10-K 1 ai9313.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO _________ COMMISSION FILE NUMBER: 0-15661 AMCOL INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-0724340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One North Arlington, 1500 West Shure Drive, Suite 500 Arlington Heights, Illinois 60004-7803 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 394-8730 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: $.01 par value Common Stock Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the registrant's $.01 par value Common Stock held by non-affiliates of the registrant (based upon the per share closing price of $26.35 per share on June 30, 2006, and, for the purpose of this calculation only, the assumption that all of the registrant's directors and executive officers are affiliates) was approximately $583.5 million. Registrant had 30,028,878 shares of $.01 par value Common Stock outstanding as of February 28, 2007. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III hereof. ================================================================================ PART I ITEM 1. BUSINESS INTRODUCTION AMCOL International Corporation was originally incorporated in South Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was changed to American Colloid Company in 1927, and in 1959, the Company was reincorporated in Delaware. In 1995, its name was changed to AMCOL International Corporation. Except as otherwise noted or indicated by context, the term "Company" refers to AMCOL International Corporation and its subsidiaries. We operate in five segments: minerals, environmental, oilfield services, transportation and corporate. Our minerals segment mines, processes and distributes clays and products with similar applications for use in various industrial and consumer markets. Our environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and a variety of other industrial and commercial applications. Our oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, and well testing services for the oil and gas industry. Our transportation segment includes both a long-haul trucking business and a freight brokerage business for our domestic subsidiaries as well as third parties. Intersegment shipping revenues are eliminated in our corporate segment. Prior to the third quarter of 2006, we did not report our oilfield services business as a separate segment. This business was included as part of our environmental segment. In the third quarter of 2006, we reorganized how we view and manage our business. We began capturing discrete financial information for our oilfield services business and reporting it separately to management. As a result, commencing in the third quarter of 2006, we recognized oilfield services as a stand-along segment, separate from our environmental segment. We have revised the segment information for prior periods to conform to this new presentation. The following table sets forth the percentage contributions of our operating segments to our net sales for the last three years. PERCENTAGE OF NET SALES ---------------------------------------------- 2006 2005 2004 ------------ ------------ ------------ Minerals 52% 55% 57% Environmental 33% 32% 32% Oilfield services 10% 7% 5% Transportation 8% 9% 9% Intersegment shipping -3% -3% -3% ------------ ------------ ------------ 100% 100% 100% ============ ============ ============ Net revenues, operating profit, assets, depreciation, depletion and amortization, capital expenditures and research and development expenditures attributable to each of our business segments are set forth in our Notes to Consolidated Financial Statements included later herein. MINERALS SEGMENT The business is principally conducted through wholly-owned subsidiaries and investments in affiliates and joint ventures throughout the world. Our principal bentonite products are marketed under various internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R), PREMIUM GEL(R) and ADDITROL(R). 2 Commercially produced bentonite is a type of montmorillonite clay found in beds ranging in thickness from two to 50 feet beneath overburden of up to 60 feet. There are two basic types of bentonite, each having different chemical and physical properties. These are commonly known as sodium bentonite and calcium bentonite. Sodium bentonite is generally referred to as Western bentonite because it predominately exists in the Western United States. Sodium bentonites of lesser purity exist outside the United States. Calcium bentonite is sometimes referred to as Southern bentonite in the United States and as Fuller's Earth outside the United States. Calcium bentonites mined outside the United States are sometimes activated with sodium carbonate or similar compounds to produce properties similar to natural sodium bentonite. PRINCIPAL PRODUCTS AND MARKETS Metalcasting. In the formation of sand molds for metalcastings, sand is bonded with bentonite and various other additives to yield desired casting form and surface finish. We serve the foundry and casting industry throughout the North America and the Asia-Pacific region with custom-blended bentonite and allied non-bentonite products to strengthen sand molds for cast auto parts, farm implements, railcars, home appliances and metallurgical products. The blended mineral binders containing sodium bentonite, calcium bentonite, seacoal and other ingredients are sold under the trade name ADDITROL(R). We also have a line of formulated additives that are used to introduce silicon and carbon in the melt phase of the casting process. Pet Products. We produce and market sodium bentonite-based scoopable (clumping), traditional and alternative cat litters as well as specialty pet products to grocery and drug stores, mass merchandisers, wholesale clubs and pet specialty stores throughout the U.S. Our scoopable products' clump-forming capability traps urine, allowing for easy removal of the odor-producing elements from the litter box. Our products are marketed under various trade names. Specialty Minerals. Our products are sold in markets with generally lower volume applications where our material acts as a performance additive. The following are the major markets for such mineral applications: o Detergents. We supply high-grade agglomerated bentonite to the detergent industry. Bentonite performs as a softening agent in certain powdered-detergent formulations. It can also act as a carrier for colorants and fragrances. o Health and Beauty. We manufacture adsorbent polymers and purified grades of bentonite ingredients for sale to manufacturers of personal skin care products. The adsorbent polymers are used to deliver high-value actives in skin-care products. Bentonite-based materials act as thickening, suspension and dispersion agent emollients. o Nanocomposites. We determined that nanoclays which are surface-modified could improve physical properties of certain polymers. Depending on the product requirements, we source or purchase bentonite from third-party suppliers. Surface-treatment chemicals are added in the production process to enable the bentonite to properly function within the polymer. The surface-treatment compounds are readily available on the market. Our production facility is located in Aberdeen, Mississippi. o Petroleum Products. Sodium bentonite and leonardite, a form of oxidized lignite mined and processed by us in North Dakota, are components of drilling fluids used in oil and gas well drilling. Bentonite imparts thickening and suspension properties, which facilitate the transport of rock cuttings to the surface during the drilling process. Drilling fluids lubricate the drilling bit and coat the underground formations to prevent hole collapse and drill-bit seizing. Our primary trademark for this application is sold under the trade name PREMIUM GEL(R). o Other Industrial. We produce bentonite and bentonite blends for the construction industry, which are used as a plasticizing agent in cement, plaster and bricks, and as an emulsifier in asphalt. We also supply grades of bentonite used for pellitizing other materials for ease of use. Examples of this application are iron ore and livestock feed. 3 SALES AND DISTRIBUTION In 2006, the top five customers of the minerals segment accounted for approximately 34% of the segment's sales worldwide. Approximately 73% of our sales in this segment are to customers in North and South America. Metalcasting is our largest market in the Americas and all of our pet products sales are in this region. Our sales in Europe represent approximately 16% of sales and are principally to detergent producers. The Asia-Pacific region represents approximately 11% of sales with metalcasting being our largest market. A large majority of our sales and distribution is conducted by our own personnel and facilities. We have established industry-specialized sales groups staffed with technically oriented salespersons serving each of our major markets. Certain businesses will have networks of distributors and representatives, including companies that warehouse products at strategic locations. We believe our strong global market position in the metalcasting market is largely due to our technical service capabilities and our distribution network. We provide training courses and laboratory testing for customers who use our products in the metalcasting process. Our technical sales personnel provide expertise to not only educate our customers on the bentonite blend properties but also aid them in producing castings efficiently and productively. For cat litter, we are primarily a private-label producer, and have three principal sites from where we package and distribute finished goods. Our transportation segment provides logistics services for the cat litter business, and is a key component of our capability in supplying customers on a national basis. Certain specialty mineral markets require considerable technical expertise. Our detergent additives market position requires an ability to not only supply cost-effective products but also provide product development capabilities to adapt to our customers' product requirements. We experience a similar requirement for our health and beauty business, which makes use of several patents with various durations that we believe are collectively important to that business. Petroleum products are sold under our own and private-label trade names. Bentonite is a major component of drilling fluids. At least two drilling fluid service companies have captive bentonite operations and others are party to long-term bentonite supply agreements. Our potential market, therefore, is generally limited to those service organizations that are not vertically integrated or do not have long-term supply arrangements with other bentonite producers. COMPETITION We are one of the largest producers of bentonite products globally. There is substantial domestic and international competition, which is essentially a matter of product quality, price, logistics, service and technical support. There are at least 15 other major sodium bentonite or sodium activated calcium bentonite producers throughout the world including several importers into the U.S. market. There are also numerous major producers of calcium bentonite and various regional suppliers in the areas we serve. Some of the producers are companies primarily in other lines of business with substantially greater financial resources than ours. SEASONALITY We do not consider our minerals segment to be seasonal in nature. 