10-K 1 ai2338.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _________ Commission File Number: 0-15661 AMCOL INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-0724340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One North Arlington, 1500 West Shure Drive, Suite 500 Arlington Heights, Illinois 60004-7803 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 394-8730 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: $.01 par value Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] The aggregate market value of the registrant's $.01 par value Common Stock held by non-affiliates of the registrant (based upon the per share closing price of $18.69 per share on June 30, 2004, and, for the purpose of this calculation only, the assumption that all of the registrant's directors and executive officers are affiliates) was approximately $413.0 million. Registrant had 29,524,128 shares of $.01 par value Common Stock outstanding as of February 28, 2005. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III hereof. ================================================================================ PART I ITEM 1. BUSINESS INTRODUCTION AMCOL International Corporation was originally incorporated in South Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was changed to American Colloid Company in 1927, and in 1959, the Company was reincorporated in Delaware. In 1995, its name was changed to AMCOL International Corporation. Except as otherwise noted or indicated by context, the term "Company" refers to AMCOL International Corporation and its subsidiaries. The Company operates in two major industry segments: minerals and environmental. The Company also operates a transportation business. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The transportation segment includes a long-haul trucking business and a freight brokerage business, which provide services to both the Company's plants and unrelated customers. The following table sets forth the percentage contributions to net sales of the Company attributable to its minerals, environmental and transportation segments as well as intersegment shipping amounts for the last three calendar years. Percentage of Sales -------------------------- 2004 2003 2002 ------ ------ ------ Minerals 58% 58% 57% Environmental 37% 35% 36% Transportation 9% 10% 11% Intersegment Shipping -4% -3% -4% ------ ------ ------ 100% 100% 100% ====== ====== ====== Net revenues, operating profit, assets, depreciation, depletion and amortization, capital expenditures and research and development expenditures attributable to each of the Company's business segments are set forth in Note 4 of the Company's Notes to Consolidated Financial Statements included elsewhere herein. MINERALS The Company's minerals business is principally conducted through its wholly-owned subsidiaries and subsidiaries consolidated in the financial statements: American Colloid Company in the United States and Canada; Colin Stewart Minchem Limited in the United Kingdom; Volclay Siam Ltd. in Thailand; Volclay Korea Ltd. in South Korea; Volclay Pty., Ltd. in Australia; Volclay MinChem Co. Ltd. and Volclay DongMing Industrial Minerals Co., Ltd. in China; and through its joint venture companies: Volclay de Mexico S.A. & C.V. in Mexico; Ashapura Volclay Limited in India; Egypt Mining & Drilling Chemicals Company in Egypt; and Volclay Japan Co. Ltd. in Japan. The Company also has a 20% equity interest in Ashapura Minechem Ltd., a publicly traded Indian bentonite producer. Commercially produced bentonite is a type of montmorillonite clay found in beds ranging in thickness from two to 50 feet under overburden of up to 60 feet. There are two basic types of bentonite, each having different chemical and physical properties. These are commonly known as sodium bentonite and calcium bentonite. Sodium bentonite is generally referred to as Western bentonite because it predominately occurs in the Western United States. Sodium bentonites of lesser purity occur outside the United States. Calcium bentonite is sometimes referred to as Southern bentonite in the United States and as fuller's earth outside the United States. Calcium bentonites mined outside the United States are commonly activated with sodium carbonate to produce properties similar to natural sodium bentonite. 2 The Company's principal bentonite products are marketed under various internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R), PREMIUM GEL(R) and ADDITROL(R). The Company's cat litter is sold under various trade names and private labels. Trade names include NATURAL SELECT(R), CAREFREE KITTY(R), PREMIUM CHOICE(R) and CAT TAILS(R). PRINCIPAL PRODUCTS AND MARKETS Metalcasting. In the formation of sand molds for metal castings, sand is bonded with bentonite and various other additives to yield desired casting form and surface finish. The Company serves the foundry and casting industry throughout North America, Asia and Australia with custom-blended bentonite and allied non-bentonite products to strengthen sand molds for cast auto parts, farm implements, railcars, home appliances and metallurgical products. The blended mineral binders containing sodium bentonite, calcium bentonite, seacoal and other ingredients are sold under the trade name ADDITROL(R). Cat Litter. The Company produces and markets sodium bentonite-based, scoopable (clumping), traditional and alternative cat litters as well as specialty pet products to grocery and drug stores, mass merchandisers, wholesale clubs and pet specialty stores throughout the U.S. The Company's scoopable products' clump-forming capability traps urine, allowing for easy removal of the odor-producing elements from the litter box. The Company's products are marketed under various trade names. Specialty Minerals. This category includes several business units that are major suppliers of gelling, binding, thickening, plasticizing and emulsifying agents for cosmetics, pharmaceuticals, drilling fluids or household products. The Company is also a global supplier of nanoclays. Detergents. The Company supplies high-grade agglomerated bentonite to the detergent industry. Health and Beauty. The Company manufactures adsorbent polymers and purified grades of bentonite ingredients for sale to manufacturers of personal care products. The adsorbent polymers are used to deliver high-value actives in skin-care products. Bentonite-based materials act as thickening, suspension and dispersion agent emollients. Iron Ore Pelletizing. The Company supplies sodium bentonite for use as a pelletizing aid in the production of taconite pellets. Well Drilling. Sodium bentonite and leonardite, a form of oxidized lignite mined and processed by the Company in North Dakota, are components of drilling fluids used in oil and gas well drilling. Bentonite imparts thickening and suspension properties, which facilitate the transport of rock cuttings to the surface during the drilling process. Drilling fluids lubricate the drilling bit and coat the underground formations to prevent hole collapse and drill bit seizing. The Company's primary trademark for this application is PREMIUM GEL(R). Other Industrial. The Company produces bentonite and bentonite blends for the construction industry, which are used as a plasticizing agent in cement, plaster and bricks, and as an emulsifier in asphalt. Agricultural. Sodium bentonite and calcium bentonite are sold as pelletizing aids in livestock feed and as anti-caking agents for livestock feed in storage or during transit. SALES AND DISTRIBUTION In 2004, the top five customers of the minerals segment accounted for approximately 31% of the segment sales worldwide. 3 The Company has established industry-specialized sales groups staffed with technically oriented salespersons serving each of the Company's major markets. Certain groups have networks of distributors and representatives, including companies that warehouse products at strategic locations. Most customers in the metalcasting industry are served on a direct basis by teams of Company sales, technical and manufacturing personnel. The Company also provides training courses and laboratory testing for customers who use the Company's products in the metalcasting process. Sales to the oil and gas well drilling industry are primarily made directly to oil and gas well drilling fluid service companies, both under the Company's trade name and under private label. Because bentonite is a major component of drilling fluids, two service companies have captive bentonite operations. The Company's potential market, therefore, generally is limited to those service organizations that are not vertically integrated or do not have long-term supply arrangements with other bentonite producers. Detergent sales and marketing activities are performed on a direct basis and primarily focused in Europe. Sales and marketing of health and beauty care products is performed direct and through agents on a global basis. Sales to the cat litter market are made on a direct basis and through industry brokers. All sales to the iron ore pelletizing industry are made directly to the end user. Sales to the Company's remaining markets are made primarily through independent distributors and representatives. COMPETITION The Company is one of the largest producers of bentonite products globally. There is substantial domestic and international competition, which is essentially a matter of product quality, price, logistics, service and technical support. There are at least 15 other major sodium bentonite or sodium activated calcium bentonite producers throughout the world including several importers into the U.S. market. There are also numerous major producers of calcium bentonite as well as various regional suppliers in the areas the Company serves. Some of the producers are companies primarily in other lines of business with substantially greater financial resources than the Company. SEASONALITY Although business activities in certain portions of the industries in which the Company's mineral products are sold, e.g. oil and gas well drilling and construction, are subject to seasonal factors such as weather, the Company does not consider its minerals business, as a whole, to be seasonal. 4 ENVIRONMENTAL PRINCIPAL PRODUCTS AND MARKETS Through its wholly-owned subsidiaries, Colloid Environmental Technologies Company (CETCO) CETCO Oilfield Services, Inc. and Lafayette Well Testing, Inc. in the United States and Canada, CETCO Korea Ltd. in South Korea, CETCO Poland Sp. z o.o. in Poland, CETCO Technologies(Suzhou) Co. Ltd. in China, Commercializadora y Exportadora Cetco Latino America Limited in Chile, Linteco GmbH and Linteco Iberia S.L. in Spain, and CETCO (Europe) Ltd. in the United Kingdom, the Company sells sodium bentonite, products containing sodium bentonite, and other products, services and equipment for use in environmental and construction applications. Lining Technologies. CETCO sells bentonite in its geosynthetic clay liner products under the BENTOMAT(R) and CLAYMAX(R) trade names for lining and capping landfills and for containment in tank farms, storm water containment systems, waste stabilization lagoons, slurry walls, sewage lagoons and mine site and wetlands reclamation applications. Building Materials. The Company's VOLCLAY(R) Waterproofing System is sold to the non-residential construction industry. This line includes VOLTEX(R), a waterproofing composite comprised of two polypropylene geotextiles filled with sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground foundation walls and slabs. The following products round out the principal components of the product line: VOLCLAY PANELS(R), also used for below-grade waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and plaza areas. The Company also manufactures and sells asphalt emulsion based waterproofing systems for residential and non-residential waterproofing applications. In addition, the Company's STRONGSEAL(TM) and DUCKSBACK(TM) roofing underlayment systems are sold to the residential and non-residential roofing industry. Industrial Water Treatment. Bentonite-based flocculants and customized equipment are used to remove emulsified oils and heavy metals from wastewater. Bentonite-based products are formulated to solidify liquid waste for proper disposal in landfills. These products are sold primarily under the SYSTEM-AC(TM), RM-10(R) and SORBOND(R) trade names. Oilfield Services. CETCO's oilfield services group employs CRUDESORB(R) and CRUDESEP(R) filtration technology, used primarily on offshore oil production platforms. CETCO employs several technologies to allow platform operators to maintain compliance with regulatory requirements governing discharge of waste water generated during oil production. CETCO's filtration technology is marketed with all necessary equipment, proprietary filter media and trained professional service personnel. The Company is also actively involved in providing wastewater treatment solutions to pipeline operators to enable them to meet wastewater discharge requirements. Well testing services are also provided by the Company as a result of the acquisition of Lafayette Well Testing, Inc., completed in early 2004. The Company provides equipment and personnel for production well control, clean-up, unload, separation, measure of component flow and disposal of fluids from oil and gas wells. Drilling Products. CETCO's drilling products are used in environmental and geotechnical drilling applications, horizontal directional drilling, mineral exploration and foundation construction. The products are used to install monitoring wells, facilitate horizontal drilling and water wells, rehabilitate existing water wells and seal abandoned exploration drill holes. VOLCLAY(R) GROUT, HYDRAUL-EZ(R), BENTOGROUT(R) and VOLCLAY(R) TABLETS are among the trade names for products used in these applications. Geothermal grouting applications utilizing GEOTHERMAL GROUT(TM) represent a developing area for CETCO drilling products. VOLCLAY(R) SHORE PAC is used in special foundation drilling applications. 5 COMPETITION CETCO principally competes with seven regional geosynthetic clay liner manufacturers worldwide and several suppliers of alternative technologies. The construction and wastewater treatment product lines are specialized businesses that compete primarily with alternative technologies. The groundwater monitoring, well drilling and sealants products compete with the Company's traditional rivals in the sodium bentonite business. The oilfield services group competes with several larger oil services companies using different technology. Competition is based on product quality, service, price, technical support and availability of product. Historically, the competition has been vigorous. SALES AND DISTRIBUTION CETCO products are sold domestically and internationally. CETCO sells most of its products through direct sales and marketing personnel specializing in the Company's major product lines. CETCO employs technically oriented marketing personnel to support its network of distributors and representatives for several other product lines. Oilfield Services customers are primarily major oil companies to which products are sold on a direct basis. SEASONALITY Much of the business in the environmental sector is impacted by weather and soil conditions. Many of the products cannot be applied in harsh weather conditions and, as such, sales and profits tend to be stronger during the period from April through October. As a result, the Company considers the business of this segment to be seasonal. MINERALS/ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS MINERAL RESERVES The Company has reserves of sodium and calcium bentonite at various locations in North America, including Wyoming, South Dakota, Montana and Alabama, and in China. The Company, indirectly through its joint venture companies, has access to bentonite deposits in Egypt, India and Mexico. At 2004 consumption rates and product mix, the Company estimates its proven, assigned reserves of commercially usable sodium bentonite at approximately 18 years. The Company estimates its proven, assigned reserves of calcium bentonite at approximately 26 years in North America. While the Company, based upon its experience, believes that its reserve estimates are reasonable and its title and mining rights to its reserves are valid, the Company has not obtained any independent verification of such reserve estimates or such title or mining rights. The Company owns or controls the properties on which its reserves are located through long-term leases, royalty agreements and patented and unpatented mining claims. A majority of the Company's bentonite reserves are owned. All of the properties on which the Company's reserves are located are either physically accessible for the purposes of mining and hauling or the cost of obtaining physical access would not be material. To retain possessory rights in unpatented mining claims in North America, a fee of $100 per year for each unpatented mining claim is required. The validity of title to unpatented mining claims is dependent upon numerous factual matters. The Company believes that the unpatented mining claims that it owns have been located in compliance with all applicable federal, state and local mining laws, rules and regulations. The Company is not aware of any material conflicts with other parties concerning its claims. From time to time, members of Congress and members of the executive branch of the federal government have proposed amendments to existing federal mining laws. The various amendments would have had a prospective effect on mining operations on federal lands and include, among other things, the imposition of royalty fees on the mining of unpatented claims, the elimination or restructuring of the patent system and an increase in fees for the maintenance of unpatented claims. To the extent that future proposals may result in the imposition of royalty fees on unpatented lands, the mining of the Company's unpatented claims may become uneconomic and royalty rates for privately leased lands may be affected. The Company cannot predict the form that any amendments might ultimately take or whether or when any such amendments might be adopted. The Company maintains a continuous program of worldwide exploration for additional reserves and attempts to acquire reserves sufficient to replenish its consumption each year, but it cannot assure that additional reserves will continue to become available. 6 The Company oversees all of its mining operations, including its exploration activity and securing the necessary state and federal mining permits. The following table shows a summary of minerals sold by the Company from active mining areas for the last 3 years in short tons, as well as mineral reserves by major mineral category.
