as of March 9, 2007 among AMCOL International Corporation; CETCO Europe, Ltd.; AMCOL Minerals Europe, Ltd. (f/k/a Colin Steward Minchem Limited); CETCO Poland SP. Z.O.O; Volclay Pty. Ltd.; Ameri-Co Logistics, Inc.; American Colloid Company; Colloid Environmental Technologies Company; AMCOL Specialties Holdings, Inc.; CETCO Oilfield Services Company; Harris N.A.; Wells Fargo Bank, N.A.; Bank of America, N.A.; and The Northern Trust Company (incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K filed March 13, 2007) 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)* 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)* 32 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350* * Filed herewith. 27