4 ENVIRONMENTAL SEGMENT PRINCIPAL PRODUCTS AND MARKETS The business is principally conducted through wholly-owned subsidiaries, including Colloid Environmental Technologies Company ("CETCO"), and joint ventures throughout the world. The following are our three principal markets and a description of the products we produce for them: Lining Technologies. CETCO sells geosynthetic clay liner products containing bentonite under the BENTOMAT(R) and CLAYMAX(R) trade names for lining and capping landfills and for containment in tank farms, storm water containment systems, waste stabilization lagoons, sewage lagoons and mine site and wetlands reclamation applications. Additionally, we provide contracting services in the application of certain geosynthetic materials, including our clay liners, for a number of civil infrastructure projects. Building Materials. Our VOLCLAY(R) Waterproofing System is sold to the non-residential construction industry. This line includes VOLTEX(R), a waterproofing composite comprised of two polypropylene geotextiles filled with sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground foundation walls and slabs. The following products round out the principal components of the product line: VOLCLAY PANELS(R), also used for below-grade waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and plaza areas. We also manufacture and sell asphalt emulsion-based waterproofing systems for residential and non-residential waterproofing applications. In addition, our STRONGSEAL(TM) and DUCKSBACK(TM) roofing underlayment systems are sold to the residential and non-residential roofing industry. Drilling Products. CETCO's drilling products are used in environmental and geotechnical drilling applications, horizontal directional drilling, mineral exploration and foundation construction. The products are used to install monitoring wells, facilitate horizontal and water well drilling, rehabilitate existing water wells and seal abandoned exploration drill holes. VOLCLAY GROUT(R), HYDRAUL-EZ(R), BENTOGROUT(R) and VOLCLAY TABLETS(R) are among the trade names for products used in these applications. Geothermal grouting applications utilizing GEOTHERMAL GROUT(TM) represent a developing area for CETCO drilling products. VOLCLAY SHORE PAC(R) is used in special foundation drilling applications. COMPETITION CETCO principally competes with at least seven regional geosynthetic clay liner manufacturers worldwide and several suppliers of alternative technologies. The building materials product lines are specialized businesses that compete primarily with alternative technologies. A number of integrated bentonite companies compete against us in the drilling products business. Competition is based on product quality, service, price, technical support and product availability. SALES AND DISTRIBUTION The top five customers in our environmental segment accounted for less than 10% of the segment sales worldwide. Approximately 54% of sales are in North and South America. The United States is our largest geographical market for all product lines. Approximately 40% of sales are in Europe and the remaining 6% in the Asia-Pacific region. Sales and distribution of the lining technologies are primarily performed through our own personnel and facilities. Our staff includes engineers who assist with specifying products for topographical conditions that liners will endure. The building materials products are primarily sold through distributor and dealer networks. The end customers are generally building sub-contractors who are responsible for installing the products. 5 For drilling product lines, we generally sell through distribution networks. The end customers for the industrial product lines include metal plating and finishing plants and corrugated cardboard operations. Drilling products are also sold through distributors who are overseen by our regional managers. SEASONALITY Much of the business in the environmental sector is impacted by weather and soil conditions. Many of the products cannot be applied in harsh weather conditions and, as such, sales and profits tend to be stronger during the period from April through October. As a result, we consider the business of this segment to be seasonal. OILFIELD SERVICES SEGMENT PRINCIPAL PRODUCTS AND MARKETS Our oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, and well testing services for the oil and gas industry. We sell products and services through wholly-owned subsidiaries located in Australia; Brazil; Nigeria; the United Kingdom; and the United States. The following are our principal markets and a description of the products and services we provide: Water Treatment. We employ several technologies allowing offshore oil drilling and production platform operators to maintain compliance with regulatory requirements governing the discharge of waste water generated during oil production as well as refineries. Well Testing. We provide equipment and personnel for production well control, clean up, unload, separation, measure of component flow and disposal of fluids from oil and gas wells. Pipeline. Our personnel utilize engineered equipment that separates and allows treatment of effluents arising from pipeline testing and maintenance activities. Other products and services. We rent specialized equipment such as high-pressure pumps to oil and gas production platform operators. We also provide liquid nitrogen with our personnel and mobile equipment to the same production platforms, pipeline operators, and refineries. Liquid nitrogen is commonly used to purge atmospheric conditions that will allow safe performance of maintenance activities at these operations. COMPETITION Our oilfield services group competes with several larger oil services companies using different technologies. SALES AND DISTRIBUTION The top five customers in our oilfield services segment accounted for 28% of the segment sales worldwide. Approximately 82% of sales are in North and South America. The United States is our largest geographical market for all product lines. The remaining 18% of sales primarily originate in Europe and Africa. Our filtration business primarily sells and distributes products and services on a direct basis. Our principal customers are oil companies who maintain substantial offshore drilling and production platforms. The well testing business also sells and distributes services to customers on a direct basis. Our customer base is comprised of onshore and offshore oil and gas production firms. 6 SEASONALITY Much of the business in the oilfield services sector is impacted by weather conditions given that a significant portion of our customers' oil and gas production facilities are subject to natural disasters, such as hurricanes. MINERALS & ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS MINERAL RESERVES We have reserves of sodium and calcium bentonite at various locations in the United States, including Wyoming, South Dakota, Montana and Alabama, and also in Australia and China. Through our investments in affiliates and joint ventures, we also have access to bentonite deposits in Egypt, India and Mexico. At 2005 consumption rates and product mix, we estimate the proven, assigned reserves of commercially usable sodium bentonite at approximately 17 years. We estimate the proven, assigned reserves of calcium bentonite at approximately 22 years in North America. While we believe, based upon our experience, that our reserve estimates are reasonable and our title and mining rights to our reserves are valid, we have not obtained any independent verification of such reserve estimates or such title or mining rights. We own or control the properties on which reserves are located through long-term leases, royalty agreements and patented and unpatented mining claims. A majority of our bentonite reserves are owned. All of the properties on which our reserves are located are either physically accessible for the purposes of mining and hauling or the cost of obtaining physical access would not be material. To retain possessory rights in unpatented mining claims in North America, a fee of $100 per year for each unpatented mining claim is required. The validity of title to unpatented mining claims is dependent upon numerous factual matters. We believe that the unpatented mining claims that we own are in compliance with all applicable federal, state and local mining laws, rules and regulations. We are not aware of any material conflicts with other parties concerning our claims. From time to time, members of Congress and members of the executive branch of the federal government have proposed amendments to existing federal mining laws. The various amendments would have had a prospective effect on mining operations on federal lands and include, among other things, the imposition of royalty fees on the mining of unpatented claims, the elimination or restructuring of the patent system and an increase in fees for the maintenance of unpatented claims. To the extent that future proposals may result in the imposition of royalty fees on unpatented lands, the mining of our unpatented claims may become uneconomic and royalty rates for privately leased lands may be affected. We cannot predict the effect any potential amendments may have or whether or when any such amendments might be adopted. We maintain a continuous program of worldwide exploration for additional reserves and attempt to acquire reserves sufficient to replenish our consumption each year, but we cannot assure that additional reserves will continue to become available. We oversee all of our mining operations, including our exploration activity and securing the necessary state and federal mining permits. 7 The following table shows a summary of minerals sold by the Company from active mining areas for the last 3 years in short tons, as well as mineral reserves by major mineral category.