TONS SOLD WET TONS -------------------------------------- OF ASSIGNED All amounts are in thousands of tons 2004 2003 2002 RESERVES RESERVES ------------------------------------ ---------- ---------- ---------- ---------- ---------- SODIUM BENTONITE ASSIGNED Belle/Colony, WY/SD 1,227 1,088 941 18,842 18,842 Lovell, WY 564 477 379 24,157 24,157 TOTAL ASSIGNED 1,791 1,565 1,320 42,999 42,999 Other / Unassigned (SD, WY, MT, NV) 2 1 62 65,663 34 TOTAL OTHER / UNASSIGNED 2 1 62 65,663 34 TOTAL SODIUM BENTONITE 1,793 1,566 1,381 108,662 43,033 40% CALCIUM BENTONITE ASSIGNED Sandy Ridge, AL 132 132 138 4,018 4,018 Chao Yang, Liaoning, China 88 57 31 3,758 3,758 TOTAL ASSIGNED 220 189 169 7,776 7,776 Other / Unassigned - - - 115 - TOTAL OTHER / UNASSIGNED - - - 115 - TOTAL CALCIUM BENTONITE 220 189 169 7,891 7,776 99% LEONARDITE Gascoyne, ND 41 34 25 504 504 TOTAL LEONARDITE 41 34 25 504 504 100% ---------- ---------- ---------- ---------- ---------- GRAND TOTALS 2,054 1,789 1,575 117,057 51,313 44% MINING CLAIMS -------------------------------------- UNASSIGNED CONVERSION UNPATENTED All amounts are in thousands of tons RESERVES FACTOR OWNED ** LEASED ------------------------------------ ---------- ---------- ---------- ---------- ---------- SODIUM BENTONITE ASSIGNED Belle/Colony, WY/SD - 76.18% 811 380 17,651 Lovell, WY - 76.18% 14,096 9,727 334 TOTAL ASSIGNED - 14,907 10,107 17,985 Other / Unassigned (SD, WY, MT, NV) 65,629 76.18% 55,446 4,154 6,063 TOTAL OTHER / UNASSIGNED 65,629 55,446 4,154 6,063 TOTAL SODIUM BENTONITE 65,629 - 70,353 14,261 24,048 60% 65% 13% 22% CALCIUM BENTONITE ASSIGNED Sandy Ridge, AL - 72.70% 1,824 - 2,194 Chao Yang, Liaoning, China - 76.00% - - 3,758 TOTAL ASSIGNED - 1,824 - 5,952 Other / Unassigned 77.31% - - 115 TOTAL OTHER / UNASSIGNED 115 - - 115 TOTAL CALCIUM BENTONITE 115 1,824 - 6,067 1% 23% 77% LEONARDITE Gascoyne, ND - 63.43% - - 504 TOTAL LEONARDITE - - - 504 100% ---------- ---------- ---------- ---------- ---------- GRAND TOTALS 65,744 72,177 14,261 30,619 56% 62% 12% 26%
** Quantity of reserves that would be owned if patent was granted. Assigned reserves means reserves which could be reasonably expected to be processed in existing plants. Unassigned reserves means reserves which will require additional expenditures for processing facilities. Conversion factor means the percentage of reserves that will be available for sale after processing. The Company estimates that available supplies of other materials utilized in its minerals business are sufficient to meet its production requirements for the foreseeable future. MINING AND PROCESSING Bentonite is surface mined, generally with large earthmoving scrapers, and then loaded into trucks and off-highway-haul wagons for movement to processing plants. The mining and hauling of the Company's clay is done both by the Company and by independent contractors. At the processing plants, bentonite is dried, crushed and sent through grinding mills, where it is sized to customer requirements, then chemically modified where needed and transferred to silos for automatic bagging or bulk shipment. Virtually all production is shipped as processed rather than stored for inventory. 7 PRODUCT DEVELOPMENT AND PATENTS The Company works actively with customers in each of its major markets to develop commercial applications of specialized grades of bentonite. It maintains a bentonite research center and laboratory testing facility adjacent to its corporate headquarters. When a need for a product that will accomplish a particular goal is perceived, the Company works to develop the product, research its marketability and study the feasibility of its production. The Company also co-develops products with customers, or others, as needs arise. The Company's development efforts emphasize markets with which it is familiar and products for which it believes there is a viable market. The Company holds a number of U.S. and international patents covering the use of bentonite and products containing bentonite. The Company follows the practice of obtaining patents on new developments whenever feasible. The Company, however, does not consider that any one or any combination of such patents is material to its minerals and environmental businesses as a whole. RESEARCH AND DEVELOPMENT All Company business segments share research and laboratory facilities adjacent to the corporate headquarters. Technological developments are shared among the companies, subject to license agreements where appropriate. Notes 1 and 4 of the Notes to Consolidated Financial Statements include further information on research and development activities. REGULATION AND ENVIRONMENTAL The Company believes it is in material compliance with applicable regulations now in effect for surface mining. Since reclamation of exhausted mining sites has been a regular part of the Company's surface mining operations for the past 35 years, maintaining compliance with current regulations has not had a material effect on mining costs. Reclamation costs are reflected in the prices of the bentonite sold. The grinding and handling of dried clay is part of the production process and because it generates dust, the Company's mineral processing plants are subject to applicable clean air standards (including Title V of the Clean Air Act). All of the Company's plants are equipped with dust collection systems. The Company has not had, and does not presently anticipate, any significant regulatory problems in connection with its dust emission, though it expects ongoing expenditures for the maintenance of its dust collection systems and required annual fees. The Company's mineral operations are also subject to other federal, state, local and foreign laws and regulations relating to the environment and to health and safety matters. Certain of these laws and regulations provide for the imposition of substantial penalties for noncompliance. While the costs of compliance with, and penalties imposed under, these laws and regulations have not had a material adverse effect on the Company, future events, such as changes in or modified interpretations of existing laws and regulations, enforcement policies, and further investigation or evaluation of potential health hazards of certain products, may give rise to additional compliance and other costs that could have a material adverse effect on the Company. TRANSPORTATION The Company operates a long-haul trucking business and a freight brokerage business primarily for delivery of finished products throughout the continental United States. These services are provided to the Company's subsidiaries as well as third party customers. Through its transportation operation, the Company is better able to control costs, maintain delivery schedules and assure equipment availability for delivery of its products. In 2004, approximately 39% of the revenues of this operation involved services provided to the Company's domestic minerals and environmental segments. 8 CORPORATE ACTIVITIES - NANOCOMPOSITE PRODUCT DEVELOPMENT The Company is always seeking to develop broader-based technologies that may use bentonite for new, value-added applications. One such technology is nanocomposites for the plastics industry. In the mid-90's, the Company established its Nanocor subsidiary to develop surface-modified bentonites suitable for the emerging nanocomposite market. The primary raw material is bentonite. For some applications, material will be purchased from third-party suppliers. Surface-treatment chemicals, added in the production process, are readily available on the merchant market. The Company has a nanocomposite production facility in Aberdeen, Mississippi. All costs, in excess of sales, associated with the development, production and sales of nanocomposites are included in corporate costs. Although the Company is developing sales opportunities through multiple supply channels, its primary business model centers around two commercial alliances (discussed below), each intended to serve a major consumption sector. In 2003, an agreement was reached with Mitsubishi Gas Chemical Company, Inc. (MGC) which involves the manufacture and sale of high-barrier plastics that will combine the Company's patented nanocomposite technology and MXD6, a form of nylon. MGC is the world's largest producer of MXD6, which is an established product used in consumer and industrial packaging. A MXD6-nanocomposite has significantly higher gas-barrier properties, which could greatly improve sales potential in the packaging market. Two products are commercially available under the Imperm(R) brand. Imperm(R) is being evaluated for packaging of carbonated soft drinks, beers and soft food products. Additional new product variations may be introduced over the next 18 months. In addition to the sale of Nanomer(R) products to MGC for use in the production of Imperm(R), the Company intends to earn profits generated by sales to MGC's customers. The Company has a similar agreement with PolyOne Corporation (PolyOne) involving sales, marketing and development of polyolefin nanocomposite concentrates and compounds. PolyOne is the world's largest polymer services company which includes the production of plastic compounds. The alliance is focused on improving strength, dimensional stability and fire-resistant properties of plastics used in a wide variety of consumer and industrial products, especially in the automotive sector. The Company's Nanomer (R) Products and technology are included in two PolyOne product lines, Nanoblend(R) and Maxxam(R) LST. These products are supplied commercially to customers, which include automotive applications. Similar to its alliance agreement with MGC, the Company profits from supply of Nanomer (R) Products to PolyOne and earns added revenue from profits generated by sales to its customers. Sales to date from these alliances have been minimal. FOREIGN OPERATIONS AND EXPORT SALES Approximately 37% of the Company's 2004 net sales were to customers in countries outside North America. To enhance its overseas market penetration, the Company maintains mineral processing plants in the United Kingdom, China, Australia, South Korea, Poland and Thailand, as well as a blending plant in Canada. Through joint ventures, the Company also has the capability to process minerals in Japan, Egypt, India and Mexico. Chartered vessels deliver large quantities of the Company's bulk, dried sodium bentonite to the plants in the United Kingdom, Australia, Thailand and South Korea where it is processed and mixed with other clays and distributed throughout Europe, Australia and Southeast Asia. In addition, the Company maintains a worldwide network of independent dealers, distributors and representatives. The Company manufactures geosynthetic clay liners in the United Kingdom, Poland, China and South Korea, primarily for the European and Asian markets. The Company's international operations are subject to the usual risks of doing business abroad, such as currency fluctuations and devaluation, restrictions on the transfer of funds, and import and export duties. 9 See Note 4 of the Company's Notes to Consolidated Financial Statements included elsewhere herein. This Note is incorporated by reference for sales attributed to foreign operations and export sales from the United States. EMPLOYEES As of December 31, 2004, the Company employed 1,427 persons, 591 of whom were employed outside of the United States. At December 31, 2004, there were approximately 826, 515, and 29 persons employed in the Company's minerals, environmental and transportation segments, respectively, along with 57 corporate employees. The corporate employees include personnel engaged in the nanocomposite research and development effort. Operating plants are adequately staffed, and no significant labor shortages are presently foreseen. AVAILABLE INFORMATION The Company files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any reports, statements and other information filed by the Company at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The Company's filings are also available to the public at the website maintained by the SEC, www.sec.gov. The Company's principal Internet address is www.amcol.com. The Company's annual, quarterly and current reports, and amendments to those reports are available free of charge on www.amcol.com, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. CERTIFICATIONS As required by the rules and regulations of the New York Stock Exchange (the "NYSE"), the Company delivered to the NYSE a certification executed by the Company's Chief Executive Officer, Lawrence E. Washow, certifying that Mr. Washow was not aware of any violation by the Company of the NYSE's corporate governance listing standards as of June 11, 2004. As required by the rules and regulations of the SEC, the Sarbanes-Oxley Act Section 302 certifications regarding the quality of the Company's public disclosure are filed as exhibits to this Annual Report on Form 10-K. 10 ITEM 2. PROPERTIES The Company and its subsidiaries operate the following principal plants, mines and other facilities, all of which are owned, except as noted below. The Company also has numerous other facilities which blend Additrol (R), package cat litter and chromite sand, warehouse products and serve as sales offices. LOCATION PRINCIPAL FUNCTION ------------------------------------ ---------------------------------------------------------------------- MINERALS Belle Fourche, SD Mine and process sodium bentonite Colony, WY (two plants) Mine and process sodium bentonite, package cat litter Gascoyne, ND Mine and process leonardite Lovell, WY (1) Mine and process sodium bentonite Sandy Ridge, AL Mine and process calcium bentonite; blend ADDITROL(R) Chao Yang, Liaoning, China Mine and process calcium bentonite Geelong, Victoria, Australia (1)(3) Process bentonite; blend ADDITROL(R) Rayong, Thailand Process bentonite Winsford, Cheshire, U.K. Process calcium bentonite and other minerals Kyungju Kyung-Buk, South Korea Process bentonite ENVIRONMENTAL Broussard, LA Environmental Offshore operations and distribution Cartersville, GA (2) Manufacture components for geosynthetic clay liners; manufacture Bentomat(R) and Claymax(R) geosynthetic clay liners Fairmount, GA Manufacture Bentomat(R) and Claymax(R) geosynthetic clay liners Lovell, WY (1) Manufacture Bentomat(R) and Claymax(R) geosynthetic clay liners Villa Rica, GA Manufacture components for geosynthetic clay liners Birkenhead, Merseyside, U.K. (1)(3) Manufacture Bentomat(R) geosynthetic clay liner; research laboratory; headquarters for CETCO (Europe) Ltd. Pyeongtaek, South Korea Manufacture Bentomat(R) geosynthetic clay liners Suzhou, Jiangsu, China Manufacture Bentomat(R) geosynthetic clay liners Szczytno, Poland Manufacture Bentomat(R) and Claymax(R) geosynthetic clay liners TRANSPORTATION Scottsbluff, NE Transportation headquarters and terminal CORPORATE Arlington Heights, IL (3) Corporate headquarters; CETCO headquarters; American Colloid Company headquarters; Nanocor, Inc. headquarters; research laboratory Aberdeen, MS Process purified bentonite (Nanocor, Inc.)
(1) Shared facilities between minerals and environmental segments. (2) This facility was acquired in October 2004 and was not yet operational at December 31, 2004. (3) Certain offices and facilities are leased. ITEM 3. LEGAL PROCEEDINGS The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial position. The Company's processing operations require permits from various governmental authorities. From time to time, the Company has been contacted by government agencies with respect to required permits or compliance with existing permits. While the Company has been notified of certain situations of non-compliance, management does not expect the fines or the cost of compliance, if any, to be significant. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF REGISTRANT NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS -------------------- ----- ------------------------------------------------ Gary L. Castagna 43 Senior Vice President, Chief Financial Officer and Treasurer of the Company since February 2001; prior thereto, a consultant to AMCOL since June 2000; prior thereto, Vice President of the Company and President of Chemdal International Corporation (this business is a former subsidiary of AMCOL, and consisted of the absorbent polymers business that was sold to BASF AG in June 2000) since August 1997; since January 2000, Director of M~Wave Incorporated, a manufacturer and distributor of printed circuit boards. Peter L. Maul 55 Vice President of the Company since 1993 and President of Nanocor, Inc. since 1995. Ryan F. McKendrick 53 Vice President of the Company and President of Colloid Environmental Technologies Company since November 1998; President of Volclay International Corporation since 2002; prior thereto, Vice President of Colloid Environmental Technologies Company since 1994. Gary Morrison 49 Vice President of the Company and President of American Colloid Company since February 2000; prior thereto, Executive Vice President of American Colloid Company since 1998. Clarence O. Redman 62 Secretary of the Company since 1982. Clarence O. Redman is of counsel to the law firm of Lord, Bissell & Brook LLP, the law firm that serves as Corporate Counsel to the Company, since October 1997. Lawrence E. Washow 51 Chief Executive Officer since May 2000; President of the Company since May 1998; Chief Operating Officer of the Company since 1997; a Director since February, 1998. All executive officers of the Company are elected annually by the Board of Directors for a term expiring at the annual meeting of directors following their election or when their respective successors are elected and shall have qualified. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the New York Stock Exchange under the symbol "ACO." The following table sets forth, for the periods indicated, the high and low closing sale prices of the common stock, as reported by the New York Stock Exchange, and cash dividends declared per share.
CASH STOCK PRICE DIVIDENDS ------------------------- DECLARED HIGH LOW PER SHARE ----------- ----------- ----------- Fiscal Year Ended December 31, 2004: 1st Quarter $ 24.36 $ 16.12 $ 0.07 2nd Quarter $ 20.11 $ 15.25 0.07 3rd Quarter $ 20.10 $ 16.99 0.09 4th Quarter $ 20.30 $ 17.15 0.09 Fiscal Year Ended December 31, 2003: 1st Quarter $ 6.19 $ 5.40 $ 0.03 2nd Quarter $ 8.30 $ 5.68 0.04 3rd Quarter $ 14.45 $ 7.83 0.04 4th Quarter $ 23.30 $ 12.36 0.05
The Company has paid cash dividends every year for 68 years. As of March 3, 2005 there were 1,380 holders of record of the common stock, excluding shares held in street name. PURCHASES OF EQUITY SECURITIES The Company has a program to repurchase its common stock in the open market. The following table summarizes the repurchases made and the remaining amount of repurchases authorized:
TOTAL NUMBER OF SHARES MAXIMUM VALUE REPURCHASED OF SHARES AS PART THAT MAY YET BE OF THE STOCK AVERAGE REPURCHASED REPURCHASE PRICE PAID UNDER THE PROGRAM PER SHARE PROGRAM --------------- --------------- --------------- January 1, 2004 - January 31, 2004 Shares repurchased - $ - $ 3,704,133 February 1, 2004 - February 29, 2004 Shares repurchased - $ - $ 3,704,133 March 1, 2004 - March 31, 2004 Shares repurchased 12,400 $ 15.83 $ 3,507,839 April 1, 2004 - April 30, 2004 Shares repurchased - $ - $ 3,507,839 May 1, 2004 - May 31, 2004 Shares repurchased 171,000 $ 15.69 $ 825,448 Cancellation of unused authorization (1) - $ - $ - New repurchase authorization (2) - $ - $ 10,000,000 June 1, 2004 - June 30, 2004 Shares repurchased - $ - $ 10,000,000 July 1, 2004 - September 30, 2004 Shares repurchased - $ - $ 10,000,000 October 1, 2004 - December 31, 2004 Shares repurchased - $ - $ 10,000,000 --------------- --------------- Total 183,400 $ 15.70 $ 10,000,000 =============== ===============
13 (1) On May 16, 2002, the Company announced a share repurchase program for the repurchase of $10 million of its common stock during the following 24 months. The Company terminated this program on May 13, 2004. (2) On May 13, 2004, the Company announced a share repurchase program for the repurchase of $10 million of its common stock. The Company has not set an expiration date for this program. ITEM 6. SELECTED FINANCIAL DATA The following is selected financial data for the Company as of and for the five years ended December 31, 2004. SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Restated Restated Restated Restated OPERATIONS DATA Net sales (4) $ 459,105 $ 371,966 $ 305,100 $ 281,155 $ 289,520 Gross profit (4) 115,895 97,551 78,095 72,172 73,776 General, selling and administrative expenses (4) 80,222 68,614 58,437 53,607 53,449 Business realignment and other charges - - - - 2,357 Operating profit 35,673 28,937 19,658 18,565 17,970 Investment income - - - 3,015 9,816 Change in value of interest rate swap - - - (401) - Net interest expense (826) (280) (512) (2,196) (3,160) Net other income (expense) 225 604 43 223 (23) Pretax income 35,072 29,261 19,189 19,206 24,603 Income taxes (benefit) (3) 4,687 9,946 6,916 5,149 6,981 Income from joint ventures 1,180 600 531 28 470 Minority interest in net loss of subsidiary - - 164 59 - Income from continuing operations (3) 31,565 19,915 12,968 14,144 18,092 Income (loss) from discontinued operations - - - (879) (8,185) Gain on disposal of discontinued operations (2) - 8,950 - 1,154 321,876 Cumulative effect of change in accounting principle (net of tax) - - - (182) - Net income (2) (3) 31,565 28,865 12,968 14,237 331,783 PER SHARE DATA Basic earnings (loss) per share Continuing operations (3) 1.08 0.70 0.46 0.50 0.65 Discontinued operations (2) - 0.32 - 0.01 11.40 Cumulative effect of change in accounting principle (net of tax) - - - (0.01) - Net income (2)(3) 1.08 1.02 0.46 0.50 12.05 Diluted earnings (loss) per share Continuing operations (3) 1.03 0.67 0.43 0.46 0.61 Discontinued operations (2) - 0.30 - 0.01 10.48 Cumulative effect of change in accounting principle (net of tax) - - - (0.01) - Net income (2)(3) 1.03 0.97 0.43 0.46 11.09 Stockholders' equity (1)(2)(3)(5) 7.55 6.58 5.66 5.21 4.88 Dividends 0.32 0.16 0.10 0.06 0.16 Partial liquidation distribution - - - - 14.00
14 SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- (Restated) (Restated) (Restated) (Restated) SHARES OUTSTANDING DATA End of period 29,395,755 29,107,746 27,881,903 28,256,389 28,781,304 Weighted average for the period-basic 29,140,892 28,357,009 28,133,795 28,193,234 27,523,157 Incremental impact of stock options 1,561,969 1,492,569 2,014,725 2,412,826 2,433,533 Weighted average for the period-diluted 30,702,861 29,849,578 30,148,520 30,606,060 29,956,690 BALANCE SHEET DATA (AT END OF PERIOD) Current assets (5)(6) $ 191,100 $ 143,574 $ 116,935 $ 106,979 $ 258,480 Cash equivalents included in current assets - - - - 168,549 Net current assets of discontinued operations included in current assets - - 798 - Net property and equipment 93,641 86,996 81,847 72,348 74,665 Other long-term assets (9)(6) 51,701 34,759 29,598 23,555 32,622 Net long-term assets of discontinued operations included in long-term assets - - - 311 6,932 Total assets (5) 336,442 265,329 228,380 202,882 365,767 Current liabilities (7)(8)(9) 61,681 47,708 52,639 31,083 164,038 Long-term debt 34,295 9,006 5,573 13,245 51,334 Other long-term liabilities (8) 18,532 17,165 12,233 11,275 9,942 Stockholders' equity (5) 221,934 191,450 157,935 147,279 140,453 OTHER STATISTICS FOR CONTINUING OPERATIONS Depreciation, depletion and amortization (10) $ 20,124 $ 18,910 $ 20,759 $ 18,552 $ 17,625 Capital expenditures 21,627 15,795 16,223 14,730 14,975 Gross profit margin (4) 25.2% 26.2% 25.6% 25.7% 25.5% Operating profit margin (4) 7.8% 7.8% 6.4% 6.6% 6.2% Pretax profit margin (4) 7.6% 7.9% 6.3% 6.8% 8.5% Effective tax (benefit) rate (3) 13.4% 34.0% 36.0% 26.8% 28.4% Net profit from continuing operations margin (3)(4) 6.9% 5.4% 4.3% 5.0% 6.2% Return on average equity 15.3% 11.4% 8.5% 9.8% 11.1%
(1) Based on the number of common shares outstanding at the end of each year rather than a weighted average. (2) The amount for 2000 includes a prior period adjustment identified in 2004 to correct an error in the computation of taxes owed in 2000 on the gain on the sale of a business. See Note 2 of Notes to Consolidated Financial Statements for further information. (3) The amount for 2001 includes a prior period adjustment identified in 2004 for adjustments to the computation of income taxes owed in 2001 to foreign jurisdictions. See Note 2 of Notes to Consolidated Financial Statements for further information. (4) Amounts for 2000 through 2003 include reclassifications for commissions. See Note 1 of Notes to Consolidated Financial Statements for further information. (5) Amounts in years 2000 through 2003 include the effect of adjustments noted above in (2) and (3) above. (6) Historical amounts include the reclassification of intangible assets and prior period adjustments. See Note 1 and Note 2 of Notes to Consolidated Financial Statements for further information. (7) The amount discussed in note (2) above is included within taxes payable in 2000 as the Company had a net liability in 2000. In later years, the amount was reclassified to current assets as the Company had a net tax receivable. (8) Amount includes a reclassification for of certain reclamation liabilities. See Note 1 of Notes to Consolidated Financial Statements for further information. (9) Amount in 2001 through 2003 includes the effect of the adjustment in note (3) above. (10) Amounts in 2000 through 2003 include adjustments related to the reclassification of intangible assets. See Note 1 of Notes to Consolidated Financial Statements for further information. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a global, specialty minerals company and earn our revenues and profits from seven product lines. Our minerals segment operates manufacturing facilities in North America, Europe, and Asia/Pacific regions and has three business units: metalcasting, pet products and specialty minerals. Our environmental segment operates seven manufacturing facilities in six countries and has three business units: lining technologies, building materials and water treatment. Additionally, we have a transportation segment that performs trucking services for the minerals and environmental segments as well as unrelated parties. We are also developing a nanocomposite business that is reported within our corporate segment. The principal mineral that we utilize to generate revenues is bentonite. We own or lease bentonite reserves in the United States and China. Additionally, through our joint ventures and minority interests, we have access to bentonite reserves in Egypt, India and Mexico. Bentonite deposits have varying physical properties which require us to characterize which markets our reserves can serve. We believe that our understanding of bentonite properties, mining methods, processing and application to markets are the core components of the longevity of our Company and our future prospects. Our customer base is diverse in regard to their end-markets and geography. They range from foundries that produce castings for automotive and transportation products--heavy-duty trucks and railroad cars--to producers of consumer goods--cat box filler, cosmetics and detergents. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year. Approximately 63% of our revenue is generated in North America, consequently, the state of the U.S. economy impacts our revenues. Our fastest growing markets are in Central Europe and Asia, which have continued to outpace the U.S. in economic growth. The weakening of the U.S. dollar has been a benefit to our revenues and profits over the past year; however, our operating results may be affected in the future by changes in the euro, British pound, and Polish zloty compared to the U.S. dollar. Sustainable, long-term profit growth is our primary objective. We are undertaking a number of strategic initiatives to achieve this goal: . Organic growth: The central component of our growth strategy is expansion of our product lines and market presence. We have had a history of commitment to research and development and using this resource to bring innovative products to market. We believe this approach to growth offers the best probability of achieving our long-term goals at the lowest risk. . Globalization: We have expanded our manufacturing and marketing organizations into Europe and Asia-Pacific over the last 40 years. This operating experience enables us to expand further into emerging markets. We see China and India as significant opportunities for expanding our revenues and earnings over the long-term as a number of markets we serve, such as metalcasting and lining technologies, are expected to grow. . Mineral development: Bentonite is a component in over 90% of the products we produce. Since it is a natural material, we must continually expand our reserve base to maintain a long-term business. Our goal is to add new reserves to replace the bentonite mined each year. Furthermore, we need to assure new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization that is committed to developing its global reserve base to meet these requirements. . Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products. Over the last three years, we have acquired seven businesses for a total cost of approximately $37 million. A strong financial position will enable us to continue to acquire businesses which, in our assessment, are valued fairly and fit with our growth strategy. There can be no assurance that we will achieve success in implementing any one or more of the strategic initiatives described above. 16 A number of risks will challenge us in meeting our long-term objectives. We describe certain risks, such as competition and our reliance on economically sensitive markets, under "Item 7A. Quantitive and Qualitative Disclosures About Market Risk". In general, the significance of these risks has not changed over the past year. One particular situation, however, does present a challenge to manage in the near term. Transportation costs continue to increase significantly. Domestically, inland rail and trucking costs continue to increase. In addition, bulk cargo shipping costs continue to increase due to acute demand from China. We rely on shipping bulk cargos of bentonite from the U.S. and China to customers, as well as our own subsidiaries. This issue is not isolated to AMCOL; however, we may need to offset additional shipping costs with price increases to customers in order to maintain our profitability. There can be no assurance that we will be successful in achieving these price increases. We are also reviewing our shipping patterns to determine more cost-effective means of transporting bulk cargos. CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations describes relevant aspects of our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to select accounting policies that are appropriate for our business, and to make certain estimates, judgments and assumptions about matters that are inherently uncertain in applying those policies. On an ongoing basis, we re-evaluate these estimates, judgments and assumptions for reasonableness because of the critical impact that these factors have on the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates. Our management has identified the most critical accounting policies upon which the financial statements are based and that involve the most complex and subjective decisions and assessments. These policies are discussed below and also in Note 1 of the Notes to Consolidated Financial Statements. Our senior management has discussed the development, selection and disclosure of these policies with the members of the Audit Committee of our Board of Directors. These accounting policies are disclosed in the notes to the consolidated financial statements. The discussion which follows should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. VALUATION OF ACCOUNTS RECEIVABLE We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Our customer base is diverse and includes customers located throughout the world. Payment terms in certain of the foreign countries in which we do business are longer than those that are customary in the United States, and as a result, may give rise to additional credit risk related to outstanding accounts receivable from these non-U.S. customers. Likewise, a change in the financial position, liquidity or prospects of any of our customers could have an impact on our ability to collect amounts due. While concentrations of credit risk related to trade receivables are somewhat limited by our large customer base, we do extend significant credit to some of our customers. We make estimates of the amounts of our gross accounts receivable that will not be collectible, and record an allowance for doubtful accounts to reduce the carrying value of accounts receivable to the amount that is expected to be realized. The allowance for doubtful accounts is established based upon the Company's historical bad debt experience, a review of the overall aging of the accounts, and an analysis of specific customer accounts, particularly those with past-due balances. The recorded allowance for doubtful accounts is intended to cover specific customer collection issues identified by management at the balance sheet date, and to provide for potential losses from other accounts based on our historical experience. Increases in the allowance for doubtful accounts are recorded as an expense and included in general, selling and administrative expenses in the period identified. Our estimate of the required allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change from period to period. In addition, it requires management to make judgments about the future collectibility of customer accounts. 17 INVENTORY VALUATION Inventories are recorded at the lower of actual manufactured or purchased cost, or estimated net realizable value. In order to determine net realizable value, management regularly reviews inventory quantities on hand and evaluates significant items to determine whether they are excess or obsolete. We record the value of estimated excess or obsolete inventory as a reduction of inventory and as an expense which is included in cost of sales in the period it is identified. Our estimate of excess and obsolete inventory is a critical accounting estimate because it is susceptible to change from period to period. In addition, it requires management to make judgments about the future demand for inventory. In order to quantify excess or obsolete inventory, management prepares lists of inventory quantities on hand and determines the amount of such inventories that, based on projected demand, are not anticipated to be sold within the next 12 to 24 months or, based on our current product offerings, are excess or obsolete. This list is then reviewed with sales and production management personnel to determine whether this list of potential excess or obsolete inventory is complete. Factors which impact this evaluation include, for example, whether there has been a change in the market or packaging for particular products, and whether there are components of inventory that incorporate obsolete formulations or technology. In certain businesses in which we are engaged, such as the domestic cat litter business, product and packaging changes can occur rapidly and expose us to excess and obsolete inventories. GOODWILL AND LONG-LIVED ASSETS We have made substantial investments in property, plant and equipment and have a moderate investment in goodwill. For property, plant and equipment, we evaluate the recoverability of these assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. For goodwill, we perform an annual impairment assessment (or more frequently if impairment indicators arise) as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. In analyzing the fair value of goodwill and assessing the recoverability of the carrying value of property, plant and equipment, management uses models which are based on estimates of future operating performance and related cash flows. In preparing these models, management must make estimates in projecting future cash flows attributable to the reporting unit or assets being tested, in selecting a discount rate that reflects the related business risks, and in determining the appropriate perpetuity or disposal value. In developing these projections of future cash flows, we make a variety of important assumptions and estimates that have a significant impact on management's assessments of whether the carrying values of goodwill and property, plant and equipment should be adjusted to reflect impairment. Among these are assumptions and estimates about the future growth and profitability of the related business unit or asset, and assumptions about anticipated future economic, regulatory and political conditions in the relevant market. Our estimates related to the carrying values of goodwill and property, plant and equipment are considered to be critical accounting estimates because they are susceptible to change from period to period based on our judgments about a variety of factors. For example, judgment is required to determine whether events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. In addition, in performing assessments of the carrying values of these assets, we must make judgments about the future business, economic, regulatory, and political conditions affecting these assets, as well as to select the appropriate risk-related rates for discounting estimated future cash flows, and to develop reasonable estimates of disposal values. RETIREMENT BENEFITS We sponsor a defined-benefit pension plan for substantially all of our domestic employees hired on or before December 31, 2003. In order to measure the expense and obligations associated with these retirement benefits, management must make a variety of estimates including discount rates used to value certain liabilities, expected return on plan assets set aside to fund these liabilities, rate of compensation increase, employee turnover rates, retirement rates, mortality rates and 18 other factors. Our benefit plan committee determines the key assumptions related to the discount rate, expected investment rate of return and compensation increases after consulting with the actuarial firm that performs the calculations. Other assumptions are also set based on consultation with our actuaries. We base our estimates on our historical experience as well as current facts and circumstances. The discount rate reflects the market rate for high-quality fixed income debt instruments on the measurement date. The rate is used to discount the future cash flows of benefit obligations back to the measurement date. An increase in the discount rate reduces pension expense and liabilities. The expected long-term rate of return on plan assets is determined using historic market return trends together with current market conditions and actual plan experience. An increase in the expected long-term rate of return on plan assets reduces pension expense and liabilities. The expected rate of compensation increase is determined based on our near-term outlook and assumed inflation. Higher compensation rates increase the pension expense and liabilities. Retirement rates are based primarily on actual plan experience. Mortality rates are based on tables published by the insurance industry. Different estimates used by management could result in our recognizing different amounts of expense over different periods of time. Note 13 to Notes to Consolidated Financial Statements describes details of our pension obligations and the expense for the year ended December 31, 2004. INCOME TAXES Our effective tax rate is based on the expected income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe those positions are likely to be challenged and that we may not succeed. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our effective tax rate includes the impact of changes to reserves that we consider appropriate. The rate is then applied to pre-tax income reported in our consolidated statements of operations. Our estimates of income tax items, expense and reserves are considered to be critical accounting estimates because they are susceptible to change from period to period based on our judgments about a variety of factors. As of December 31, 2004, our income taxes receivable includes a contingency reserve to reflect the potential reduction of refunds which may result from the examination of the returns by the IRS. Valuation allowances are recorded, if necessary, to measure a deferred tax asset at an estimated realizable value. Both positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is appropriate. Changes in a valuation allowance are recorded in the period when we determine events have occurred that will impact the realizable value of the asset. A number of years may elapse before a particular matter, for which we have established a reserve or valuation allowance, is audited and finally resolved. Audits of our United States federal income tax returns have been completed through 2001. State income tax returns are audited more infrequently. Unfavorable settlement of any particular issue would require use of our cash and could result in the recording of additional tax expense. Favorable resolution would be recognized as a reduction to our tax provision in the year of resolution. The Company has not provided for U.S. federal income and foreign withholding taxes on approximately $31.1 million of undistributed earnings from international subsidiaries as of December 31, 2004 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce or eliminate the resulting U.S. income tax liability. In October 2004, the American Jobs Creation Act (the "Act") was enacted which allowed for a temporary 85% dividends received deduction on certain foreign earnings repatriated into the U.S. The portion of the dividend that qualifies for the 85% deduction is that amount which exceeds an average of past years' foreign dividends. Additionally, certain criteria must be met when the funds are repatriated and may ultimately qualify for an effective tax rate as low as 5.25%. 19 The Company is in process of evaluating whether it will repatriate foreign earnings under the Act. The range of amounts that are reasonably under consideration for repatriation are from $0 to $26.9 million. The Company will evaluate the merits of repatriating foreign earnings in 2005 and report the tax impact, if any, of an envisioned repatriation upon the finalization of a repatriation plan. The Company has not recognized any income tax effect relating to the Act as we are currently not in a position to reasonably estimate the tax impact of any repatriation. NEW ACCOUNTING STANDARDS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. SFAS No. 151 also requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities; it is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company adopted this Statement in 2004; the adoption of this Statement did not have a material impact on our results of operations, financial position or cash flows. In December 2003, the FASB issued a revision to SFAS No. 132R, "Employers' Disclosures about Pensions and Other Postretirement Benefits," to improve financial statement disclosure for defined benefit plans. This Statement requires additional disclosures about the assets (including plan assets by category), obligations and cash flows of defined pension plans and other defined benefit postretirement plans. It also requires reporting of various elements of pension and other postretirement benefit costs on a quarterly basis. Generally, the disclosure requirements are effective for interim periods beginning after December 15, 2003; however, information about foreign plans is effective for fiscal years ending after June 15, 2004. We adopted the revised SFAS No. 132 in December 2003. We grant various types of stock-based compensation to directors, executives and employees. The majority of our stock-based compensation is awarded in the form of non-qualified stock options and restricted stock. Effective January 1, 2003, we prospectively adopted the fair value method of recording stock-based compensation as defined in SFAS No. 123, "Accounting for Stock-based Compensation." As a result, in 2003 we began to expense the fair value of stock options that were awarded to employees after January 1, 2003. Prior to 2003, we accounted for stock options using the intrinsic method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, no compensation expense was recognized for stock options awarded prior to 2003. The disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which allowed us to adopt SFAS No. 123 prospectively, provide that the pro forma net earnings and net earnings per share be presented as if the fair value based method had been applied to all awards granted to employees, not just awards granted after the date of adoption. Since we chose the prospective method of expensing stock options, the actual stock-based compensation expense recorded in 2003 and 2004 was less than the amount calculated for this pro forma requirement. In December 2004, the FASB amended FAS 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement eliminates the prospective option we have applied under SFAS No. 148 and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. Due to the fact that the majority of our options issued prior to January 1, 2003, the date we adopted SFAS No. 123, will have vested as of June 15, 2005 the revised computations will not have a material impact on our financial statements. FASB Staff Position ("FSP") No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), provides guidance under SFAS No. 109, "Accounting for Income Taxes," with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the "Jobs Act") on enterprises' income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. The Jobs Act creates a temporary incentive for U.S. corporations to repatriate income earned abroad principally for earnings that have previously been deemed permanently reinvested by providing a dividends received deduction for certain dividends from controlled foreign corporations. We have previously deemed our foreign earnings as 20 permanently reinvested and have not fully provided for taxes on unremitted foreign earnings. As a result and under the Company's current plans, we do not expect that FSP 109-2 will have a material impact on our results of operations, financial position or cash flows. FSP No. 109-1, "Application of FASB Statement No.109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" provides guidance on applying the deduction for income from qualified domestic production activities. The deduction will be phased in from 2005 through 2010. The Jobs Act also provides for a two-year phase out of the existing extra-territorial income exclusion ("ETI") for foreign sales. The deduction will be treated as a "special deduction" as described in FASB Statement No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return. We do not expect the net effect of the phase out of the ETI and the phase in of this new deduction to result in a material change in our effective tax rate for fiscal years 2005 and 2006, based on current earnings levels. RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2004 The discussion below references the consolidated statement of operations on page F-4 in Part IV of this document. Net sales for the year ended December 31, 2004 were $459.1 million compared with $372.0 million for 2003 and $305.1 million for 2002. Minerals contributed approximately 54% of the increase in net sales over 2003. The environmental and transportation segments contributed 45% and 1%, respectively, to the increase in net sales; intersegment shipping revenue increased by 12% over 2003. Acquisitions and fluctuation in foreign currency translation accounted for approximately 32% and 14%, respectively, of the 2004 over 2003 increase. In comparing 2003 with 2002, minerals accounted for approximately 67% of the increase, while environmental and transportation contributed 30% and 3%, respectively. Acquisitions and fluctuations in foreign currency translation accounted for approximately 17% and 9%, respectively, of the 2003 over 2002 increase. Other elements of the increase in net sales are described in the operating segment discussions below. Gross profit was $115.9 million for the year ended December 31, 2004 compared with $97.6 million for 2003 and $78.1 million in 2002. The 19% increase in gross profit in 2004 over 2003 resulted from the higher overall sales. Higher minerals segment sales generated the 25% increase in gross profit in 2003 compared with 2002. Gross margin was 25.2% in 2004 compared with 26.2% in 2003 and 25.6% in 2002. Higher production costs and greater sales of low gross margin products in the environmental segment led to the 100 basis point decline in 2004 compared with 2003. The 60 basis point improvement in gross margin in 2003 over 2002 followed the increase in net sales and lower production costs. General, selling and administrative expenses were $80.2 million for the year ended December 31, 2004 compared with $68.6 million in 2003 and $58.4 million in 2002. A number of expenses including higher compensation, employee benefits and professional and consulting fees associated with Section 404 of the Sarbanes-Oxley Act caused the increase in 2004 over 2003. Higher compensation and employee benefit costs were the primary causes for the increase in 2003 over 2002. Operating profit was $35.7 million for the year ended December 31, 2004, compared with $28.9 million in 2003 and $19.7 million in 2002. The improvement in operating profit in both periods followed the increase in sales and gross profit. Operating margin for 2004 was 7.8% compared with 7.8% in 2003 and 6.4% in 2002. Minerals segment margins improved in 2004 compared with 2003; however, a decline in environmental segment margins offset the improvement. The 140 basis point improvement in operating margin in 2003 resulted from increased profitability in the minerals and environmental segments that was generated by higher sales and gross profit. 21 A review of sales, gross profit, general, selling and administrative expenses and operating profit by segment follows. MINERALS SEGMENT
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------------- MINERALS 2004 2003 2002 2004 VS. 2003 2003 VS. 2002 ------------------------- ------------------ ------------------ ----------------- ------------------ ------------------ (Dollars in Thousands) Net sales 264,065 100.0% 217,104 100.0% 172,570 100.0% 46,961 21.6% 44,534 25.8% Cost of sales 211,228 80.0% 174,048 80.2% 139,636 80.9% --------- ------ --------- ------ --------- ------ Gross profit 52,837 20.0% 43,056 19.8% 32,934 19.1% 9,781 22.7% 10,122 30.7% General, selling and administrative expenses 22,518 8.5% 19,633 9.0% 17,064 9.9% 2,885 14.7% 2,569 15.1% --------- ------ --------- ------ --------- ------ Operating profit $ 30,319 11.5% $ 23,423 10.8% $ 15,870 9.2% $ 6,896 29.4% $ 7,553 47.6%
2004 VS. 2003 The $47.0 million increase in sales resulted from strong volume growth in the metalcasting and specialty minerals businesses. Metalcasting sales were also aided by price increases implemented as a result of rising raw materials and logistics costs. The detergents additives business led the increase in specialty minerals sales. Pet products sales were relatively stable. Acquisitions and fluctuations in foreign currency translation accounted for approximately 11% and 13%, respectively, of the increase in sales. Gross profit increased commensurate with higher sales. Gross margin improved by 20 basis points due to higher volumes which contributed to lower production costs for certain businesses. General, selling and administrative expenses increased due to higher compensation and benefit costs. Acquisitions and foreign exchange also contributed to the increase. Operating profit improved due to the greater sales and gross profit as explained above. Operating margin improved by 70 basis points with the higher volume in the metalcasting and specialty minerals businesses. 2003 VS. 2002 Approximately 24% of the $44.5 million increase in minerals net sales over 2002 was attributed to the January through April period in 2003, which is the period in 2002 prior to the acquisition of Colin Stewart Minchem Limited (CSM). Net sales improved over 2002 in all three business units, metalcasting, pet products and specialty minerals. Metalcasting volumes improved in North America primarily from increased demand from certain foundry customers. Pricing also improved in certain product lines to offset higher raw material and shipping costs. Our Asian metalcasting businesses also increased volumes over 2002, particularly in China. Pet products sales increased due to higher volume and improved pricing, which was aided by lower customer discounts. Specialty minerals sales primarily improved due to higher volume to detergent customers. Oil and gas drilling volume also improved over 2002. Gross profit increased over 2002 primarily as a result of the improvement in net sales described above. In addition, productivity improvements in the pet products business decreased unit manufacturing costs. Higher volume and productivity improvements expanded gross margin by 70 basis points to 19.8% in 2003. The inclusion of a full year of costs related to CSM, together with higher compensation and employee benefit costs accounted for a majority of the increase in general, selling and administrative expenses. 22 ENVIRONMENTAL SEGMENT