TONS SOLD MINING CLAIMS ------------------------- WET TONS ------------------------------- ALL AMOUNTS ARE IN OF ASSIGNED UNASSIGNED CONVERSION UNPATENTED THOUSANDS OF TONS 2006 2005 2004 RESERVES RESERVES RESERVES FACTOR OWNED ** LEASED ----------------------- ------- ------- ------- ---------- --------- ---------- ---------- -------- ---------- -------- SODIUM BENTONITE Assigned Belle/Colony, WY/SD 1,310 1,295 1,227 19,328 19,328 -- 77.02% 826 342 18,160 Lovell, WY 663 609 564 21,996 21,996 -- 84.34% 12,262 9,413 321 TOTAL ASSIGNED 1,973 1,904 1,791 41,324 41,324 -- 13,088 9,755 18,481 Unassigned SD, WY, MT -- -- -- 61,980 -- 61,980 76.18% 55,412 3,502 3,066 TOTAL OTHER / UNASSIGNED -- -- -- 61,980 -- 61,980 55,412 3,502 3,066 TOTAL SODIUM BENTONITE 1,973 1,904 1,791 103,304 41,324 61,980 -- 68,500 13,257 21,547 40% 60% 66% 13% 21% CALCIUM BENTONITE Assigned Sandy Ridge, AL 124 120 132 3,690 3,690 -- 75.36% 1,660 -- 2,030 Chao Yang, Liaoning, China 175 89 88 2,404 2,404 -- 76.00% -- -- 2,404 Nevada 1 2 2 3,534 37 3,497 76.18% 37 500 2,997 Queensland, Australia 2 N/A N/A 426 426 -- 77.00% -- -- 426 TOTAL CALCIUM BENTONITE 302 211 222 10,054 6,557 3,497 1,697 500 7,857 65% 35% 17% 78% LEONARDITE Gascoyne, ND 63 50 41 1,297 1,297 -- 73.96% -- -- 1,297 100% 100% OTHER Unassigned Other (NV, OK) -- -- -- 2,630 -- 2,630 76.18% -- -- 2,630 GRAND TOTALS 2,338 2,165 2,054 117,285 49,178 68,107 70,197 13,757 33,331 42% 58% 60% 12% 28%
** Quantity of reserves that would be owned if patent was granted. Assigned reserves are reserves which could be reasonably expected to be processed in existing plants. Unassigned reserves are reserves which will require additional expenditures for processing facilities. Conversion factor is the percentage of reserves that will be available for sale after processing. We estimate that available supplies of other materials utilized in our minerals business are sufficient to meet our production requirements for the foreseeable future. MINING AND PROCESSING Bentonite is surface mined, generally with large earthmoving scrapers, and then loaded into trucks and off-highway-haul wagons for movement to processing plants. The mining and hauling of our clay is done by us and by independent contractors. At the processing plants, bentonite is dried, crushed and sent through grinding mills, where it is sized to customer requirements, then chemically modified where needed and transferred to silos for automatic bagging or bulk shipment. Virtually all production is shipped as processed rather than stored for inventory. PRODUCT DEVELOPMENT AND PATENTS We work actively with customers in each of our major markets to develop commercial applications of specialized grades of bentonite. We maintain a research center and laboratory testing facilities in Arlington Heights, Illinois, and Birkenhead, England. When we perceive a need for a product that will accomplish a particular goal, we work to develop the product, research its marketability and study the feasibility of its production. We also co-develop products with customers, or others, as needs arise. Our development efforts emphasize markets with which we are familiar and products for which we believe there is a viable market. 8 We hold a number of U.S. and international patents covering the use of bentonite and products containing bentonite. We follow the practice of obtaining patents on new developments whenever feasible. However, we do not consider that any one or any combination of such patents is material to our businesses as a whole. RESEARCH AND DEVELOPMENT Our business segments share research and laboratory facilities adjacent to our corporate headquarters. Technological developments are shared among our subsidiaries, subject to license agreements where appropriate. Further information on research and development activities is included in our Notes to Consolidated Financial Statements contained in Item 8 of this report. REGULATION AND ENVIRONMENTAL We believe we are in material compliance with current, applicable regulations for surface mining. Since reclamation of exhausted mining sites has been a regular part of our surface mining operations for the past 35 years, maintaining compliance with current regulations has not had a material effect on mining costs. Reclamation costs are reflected in the prices of the bentonite sold. The grinding and handling of dried clay is part of the production process, and, because these processes generate dust, our mineral processing plants are subject to applicable clean air standards (including Title V of the Clean Air Act). All of our plants are equipped with dust collection systems. We have not had, and do not presently anticipate, any significant regulatory problems in connection with our dust emission, though we expect ongoing expenditures for the maintenance of our dust collection systems and required annual fees. Our operations are also subject to other federal, state, local and foreign laws and regulations relating to the environment and to health and safety matters. Certain of these laws and regulations provide for the imposition of substantial penalties for noncompliance. While the costs of compliance with, and penalties imposed under, these laws and regulations have historically not had a material adverse effect on us, future events, such as changes in or modified interpretations of existing laws and regulations, enforcement policies, or further investigation or evaluation of potential health hazards of certain products, may give rise to additional compliance and other costs that could have a material adverse effect on us. TRANSPORTATION SEGMENT We operate a long-haul trucking business and a freight brokerage business primarily for delivery of finished products throughout the continental United States. These services are provided to our subsidiaries as well as third-party customers. Through our transportation business, we are better able to control costs, maintain delivery schedules and assure equipment availability in the delivery of our products. In 2006, approximately 41% of the revenues of this operation involved services provided to our domestic minerals and environmental segments. FOREIGN OPERATIONS AND EXPORT SALES Approximately 31% of our 2006 net sales were to customers in countries outside North America. To enhance our overseas market presence, we maintain mineral processing plants in the United Kingdom, Spain, China, Australia, South Korea, Poland and Thailand, as well as a blending plant in Canada. Chartered vessels deliver large quantities of our bulk, dried sodium bentonite to the plants in the United Kingdom, Poland, Australia, Thailand and South Korea where it is processed and mixed with other clays and distributed throughout Europe and the Asia-Pacific region. In addition, we maintain a worldwide network of independent dealers, distributors and representatives to support sales and distribution. 9 We manufacture geosynthetic clay liners in the United Kingdom, Poland, China, South Korea, and India through our joint venture company Ashapura Volclay Limited. These international operations provide a cost-effective means of supplying the European and Asia-Pacific markets. Our international operations are subject to the usual risks of doing business abroad, such as currency fluctuations and devaluation, restrictions on the transfer of funds, and import and export duties. The Notes to Consolidated Financial Statements included in Item 8 of this report presents further details on our sales by geographic region. This Note is incorporated by reference for sales attributed to foreign operations and export sales from the United States. EMPLOYEES As of December 31, 2006, we employed 1,759 people in our global organization, 706 of whom were employed outside of the United States. Operating plants are adequately staffed, and no significant labor shortages are presently foreseen. Labor relations have been satisfactory. AVAILABLE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any reports, statements and other information filed by the Company at the SEC's Public Reference Room at 100 F. Street N.E., Washington, D.C., 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains a website that contains reports, proxy and information statements and the operations of other information regarding issuers that file electronically with the SEC. Our filings are also available to the public at the website maintained by the SEC, www.sec.gov. Our principal Internet address is www.amcol.com. Our annual, quarterly and current reports, and amendments to those reports, are available free of charge on www.amcol.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. CERTIFICATIONS As required by the rules and regulations of the New York Stock Exchange (the "NYSE"), we delivered to the NYSE a certification executed by our Chief Executive Officer, Lawrence E. Washow, certifying that Mr. Washow was not aware of any violation by the Company of the NYSE's corporate governance listing standards as of May 12, 2006. As required by the rules and regulations of the SEC, the Sarbanes-Oxley Act Section 302 certifications regarding the quality of our public disclosures are filed as exhibits to this Annual Report on Form 10-K. 10 ITEM 1A. RISK FACTORS Certain statements we make from time to time, including statements in the Management's Discussion and Analysis of Financial Condition and Results of Operation section hereafter, constitute "forward-looking statements" made in reliance upon the safe harbor contained in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements relating to our company or our operations that are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions, and statements relating to anticipated growth, acquisitions, levels of capital expenditures, future dividends, expansion into global markets and the development of new products. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our actual results, performance or achievements could differ materially from the results, performance or achievements expressed in, or implied by, these forward-looking statements as a result of various factors, including without limitation the following: COMPETITION Our businesses are very competitive. We believe competition is essentially a matter of product quality, price, delivery, service and technical support. Several of our competitors in the world market are larger and have substantially greater financial resources. If we fail to compete successfully based on these or other factors, we may lose customers or fail to recruit new customers and our business and future financial results could be materially and adversely affected. RELIANCE ON METALCASTING AND CONSTRUCTION INDUSTRIES Approximately 44% of our minerals segment's sales and 34% of our environmental segment's sales in 2006 were to the metalcasting and construction markets, respectively. The metalcasting and construction markets depend heavily upon the strength of the domestic and international economies. If these economies weaken, demand for products by the metalcasting and construction markets may decline and our business or future financial results may be adversely affected. RELIANCE ON THE OIL AND GAS ACTIVITIES Our oilfield services segment now represents in excess of 10% of consolidated revenues and approximately 19% of consolidated operating income. Oil and gas production activities are heavily influenced by the benchmark price of these commodities. In turn, both economic and political events can influence the benchmark price which may ultimately affect the revenue potential of our business. INTEGRATION OF ACQUIRED BUSINESSES We completed three business acquisitions in 2006 and another in January 2007. Acquisitions may continue to be an element of our growth strategy in the future. If actual integration costs are higher than amounts assumed, the profitability of acquired businesses is lower than amounts assumed, or we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, our future earnings may be lower than anticipated. REGULATORY AND LEGAL MATTERS Our operations are subject to various federal, state, local and foreign laws and regulations relating to the environmental and to health and safety matters. Substantial penalties may be imposed if we violate certain of these laws and regulations even if the violation was inadvertent or unintentional. If these laws or regulations are changed or interpreted differently in the future, it may become more difficult or expensive for us to comply. In addition, investigations or evaluations of our products by government agencies may require us to adopt additional safety measures or precautions. If our costs to comply with such laws and regulations in the future materially increase, our business and future financial results could be materially and adversely affected. We may also be subject to adverse litigation results in addition to increased compliance costs arising from future changes in laws and regulations that may negatively impact our operations and profits. 11 RISKS OF INTERNATIONAL EXPANSION An important part of our business strategy is to expand internationally. We intend to seek acquisitions, joint ventures and strategic alliances globally. Sales and earnings from our overseas operations have increased considerably in recent years. In 2006, approximately 23% and 8% of consolidated net sales were from Europe and the Asia-Pacific regions, respectively. Approximately 43% of operating profit in 2006 was earned by our overseas businesses. We also recorded approximately $0.17 per diluted share for earnings, under the equity method of accounting, from investments in affiliate businesses. As we expand internationally, we will be subject to increased risks, which may include the following: o currency exchange or price control laws; o currency translation adjustments; o political and economic instability; o unexpected changes in regulatory requirements; o tariffs and other trade barriers; o longer accounts receivable collection cycles; and o adverse tax consequences. The above listed events could result in sudden, and potentially prolonged, changes in demand for our products. Also, we may have difficulty enforcing agreements and collecting accounts receivable through a foreign country's legal system. OCEAN SHIPPING AND LOGISTICS Bulk cargo shipping costs have been rising significantly due to greater demand from China. We rely on shipping bulk cargos of bentonite from the United States and China to customers, as well as our own subsidiaries. We may need to offset additional shipping costs with price increases to customers in order to maintain our profitability. Other factors in the United States that will potentially impact us are escalating costs of purchased raw materials derived from petrochemical stocks and increases in rail and long-haul freight rates. While we have been successful in attaining price increases in certain markets to offset some of these rising costs, there can be no assurance that we will be successful in continuing to achieve these price increases. VOLATILITY OF STOCK PRICE The stock market has been extremely volatile in recent years. These broad market fluctuations may adversely affect the market price of our common stock. In addition, factors such as the following may have a significant effect on the market price of our common stock: o quarterly fluctuations in our financial results; o our introduction of new services or products; o announcements of acquisitions, strategic alliances or joint ventures by us, our customers or our competitors; o changes in analysts' recommendations regarding our common stock; and o general economic conditions. There can be no assurance that the price of our common stock will increase in the future or be maintained at its recent levels. 12 ITEM 2. PROPERTIES We operate the following principal plants, mines and other facilities, all of which are owned, except as noted below. We also have numerous other facilities which blend ADDITROL (R), package cat litter and chromite sand, warehouse products and serve as sales offices.