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------------- ENVIRONMENTAL 2004 2003 2002 2004 VS. 2003 2003 VS. 2002 ------------------------- ----------------- ----------------- ----------------- ----------------- ----------------- (Dollars in Thousands) Net sales 170,152 100.0% 131,351 100.0% 111,126 100.0% 38,801 29.5% 20,225 18.2% Cost of sales 111,565 65.6% 80,897 61.6% 69,333 62.4% -------- ------ -------- ------ -------- ------ Gross profit 58,587 34.4% 50,454 38.4% 41,793 37.6% 8,133 16.1% 8,661 20.7% General, selling and administrative expenses 38,028 22.3% 32,599 24.8% 27,420 24.7% 5,429 16.7% 5,179 18.9% -------- ------ -------- ------ -------- ------ Operating profit $ 20,559 12.1% $ 17,855 13.6% $ 14,373 12.9% $ 2,704 15.1% $ 3,482 24.2%
2004 VS. 2003 The $38.8 million increase in sales was primarily attributed to the impact of acquisitions. The two acquisitions, which were completed as of January 1, 2004, contributed approximately 58% of the growth in sales. See Note 10 of the accompanying consolidated financial statements for further details on the acquisitions. Fluctuations in foreign currency translation accounted for approximately 17% of the increase. Strong volume increases in the European lining technologies and building materials businesses also contributed to the increase. Gross profit increased due to the increase in sales; however, gross margins declined by 400 basis points. Lower relative profitability on sales generated by the acquired businesses was the primary reason for the margin decline. The domestic businesses also experienced margin pressure due to increased raw materials and logistics costs. General, selling and administrative expenses increased due to higher compensation and benefit costs. Acquisitions and foreign exchange also accounted for the increase. Operating profit improved with the increase in sales and gross profit; however, operating margin declined by 150 basis points. As referenced in the explanation for the gross margin decline, acquisitions had the primary detrimental impact on operating margin. 2003 VS. 2002 Lining technologies shipments in the U.S. and Europe primarily accounted for the increase in net sales. Building materials shipments in Europe also improved over 2002. Water treatment revenues declined from 2002 primarily due to the lower sales in the offshore services group. The increase in gross profit over 2002 corresponds with the increase in sales. Unit production costs in 2003 were comparable to the prior year levels. Higher compensation and benefit costs accounted for the increase in general, selling and administrative expenses over the prior year period. 23 TRANSPORTATION SEGMENT
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------------- TRANSPORTATION 2004 2003 2002 2004 VS. 2003 2003 VS. 2002 ------------------------- ----------------- ----------------- ----------------- ----------------- ----------------- (Dollars in Thousands) Net sales $ 40,650 100.0% $ 37,549 100.0% $ 32,509 100.0% 3,101 8.3% 5,040 15.5% Cost of sales 36,179 89.0% 33,508 89.2% 29,141 89.6% -------- ------ -------- ------ -------- ------ Gross profit 4,471 11.0% 4,041 10.8% 3,368 10.4% 430 10.6% 673 20.0% General, selling and administrative expenses 2,751 6.8% 2,494 6.6% 2,401 7.4% 257 10.3% 93 3.9% -------- ------ -------- ------ -------- ------ Operating profit $ 1,720 4.2% $ 1,547 4.2% $ 967 3.0% $ 173 11.2% $ 580 60.0%
2004 VS. 2003 A majority of the increase in sales was attributed to greater intersegment business. Both the domestic minerals and environmental segments experienced higher volumes that led to the increase in transportation services. Intersegment sales accounted for approximately 39% of the segment total. Higher freight rates also contributed to the increase. 2003 VS. 2002 Approximately 37% of the segment's sales in 2003 were to the domestic minerals and environmental segments. Intersegment sales contributed approximately 58% of the sales increase over 2002. Higher traffic levels and new customer sales accounted for the remainder of the increase. Gross margin increased 40 basis points due to higher equipment utilization rates and better sales pricing. General, selling and administrative expenses increased due to higher compensation and employee benefit costs. CORPORATE SEGMENT
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- CORPORATE 2004 2003 2002 2004 VS. 2003 2003 VS. 2002 --------------------------- --------- --------- --------- ------------------- ------------------- (Dollars in Thousands) Intersegment shipping sales $ (15,762) $ (14,038) $ (11,105) Intersegment shipping costs (15,762) (14,038) (11,105) --------- --------- --------- Gross profit - - - Corporate general, selling and administrative expenses 13,270 10,090 7,108 $ 3,180 31.5% $ 2,982 42.0% Nanocomposite business development expenses 3,655 3,798 4,444 (143) -3.8% (646) -14.5% --------- --------- --------- Operating loss $ (16,925) $ (13,888) $ (11,552) $ (3,037) 21.9% $ (2,336) 20.2%
2004 VS. 2003 Intersegment shipping sales and costs are related to billings from the transportation segment to the domestic minerals and environmental segments for services. These services are invoiced to the minerals and environmental segments at arms-length rates and those costs are subsequently charged to customers. Intersegment sales and costs reported above reflect the elimination of these transactions. Corporate costs include management information systems, human resources, investor relations, corporate communications and finance. Additionally, marketing, research and operating costs related to the development of the nanocomposite business are included in this segment. 24 Segment operating expenses were primarily impacted by increased stock compensation costs and higher professional and consulting fees associated with complying with Section 404 of the Sarbanes-Oxley Act. We recorded approximately $1.2 million of tax consulting fees in 2004 in connection with the filing of amended federal income tax returns which are claiming refunds for increased deductions and credits for the 1999 through 2002 periods. Further background on the amended returns is described below in the income taxes narrative. Nanocomposite expenses declined slightly due lower net manufacturing costs. 2003 VS. 2002 The increase in corporate general, selling and administrative expenses in 2003 related to higher compensation and employee benefit costs. Included in compensation costs in the current period were costs associated with stock options granted to employees in the current year. As disclosed in Note 1 to the Consolidated Financial Statements included in Item IV of this document, effective from January 1, 2003, we adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation. We elected to record stock-based compensation costs using fair value under the prospective method. Lower nanocomposite development expenses in 2003 were due to a decline in research and development costs and lower net manufacturing costs. NET INTEREST EXPENSE Net interest expense was $0.8 million, $0.3 million and $0.5 million in 2004, 2003, and 2002, respectively. Higher average funded debt was the primary cause for the increase in 2004 over 2003. Debt increased due to acquisitions and an increase in working capital. The change from 2002 to 2003 was due to lower average funded debt. OTHER INCOME (EXPENSE) Other income in 2004 was approximately $0.2 million. In 2003 and 2002, other income was $0.6 million and less than $0.1 million, respectively. This item reflects a number of miscellaneous transactions including gains and losses related to foreign exchange transactions and disposals of fixed assets. The decline in 2004 from 2003 was primarily attributed to lower recognized foreign exchange gains at our U.K. and Poland businesses in the current year. INCOME TAXES The effective income tax rate for 2004 was 13% compared with 34% in 2003 and 36% in 2002. In 2004, the Company recorded a reduction to income tax expense of $4,789 associated with depletion deductions and research and development credits available in computing income tax expense. Approximately $821 of this amount relates to changes in estimates resulting from the finalization, in 2004, of the tax return for the 2003 tax year. The remaining $3,968 relates to the filing of amended federal income tax returns dating from 1999 through 2002. Regarding the $4,789 mentioned above, the Company recomputed its federal income tax liability for these periods after determining that it could increase certain deductions and credits as allowed under the Internal Revenue Code. The total refund claimed on the returns was $5.2 million; however, the Company determined that a contingency reserve was necessary to reflect potential reduction of the refund after examination of the returns by the IRS. The Company also recorded, in 2004, a $1.1 million credit to income tax expense for the adjustment of deferred income tax assets and income tax payables at a U.K. subsidiary. A portion of this adjustment related to prior reporting periods, but was considered immaterial to those periods; therefore, the entire amount was reflected in 2004. If these two adjustments had not been recorded, the effective income tax rate for 2004 would have been 30%. 25 Our effective tax rate is also influenced by the mix of earnings amongst various tax jurisdictions and changes in tax deductions that impact our federal income tax return, but are not recorded in our financial statements. In 2004, the rate was positively impacted due to our use of alternative percentage depletion calculations. Additionally, we incurred lower effective tax rates in foreign jurisdictions. Note 8 of Notes to Consolidated Financial Statements, which is included in Part IV of this report, provides further detail on the reconciliation of our effective tax rate to the statutory rate. The decrease in the 2003 rate from 2002 was due to increased taxable income in foreign jurisdictions which have lower statutory rates than the U.S. DISCONTINUED OPERATIONS Discontinued operations reported in 2003 reflected the recording of a tax benefit associated with the disposal of the U.K.-based metalcasting and cat litter businesses. The disposal transactions were completed in 2001. On February 18, 2004, the Internal Revenue Service notified us that audits of certain federal income tax returns, including 2001, had been completed and approved by the Committee on Joint Taxation. The 2001 return included deductions for losses associated with the disposal of the aforementioned businesses. Upon receiving this notification, effective as of December 31, 2003, we revised our estimate of income taxes payable previously recorded to recognize an income tax receivable of $8.9 million, including interest on the forthcoming refund. The tax refunds were received in 2004. NET INCOME Net income for 2004 was $31.6 million compared with $28.9 million and $13.0 million in 2003 and 2002, respectively. In 2003, net income included an $8.9 million benefit from discontinued operations as previously discussed. The improvement in income from continuing operations in both comparison periods (2004 vs. 2003 and 2003 vs. 2002) was attributed to the increase in operating profit for the reasons described earlier in this report. Net income in 2004 was also positively impacted by the adjustments to income tax expense which reduced the overall effective tax rate as previously discussed. EARNINGS PER SHARE Diluted earnings per share were calculated using the weighted average number of shares of common stock, including common share equivalents, outstanding during the year. Stock options issued to key employees and directors are considered common share equivalents. The weighted average number of shares of common stock and common stock equivalent shares outstanding was approximately 30.7 million in 2004, 29.8 million in 2003 and 30.1 million in 2002. There were 29.4 million shares outstanding, excluding common share equivalents, at December 31, 2004, compared with 29.1 million at December 31, 2003, and 27.9 million at December 31, 2002. The increase in shares in 2004 was due to exercise of stock options which was partially offset by stock repurchases. The 1.2 million share increase in 2003 was related to the issuance of 1.5 million shares of treasury stock to employees in connection with the exercise of stock options. This increase was offset by the repurchase of 267,000 shares of common stock on the open market. Diluted earnings per share from continuing operations in 2004 were $1.03 per share compared with $0.67 per share and $0.43 per share in 2003 and 2002, respectively. The improvement for both comparison periods was commensurate with the increase in net income from continuing operations previously described. Also impacting 2004, was a reduction of income tax expense, described above, which contributed approximately $0.14 per share. Net income per diluted share was $0.97 share in 2003 which was positively impacted by $0.30 per diluted share due to the effect of discontinued operations as previously described. Net income per diluted share was equal to income from continuing operations per share in 2004 and 2002. 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 the sources of funds to purchase property, plant and equipment; acquire businesses; repurchase common stock; and pay dividends to shareholders. We believe cash flows from operations and borrowings from an unused and committed revolving credit facility will be adequate to support our operating plans for the foreseeable future. Following is a discussion and analysis of our cash flow activities as presented in the Consolidated Statements of Cash Flows within Part IV of this report. 26 During 2004, cash provided by operating activities of continuing operations was $17.4 million compared with $28.6 million in 2003 and $38.4 million in 2002. The decline in 2004 was primarily attributed to cash used for working capital. Accounts receivable and inventories in 2004 increased by $22.0 million and $16.8 million, respectively, over 2003. The increases were commensurate with our sales growth. The decline in 2003 from 2002 was also due to an increase in working capital. Accounts receivable and inventories increases also accounted for the working capital increase in 2003. Net cash provided by discontinued operations was $8.6 million in 2004, which was attributed to the receipt of federal income tax refunds recorded as receivables in December, 2003. Net cash used in investing activities in 2004 was $34.7 million compared with $22.8 million in 2003 and $32.3 million in 2002. Capital expenditures totaled $21.6 million and acquisitions were $13.3 million in 2004. In 2003 and 2002, capital expenditures were $15.8 million and $16.2 million, respectively, while acquisitions were $7.1 million and $17.0 million, respectively. Capital expenditures increased in 2004 over 2003 primarily due to an acquisition of a vacant facility in the U.S. for $4.4 million that is planned for consolidating certain manufacturing operations for our environmental segment. The remaining portion of the increase was due to further expansion of operations in Asia. There was minimal change in capital expenditures in 2003 compared with 2002. Acquisitions increased in 2004 over 2003 due to two acquisitions that added to our environmental segment. We foresee capital expenditures in 2005 to be comparable to 2004. We continue to seek businesses to acquire that meet our strategic objectives; however, we currently do not anticipate any significant funding requirements for such activities in 2005. Cash provided by financing activities was $9.3 million in 2004, while cash used in financing activities was $11.6 million in 2003 and $3.0 million in 2002. Net borrowings of debt in 2004 were approximately $20.5 million. We had net repayments of debt totaling approximately $8.3 million and net borrowings of approximately $4.9 million in 2003 and 2002, respectively. The increase in borrowings in 2004 was attributed to acquisitions and funding working capital growth. Net debt repayments in 2003 were the result of higher cash flow from operations and relatively lower spending on acquisitions. Acquisitions completed in 2002 were the primary reason for the net borrowings in that year. We repurchased approximately $2.9 million of our common stock in 2004 compared with $1.6 million in 2003 and $6.9 million in 2002. Our Board of Directors authorized $10 million for stock repurchases in May, 2004. All of the funds remain available for stock repurchases as of December 31, 2004. We elect to repurchase our common stock in the open market from time to time when we consider utilizing funds for this purpose represent a good return to our shareholders. Dividends on our common stock were $9.4 million in 2004 compared with $4.6 million in 2003 and $2.7 million in 2002. Declared dividends were $0.32 per share in 2004 compared with $0.16 per share in 2003 to $0.095 per share in 2002. The increases reflected the improvement in our earnings and cash flows from 2002 through 2004. As of December 31, 2004, we had outstanding debt of $34.3 million and cash of $17.6 million, compared with $9.9 million of outstanding debt and $13.5 million of cash at December 31, 2003. Long-term debt represented 13% of total capitalization at December 31, 2004, compared with 5% at December 31, 2003. We had a current ratio of 3.1-to-1 as of December 31, 2004, and working capital of approximately $129.4 million, compared with 3.0-to-1 and $95.9 million, respectively, as of December 31, 2003. The current ratio and working capital increased due to the growth in sales we experienced in 2004. 27 The following schedule sets forth details of our contractual obligations at December 31, 2004:
PAYMENTS DUE BY PERIOD ---------------------------------------------------- LESS THAN 1 1-3 4-5 AFTER 5 TOTAL YEAR YEARS YEARS YEARS -------- -------- -------- -------- -------- (in millions) Bank debt 34.3 $ - $ 29.5 $ - $ 4.8 Operating leases 13.4 4.1 8.0 0.5 0.8 -------- -------- -------- -------- -------- Total contractual cash obligations $ 47.7 $ 4.1 $ 37.5 $ 0.5 $ 5.6 ======== ======== ======== ======== ========
Bank debt includes approximately $29.5 million due under a revolving credit agreement, which provides for a commitment of $100 million in borrowing capacity and matures on October 31, 2006. Borrowing rates on the facility can range from 0.625% to 1.20% above the 3-month London Inter Bank Offered Rate (LIBOR) depending upon the amount of the credit line used and certain capitalization ratios. The facility requires certain covenants to be met including specific amounts of net worth, and also limits our ability to make additional borrowings and guarantees. We were in compliance with these covenants at December 31, 2004. Operating leases relate to non-cancelable obligations for railroad cars, truck trailers, computer software, office equipment, certain automobiles, and office and plant facilities. Additional information regarding operating leases is disclosed in Note 12 of Notes to the Consolidated Financial Statements included in Part IV of this report. At December 31, 2004 and 2003, the Company had outstanding standby letters of credit of $13.9 million and $13.7 million, respectively, which are not included in the obligations in the table above. These letters of credit typically serve to guarantee the Company's performance of its obligations related to land reclamation and workers' compensation claims. The Company has recognized the estimated costs of its obligations related to land reclamation and workers' compensation claims in the Company's consolidated balance sheets as of December 31, 2004 and 2003. Since the mid-1980s, we and/or our subsidiaries have been named as one of a number of defendants in product liability lawsuits relating to the minor free-silica content of our bentonite products used in the metalcasting industry. The plaintiffs in these lawsuits are primarily employees of our foundry customers. To date, we have not incurred significant costs in defending these matters. We believe we have adequate insurance coverage and do not believe the litigation will have a material adverse impact on our financial condition, liquidity or results of the operations. FORWARD LOOKING STATEMENTS AND RISK FACTORS Certain statements we make from time to time, including statements in the Management's Discussion and Analysis of Financial Condition and Results of Operation section above, constitute "forward-looking statements" made in reliance upon the safe harbor contained in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements relating to our Company or our operations that are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions, and statements relating to anticipated growth, levels of capital expenditures, future dividends, expansion into global markets and the development of new products. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our actual results, performance or achievements could differ materially from the results, performance or achievements expressed in, or implied by, these forward-looking statements as a result of various factors, including without limitation the following: COMPETITION The minerals market is very competitive. We believe competition is essentially a matter of product quality, price, delivery, service and technical support. Several of our competitors in the U.S. market are larger and have substantially greater financial resources. If we fail to compete successfully based on these or other factors, we may lose customers or fail to recruit new customers and our business and future financial results could be materially and adversely affected. 28 RELIANCE ON METALCASTING AND CONSTRUCTION INDUSTRIES Approximately 45% of our minerals segment's sales and 30% of our environmental segment's sales in 2004 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 in the minerals and environmental segments may be adversely affected. REGULATORY AND LEGAL MATTERS Our operations are subject to various federal, state, local and foreign laws and regulations relating to the environment 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. In 2004, our business outside North America represented approximately 37% of our consolidated sales. The approximate breakdown of the sales outside of the United States for 2004 was as follows: Europe 73%; Asia Pacific 24%; and other regions 3%. As we expand internationally, we will be subject to increased risks, which may include the following: . currency exchange or price control laws; . currency translation adjustments; . political and economic instability; . unexpected changes in regulatory requirements; . tariffs and other trade barriers; . longer accounts receivable collection cycles; and . 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 acute demand from China. We rely on shipping bulk cargos of bentonite from the U.S. and China to customers, as well as our own subsidiaries. This issue is not isolated to AMCOL; however, we may need to offset additional shipping costs with price increases to customers in order to maintain our profitability. Other factors in the U.S. that will potentially impact us are escalating costs of purchased raw materials derived from petrochemical stocks and increases in rail 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. 29 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: . fluctuations in our financial results; . our introduction of new services or products; . announcements of acquisitions, strategic alliances or joint ventures by us, our customers or our competitors; . changes in analysts' recommendations regarding our common stock; and . 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. FINANCIAL REGULATION RISK In response to recently enacted changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes Oxley Act of 2002, we continue to devote significant resources and time to comply with these new requirements. In particular, we are currently undertaking a full analysis and documentation of the Company's internal control over financial reporting. In addition to significant expenditures, compliance with these new rules has also required significant time and attention by our management, which has caused disruptions to normal business operations. As discussed in Item 9A. Controls and Procedures, we have identified a material weakness that relates to financial statement tax provisions. Additional testing could identify additional deficiencies in our internal control over financial reporting. We expect to conclude that the Company has at least one material weakness in internal control over financial reporting. As a result, we will be unable to conclude that our disclosure controls or our internal control over financial reporting are effective as of December 31, 2004. We are not certain of the consequences of our inability to conclude that our disclosure controls and internal control over financial reporting are effective, although possible consequences could include actions by regulatory authorities such as the SEC or the New York Stock Exchange, a loss of confidence by our investors in our reported financial information, and a decline in the trading price of our common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a multinational corporation that manufactures and markets products in countries throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and does not use them for trading or speculative purposes. EXCHANGE RATE SENSITIVITY We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the euro, the British pound, and the Polish zloty. We also have significant exposure to changes in exchange rates between the British pound and the euro and the Polish zloty and the euro. Our various currency exposures often offset each other, providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2004, we had no material outstanding foreign currency contracts. 30 INTEREST RATE SENSITIVITY The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates for debt obligations. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The instruments' actual cash flows are denominated in U.S. dollars.
EXPECTED MATURITY DATE ---------------------------------------------------------------------------------------------- FAIR 2005 2006 2007 2008 2009 THEREAFTER TOTAL VALUE --------- --------- --------- --------- --------- ---------- --------- --------- (US$ equivalent in thousands) Short-term debt: Variable rate $ - $ - $ - $ - $ - $ - $ - $ - Average interest rate - - - - - - - - Long-term debt: Variable rate - 29,495 - - - 4,800 - 34,295 Average interest rate - 3.0% - - - 1.7% - - --------- --------- --------- --------- --------- ---------- --------- --------- Total $ - $ 29,495 $ - $ - $ - $ 4,800 $ - $ 34,295 ========= ========= ========= ========= ========= ========== ========= =========
We periodically use interest rate swaps to manage interest rate risk on debt securities. These instruments allow us to change the characteristics of variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2004 and 2003, there were no interest rate swaps outstanding. CREDIT RISK We are exposed to credit risk on certain assets, primarily accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks. Our accounts receivable financial instruments are carried at amounts that approximate fair value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to Financial Statements and Financial Statement Schedule on Page F-1. Such financial statements and schedule are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 31 ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of December 31, 2004. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, solely as a result of the material weakness in our internal control over financial reporting discussed below under "Management's Report on Internal Control Over Financial Reporting," our disclosure controls and procedures were not effective as of December 31, 2004 to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act are recorded, processed, summarized and reported as and when required. Notwithstanding the foregoing, management believes that the financial statements included within this report fairly present in all material respects the financial position and results of operations of the Company, in conformity with generally accepted accounting principles in the United States, for the periods presented. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time. As permitted by an exemptive order issued by the SEC on November 30, 2004 (SEC Release No. 34-50754), management's annual report on internal control over financial reporting, required by Item 308(a) of Regulation S-K, and the related attestation report of our registered independent auditors required by Item 308(b) of Regulation S-K, may be filed by amendment to our Annual Report on Form 10-K within forty five days after the original filing period for such Annual Report on Form 10-K (the "Extension Order"). Because our management continues to assess the effectiveness of it's internal control over financial reporting, we will take advantage of the extension provided by the Extension Order and file management's annual report on internal control over financial reporting and the related attestation report of our independent registered public accounting firm by amendment to this Annual Report on Form 10-K prior to the expiration of such extension on May 2, 2005. Although we are relying upon the Extension Order, management of the Company will report a material weakness in internal control over financial reporting as of December 31, 2004 with respect to controls over accounting for income taxes, when it completes the assessment required by Section 404 of the Sarbanes-Oxley Act. Therefore, management will be required to conclude that the Company's internal control over financial reporting was ineffective as of December 31, 2004. In making this assessment, our management will use the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In conducting the aforementioned evaluation and assessment, management identified a material weakness in internal control over financial reporting relative to our accounting for income taxes. In particular, our design of internal controls did not address the accounting considerations arising from the filing of tax returns or the timing of recording of changes in accounting estimates relating to income taxes of foreign subsidiaries. This control weakness resulted in errors in our accounting for income taxes, which were identified during the course of our 2004 audit, and resulted in (i) restatement of our financial results for the quarter ended September 30, 2004 to both increase net income reported in such financial statements to recognize expected federal income tax refunds relating to certain deductions and credits claimed in amended tax returns filed in September 2004 and to make certain adjustments to deferred income tax assets and income taxes payable by a wholly-owned Company subsidiary in the United Kingdom and (ii) increase retained earnings to reflect its estimate of the refund resulting from such certain state tax deductions claimed in amended tax returns filed in September 2004. 32 Our management is in the process of further assessing the effectiveness of our internal controls over financial reporting. Additional testing may cause management to identify additional deficiencies in our internal controls over financial reporting as of December 31, 2004. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934) during the fourth quarter of 2004 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We are working to design and implement appropriate procedures in order to remediate the deficiencies in our internal control over financial reporting concerning accounting for income taxes. After the discovery, in the first quarter of 2005, of the errors resulting in the restatement of our financial statements for the quarter ended September 30, 2004, we implemented changes to our design of internal control with respect to accounting for income taxes. Specifically, we will formalize procedures relating to determination of appropriate accounting treatment for certain deduction and credit positions taken in filing income tax returns, both amended and original. Our Tax Manager will be responsible to report to the Controller and Chief Financial Officer each quarter changes in such tax positions that may have a material effect on the financial statements. The Controller and Chief Financial Officer will review the positions and document conclusions as to the accounting treatment. Additionally, we will enhance controls over financial reporting of our foreign subsidiaries to assure the consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles and changes in accounting estimates are recorded in the appropriate reporting period. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors of the Company is included under the captions "Election of Directors", "Corporate Governance Matters" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. Information regarding the executive officers of the Company is included under a separate caption in Part I hereof in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. We have adopted a Code of Business Conduct and Ethics (the "Code") that applies to our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions, as well as other employees. The Code, our Corporate Governance Guidelines and the charters of our Audit Committee, Compensation Committee and Nominating and Governance Committee are publicly available on our website at www.amcol.com and are available in print, free of charge, to any shareholder upon request to the Company's Corporate Secretary at AMCOL International Corporation, One North Arlington, 1500 West Shure Drive, Suite 500, Arlington Heights, Illinois 60004-7803. If we make any substantive amendments to the Code or grant any waiver, including any implicit waiver, from a provision of the Code to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K in accordance with applicable rules and regulations. 33 ITEM 11. EXECUTIVE COMPENSATION Information regarding the above is included under the captions "Named Officers' Compensation" and "Stock Performance Graph" in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is included under the caption "Security Ownership" in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. Information regarding the Company's securities authorized for issuance under equity compensation plans is included under the caption "Named Officers' Compensation" and "Equity Compensation Plan Information" in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding the above is included under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is included under the captions "Independent Public Accountants" and "Corporate Governance Matters - The Audit Committee" in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. 34 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (a) 1. See Index to Financial Statements and Financial Statement Schedule below. 2. See Financial Statements and Index to Financial Statement Schedule below. Such Financial Statements and Schedule are incorporated herein by reference. 3. See Index to Exhibits immediately following the signature page. (b) See Index to Exhibits immediately following the signature page. (c) See Index to Financial Statements and Financial Statement Schedule below.
ITEM 15(a) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ---- (1) Financial Statements: Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets, December 31, 2004 and 2003 F-3 Consolidated Statements of Operations, Years ended December 31, 2004, 2003 and 2002 F-4 Consolidated Statements of Comprehensive Income, Years ended December 31, 2004, 2003 and 2002 F-5 Consolidated Statements of Stockholders' Equity, Years ended December 31, 2004, 2003 and 2002 F-6 Consolidated Statements of Cash Flows, Years ended December 31, 2004, 2003 and 2002 F-7 Notes to Consolidated Financial Statements F-8 (2) Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts F-30
All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required, or because the required information is not material. F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders AMCOL International Corporation: We have audited the consolidated financial statements of AMCOL International Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMCOL International Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As described in Note 2 to the consolidated financial statements, the Company's consolidated balance sheet as of December 31, 2003 and the related consolidated statements of stockholders' equity for the years ended December 31, 2003 and 2002 have been restated. As described in Note 1 to the consolidated financial statements, the Company changed its method of accounting for stock based compensation effective January 1, 2003, and its method of accounting for goodwill as of January 1, 2002. KPMG LLP Chicago, Illinois March 30, 2005 F-2 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) DECEMBER 31, ----------------------------- 2003 Restated ASSETS 2004 (Note 2) ---------------------------------------------- ------------ ------------ Current assets: Cash $ 17,594 $ 13,525 Accounts receivable: Trade, less allowance for doubtful accounts of $4,637 and $3,455 in 2004 and 2003, respectively 86,128 58,385 Other 2,214 2,612 Inventories 63,882 46,182 Prepaid expenses 7,111 5,108 Current deferred tax assets 4,293 3,639 Income taxes receivable 9,126 14,123 Assets held for sale 752 - ------------ ------------ Total current assets 191,100 143,574 ------------ ------------ Investment in and advances to joint ventures 15,023 13,068 ------------ ------------ Property, plant, equipment, and mineral rights and reserves: Land and mineral rights 12,019 10,275 Depreciable assets 247,280 226,221 ------------ ------------ 259,299 236,496 Less: accumulated depreciation 165,658 149,500 ------------ ------------ 93,641 86,996 ------------ ------------ Other assets: Goodwill 19,225 5,633 Intangible assets, less accumulated amortization of $4,953 and $3,872 in 2004 and 2003, respectively 3,802 4,345 Deferred tax assets 6,444 5,314 Other assets 7,207 6,399 ------------ ------------ 36,678 21,691 ------------ ------------ $ 336,442 $ 265,329 ============ ============ DECEMBER 31, ----------------------------- 2003 Restated LIABILITIES AND STOCKHOLDERS' EQUITY 2004 (Note 2) ---------------------------------------------- ------------ ------------ Current liabilities: Current maturities of long-term debt and notes payable $ - $ 844 Accounts payable 25,474 20,365 Accrued liabilities 36,207 26,499 ------------ ------------ Total current liabilities 61,681 47,708 ------------ ------------ Long-term debt 34,295 9,006 ------------ ------------ Minority interests in subsidiaries 5 116 Deferred compensation 5,872 4,583 Other liabilities 12,655 12,466 ------------ ------------ 18,532 17,165 ------------ ------------ Stockholders' equity: Common stock, par value $.01 per share. Authorized 100,000,000 shares; issued 32,015,771 shares in 2004 and 2003 320 320 Additional paid in capital 69,763 67,513 Retained earnings 154,366 132,179 Accumulated other comprehensive income 14,905 8,372 ------------ ------------ 239,354 208,384 Less: Treasury stock (2,620,016 and 2,908,025 shares in 2004 and 2003, respectively) 17,420 16,934 ------------ ------------ 221,934 191,450 ------------ ------------ $ 336,442 $ 265,329 ============ ============ See accompanying notes to consolidated financial statements. F-3 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31, ------------------------------------------ 2004 2003 2002 ------------ ------------ ------------ CONTINUING OPERATIONS Net sales $ 459,105 $ 371,966 $ 305,100 Cost of sales 343,210 274,415 227,005 ------------ ------------ ------------ Gross profit 115,895 97,551 78,095 General, selling and administrative expenses 80,222 68,614 58,437 ------------ ------------ ------------ Operating profit 35,673 28,937 19,658 ------------ ------------ ------------ Other income (expense): Interest expense, net (826) (280) (512) Other, net 225 604 43 ------------ ------------ ------------ (601) 324 (469) ------------ ------------ ------------ Income before income taxes, equity in income of joint ventures, and minority interest 35,072 29,261 19,189 Income tax expense 4,687 9,946 6,916 ------------ ------------ ------------ Income before equity in income of joint ventures and minority interest 30,385 19,315 12,273 Income from joint ventures 1,180 600 531 Minority interest in net loss of subsidiary - - 164 ------------ ------------ ------------ Income from continuing operations 31,565 19,915 12,968 ------------ ------------ ------------ DISCONTINUED OPERATIONS Gain on 2001 disposal (including income tax benefits of $8,741 in 2003) - 8,950 - ------------ ------------ ------------ Income from discontinued operations - 8,950 - ------------ ------------ ------------ Net income $ 31,565 $ 28,865 $ 12,968 ============ ============ ============
See accompanying notes to consolidated financial statements. Continued... F-4 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31, ------------------------------------------ 2004 2003 2002 ------------ ------------ ------------ EARNINGS PER SHARE Basic earnings per share: Continuing operations $ 1.08 $ 0.70 $ 0.46 ------------ ------------ ------------ Discontinued operations: Gain on disposal - 0.32 - ------------ ------------ ------------ - 0.32 - ------------ ------------ ------------ Net income $ 1.08 $ 1.02 $ 0.46 ============ ============ ============ Diluted earnings per share: Continuing operations $ 1.03 $ 0.67 $ 0.43 ------------ ------------ ------------ Discontinued operations: Gain on disposal - 0.30 - ------------ ------------ ------------ - 0.30 - ------------ ------------ ------------ Net income $ 1.03 $ 0.97 $ 0.43 ============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
YEAR ENDED DECEMBER 31, ------------------------------------------ 2004 2003 2002 ------------ ------------ ------------ Net income $ 31,565 $ 28,865 $ 12,968 Other comprehensive income (loss) - Minimum pension liability (457) - - Foreign currency translation adjustment 6,990 6,367 4,693 ------------ ------------ ------------ Comprehensive income $ 38,098 $ 35,232 $ 17,661 ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
COMMON STOCK -------------------------- NUMBER ADDITIONAL OF PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ----------- ----------- ----------- ----------- Balance at December 31, 2001 32,015,771 320 71,905 91,017 Prior period adjustments (Note 2) 6,552 ----------- ----------- ----------- ----------- Balance at December 31, 2001 (Restated) 32,015,771 320 71,905 97,569 Net income - - - 12,968 Cash dividends ($0.095 per share) - - - (2,663) Translation adjustment - - - - Purchase of 1,248,407 treasury shares - - - - Sales of 873,921 treasury shares pursuant to options - - (2,993) - Tax benefit from employee stock plans - - 938 - ----------- ----------- ----------- ----------- Balance at December 31, 2002 (Restated) 32,015,771 320 69,850 107,874 Net income - - - 28,865 Cash dividends ($0.16 per share) - - - (4,560) Translation adjustment - - - - Purchase of 266,963 treasury shares - - - - Sales of 1,492,806 treasury shares pursuant to options - - (5,145) - Tax benefit from employee stock plans - - 2,195 - Vesting of common stock in connection with employee stock plans - - 613 - ----------- ----------- ----------- ----------- Balance at December 31, 2003 (Restated) 32,015,771 320 67,513 132,179 Net income 31,565 Cash dividends ($0.32 per share) (9,378) Translation adjustment Purchase of 189,800 treasury shares Sales of 477,809 treasury shares pursuant to options (1,551) Tax benefit from employee stock plans 2,027 Vesting of common stock in connection with employee stock plans 1,774 Minimum pension liability ----------- ----------- ----------- ----------- Balance at December 31, 2004 32,015,771 320 69,763 154,366 =========== =========== =========== =========== ACCUMULATED OTHER COMPREHENSIVE INCOME TREASURY (LOSS) STOCK TOTAL ------------- ----------- ----------- Balance at December 31, 2001 (2,688) (19,828) 140,726 Prior period adjustments (Note 2) 6,552 ------------- ----------- ----------- Balance at December 31, 2001 (Restated) (2,688) (19,828) (147,278) Net income - - 12,968 Cash dividends ($0.095 per share) - - (2,663) Translation adjustment 4,693 - 4,693 Purchase of 1,248,407 treasury shares - (6,933) (6,933) Sales of 873,921 treasury shares pursuant to options - 4,647 1,654 Tax benefit from employee stock plans - - 938 ------------- ----------- ----------- Balance at December 31, 2002 (Restated) 2,005 (22,114) 157,935 Net income - - 28,865 Cash dividends ($0.16 per share) - - (4,560) Translation adjustment 6,367 - 6,367 Purchase of 266,963 treasury shares - (2,853) (2,853) Sales of 1,492,806 treasury - shares pursuant to options - 7,273 2,128 Tax benefit from employee stock plans - - 2,195 Vesting of common stock in connection with employee stock plans - 760 1,373 ------------- ----------- ----------- Balance at December 31, 2003 (Restated) 8,372 (16,934) 191,450 Net income 31,565 Cash dividends ($0.32 per share) (9,378) Translation adjustment 6,990 6,990 Purchase of 189,800 treasury - shares (3,243) (3,243) Sales of 477,809 treasury - shares pursuant to options 2,757 1,206 Tax benefit from employee stock plans 2,027 Vesting of common stock in connection with employee stock plans 1,774 Minimum pension liability (457) (457) ------------- ----------- ----------- Balance at December 31, 2004 14,905 (17,420) 221,934 ============= =========== ===========