LOCATION PRINCIPAL FUNCTION ------------------------------------- ---------------------------------------------------------------------------- MINERALS Belle Fourche, SD Mine and process sodium bentonite Colony, WY (two plants) Mine and process sodium bentonite, package cat litter Gascoyne, ND Mine and process leonardite Lovell, WY (1) Mine and process sodium bentonite Sandy Ridge, AL Mine and process calcium bentonite; blend ADDITROL(R) Chao Yang, Liaoning, China Mine and process calcium bentonite Geelong, Victoria, Australia (1)(2) Process sodium and calcium bentonite; blend ADDITROL(R) Rayong, Thailand Process sodium and calcium bentonite Winsford, Cheshire, U.K. Process bentonite and other minerals Kyungju Kyung-Buk, South Korea Process sodium and calcium bentonite Aberdeen, MS Process purified bentonite (Nanocor, Inc.) ENVIRONMENTAL Cartersville, GA Manufacture components for geosynthetic clay liners; manufacture Bentomat(R)and Claymax(R)geosynthetic clay liners Lovell, WY (1) Manufacture Bentomat(R)and Claymax(R)geosynthetic clay liners Philadelphia, PA Provider of services for the design and installation of geosynthetic systems Birkenhead, Merseyside, U.K. (1)(2) Manufacture Bentomat(R)geosynthetic clay liner; research laboratory; headquarters for CETCO (Europe) Ltd. Pyeongtaek, South Korea Manufacture Bentomat(R)geosynthetic clay liners Segovia, Spain 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 OILFIELD SERVICES Broussard, LA Central operations and distribution Aberdeen, Scotland Oilfield operations and distribution Harvey, LA Nitrogen sales and service TRANSPORTATION Scottsbluff, NE Transportation headquarters and terminal CORPORATE Arlington Heights, IL (2) Corporate headquarters; CETCO headquarters; American Colloid Company headquarters; Nanocor, Inc. headquarters; research laboratory
(1) Shared facilities between minerals and environmental segments. (2) Certain offices and facilities are leased. ITEM 3. LEGAL PROCEEDINGS We are party to a number of lawsuits arising in the normal course of our business. We do not believe that any pending litigation will have a material adverse effect on our consolidated financial position or results of operations. Our processing operations require permits from various governmental authorities. From time to time, we have been contacted by government agencies with respect to required permits or compliance with existing permits. While we have been notified of certain situations of non-compliance, management does not expect the fines or the cost of becoming compliant, if any, to be significant. 13 We have neither been nor expect to be assessed any tax shelter penalties by the United States Internal Revenue Service for tax shelter transactions that either the IRS deems abusive or have significant tax avoidance penalties. ITEM 4. 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 45 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. Ryan F. McKendrick 55 Vice President of the Company and President of CETCO since November 1998; President of Volclay International Corporation since 2002; prior thereto, Vice President of CETCO since 1994. Gary Morrison 51 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. Lawrence E. Washow 53 Chief Executive Officer since May 2000; President of the Company since May 1998; Chief Operating Officer of the Company since 1997; a Director since February, 1998.
All executive officers of the Company are elected annually by the Board of Directors for a term expiring at the annual meeting of directors following their election or when their respective successors are elected and shall have qualified. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock trades on the New York Stock Exchange under the symbol "ACO." The following table sets forth, for the periods indicated, the high and low closing sale prices of the common stock, as reported by the New York Stock Exchange, and cash dividends declared per share.
CASH STOCK PRICE DIVIDENDS -------------------------- DECLARED HIGH LOW PER SHARE ------------ ------------ ----------- Fiscal Year Ended December 31, 2006: 1st Quarter $ 29.40 $ 20.28 $ 0.11 2nd Quarter 33.49 22.56 0.12 3rd Quarter 26.95 18.71 0.12 4th Quarter 29.43 23.87 0.14 Fiscal Year Ended December 31, 2005: 1st Quarter $ 23.09 $ 18.11 $ 0.09 2nd Quarter 21.27 16.90 0.09 3rd Quarter 20.75 18.20 0.10 4th Quarter 21.65 16.35 0.10
We have paid cash dividends every year for 69 years. As of March 5, 2007, there were 7,225 holders of record of the common stock, including shares held in street name. 14 PURCHASES OF EQUITY SECURITIES On May 13, 2004, we announced a share repurchase program for the repurchase of $10 million of our common stock in the open market. This program terminated on September 30, 2006 and was replaced with a share repurchase program that provides for the repurchase of up to $15 million of our common stock on the open market or in privately negotiated transactions. This new program terminates on November 10, 2008. The following table summarizes the repurchases made during the year under the terminated 2004 stock repurchase program. In 2006, we did not purchase any of our common stock under the currently authorized stock repurchase program.