See accompanying notes to consolidated financial statements. F-6 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, ------------------------------------------ 2004 2003 2002 ------------ ------------ ------------ Cash flow from operating activities: Income from continuing operations $ 31,565 $ 19,915 $ 12,968 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation, depletion, and amortization 20,124 18,910 20,759 Equity in income of joint ventures (1,187) (600) (531) Minority interest in net loss of subsidiary 7 - (164) Change in minority interest in subsidiaries - - 92 Increase (decrease) in allowance for doubtful accounts 1,063 813 515 Decrease (increase) in deferred income taxes (856) (2,586) 2,882 Tax benefit from employee stock plans 2,027 2,195 938 Gain on sale of depreciable assets (311) (73) (11) Stock compensation expense 1,772 613 - Other non-cash charges (457) - - (Increase) decrease in current assets, net of effects of acquisitions: Accounts receivable (22,040) (12,615) (2,133) Income taxes receivable (3,688) 897 2,403 Inventories (16,817) (6,721) (585) Prepaid expenses (2,003) (1,588) 149 Increase (decrease) in current liabilities, net of effects of acquisitions: Accounts payable 2,897 2,447 5,051 Accrued liabilities 5,975 8,841 (2,713) Increase in other noncurrent assets (1,893) (1,345) (3,026) Increase (decrease) in other noncurrent liabilities 1,209 (457) 1,775 ------------ ------------ ------------ Net cash provided by operating activities of continuing operations 17,387 28,646 38,369 ------------ ------------ ------------ Net cash provided by discontinued operations 8,625 - - ------------ ------------ ------------ Cash flow from investing activities: Proceeds from sale of depreciable assets 739 195 187 Capital expenditures for land, mineral reserves, and depreciable assets (21,627) (15,795) (16,223) (Increase) decrease in investments in and advances to joint ventures (775) (49) 1,495 Acquisitions (13,333) (7,144) (16,982) Payment of minority interest (111) (499) - Decrease (increase) in other assets 427 505 (767) ------------ ------------ ------------ Net cash used in investing activities (34,680) (22,787) (32,290) ------------ ------------ ------------ Cash flow from financing activities: Proceeds from issuance of debt 88,208 17,145 28,100 Principal payments of debt (67,718) (25,469) (23,172) Proceeds from sales of treasury stock 1,090 2,888 1,653 Purchases of treasury stock (2,879) (1,593) (6,933) Dividends paid (9,377) (4,560) (2,663) ------------ ------------ ------------ Net cash provided by (used in) financing activities 9,324 (11,589) (3,015) ------------ ------------ ------------ Effect of foreign currency rate changes on cash 3,413 3,658 2,213 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 4,069 (2,072) 5,277 Cash and cash equivalents at beginning of year 13,525 15,597 10,320 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 17,594 $ 13,525 $ 15,597 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid for: Interest, Net $ 537 $ 415 $ 671 ============ ============ ============ Net income taxes paid (refunded) $ (706) $ 12,808 $ 1,632 ============ ============ ============
See accompanying notes to consolidated financial statements. F-7 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Company Operations AMCOL International Corporation (the Company) operates in two principal areas of activity: minerals and environmental. The Company also operates a transportation business which includes delivery of its own products. In 2004, the Company's revenues were derived 58% from minerals, 37% from environmental, and 9% from transportation operations, all reduced by 4% from the elimination of intersegment shipping revenues. The Company's sales in 2004 were approximately 63% from North America and 37% outside of North America. Further descriptions of the Company's products, its principal markets and the relative significance of its operations are included in Note 4, "Business Segment and Geographic Area Information." Principles of Consolidation The consolidated financial statements include the accounts of the Company and its foreign and domestic subsidiaries. All subsidiaries greater than 50% owned by the Company are consolidated. The Company's ownership interests in the U.K., Mexican, Indian, and Egyptian ventures range between 20% and 50%. Accordingly, these investments are accounted for using the equity method. The Company's ownership interest in the Japanese investment is recorded at cost. All material intercompany balances and transactions between wholly-owned subsidiaries, including profits on inventories, have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Translation of Foreign Currencies The assets and liabilities of subsidiaries located outside of the United States are translated into U.S. dollars at the rates of exchange at the balance sheet dates. The statements of operations are translated at the weighted average rates during the periods. Foreign exchange translation adjustments are accumulated as a separate component of stockholders' equity, while foreign currency transaction gains or losses are included in income. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) or moving average methods. Exploration costs are expensed as incurred. Costs incurred in removing overburden and mining bentonite are capitalized as advance mining costs until the bentonite from such mining area is transported to the plant site, at which point the costs are included in crude bentonite stockpile inventory. Property, Plant, Equipment, and Mineral Rights and Reserves Property, plant, equipment, and mineral rights and reserves are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method for substantially all of the assets. Certain other assets, primarily field equipment, are depreciated on the units-of-production method. Mineral rights and reserves are depleted using the units-of-production method. F-8 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", goodwill is tested annually (or more frequently if impairment indicators arise) for impairment. Other intangibles, including trademarks and non-compete agreements, are amortized on the straight-line method over the expected periods to be benefited, which extend up to 10 years. The adoption of the provisions within SFAS 142 relating to goodwill amortization resulted in the Company discontinuing the amortization of goodwill effective January 1, 2002. At the date of adoption, the Company's goodwill balance was not significant. Impairment of Long-Lived Assets The Company reviews the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs of disposal. Income Taxes The Company and its U.S. subsidiaries file a consolidated tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Revenue Recognition Product revenue is recognized when products are shipped to customers. Allowances for discounts, rebates, and estimated returns are recorded at the time of sale and are reported as a reduction in revenue. The Company generates some sales through independent, third-party representatives. These sales are recorded in revenues and the commission compensation paid to the representatives is recorded in general, selling and administrative expenses. Transportation segment revenue for freight delivery services is recognized upon receipt of signed proof of delivery documents. Amounts payable for purchased transportation, commissions and insurance are accrued when the related revenue is recognized. Service revenues, primarily earned by the environmental segment, represent less than 10% of consolidated net sales. Revenue for services performed are recognized in the period such services are performed and customer acceptance is obtained. Shipping Revenues and Costs The Company reports shipping and handling costs that are passed on to customers as sales revenue and cost of sales in the consolidated statements of operations. F-9 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Land Reclamation The Company mines various minerals using a surface-mining process which requires the removal of overburden. The Company is obligated to restore the land comprising each mining site to its original condition at the completion of mining activity. The Company recognizes the liability for land reclamation based on the estimated fair value of the obligation. The obligation is adjusted to reflect the passage of time and changes in estimated future cash outflows. At December 31, 2004 the Company's recorded reclamation obligation was $4,850. During the year ended December 31, 2004, the obligation was reduced by $1,325 due to payments made in connection with ongoing reclamation activities offset by accretion of $97 and recognition of additional obligations resulting from normal mining activities of $1,018. Research and Development Research and development costs are included in general, selling and administrative expenses and amounted to approximately $5,349, $5,018, and $5,953 for the years ended December 31, 2004, 2003 and 2002, respectively. Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding after consideration of the dilutive effect of stock options. A reconciliation between the number of shares used to compute basic and diluted earnings per share follows:
2004 2003 2002 ------------ ------------ ------------ Weighted average of common shares outstanding for the year 29,140,892 28,357,009 28,133,795 Dilutive impact of stock equivalents 1,561,969 1,492,569 2,014,725 ------------ ------------ ------------ Weighted average of common and common equivalent shares for the year 30,702,861 29,849,578 30,148,520 ============ ============ ============ Common shares outstanding at December 31 29,395,755 29,107,746 27,881,903 ============ ============ ============
Stock-Based Compensation Prior to 2003, the Company accounted for its fixed plan stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in operations prior to 2003, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and has elected to apply these provisions prospectively, in accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123, to all employee awards granted, modified, or settled after January 1, 2003. Awards under the Company's plans vest over three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 and 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS 123. F-10 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Results for prior years have not been adjusted to reflect the use of the fair value based method of accounting for employee awards. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period:
YEAR ENDED DECEMBER 31, ------------------------------------------ 2004 2003 2002 ------------ ------------ ------------ Net income, as reported $ 31,565 $ 28,865 $ 12,968 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 1,090 405 - Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,348) (962) (781) ------------ ------------ ------------ Pro forma net income $ 31,307 $ 28,308 $ 12,187 ============ ============ ============ Earnings per share: Basic - as reported $ 1.08 $ 1.02 $ 0.46 Basic - pro forma $ 1.07 $ 1.00 $ 0.43 Diluted - as reported $ 1.03 $ 0.97 $ 0.43 Diluted - pro forma $ 1.02 $ 0.95 $ 0.40
Derivative Instruments and Hedging Activities The Company occasionally uses derivative financial instruments (principally interest rate swaps or options) to manage its exposure to changes in interest rates. The Company does not use derivative instruments for trading or other speculative purposes. The Company had no derivative financial instruments outstanding at December 31, 2004 and 2003. Reclassifications Certain items in the consolidated financial statements contained herein and notes thereto have been reclassified to conform with the consolidated financial statement presentation for 2004; these reclassifications relate to commissions, intangible assets and reclamation liabilities. Commissions paid to external sales representatives have been reclassified, resulting in increases in net sales, gross profit, and operating expenses. The amounts reclassified for 2002 and 2003 are $6,227 and $8,000, respectively. An intangible asset for the environmental segment have been reclassified to reduce prepaid expenses and other long term assets and increase intangible assets; the $750 amortization expense each year relating to the intangible asset within the statement of cash flows has also been reclassified to amortization expense. The reduction in prepaid expenses in 2002 and 2003 was $750 each year; the reduction in other assets in 2002 and 2003 was $3,000 and $2,250, respectively. The portion of the reclamation liability expected to be paid within one year for the minerals segment has been reclassified to accrued liabilities in 2003; the amount was $1,337. (2) RESTATEMENT During 2004, the Company recorded an adjustment of $5,546 to increase retained earnings and income taxes receivable to reflect the correction of an accounting error that occurred in 2000. Commensurate with the sale of its absorbent polymer segment in June 2000, the Company recorded an income tax accrual for the gain on the sale of the segment. In connection with the filing of amended income tax returns in 2004 that, in part, reduced the 2000 income tax liability, the Company discovered an error in the computation of the income tax accrual associated with the sale of the segment. Also during 2004, the Company recorded an adjustment of $1,006 to increase retained earnings resulting from a $524 increase in long-term deferred income tax assets, a $350 increase in short-term deferred tax assets and a $132 reduction in income tax accrual to reflect the correction of an accounting error that occurred in 2001. The aforementioned adjustments of $1,006 and $5,546 have been recorded as adjustments to retained earnings in the Consolidated Statement of Stockholders' Equity as of January 1, 2002. F-11 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (3) DISCONTINUED OPERATIONS In 2003, the Internal Revenue Service concluded audits which resulted in a reduction of the Company's income taxes payable and the recording of an income tax receivable of approximately $8.9 million related to the sale of the Company's U.K. metalcasting business in 2001 and closure of the U.K. cat litter business in 2000. Those audits resulted in an actual tax liability that was lower than the estimate of taxes payable related to those periods. Therefore, the Company adjusted its estimate of taxes payable to reflect the actual amount due as of December 31, 2003 and recorded $8.9 million of income from discontinued operations. (4) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION The Company operates in two principal business segments: minerals and environmental. The Company also operates a transportation business. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The transportation segment includes a long-haul trucking business and a freight brokerage business, which provide services to both the Company's plants and outside customers. The Company identifies segments based on management responsibility and the nature of the business activities of each component of the Company. Intersegment sales are insignificant, other than intersegment shipping, which is disclosed in the following table. The Company measures segment profit based on operating profit. Operating profit is defined as sales less cost of sales and general, selling and administrative expenses related to a segment's operations. The costs deducted to arrive at operating profit do not include interest or income taxes. Segment assets are those assets used in the Company's operations in that segment. Corporate assets include cash, corporate leasehold improvements, the nanocomposite plant investment and other miscellaneous equipment. The following summaries set forth certain financial information by business segment and geographic area as of and for the years ended December 31, 2004, 2003 and 2002; the amounts in the prior years have been restated as a result of the prior period adjustments detailed in Note 2. F-12 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2004 2003 2002 ------------ ------------ ------------ Business Segment: Revenues: Minerals $ 264,065 $ 217,104 $ 172,570 Environmental 170,152 131,351 111,126 Transportation 40,650 37,549 32,509 Intersegment shipping (15,762) (14,038) (11,105) ------------ ------------ ------------ Total $ 459,105 $ 371,966 $ 305,100 ============ ============ ============ Operating profit (loss): Minerals $ 30,319 $ 23,423 $ 15,870 Environmental 20,559 17,855 14,373 Transportation 1,720 1,547 967 Corporate (16,925) (13,888) (11,552) ------------ ------------ ------------ Total $ 35,673 $ 28,937 $ 19,658 ============ ============ ============ Assets: Minerals $ 172,972 $ 144,973 $ 128,566 Environmental 128,154 83,459 66,789 Transportation 3,122 1,891 1,895 Corporate 32,194 35,006 31,130 Discontinued operations (net liabilities) - - ------------ ------------ ------------ Total $ 336,442 $ 265,329 $ 228,380 ============ ============ ============ Depreciation, depletion and amortization: Minerals $ 10,546 $ 10,334 $ 10,840 Environmental 6,751 6,002 7,365 Transportation 108 88 58 Corporate 2,719 2,486 2,496 ------------ ------------ ------------ Total $ 20,124 $ 18,910 $ 20,759 ============ ============ ============ Capital expenditures: Minerals $ 9,860 $ 6,464 $ 8,263 Environmental 10,647 7,660 6,174 Transportation 101 80 145 Corporate 1,019 1,591 1,641 ------------ ------------ ------------ Total $ 21,627 $ 15,795 $ 16,223 ============ ============ ============ Research and development expenses: Minerals $ 2,517 $ 2,184 $ 2,632 Environmental 1,921 1,873 2,051 Corporate 911 961 1,270 ------------ ------------ ------------ Total $ 5,349 $ 5,018 $ 5,953 ============ ============ ============
Continued... F-13 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2004 2003 2002 ------------ ------------ ------------ Geographic area: Sales to unaffiliated customers shipped to: North America $ 289,795 $ 245,715 $ 221,863 Europe 123,485 90,683 57,172 Asia Pacific 40,621 30,967 21,243 Other 5,204 4,601 4,822 ------------ ------------ ------------ Total $ 459,105 $ 371,966 $ 305,100 ============ ============ ============ Operating profit from sales to: North America $ 16,728 $ 15,188 $ 10,263 Europe 12,686 8,655 5,966 Asia Pacific 5,441 4,113 2,409 Other 818 981 1,020 ------------ ------------ ------------ Total $ 35,673 $ 28,937 $ 19,658 ============ ============ ============ Identifiable assets in: North America $ 202,766 $ 170,797 $ 149,614 Europe 97,777 70,114 58,585 Asia Pacific 35,899 24,418 20,181 Discontinued operations - - - ------------ ------------ ------------ Total $ 336,442 $ 265,329 $ 228,380 ============ ============ ============
The Company reported revenues for the following product lines:
2004 2003 2002 ------------ ------------ ------------ Metalcasting $ 117,653 $ 91,767 $ 83,404 Pet products 53,370 48,319 44,467 Specialty Minerals 89,863 77,017 44,699 Lining technologies 78,218 56,061 38,946 Water treatment 42,512 34,429 38,696 Building materials 52,601 40,862 33,484 Transportation 40,650 37,549 32,509 Intersegment shipping revenue (15,762) (14,038) (11,105) ------------ ------------ ------------ Total $ 459,105 $ 371,966 $ 305,100 ============ ============ ============
(5) INVENTORIES Inventories at December 31 consisted of: 2004 2003 ------------ ------------ Advance mining $ 2,277 $ 2,605 Crude stockpile inventories 25,159 14,410 In-process inventories 18,123 14,190 Other raw material, container, and supplies inventories 18,323 14,977 ------------ ------------ $ 63,882 $ 46,182 ============ ============ F-14 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (6) PROPERTY, PLANT, EQUIPMENT, AND MINERAL RIGHTS AND RESERVES Property, plant, equipment and mineral rights and reserves consisted of the following:
DECEMBER 31, DEPRECIATION/ Amortization 2004 2003 Annual Rates ------------ ------------ -------------- Mineral rights and reserves $ 4,169 $ 4,030 Other land 7,850 6,244 Buildings and improvements 61,987 55,635 4.9% to 25.0% Machinery and equipment 185,293 170,587 10.0% to 50.0% ------------ ------------ $ 259,299 $ 236,496 ============ ============
Depreciation and depletion were charged to income as follows:
2004 2003 2002 ------------ ------------ ------------ Depreciation expense $ 18,895 $ 17,759 $ 19,064 Depletion expense 149 232 806 ------------ ------------ ------------ $ 19,044 $ 17,991 $ 19,870 ============ ============ ============