MAXIMUM VALUE OF TOTAL NUMBER OF SHARES THAT SHARES REPURCHASED AVERAGE MAY YET BE AS PART OF THE STOCK PRICE PAID REPURCHASED REPURCHASE PROGRAM PER SHARE UNDER THE PROGRAM -------------------- ----------------- ----------------- Amount of authorization outstanding at December 31, 2005 $ 8,035,285 Activity in current year: January 1 - January 31 Shares repurchased -- N/A $ 8,035,285 February 1 - February 28 Shares repurchased -- N/A $ 8,035,285 March 1 - March 31 Shares repurchased 40,000 $ 26.89 $ 6,959,825 April 1 - April 30 Shares repurchased 10,000 $ 29.48 $ 6,665,075 May 1 - May 31 Shares repurchased 30,000 $ 28.69 $ 5,804,367 June 1 - June 30 Shares repurchased 40,000 $ 24.70 $ 4,816,242 July 1 - July 31 Shares repurchased 15,000 $ 23.05 $ 4,470,492 August 1 - August 31 Shares repurchased 40,100 $ 22.86 $ 3,553,806 September 1 - September 30 Shares repurchased 44,900 $ 23.87 $ 2,482,043 October 1 - October 31 Shares repurchased -- N/A $ -- November 1 - November 30 Shares repurchased -- N/A $ 15,000,000 December 1 - December 31 Shares repurchased -- N/A $ 15,000,000 ----------------- Total 220,000 $ 25.24 $ 15,000,000 =================
15 ITEM 6. SELECTED FINANCIAL DATA The following is selected financial data for the Company as of and for the five years ended December 31, 2006. SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
2006 2005 2004 2003 2002 ------------ ------------ ------------ ------------ ------------ OPERATIONS DATA Net sales $ 611,556 $ 535,924 $ 461,778 $ 374,483 $ 307,422 Gross profit 159,466 138,023 118,568 100,068 80,417 General, selling and administrative expenses 102,078 90,947 82,584 71,053 60,764 Operating profit 57,388 47,076 35,984 29,015 19,653 Net interest expense (2,951) (1,660) (826) (280) (512) Net other income (expense) 231 (393) (86) 526 48 Pretax income 54,668 45,023 35,072 29,261 19,189 Income taxes 10,425 11,645 4,687 9,946 6,916 Income from affiliates and joint ventures 5,420 2,912 1,180 600 531 Minority interest in net loss of subsidiary -- -- -- -- 164 Income from continuing operations 49,663 36,290 31,565 19,915 12,968 Gain on disposal of discontinued operations 585 4,755 -- 8,950 -- Net income 50,248 41,045 31,565 28,865 12,968 PER SHARE DATA Basic earnings per share Continuing operations 1.65 1.23 1.08 0.70 0.46 Discontinued operations 0.02 0.16 -- 0.32 -- Net income 1.67 1.39 1.08 1.02 0.46 Diluted earnings per share Continuing operations 1.60 1.18 1.03 0.67 0.43 Discontinued operations 0.02 0.15 -- 0.30 -- Net income 1.62 1.33 1.03 0.97 0.43 Stockholders' equity (1) 9.85 8.36 7.55 6.58 5.66 Dividends 0.49 0.38 0.32 0.16 0.10
Continued 16 SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
2006 2005 2004 2003 2002 ------------ ------------ ------------ ------------ ------------ SHARES OUTSTANDING DATA End of period 29,936,356 29,783,639 29,395,755 29,107,746 27,881,903 Weighted average for the period-basic 30,054,267 29,525,033 29,140,892 28,357,009 28,133,795 Incremental impact of stock options 971,621 1,278,105 1,561,969 1,492,569 2,014,725 Weighted average for the period-diluted 31,025,888 30,803,138 30,702,861 29,849,578 30,148,520 BALANCE SHEET DATA (at end of period) Current assets $ 251,684 $ 211,209 $ 192,724 $ 143,574 $ 116,935 Net property and equipment 140,772 100,064 93,641 86,996 81,847 Other long-term assets 118,768 57,256 50,077 34,759 29,598 Total assets 511,224 368,529 336,442 265,329 228,380 Current liabilities 78,383 63,269 61,681 47,708 52,639 Long-term debt 112,448 34,838 34,295 9,006 5,573 Other long-term liabilities 25,575 21,566 18,532 17,165 12,233 Stockholders' equity 294,818 248,856 221,934 191,450 157,935 OTHER STATISTICS FOR CONTINUING OPERATIONS Depreciation, depletion and amortization $ 20,483 $ 19,558 $ 20,124 $ 18,910 $ 20,759 Capital expenditures 42,099 28,626 21,627 15,795 16,223 Gross profit margin 26.1% 25.8% 25.7% 26.7% 26.2% Operating profit margin 9.4% 8.8% 7.8% 7.7% 6.4% Pretax profit margin 8.9% 8.4% 7.6% 7.8% 6.2% Effective tax rate 19.1% 25.9% 13.4% 34.0% 36.0% Net profit from continuing operations margin 8.1% 6.8% 6.8% 5.3% 4.2% Return on average equity 18.3% 15.4% 15.3% 11.4% 8.5%
(1) Based on the number of common shares outstanding at the end of each year rather than a weighted average. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a global, specialty minerals company and earn our revenues and profits from a diverse group of industrial and consumer product lines. The principal mineral that we utilize to generate revenues is bentonite. We own or lease bentonite reserves in the United States, Australia and China. Additionally, through our affiliates and joint ventures, we have access to bentonite reserves in Egypt, India and Mexico. Bentonite deposits have varying physical properties which require us to identify which markets our reserves can serve. We believe that our understanding of bentonite properties, mining methods, processing and application to markets are the core components of our longevity and future prospects. We operate in five segments: minerals, environmental, oilfield services, transportation and corporate. Prior to the third quarter of 2006, we did not report our oilfield services business as a separate segment. This business was included as part of our environmental segment. In the third quarter of 2006, we reorganized how we view and manage our business. We began capturing discrete financial information for our oilfield services business and reporting it separately to management. As a result, commencing in the third quarter of 2006, we recognized oilfield services as a stand-alone segment, separate from our environmental segment. We have revised the segment information for prior periods to conform to this new presentation. Both our minerals and environmental segments operate manufacturing facilities in North America, Europe, and Asia-Pacific regions. Our oilfield services segment operates principally in North America, Europe and Africa. Additionally, we have a transportation segment that performs trucking services for our domestic minerals and environmental businesses as well as third parties. Our customers are engaged in varied end-markets and geographies. Customers in the minerals segment range from foundries that produce castings for automotive, industrial, and transportation equipment, including heavy-duty trucks and railroad cars, to producers of consumer goods, including cat box filler, cosmetics and detergents. The customers for our lining technologies and building materials products are predominantly engineering contractors. The oilfield services customer base is primarily comprised of oil and gas service or exploration companies. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year. Approximately 69% of our revenue is generated in North America; consequently, the state of the U.S. economy impacts our revenues. Our fastest growing markets are in the Asia-Pacific and European regions, which have continued to outpace the United States in economic growth. Sustainable, long-term profit growth is our primary objective. We employ a number of strategic initiatives to achieve this goal: o Organic growth: The central component of our growth strategy is expansion of our product lines and market presence. We have a history of commitment to research and development and using this resource to bring innovative products to market. We believe this approach to growth offers the best probability of achieving our long-term goals at the lowest risk. o Globalization: We have expanded our manufacturing and marketing organizations into Europe and Asia-Pacific over the last 40 years. This operating experience enables us to expand further into emerging markets. We see the significant opportunities in the Asia-Pacific region for expanding our revenues and earnings over the long-term as a number of markets we serve, such as metalcasting and lining technologies, are expected to grow. We expect to take advantage of these growth areas either through our wholly-owned subsidiaries or investments in affiliates and joint ventures. 18 o Mineral development: Bentonite is a component in a majority of the products we produce. Since it is a natural material, we must continually expand our reserve base to maintain a long-term business. Our goal is to add new reserves to replace the bentonite mined each year. Furthermore, we need to assure that new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization is committed to developing its global reserve base to meet these requirements. o Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products. In 2006, we acquired a number of businesses for a total cost of approximately $63 million. A strong financial position will enable us to continue to acquire businesses which, in our assessment, are valued fairly and fit with our growth strategy. There can be no assurance that we will achieve success in implementing any one or more of the strategic initiatives described above. A number of risks will challenge us in meeting our long-term objectives. We describe certain risks, such as competition and our reliance on economically sensitive markets, under "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." In general, the significance of these risks has not changed over the past year. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations describes relevant aspects of our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to select accounting policies that are appropriate for our business, and to make certain estimates, judgments and assumptions about matters that are inherently uncertain in applying those policies. On an ongoing basis, we re-evaluate these estimates, judgments and assumptions for reasonableness because of the critical impact that these factors have on the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates. Our financial statements are based in part upon critical accounting policies that involve complex and subjective decisions and assessments. Our senior management has discussed the development, selection and disclosure of these policies with the members of the Audit Committee of our Board of Directors. We believe our selection of accounting policies has resulted in actual results approximating the estimated amounts in each respective area. These policies are discussed below and also in Note 1 of the Notes to Consolidated Financial Statements. The discussion which follows should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. VALUATION OF ACCOUNTS RECEIVABLE We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Our customer base is diverse and includes customers located throughout the world. Payment terms in certain of the foreign countries in which we do business are longer than those that are customary in the United States, and as a result, may give rise to additional credit risk related to outstanding accounts receivable from these non-U.S. customers. Likewise, a change in the financial position, liquidity or prospects of any of our customers could have an impact on our ability to collect amounts due. While concentrations of credit risk related to trade receivables are somewhat limited by our large customer base, we do extend significant credit to some of our customers. We make estimates of the amounts of our gross accounts receivable that will not be collectible, and record an allowance for doubtful accounts to reduce the carrying value of accounts receivable to the amount that is expected to be realized. The allowance for doubtful accounts is established based upon the Company's historical bad debt experience, a review of the overall aging of the accounts, and an analysis of specific customer accounts, particularly those with past-due balances. The recorded allowance for doubtful accounts is intended to cover specific customer collection issues identified by management at the balance sheet date, and to provide for potential losses from other accounts based on our historical experience. Increases in the allowance for doubtful accounts are recorded as an expense and included in general, selling and administrative expenses in the period identified. Our estimate of the required allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change from period to period. In addition, it requires management to make judgments about the future collectibility of customer accounts. 