(7) GOODWILL AND INTANGIBLE ASSETS As of December 31, goodwill and other intangible assets consisted of: DECEMBER 31, ----------------------------- 2004 2003 ------------ ------------ Goodwill $ 19,225 $ 5,633 Intangible assets, at cost 8,755 8,217 Less: accumulated amortization 4,953 3,872 ------------ ------------ Intangible assets, net 3,802 4,345 ------------ ------------ Goodwill and intangible assets, net $ 23,027 $ 9,978 ============ ============ The Company's increases in goodwill are primarily attributable to acquisitions as detailed in Note 10. The carrying values of goodwill and intangible assets (net) as of December 31, by segment are as follows: DECEMBER 31, ----------------------------- 2004 2003 ------------ ------------ Goodwill Minerals $ 5,773 $ 5,394 Environmental 13,452 239 Intangible assets, net Minerals 425 494 Environmental 2,926 3,504 Corporate 451 347 ------------ ------------ Goodwill and intangible assets, net $ 23,027 $ 9,978 ============ ============ In accordance with SFAS 142, the Company evaluated the goodwill attributable to each reporting unit for impairment, and concluded that there was no indication of goodwill impairment. If indicators of impairment are deemed to be present, and future cash flows are not expected to be sufficient to recover the assets and carrying amounts, an F-15 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) impairment loss would be charged to expense in the period identified. The Company reviewed the intangible assets, net book values and estimated useful lives by class. As of December 31, 2004, there was no impairment related to the intangible assets. The Company will continue to amortize the remaining net book values of intangible assets over their remaining useful lives. (8) INCOME TAXES Total income tax expense (benefit) for the years ended December 31, 2004, 2003 and 2002 was allocated as follows:
2004 2003 2003 ------------ ------------ ------------ Income from continuing operations $ 4,687 $ 9,946 $ 6,916 Discontinued operations - (8,741) - ------------ ------------ ------------ $ 4,687 $ 1,205 $ 6,916 ============ ============ ============
Domestic and foreign components of income from continuing operations before income taxes, equity in income of joint ventures and minority interest are shown below:
2004 2003 2002 ------------ ------------ ------------ Income from continuing operations before income taxes, equity in income of joint ventures and minority interest: Domestic $ 20,662 $ 18,972 $ 12,266 Foreign 14,410 10,289 6,923 ------------ ------------ ------------ $ 35,072 $ 29,261 $ 19,189 ============ ============ ============
The components of the provision for income taxes attributable to income from continuing operations before income taxes, equity in income of joint ventures and minority interest for the years ended December 31, 2004, 2003 and 2002 consisted of:
2004 2003 2002 ------------ ------------ ------------ Provision (benefit) for income taxes: Federal: Current $ 1,170 $ 8,921 $ 647 Deferred (95) (2,296) 2,641 State: Current 1,404 1,265 741 Deferred (9) (230) 264 Foreign: Current 3,890 2,345 2,647 Deferred (1,673) (59) (24) ------------ ------------ ------------ $ 4,687 $ 9,946 $ 6,916 ============ ============ ============
The Company believes it is more likely than not that the deferred tax assets above will be realized in the normal course of business. The Company's federal income tax returns have been audited through 2001. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of December 31, 2004 and 2003 were as follows: F-16 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2003 Restated 2004 (Note 2) ------------ ------------ Deferred tax assets attributable to: Accounts receivable, due to allowance for doubtful accounts $ 938 $ 994 Inventories 1,638 1,669 Employee benefit plans 5,660 4,350 Intangible assets 2,384 2,706 Accrued liabilities 2,024 1,883 Maintenance of controlled foreign corporations 1,624 1,443 Other 583 186 ------------ ------------ Total deferred tax assets 14,851 13,231 Deferred tax liabilities attributable to: Plant and equipment, due to differences in depreciation (2,007) (1,503) Land and mineral reserves, due to differences in depletion (1,171) (1,498) Other (936) (1,277) ------------ ------------ Total deferred tax liabilities (4,114) (4,278) ------------ ------------ Net deferred tax assets $ 10,737 $ 8,953 ============ ============
The following analysis reconciles the statutory Federal income tax rate to the effective tax rates related to income from continuing operations before income taxes, equity in income of joint ventures and minority interest:
2004 2003 2002 --------------------------- --------------------------- --------------------------- Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income ------------ ------------ ------------ ------------ ------------ ------------ Provision for income taxes at U.S. statutory rates $ 12,275 35.0% $ 10,241 35.0% $ 6,716 35.0% Increase (decrease) in taxes resulting from: Percentage depletion (1,832) -5.2% (1,040) -3.6% (742) -3.9% State taxes, net of federal benefit 913 2.6% 824 2.8% 482 2.5% Foreign tax rates (1,445) -4.1% (738) -2.5% 200 1.0% Foreign tax adjustments (1,119) -3.2% - - - - Depletion and research and development adjustments (4,789) -13.7% - - - - Other 684 2.0% 659 2.3% 260 1.4% ------------ ------------ ------------ ------------ ------------ ------------ $ 4,687 13.4% $ 9,946 34.0% $ 6,916 36.0% ============ ============ ============ ============ ============ ============
In 2004, the Company recorded a reduction to income tax expense of $4,789 associated with depletion deductions and research and experimentation credits available in computing income tax expense. Approximately $821 of this amount relates to changes in estimates resulting from the finalization, in 2004, of the tax return for the 2003 tax year. The remaining $3,968 relates to the filing of amended federal income tax returns dating from 1999 through 2002. Regarding the $4,789 mentioned above, the Company recomputed its federal income tax liability for these periods after determining that it could increase certain deductions and credits as allowed under the Internal Revenue Code. The total refund claimed on the returns was $5.2 million; however, the Company determined that a contingency reserve was necessary to reflect a potential reduction of the refund after examination of the returns by the IRS. The Company also recorded, in 2004, a $1.1 million income tax benefit for the adjustment of deferred income tax assets and income tax payable at a U.K. subsidiary. If these two adjustments had not been recorded, the effective income tax rate for 2004 would have been 30%. The Company has not provided for U.S. federal income and foreign withholding taxes on approximately $31.1 million of undistributed earnings from international subsidiaries as of December 31, 2004 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits F-17 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) may become available under current law to reduce or eliminate the resulting U.S. income tax liability. In October 2004, the American Jobs Creation Act (the "Act") was enacted which allowed for a temporary 85% dividends received deduction on certain foreign earnings repatriated into the U.S. The portion of the dividend that qualifies for the 85% deduction is that amount which exceeds an average of past years' foreign dividends. Additionally, certain criteria must be met when the funds are repatriated and may ultimately qualify for an effective tax rate as low as 5.25%. The Company is in process of evaluating whether it will repatriate foreign earnings under the Act. The range of amounts that are reasonably under consideration for repatriation are from $0 to $26.9 million. The Company will evaluate the merits of repatriating foreign earnings in 2005 and report the tax impact, if any, of an envisioned repatriation upon the finalization of a repatriation plan. The Company has not recognized any income tax effect relating to the Act as we are currently not in a position to reasonably estimate the tax impact of any repatriation. (9) LONG-TERM DEBT Long-term debt consisted of the following: DECEMBER 31, ----------------------------- 2004 2003 ------------ ------------ Borrowings under revolving credit agreement $ 29,325 $ 4,000 Industrial revenue bond 4,800 4,800 Other notes payable 170 1,050 ------------ ------------ 34,295 9,850 Less: current portion - 844 ------------ ------------ $ 34,295 $ 9,006 ============ ============ The Company has a committed $100,000 revolving credit agreement, which matures October 31, 2006. As of December 31, 2004, there was $70,675 in borrowing capacity available under the line of credit. The revolving credit agreement is a multi-currency arrangement, which allows the Company to borrow at an adjusted LIBOR rate plus .625% to 1.20%, depending upon the amount of the credit line used and certain capitalization ratios. The facility requires certain covenants to be met including specific amounts of net worth and also limits the Company's ability to make additional borrowings and guarantees. The Company was in compliance with these covenants at December 31, 2004. The interest rate at December 31, 2004 was 3.019%. The Company has a short-term credit facility with maximum borrowings of $7,000, of which $844 was outstanding as of December 31, 2003. No amounts were outstanding under this facility as of December 31, 2004. The interest rate at December 31, 2003 was 4%. At December 31, 2004 and 2003, the Company had outstanding standby letters of credit of $13.9 million and $13.7 million, respectively. These letters of credit typically serve to guarantee the Company's performance of its obligations related to land reclamation and workers' compensation claims. The Company has recognized the estimated costs of its obligations related to land reclamation and workers' compensation claims in the accompanying consolidated balance sheets as of December 31, 2004 and 2003. F-18 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Maturities of long-term debt outstanding at December 31, 2004, were as follows:
2005 2006 2007 2008 2009 THEREAFTER ------------ ------------ ------------ ------------ ------------ ------------ Borrowings under revolving credit agreement - $ 29,325 - - - - Industrial revenue bond and other notes payable - 170 - - - 4,800 ------------ ------------ ------------ ------------ ------------ ------------ $ - $ 29,495 $ - $ - $ - $ 4,800 ============ ============ ============ ============ ============ ============
The estimated fair value of the above borrowings at December 31, 2004, was approximately equal to their carrying amounts based on discounting future cash payments using current market interest rates for loans with similar terms and maturities. (10) ACQUISITIONS On May 1, 2002, the Company acquired all of the outstanding stock of Colin Stewart Minchem Limited (CSM), a specialty minerals and chemical company located in the United Kingdom, in exchange for cash. The aggregate purchase price was $15,507. The purchase was financed utilizing the Company's revolving credit facility. CSM supplies intermediate products, industrial minerals, inorganic chemicals, and additives to customers operating in the laundry detergent, packaging, oil exploration and water treatment markets. The acquisition of CSM provides an additional platform for the Company to expand its global operations and presence. The results of CSM's operations have been included in the consolidated financial statements from the acquisition date. The following tables summarize the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition and unaudited pro forma combined results of continuing operations as if the acquisition of CSM had occurred at the beginning of each year presented. The unaudited pro forma combined information is not necessarily indicative of the combined results that would have occurred had the acquisition taken place at the beginning of the periods presented, nor is it necessarily indicative of future results. AT APRIL 30, 2002 ------------ Current assets $ 6,263 Fixed assets 10,520 Goodwill 4,172 ------------ Total assets acquired $ 20,955 ------------ Current liabilities $ 3,023 Other liabilities 2,425 ------------ Total liabilities assumed $ 5,448 ------------ Net assets acquired $ 15,507 ============ F-19 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) PRO FORMA Twelve Months Ended December 31, 2002 ------------------ Net sales $ 315,759 Income from continuing operations 13,683 Net income 13,683 Basic earnings per share 0.49 Diluted earnings per share 0.45 The Company also completed several less significant acquisitions during 2004, 2003 and 2002. The acquisitions in these years, individually and in aggregate, did not materially affect the Company's operating results or financial position in the years presented. Summarized information related to these acquisitions is as follows:
2004 2003 2002 ------------ ------------ ------------ Number of acquisitions 2 3 1 Net cash paid $ 13,333 $ 7,144 $ 1,475 Goodwill and intangible assets recorded 12,742 1,118 369
(11) MARKET RISKS AND FINANCIAL INSTRUMENTS As a multinational corporation that manufactures and markets products in countries throughout the world, the Company is subject to certain market risks, including those related to foreign currency, interest rates and government actions. The Company uses a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. The Company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. Exchange Rate Sensitivity The Company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The Company's primary exposures are to changes in exchange rates for the U.S. dollar versus the euro, the British pound and the Polish zloty. The Company also has significant exposure to changes in exchange rates between the British pound and the euro as well as between the Polish zloty and the euro. The Company's various currency exposures often offset each other, providing natural hedges against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2004, the Company did not have any material outstanding foreign currency contracts. Interest Rate Sensitivity The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates for debt obligations. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The instruments' actual cash flows are denominated in U.S. dollars. F-20 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
EXPECTED MATURITY DATE --------------------------------------------------------------------------------------- FAIR 2005 2006 2007 2008 2009 THEREAFTER TOTAL VALUE -------- -------- -------- -------- -------- ---------- -------- -------- (US$ equivalent in thousands) Short-term debt: Variable rate $ - $ - $ - $ - $ - $ - $ - $ - Average interest rate - - - - - - - - Long-term debt: Variable rate - 29,495 - - - 4,800 - 34,295 Average interest rate - 3.0% - - - 1.7% - - -------- -------- -------- -------- -------- ---------- -------- -------- Total $ - $ 29,495 $ - $ - $ - $ 4,800 $ - $ 34,295 ======== ======== ======== ======== ======== ========== ======== ========
The Company periodically uses interest rate swaps to manage interest rate risk on debt securities. These instruments allow the Company to change variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2004 and 2003, there were no interest rate swaps outstanding. The Company is exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by the Company's policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings. The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. The Company believes its allowance for doubtful accounts is sufficient to cover customer credit risks. The Company's accounts receivable financial instruments are carried at amounts that approximate fair value. (12) LEASES The Company has several noncancelable leases for railroad cars, trailers, computer software, office equipment, certain automobiles, and office and plant facilities. Total rent expense under operating lease agreements was approximately $3,945, $4,208, and $4,099 in 2004, 2003 and 2002, respectively. Additionally, the Company has three domestic facilities that are being subleased. F-21 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The following is a schedule of future minimum lease payments for operating leases (with initial terms in excess of one year) and related sublease income as of December 31, 2004:
MINIMUM LEASE PAYMENTS SUBLEASE ------------------------------------------ RENTAL DOMESTIC FOREIGN TOTAL INCOME ------------ ------------ ------------ ------------ Year ending December 31: 2005 $ 3,630 $ 474 $ 4,104 $ 509 2006 3,220 335 3,555 538 2007 2,685 228 2,913 565 2008 1,308 228 1,536 336 2009 306 216 522 - Thereafter 52 779 831 - ------------ ------------ ------------ ------------ Total $ 11,201 $ 2,260 $ 13,461 $ 1,948 ============ ============ ============ ============
(13) EMPLOYEE BENEFIT PLANS The Company has a noncontributory pension plan covering substantially all of its domestic employees. The benefits are based upon years of service and qualifying compensation. The Company's funding is calculated using the actuarially determined unit credit cost method. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. The following tables set forth pension obligations included in the Company's balance sheet at December 31, 2004 and 2003: PENSION BENEFITS ----------------------------- 2004 2003 ------------ ------------ Change in benefit obligations: Beginning benefit obligation $ 29,732 $ 26,392 Service cost 1,449 1,325 Interest cost 1,827 1,751 Actuarial loss 2,819 1,267 Benefits paid (1,020) (1,003) ------------ ------------ Ending benefit obligation $ 34,807 $ 29,732 Change in plan assets: Beginning fair value $ 22,682 $ 17,912 Actual return 4,021 4,661 Company contribution 1,000 1,112 Benefits paid (1,020) (1,003) ------------ ------------ Ending fair value $ 26,683 $ 22,682 Funded status of the plan $ (8,124) $ (7,050) Unrecognized actuarial and investment (gain) loss, net 2,620 1,884 Prior service cost 379 410 Transition asset (87) (224) ------------ ------------ Accrued pension cost liability includeded in the consolidated financial statements $ (5,212) $ (4,980) ============ ============ F-22 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Pension cost was comprised of:
2004 2003 2002 ------------ ------------ ------------ Service cost - benefits earned during the year $ 1,449 $ 1,325 $ 1,157 Interest cost on accumulated benefit obligation 1,827 1,751 1,634 Expected return on plan assets (1,938) (1,576) (1,777) Net amortization and deferral (106) (36) (106) ------------ ------------ ------------ Net periodic pension cost $ 1,232 $ 1,464 $ 908 ============ ============ ============
The following table summarizes the assumptions used in determining the pension obligation: 2004 2003 ------------ ------------ Discount rate 5.75% 6.25% Rate of compensation increase 5.75% 5.75% Long-term rate of return 8.50% 8.75% The valuation of the Company's pension benefit plan was performed as of October 1, 2004 and 2003. The Company expects to contribute $862 to the Plan in 2005. The accumulated benefit obligation (ABO) was $25,704 and $23,148 at December 31, 2004 and 2003, respectively. The Company's Plan assets, by asset category, are as follows: 2004 2003 ------------ ------------ U.S. equity securities 63% 65% International equity securities 4% 4% Fixed income securities and bonds 33% 31% Real estate and Other 0% 0% The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. The investment objectives emphasize maximizing returns consistent with ensuring that sufficient assets are available to meet liabilities, and minimizing corporate cash contributions. The Plan's assets are managed so as to include investments that balance income and capital appreciation. The Plan has a target range for equity securities of between 60% and 75%. This allocation takes into account factors such as the average age of employees covered by the Plan (benefit obligations) as well as overall market conditions. Interim portfolio reviews result in investment allocations being evaluated at least twice a year by the Pension Committee and rebalancing takes place as needed. Equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalizations. Debt securities include both government and corporate investment vehicles. These include a series of laddered debt securities as well as bond funds. Although real estate investments have been employed in the past, none are being used at the present. AMCOL employs a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater F-23 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. The average long-term rate of return on the Plan's assets since 1994 has been approximately 10.2%. The estimated future benefit payments from the defined benefit plan, reflecting expected future service, as appropriate, are presented in the following table: PER YEAR ----------- 2005 1,061 2006 1,139 2007 1,205 2008 1,284 2009 1,358 2010 through 2014 8,987 ----------- Total $ 15,034 =========== In addition to the qualified plan outlined above, the Company sponsors a supplementary pension plan that provides benefits in excess of qualified plan limitations for certain employees. The unfunded accrued liability for this plan was $3,406 and $2,911 at December 31, 2004 and 2003, respectively. However, the Company has invested assets for the benefit of the employees covered by the supplemental pension plan in the event that there is a change in control. The Company has a minimum pension liability of $457 at December 31, 2004. The Company also has a savings plan for its U.S. personnel. In 2004, the Company made a contribution in an amount equal to an employee's contributions up to a maximum of 4% of the employee's annual earnings. Company contributions are made using Company stock purchased on the open market. Company contributions under the savings plan were $1,440 in 2004, $1,202 in 2003 and $1,251 in 2002. Employees hired after December 31, 2003 do not participate in the Company's defined benefit plan. Instead, they participate in a defined contribution plan whereby the Company makes a retirement contribution into their savings plan equal to 3% of the individual's compensation. Under this defined contribution plan, the Company made a total cash contribution of $148 into employees' savings accounts in 2004. The Company also has a deferred compensation plan and a 401(k) restoration plan for its executives. The foreign pension plans, which are not subject to United States pension funding laws, are funded using individual annuity contracts and, therefore, are not included in the information reflected above. (14) STOCK OPTION PLANS Prior to 2003, the Company accounted for its fixed plan stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and has elected to apply these provisions prospectively, in accordance with SFAS No. 148, to all employee awards granted, modified, or settled after January 1, 2003. Beginning in 2003, awards granted under the Company's plans vest over three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 and 2004 are less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement No. 123. Had compensation cost for the Company's stock option plans been determined using the fair value method of accounting described in SFAS 123 for years prior to 2003, the Company's net income would have been changed to the pro forma amounts indicated in note 1 of Notes to Consolidated Financial Statements. F-24 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) For purposes of calculating the compensation cost consistent with SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2004, 2003 and 2002:
2004 2003 2002 ------------ ------------ ------------ Risk-free interest rate 3.0% 3.0% 4.5% Expected life of option in years 5 5 6 Expected dividend yield of stock 1.5% 2.1% 0.9% Expected volatility of stock price 53.3% 54.9% 44.6% Weighted-average fair value of options granted $ 5,333 $ 1,763 2,038
The 1983, 1987 and 1993 Plans The Company has reserved shares of its common stock for issuance of incentive and nonqualified stock options to its directors, officers and key employees under its 1983 Incentive Stock Option Plan, 1993 Stock Plan and 1987 Nonqualified Stock Option Plan. Options awarded under these plans, which entitle the optionee to one share of common stock, may be exercised at a price equal to the fair market value of the underlying common stock at the time of grant. Options awarded under these plans generally vest 40% after two years and continue to vest at the rate of 20% per year for each year thereafter, until they are fully vested. Options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee, or a change in control of the Company. These plans expired as of December 31, 2000, though options that were granted prior to expiration of the plans continue to be valid until the individual option grants expire. Changes in options outstanding are summarized as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------------- ------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXPIRED STOCK OPTION PLANS SHARES PRICE SHARES PRICE SHARES PRICE -------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Options outstanding at January 1 709,279 $ 2.07 1,884,421 $ 2.07 2,531,037 $ 2.09 Exercised (236,536) 2.01 (1,169,816) 2.07 (640,958) 1.92 Cancelled - - (5,326) 1.97 (5,658) 2.23 ----------- ----------- ----------- Options outstanding at December 31 472,743 2.10 709,279 2.07 1,884,421 2.07 =========== =========== =========== Options exercisable at December 31 472,743 709,279 1,725,105 =========== =========== =========== Shares available for future grant at December 31 - - - =========== =========== ===========
1998 Long-Term Incentive Plan The Company reserved 3,900,000 shares of its common stock for issuance to its officers, directors and key employees. This plan provides for the award of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and phantom stock. Different terms and conditions apply to each form of award made under the plan. Awards granted in 2003 vested ratably over a three year period and expire 6 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Options previously awarded under these plans generally vested 40% after two years and continued to vest at the rate of 20% per year for each year thereafter, until they are fully vested. These options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Changes in options outstanding are summarized as follows: F-25 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------------- ------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE 1998 LONG-TERM INCENTIVE PLAN SHARES PRICE SHARES PRICE SHARES PRICE -------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Options outstanding at January 1 1,611,318 $ 4.11 1,731,194 $ 3.46 1,693,162 $ 2.66 Granted 294,650 18.10 310,950 5.67 307,450 6.63 Exercised (258,491) 2.94 (355,334) 2.46 (232,027) 1.84 Cancelled (20,333) 7.97 (75,492) 3.32 (37,391) 3.72 ----------- ----------- ----------- Options outstanding at December 31 1,627,144 6.78 1,611,318 4.11 1,731,194 3.46 =========== =========== =========== Options exercisable at December 31 826,121 634,547 551,527 =========== =========== =========== Shares available for future grant at December 31 1,176,308 1,450,625 686,083 =========== =========== ===========
Restricted stock awards are independent of option grants and are subject to restrictions considered appropriate by the Compensation Committee of the Board of Directors. The shares of restricted stock outstanding at December 31, 2003 are subject to forfeiture if employment terminates prior to six years from the date of the grant. If certain performance criteria are satisfied, the forfeiture period may be shortened to three years for a portion of, or the entire award. During the remaining period through the sixth anniversary of a grant, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The cost of the awards, determined to be the fair market value of the shares at the date of the grant, is expensed ratably over the period the restrictions lapse. On May 22, 2003, AMCOL awarded 141,000 shares of restricted stock to six officers, and these same shares were outstanding at December 31, 2004. Total compensation expense related to this grant of $921 will be recorded over the three year period. All Stock Option Plans The following table summarizes information about stock options outstanding and exercisable at December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------- --------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE OF CONTRACTUAL EXERCISE OF EXERCISE RANGE OF EXERCISE PRICES SHARES LIFE (Yrs). PRICE SHARES PRICE --------------------------------------------- ------------ ------------ ------------ ------------ ------------ $ 1.350 - $ 2.062 529,744 2.97 $ 1.733 529,744 $ 1.733 $ 2.091 - $ 4.030 525,620 4.04 2.800 478,190 2.692 $ 5.000 - $ 6.650 753,623 5.80 5.799 290,930 5.697 $ 18.100 - $ 18.100 290,900 5.11 18.100 - - ------------ ------------ Total 2,099,887 4.55 5.727 1,298,864 2.974 ============ ============
F-26 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (15) ACCRUED LIABILITIES Accrued liabilities at December 31 consisted of: 2004 2003 ------------ ------------ Accrued severance taxes $ 2,726 $ 2,588 Accrued employee costs 1,972 1,813 Accrued vacation pay 1,650 1,650 Accrued bonus 5,131 5,139 Accrued product liability 632 1,060 Accrued commissions 2,092 2,217 Accrued reclamation costs 1,626 1,337 Other 20,378 10,695 ------------ ------------ $ 36,207 $ 26,499 ============ ============ (16) CONTINGENCIES The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial statements. (17) QUARTERLY RESULTS (Unaudited) Unaudited summarized results for each quarter in 2004 and 2003 are as follows; the amounts for the third quarter of 2004 have been restated as detailed in the table following the 2003 quarterly results:
2004 QUARTER --------------------------------------------------------- FIRST SECOND THIRD FOURTH Restated ------------ ------------ ------------ ------------ Minerals (A) $ 64,313 $ 66,686 $ 67,430 $ 65,636 Environmental (A) 33,249 46,588 49,983 40,332 Transportation 9,332 10,058 10,979 10,281 Intersegment shipping (3,187) (4,197) (4,326) (4,052) ------------ ------------ ------------ ------------ Net sales (A) $ 103,707 $ 119,135 $ 124,066 $ 112,197 ============ ============ ============ ============ Minerals (A) $ 12,861 $ 13,756 $ 14,223 $ 11,997 Environmental (A) 12,378 16,187 16,985 $ 13,037 Transportation 1,037 1,112 1,214 $ 1,108 ------------ ------------ ------------ ------------ Gross profit (A) $ 26,276 $ 31,055 $ 32,422 $ 26,142 ============ ============ ============ ============ Minerals $ 7,435 $ 8,238 $ 8,098 $ 6,548 Environmental 3,079 6,152 6,820 4,508 Transportation 386 451 523 360 Corporate (3,660) (3,740) (5,166) (4,359) ------------ ------------ ------------ ------------ Operating profit $ 7,240 $ 11,101 $ 10,275 $ 7,057 ============ ============ ============ ============ Income from continuing operations $ 5,083 $ 7,740 $ 12,469 $ 6,273 ============ ============ ============ ============ Discontinued operations $ - $ - $ - $ - ============ ============ ============ ============ Net income $ 5,083 $ 7,740 $ 12,469 $ 6,273 ============ ============ ============ ============ Basic earnings per share (B) $ 0.17 $ 0.27 $ 0.43 $ 0.21 ============ ============ ============ ============ Diluted earnings per share (B) $ 0.16 $ 0.25 $ 0.41 $ 0.20 ============ ============ ============ ============
F-27 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2003 QUARTER --------------------------------------------------------- FIRST SECOND THIRD FOURTH ------------ ------------ ------------ ------------ Minerals (A) $ 50,452 $ 53,832 $ 55,467 $ 57,353 Environmental (A) 24,722 36,035 40,305 30,289 Transportation 8,797 9,390 10,367 8,995 Intersegment shipping (2,996) (3,592) (4,379) (3,071) ------------ ------------ ------------ ------------ Net sales (A) $ 80,975 $ 95,665 $ 101,760 $ 93,566 ============ ============ ============ ============ Minerals (A) $ 9,725 $ 10,787 $ 11,026 $ 11,518 Environmental (A) 9,429 13,796 15,509 11,720 Transportation 978 1,025 1,124 914 ------------ ------------ ------------ ------------ Gross profit (A) $ 20,132 $ 25,608 $ 27,659 $ 24,152 ============ ============ ============ ============ Minerals $ 4,917 $ 5,882 $ 6,055 $ 6,569 Environmental 2,383 5,321 7,171 2,980 Transportation 376 399 477 295 Corporate (3,346) (3,335) (3,761) (3,446) ------------ ------------ ------------ ------------ Operating profit $ 4,330 $ 8,267 $ 9,942 $ 6,398 ============ ============ ============ ============ Income from continuing operations $ 2,930 $ 5,709 $ 6,632 $ 4,644 ============ ============ ============ ============ Discontinued operations $ - $ - $ - $ 8,950 ============ ============ ============ ============ Net income $ 2,930 $ 5,709 $ 6,632 $ 13,594 ============ ============ ============ ============ Basic earnings per share (B) $ 0.10 $ 0.20 $ 0.23 $ 0.48 ============ ============ ============ ============ Diluted earnings per share (B) $ 0.10 $ 0.19 $ 0.22 $ 0.45 ============ ============ ============ ============
(A) Commencing in the fourth quarter of 2004, the Company has classified commissions paid to external sales representatives as general, selling and administrative expenses. Commissions paid in prior quarters had been classified as a reduction of net sales, but have now been reclassified to conform to current presentation. Such reclassifications increased net sales and gross profits in the minerals and environmental segments and had no impact on operating profit presented for those quarters. (B) Earnings per share (EPS) for each quarter is computed using the weighted-average number of shares outstanding during the quarter, while EPS for the year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the EPS for each of the four quarters may not equal the EPS for the year. A reconciliation of the amounts presented above for the third quarter of 2004 to the amounts previously reported in the Form 10-Q report for the quarter ended September 30, 2004 is as follows: 2004 THIRD QUARTER RESTATEMENT ------------------------------- AS REPORTED AS RESTATED ------------- ------------- Minerals $ 67,116 $ 67,430 A Environmental 47,771 49,983 A Transportation 10,979 10,979 Intersegment shipping (4,326) (4,326) ------------- ------------- Net sales $ 121,540 $ 124,066 ============= ============= Minerals $ 13,909 $ 14,223 A Environmental 14,915 16,985 A, B Transportation 1,214 1,214 ------------- ------------- Gross profit $ 30,038 $ 32,422 ============= ============= Minerals $ 8,098 $ 8,098 Environmental 6,964 6,820 B Transportation 523 523 Corporate (3,961) (5,166) C ------------- ------------- Operating profit $ 11,624 $ 10,275 ============= ============= Income from continuing operations $ 8,317 $ 12,469 D ============= ============= Net income $ 8,317 $ 12,469 D ============= ============= Basic earnings per share (B) $ 0.29 $ 0.43 D ============= ============= Diluted earnings per share (B) $ 0.27 $ 0.41 D ============= ============= (A) See Note (A) to the preceding table regarding reclassifications of commissions paid to independent sales representatives. (B) Gives effect to an adjustment of $144 attributable to a revision of depreciation expense related to an asset that is to be disposed. (C) Gives effect to an adjustment of $1,205 to record professional fees associated with amended federal income tax returns dating from 1999 to 2002, which resulted in refund claims. (D) In addition to the matters described in (B) and (C) above, gives effect to reduced income taxes attributable to (i) the adjustment of foreign income taxes ($1,111) at a UK subsidiary due to non-recognition of deferred tax assets and (ii) federal income tax refunds ($3,968). Also gives effect to income tax benefits ($422) attributable to the matters described in (B) and (C) above. EPS amounts have been recalculated to give effect to the aforementioned items. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
ADDITIONS -------------------------- CHARGED BALANCE BALANCE AT CHARGED TO (credited) AT END BEGINNING COSTS AND TO OTHER OTHER CHARGES OF YEAR DESCRIPTION OF YEAR EXPENSES ACCOUNT ADD (deduct)(1) YEAR ---------- --------------------------------- ----------- ----------- ------------ --------------- ------------ 2004 Allowance for doubtful accounts $ 3,455 $ 2,467 $ - $ (1,285) $ 4,637 =========== =========== ============ ============= ============ 2003 Allowance for doubtful accounts $ 2,642 $ 1,082 $ - $ (269) $ 3,455 =========== =========== ============ ============= ============ 2002 Allowance for doubtful accounts $ 2,127 $ 1,287 $ - $ (772) $ 2,642 =========== =========== ============ ============= ============
(1) Bad debts written off. F-28 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 31, 2005 AMCOL INTERNATIONAL CORPORATION By: /s/ Lawrence E. Washow ------------------------------------- Lawrence E. Washow President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ John Hughes March 31, 2005 -------------------------------------------------- John Hughes Chairman of the Board and Director /s/ Lawrence E. Washow March 31, 2005 -------------------------------------------------- Lawrence E. Washow President and Chief Executive Officer and Director /s/ Gary L. Castagna March 31, 2005 -------------------------------------------------- Gary L. Castagna Senior Vice President and Chief Financial Officer; Treasurer and Chief Accounting Officer /s/ Arthur Brown March 31, 2005 -------------------------------------------------- Arthur Brown Director /s/ Daniel P. Casey March 31, 2005 -------------------------------------------------- Daniel P. Casey Director /s/ Robert E. Driscoll, III March 31, 2005 -------------------------------------------------- Robert E. Driscoll, III Director /s/ Jay D. Proops March 31, 2005 -------------------------------------------------- Jay D. Proops Director /s/ Clarence O. Redman March 31, 2005 -------------------------------------------------- Clarence O. Redman Director /s/ Dale E. Stahl March 31, 2005 -------------------------------------------------- Dale E. Stahl Director /s/ Audrey L. Weaver March 31, 2005 -------------------------------------------------- Audrey L. Weaver Director /s/ Paul C. Weaver March 31, 2005 -------------------------------------------------- Paul C. Weaver Director 58 INDEX TO EXHIBITS EXHIBIT NUMBER -------- 3.1 Restated Certificate of Incorporation of the Company (5), as amended (10), as amended (16) 3.2 Bylaws of the Company (10) 4 Article Four of the Company's Restated Certificate of Incorporation (5), as amended (16) 10.3 Lease Agreement for office space dated September 29, 1986, between the Company and American National Bank and Trust Company of Chicago; (1) First Amendment dated June 2, 1994 (8); Second Amendment dated June 2, 1997 (13) 10.4 AMCOL International Corporation 1987 Non-Qualified Stock Option Plan (2); as amended (6) 10.9 AMCOL International Corporation Dividend Reinvestment and Stock Purchase Plan (4); as amended (6) 10.10 AMCOL International Corporation 1993 Stock Plan, as amended and restated (10) 10.15 AMCOL International Corporation 1998 Long-Term Incentive Plan (15), as amended (21) 10.26 Employment Agreement dated March 15, 2002 by and between Registrant and Gary D. Morrison (22)* 10.27 Employment Agreement dated March 15, 2002 by and between Registrant and Peter M. Maul (22)* 10.28 Employment Agreement dated March 15, 2002 by and between Registrant and Gary Castagna (22)* 10.29 Employment Agreement dated March 15, 2002 by and between Registrant and Ryan F. McKendrick (22)* 10.30 Employment Agreement dated March 15, 2002 by and between Registrant and Lawrence E. Washow (22)* 10.31 Credit Agreement by and among AMCOL International Corporation and Harris Trust and Savings Bank, individually and as agent, Wells Fargo Bank, N.A., Bank of America N.A. and the Northern Trust Company dated October 31, 2003 (23) 10.32 A written description of compensation for the Board of Directors of the Company is set forth under the caption "Director Compensation" in the definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to the Company's shareholders in connection with the Annual Meeting of Shareholders to be held on May 12, 2005, and is hereby incorporated by reference.* 21 AMCOL International Corporation Subsidiary Listing 23 Consent of Independent Registered Public Accounting Firm 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 ---------- (1) Exhibit is incorporated by reference to the Registrant's Form 10 filed with the Securities and Exchange Commission on July 27, 1987. (2) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1988. (4) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1992. (5) Exhibit is incorporated by reference to the Registrant's Form S-3 filed with the Securities and Exchange Commission on September 15, 1993. (6) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1993. (8) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1994. (10) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1995. (13) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1997. (15) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-56017) filed with the Securities and Exchange Commission on June 4, 1998. (16) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1998. (21) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-68664) filed with the Securities and Exchange Commission on August 30, 2001. 59 (22) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended March 31, 2002. (23) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended September 30, 2003. *Management compensatory plan or arrangement 60