19 INVENTORY VALUATION Inventories are recorded at the lower of actual manufactured or purchased cost, or estimated net realizable value. In order to determine net realizable value, management regularly reviews inventory quantities on hand and evaluates significant items to determine whether they are excess or obsolete. We record the value of estimated excess or obsolete inventory as a reduction of inventory and as an expense which is included in cost of sales in the period it is identified. Our estimate of excess and obsolete inventory is a critical accounting estimate because it is susceptible to change from period to period. In addition, it requires management to make judgments about the future demand for inventory. Our process to evaluate inventories for excess or obsolete items is comprehensive. We quantify the amount of inventory on hand that, based on projected demand, is not anticipated to be sold within the next 12 to 24 months or, based on our current product offerings, is excess or obsolete. This involves a review by sales and production management personnel to determine whether this list of potential excess or obsolete inventory is complete. Factors which impact this evaluation include, for example, whether there has been a change in the market or packaging for particular products, and whether there are components of inventory that incorporate obsolete formulations or technology. In certain businesses in which we are engaged, such as the domestic cat litter business, product and packaging changes can occur rapidly and expose us to excess and obsolete inventories. GOODWILL AND LONG-LIVED ASSETS We have made substantial investments in property, plant and equipment and have a moderate investment in goodwill. For property, plant and equipment, we evaluate the recoverability of these assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. For goodwill, we perform an annual impairment assessment at the reporting unit level (or more frequently if impairment indicators arise). In analyzing the fair value of each reporting unit 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. 20 RETIREMENT BENEFITS We sponsor a defined-benefit pension plan for substantially all of our United States employees hired on or before December 31, 2003. In order to measure the expense and obligations associated with these retirement benefits, we must make a variety of estimates including discount rates used to value certain liabilities, expected return on plan assets set aside to fund these liabilities, rate of compensation increases, employee turnover rates, retirement rates, mortality rates and other factors. Our benefit plan committee determines the key assumptions related to the discount rate, expected investment rate of return and compensation increases after consulting with the actuarial firm that performs the calculations. Other assumptions are also set based on consultation with our actuaries. To determine our net accrued benefit and net periodic benefit cost, we form judgments about the best estimate for each assumption used in the actuarial computation. The most important assumptions that affect the computations are the discount rate and the expected long-term rate of return on plan assets. Our discount rate assumption is intended to reflect the rate at which the retirement benefits could be effectively settled based upon the assumed timing of the benefit payments. In determining the discount rate, we utilize the yield of a standardized benchmark, the Moody's Aa Corporate Bond Index, which consists of high quality fixed income investments, and round it to the nearest 25 basis points. The discount rate used to determine our retirement pension benefit obligation at September 30, 2006, was 5.75%. A 50 basis point decrease in this discount rate would have increased the benefit obligation at December 31, 2006 by $3.4 million and would increase net cost expected in 2007 by 14%, or $176 thousand. Likewise at December 31, 2006, a 50 basis point increase in the discount rate would have decreased the benefit obligation by $3.1 million and would decrease the net cost expected in 2007 by 14%, or $175 thousand. The expected long-term rate of return on plan assets was based on our current asset allocations and the historical long-term performance, as adjusted for existing market conditions. Information regarding our asset allocations is included in the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data." We assumed a weighted-average expected long-term rate of return on pension plan assets of 8.50% to determine our net benefit cost in 2006. A 50 basis point decrease in the expected return would increase the net cost expected in 2007 by approximately 13%, or $163 thousand. Likewise, a 50 basis point increase in the expected return would decrease the net cost expected in 2007 by $163 thousand. INCOME TAXES Our effective tax rate is based on the income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe our positions may be overturned. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our effective tax rate includes the impact of changes to reserves that we consider appropriate. Our estimates of income tax items, expense and reserves are considered to be critical accounting estimates because they are susceptible to change from period to period based on our judgments about a variety of factors. Valuation allowances are recorded, if necessary, to measure a deferred tax asset at an estimated realizable value. Both positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is appropriate. Changes in a valuation allowance are recorded in the period when we determine events have occurred that will impact the realizable value of the asset. A number of years may elapse before a particular matter, for which we have established a reserve or valuation allowance, is audited and finally resolved. Audits of our United States federal income tax returns have been completed for our income tax returns relating to fiscal years of 2002 and prior. 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. 21 RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2006 The discussion below references the consolidated statement of operations included in "Item 8. Financial Statements and Supplementary Data." Net sales for the year ended December 31, 2006 were $611.6 million, compared with $535.9 million for 2005 and $461.8 million for 2004, which were increases of 14% and 16% in 2006 and 2005, respectively. Minerals contributed approximately 28% of the increase in net sales over 2005. The environmental and oilfield services segments contributed 42% and 29%, respectively. Transportation segment revenues increased 1%. Acquisitions and favorable foreign translation accounted for approximately 29% of the growth over 2005. In comparing 2005 with 2004, minerals accounted for approximately 43% of the increase, while environmental and oilfield services contributed 31% and 20%, respectively. Transportation segment revenues increased by approximately 12%, while intersegment revenues, which are generated by transportation, were 6%. Approximately 4% of the growth in net sales for 2005 was attributed to acquisitions and favorable foreign currency translation combined. Gross profit was $159.5 million for the year ended December 31, 2006, compared with $138.0 million for 2005 and $118.6 million in 2004. The 16% increase in gross profit in 2006 over 2005 was generated by the growth in net sales. On a segment basis, minerals contributed approximately 14% of the increase over 2005, while environmental and oilfield services accounted for 44% and 42%, respectively. Relative to the comparison of 2005 with 2004, the 16% increase in gross profit followed sales growth. Minerals contributed approximately 30% of the growth in gross profit, while environmental and oilfield services accounted for 30% and 33%, respectively. The transportation segment accounted for the remaining increase over 2004. Gross margin was 26.1% in 2006, 25.8% in 2005 and 25.7% in 2004. The improvement in 2006 and 2005 gross margin was attributed to higher relative contribution by the environmental and oilfield services segments. General, selling and administrative expenses were $102.1 million for the year ended December 31, 2006, compared with $90.9 million in 2005 and $82.6 million in 2004. Higher personnel costs and added expenses from acquired businesses accounted for the increase in 2006 over 2005. The increase in 2005 over 2004 was primarily attributable to greater employee benefit and compensation costs, Sarbanes-Oxley compliance-related costs, and audit fees. Operating profit was $57.4 million for the year ended December 31, 2006, compared with $47.1 million in 2005 and $36.0 million in 2004. The improvement in operating profit for 2006 and 2005 resulted from the increase in sales and gross profit in all operating segments. Operating margin for 2006 was 9.4%, compared with 8.8% in 2005 and 7.8% in 2004. The 2006 margin expansion resulted from higher profitability in the oilfield services segment and reduced corporate segment expenses. Margin improvement in the oilfield services and environmental segments led to improvement in 2005 over 2004. A review of sales, gross profit, general, selling and administrative expenses and operating profit by segment follows. 22 MINERALS SEGMENT
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------ MINERALS 2006 2005 2004 2006 VS. 2005 2005 VS. 2004 ----------------------- ------------------ ------------------ ------------------ ------------------ ------------------ (Dollars in Thousands) Net sales $ 316,751 100.0% $ 295,686 100.0% $ 264,167 100.0% 21,065 7.1% 31,519 11.9% Cost of sales 255,064 80.5% 236,916 80.1% 211,228 80.0% --------- -------- --------- -------- --------- ----- Gross profit 61,687 19.5% 58,770 19.9% 52,939 20.0% 2,917 5.0% 5,831 11.0% General, selling and administrative expenses 24,983 7.9% 22,268 7.5% 22,307 8.4% 2,715 12.2% (39) -0.2% --------- -------- --------- -------- -------- ----- Operating profit 36,704 11.6% 36,502 12.4% 30,632 11.6% 202 0.6% 5,870 19.2%
2006 vs. 2005 Base businesses (those businesses owned for greater than one year) accounted for 69% of the growth in net sales over 2005, while acquisitions and foreign currency translation represented 20% and 11%, respectively, for the increase. Product line sales were as follows: YEAR ENDED DECEMBER 31, ---------------------------------- MINERALS PRODUCT LINE SALES 2006 2005 % ------------------------------ ---------- ---------- ---------- (Dollars in Thousands) Metalcasting $ 136,357 $ 134,138 1.7% Specialty minerals 118,016 96,758 22.0% Pet products 58,332 60,177 -3.1% Other product lines 4,046 4,613 * ---------- ---------- Total 316,751 295,686 ========== ========== * Not meaningful. Metalcasting sales principally increased due to an acquisition completed in October. After factoring out the acquisition, domestic sales declined due to lower volumes of specialty products. Asia-Pacific sales increased due to continued market expansion, particularly in China. Specialty minerals revenues increased due to higher pricing and volume levels for oil and gas drilling fluid additives along with increased market penetration for health and beauty product lines. Detergent additives volumes declined in 2006. Lower volumes due to customer losses led to decreased pet products sales. Gross profit improved with the increase in net sales; however, gross margin declined by 40 basis points. A majority of the margin decline was due to a benefit recorded in 2005 from a $2.1 million one-time reduction in mining-related taxes owed to the State of Montana. Excluding this benefit, gross profit would have improved over 2005 by approximately 9% and gross margin increased by 30 basis points. General, selling and administrative expenses increased due to benefits recorded in 2005 for gains on asset sales as well as increased personnel-related costs incurred this year. Acquisitions and foreign currency translation were the primary contributors to the improvement in operating profit. Operating margin declined by 80 basis points largely due to the benefit recorded in 2005 for mining-related taxes previously described plus the impact of the increase in general, selling and administrative expenses. 23 2005 vs. 2004 Base businesses (those businesses owned for greater than one year) accounted for all of the growth over the prior year. Product line sales were as follows: YEAR ENDED DECEMBER 31, ---------------------------------- MINERALS PRODUCT LINE SALES 2005 2004 % ------------------------------ ---------- ---------- ---------- (Dollars in Thousands) Metalcasting $ 134,138 $ 112,558 19.2% Specialty minerals 96,758 95,142 1.7% Pet products 60,177 53,288 12.9% Other product lines 4,613 3,179 * ---------- ---------- Total 295,686 264,167 ========== ========== * Not meaningful. Domestic metalcasting revenue growth was primarily attributed to selling price increases that were implemented to offset increases in raw materials, transportation and energy-related costs. Metalcasting revenue also improved due to higher sales volumes in China and Thailand. Higher volumes and selling price increases led to the improvement in pet products revenues. Specialty minerals revenues were relatively flat in comparison with the prior year. Detergent additive volumes declined in 2005 but were offset by increases in volumes and selling prices in the oil and gas drilling fluids product lines. Gross profit improved with the increase in net sales; however, gross margin declined by 10 basis points. Additionally, gross profit in 2005 benefited from a $2.1 million one-time reduction in mining-related taxes owed to the State of Montana. Excluding this benefit, gross profit would have improved over 2004 by approximately 7% and gross margin would have been 19.2%. Selling price increases were not large enough to offset the actual increase in raw materials, transportation and energy-related costs. General, selling and administrative expenses declined slightly in 2005 partly because 2004 included a charge of $0.9 million related to bad debt reserves. Also, 2005 included a $0.5 million greater benefit from gains on the disposals of certain assets. Operating margin improved by 80 basis points due to flat general, selling and administrative expenses. ENVIRONMENTAL SEGMENT
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------------- ENVIRONMENTAL 2006 2005 2004 2006 VS. 2005 2005 VS. 2004 ------------------------ ----------------- ------------------ ------------------ ------------------ ------------------ (Dollars in Thousands) Net sales $ 203,128 100.0% $ 171,144 100.0% $ 147,896 100.0% 31,984 18.7% 23,248 15.7% Cost of sales 133,414 65.7% 110,815 64.7% 93,360 63.1% --------- ----- --------- ----- --------- ----- Gross profit 69,714 34.3% 60,329 35.3% 54,536 36.9% 9,385 15.6% 5,793 10.6% General, selling and administrative expenses 42,963 21.2% 36,978 21.6% 35,926 24.3% 5,985 16.2% 1,052 2.9% --------- ----- --------- ----- --------- ----- Operating profit 26,751 13.1% 23,351 13.7% 18,610 12.6% 3,400 14.6% 4,741 25.5%
24 2006 vs. 2005 Base businesses accounted for approximately 67% of the growth in net sales, while favorable foreign currency translation and acquisitions represented the remainder. Product line sales were as follows: YEAR ENDED DECEMBER 31, ---------------------------------- ENVIRONMENTAL PRODUCT LINE SALES 2006 2005 % -------------------------------- ---------- ---------- ---------- (Dollars in Thousands) Lining technologies $ 110,906 $ 93,797 18.2% Building materials 69,529 55,621 25.0% Other product lines 22,693 21,726 * ---------- ---------- Total 203,128 171,144 ========== ========== * Not meaningful. Lining technologies sales were aided by the acquisition of a contracting services business in August 2005, as well as continued market expansion in Asia and Central Europe. Domestic revenues improved principally due to price increases. Building materials product line sales improved through market share gains throughout Europe and Asia. Other product lines are largely comprised of infrastructure drilling products. Gross profit rose commensurate with sales increases. Gross margin declined by 100 basis points principally due to changes in product mix and higher production costs at the U.S. operations. Contracting revenues within the lining technologies product line generated lower gross margins. General, selling and administrative expenses increased primarily due to higher personnel-related expenses and acquisitions. Operating profit improved along with gross profit and sales. Operating margin declined by 60 basis points following the decrease in gross margin. 2005 vs. 2004 Base businesses accounted for approximately 89% of the growth in net sales, while favorable foreign currency translation and acquisitions represented the remainder. Product line sales were as follows: YEAR ENDED DECEMBER 31, ---------------------------------- ENVIRONMENTAL PRODUCT LINE SALES 2005 2004 % ----------------------------------- ---------- ---------- ---------- (Dollars in Thousands) Lining technologies $ 93,797 $ 77,031 21.8% Building materials 55,621 53,552 3.9% Other product lines 21,726 17,313 * ---------- ---------- Total 171,144 147,896 ========== ========== * Not meaningful. Lining technologies product line revenues accounted for a large majority of the increase. Greater volumes in all geographic regions led to the increase in lining technologies revenues. We also benefited from higher average selling prices in the United States. Specialty infrastructure drilling product revenues were responsible for most of the increase in other product lines. Gross profit increased in conjunction with sales. Gross margin decreased by 60 basis points due to a greater proportion of revenues generated from lower profit product lines. Certain lining technologies product/service lines have lower gross margins. General, selling and administrative expenses grew at more modest rates as employee headcount levels remained fairly stable compared with 2004. 25 Operating profit improved in conjunction with the increase in gross profit. Operating margin improved by 110 basis points which largely resulted from less of an increase in general, selling and administrative expenses. OILFIELD SERVICES SEGMENT
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------------- OILFIELD SERVICES 2006 2005 2004 2006 VS. 2005 2005 VS. 2004 ----------------------- ------------------ ------------------- ------------------- ---------------- ---------------- (Dollars in Thousands) Net sales $ 61,928 100.0% $ 39,702 100.0% $ 24,827 100.0% 22,226 56.0% 14,875 59.9% Cost of sales 39,933 64.5% 26,711 67.3% 18,205 73.3% --------- ------ --------- ------- --------- ------- Gross profit 21,995 35.5% 12,991 32.7% 6,622 26.7% 9,004 69.3% 6,369 96.2% General, selling and administrative expenses 10,934 17.7% 7,674 19.3% 4,710 19.0% 3,260 42.5% 2,964 62.9% --------- ------ --------- ------- --------- ------- Operating profit 11,061 17.8% 5,317 13.4% 1,912 7.7% 5,744 108.0% 3,405 178.1%
2006 vs. 2005 Base businesses contributed approximately 80% of the growth in revenues over the prior year. Acquired business accounted for the remainder of the improvement. Business gained due to the hurricanes in the Gulf of Mexico aided 2006 results by approximately $5 million. Higher natural gas production activity in Northern and Eastern Texas also aided the 2006 results. International business, in particular West Africa, helped sales increase over 2005. Gross profit improved commensurate with the increase in sales. Gross margin rose by 280 basis points due to higher personnel and equipment utilization along with favorable pricing attained from hurricane-related services. General, selling and administrative expenses increased due to an expanded sales force and expansion of operations in Eastern Texas. Operating profit improved with the positive gross profit results. Operating margin expanded by 440 basis points due to high operating leverage on our cost base. 2005 vs. 2004 Base businesses accounted for all of the improvement over 2004. Higher oil and gas production activity in the Gulf of Mexico and in Eastern Texas provided more sales opportunities in 2005. Gross profit improved due to improved personnel and equipment utilization and higher pricing. Consequently, gross margins increased by 600 basis points. Higher profit margins attained with new business in West Africa also contributed to the margin increase. General, selling and administrative expenses increased due to higher personnel levels including establishment of new overseas offices. Operating profit improved along with the increase in gross profit. Operating margin increased by 570 basis points as a result of higher operating leverage and the expansion in gross margin. 26 TRANSPORTATION SEGMENT
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------------- TRANSPORTATION 2006 2005 2004 2006 VS. 2005 2005 VS. 2004 ----------------------- ------------------ ------------------- ------------------- ---------------- ---------------- (Dollars in Thousands) Net sales $ 50,228 100.0% $ 49,708 100.0% $ 40,650 100.0% 520 1.0% 9,058 22.3% Cost of sales 44,158 87.9% 43,775 88.1% 36,179 89.0% --------- ------ --------- ------- --------- ------- Gross profit 6,070 12.1% 5,933 11.9% 4,471 11.0% 137 2.3% 1,462 32.7% General, selling and administrative expenses 3,198 6.4% 3,216 6.5% 2,751 6.8% (18) -0.6% 465 16.9% --------- ------ --------- ------- --------- ------- Operating profit 2,872 5.7% 2,717 5.4% 1,720 4.2% 155 5.7% 997 58.0%
2006 vs. 2005 Revenues were flat compared with 2005 due to unchanged equipment utilization and average rates charged per mile. Approximately 41% of the segment's revenues were generated from services provided to certain domestic subsidiaries within our minerals and environmental segments. Gross margin improved despite the modest sales increase because profit per mile improved since fuel surcharges were less of an impact in 2006. Operating margin improved by 30 basis points due to the gross margin expansion and lower selling and administrative expenses. 2005 vs. 2004 Revenues grew due to higher business levels, equipment utilization rates, and average rates charged to customers. Approximately 41% of the segment's revenues were generated from services provided to certain domestic subsidiaries within our minerals and environmental segments. Gross profit improved commensurate with the increase in revenues. Gross margin benefited from improved equipment utilization and higher revenue rates. Diesel fuel surcharges negatively impacted gross margin; however, the segment was able to offset a majority of the cost by passing-through those charges to customers. CORPORATE SEGMENT
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- CORPORATE 2006 2005 2004 2006 VS. 2005 2005 VS. 2004 --------------------------------------------- ---------- ---------- ---------- -------------------- -------------------- (Dollars in Thousands) Intersegment shipping sales $ (20,479) $ (20,316) $ (15,762) Intersegment shipping costs (20,479) (20,316) (15,762) ---------- ---------- ---------- Gross profit -- -- -- Corporate general, selling and administrative expenses 17,507 17,190 13,244 $ 317 1.8% $ 3,946 29.8% Nanocomposite business development expenses 2,493 3,621 3,646 (1,128) -31.2% (25) -0.7% ---------- ---------- ---------- Operating loss $ (20,000) $ (20,811) $ (16,890) $ 811 -3.9% $ (3,921) 23.2%
2006 vs. 2005 Intersegment shipping sales and costs are related to billings from the transportation segment to the domestic minerals and environmental segments for services. These services are invoiced to the minerals and environmental segments at arms-length rates and those costs are subsequently charged to customers. Intersegment sales and costs reported above reflect the elimination of these transactions. Corporate costs include management information systems, human resources, investor relations, corporate communications and finance. Additionally, marketing, research and development and operating costs related to the development of the nanocomposite business are included in this segment. Corporate administrative expenses grew modestly in 2006. While independent registered accountant fees, tax consulting and stock compensation costs increased over 2005, those items were offset by lower spending for information technology and self-insured employee medical expenses. Nanocomposite business losses declined primarily from reduced personnel-related expenses and depreciation. 27 Beginning with our quarterly report for the first quarter of 2007, we will include the nanocomposites business results of operations and financial position within our minerals segment. 2005 vs. 2004 Contributing to the increase in general, selling and administrative expenses at corporate in 2005 were greater expenses associated with stock-based compensation, corporate development activities, professional service fees related to Sarbanes-Oxley compliance, independent registered accountant services and tax services. Nanocomposite business development expenses were comparable to the prior-year. No material changes occurred in 2005 related to new customers or product introductions. NET INTEREST EXPENSE Net interest expense was $3.0 million, $1.7 million, and $0.8 million in 2006, 2005, and 2004, respectively. Average debt levels were $73.6 million and $34.6 million in 2005 and 2004, respectively. Debt increased in 2006 to support working capital and capital expenditure funding. Additionally, we invested $63.2 million in acquired businesses in 2006. In 2005, debt increased principally due to higher average working capital and greater capital expenditures. Average interest rates on our funded debt were 5.8%, 4.7% and 2.8% in 2006, 2005 and 2004, respectively. A majority of the interest on our debt is based upon LIBOR rates. OTHER INCOME (EXPENSE), NET Net other income was $0.2 million in 2006; while net other expense in 2005 and 2004 was approximately $0.4 million and $0.1, respectively. Other income is composed of a number of miscellaneous transactions, primarily foreign currency transaction gains and losses. INCOME TAXES The effective income tax rate for 2006 was 19.1%, compared with 25.9% in 2005 and 13.4% in 2004. A schedule reconciling the U.S. federal statutory income tax rate to our effective rate is included in Note 8 of the Notes to Consolidated Financial Statements. Income tax expense was positively impacted in 2006 by completion of audits of amended income tax returns filed in 2004, as described below. The result was a reduction in our tax contingency reserves of approximately $3.4 million. In addition, we estimated higher depletion deductions in 2006 and reported more of our earnings from overseas subsidiaries, which have lower average income tax rates. The largest benefit to the tax rate in 2005 was higher depletion deductions, lower average foreign tax rates and reductions in estimates of 2004 taxes payable which were determined in conjunction with preparation of the income tax returns in 2005. In 2004, we recorded a reduction to income tax expense of $4.8 million associated with depletion deductions and research and development credits available in computing income tax expense. Approximately $0.8 million of this amount relates to changes in estimates resulting from the finalization, in 2004, of the tax return for the 2003 tax year. The remaining $4.0 million relates to the filing of amended federal income tax returns dating from 1999 through 2002. Regarding the amended income tax returns, after consultation with tax advisors, we recomputed our federal income tax liability for these periods after determining that we could increase certain deductions and credits as allowed under the Internal Revenue Code. The total refund claimed on the returns was $5.2 million; however, we determined that a contingency reserve was necessary to reflect potential reduction of the refund after examination of the returns by the IRS. No adjustments were recorded in 2005 to the contingency reserve established for these refund claims. 28 We also recorded, in 2004, a $1.1 million credit to income tax expense for the adjustment of deferred income tax assets and income taxes payable at a U.K. subsidiary. A portion of this adjustment related to prior reporting periods, but was considered immaterial to those periods; therefore, the entire amount was reflected in 2004. If the $1.1 million and $4.8 million reductions had not been recorded, the effective income tax rate for 2004 would have been approximately 30%. No adjustments were recorded in 2005 to reflect a change in the estimates for these items. INCOME FROM AFFILIATES AND JOINT VENTURES We reported income from affiliates and joint ventures of $5.4 million, $2.9 million and $1.2 million for 2006, 2005 and 2004, respectively. The major component of the increase for each of the last two years was largely related to our investments in two businesses based in India; we own 21% of the larger business and 50% of the other. The larger business has substantial bauxite and bentonite operations. Bauxite is used to produce alumina, which is then used to produce aluminum. The bauxite business had particularly strong earnings over the last two years. The second business in India is engaged in manufacturing, marketing and distributing a specialized bentonite application involving clarification of edible oils. That business has continued to increase its profits over the last two years. DISCONTINUED OPERATIONS In July 2006, the Internal Revenue Service completed audits of amended income tax returns which were filed in 2004 but relate to years prior to 2004 and are described in the income tax section of this report. We accounted for $0.6 million of the settlement as interest income related to that portion of the settlement as a discontinued operation since it related to a business we sold in 2000. In September 2004, we filed an amended income tax return in the State of Mississippi requesting a refund of approximately $12.5 million of taxes paid relating to the gain on the sale of our absorbent polymer segment. The sale of the segment was reported as a discontinued operation in the second quarter of 2000. With the assistance of a professional accounting firm, we concluded that a gain on the sale of a business under these circumstances was not taxable in Mississippi according to its laws. After negotiations and hearings with officials, the Board of Review of the Mississippi State Tax Commission accepted our settlement offer of $7.8 million in June 2005, and we received payment of this refund in July 2005. NET INCOME Net income for 2006 was $50.3 million compared with $41.0 million and $31.6 million in 2005 and 2004, respectively. In 2006 and 2005, net income included $0.6 million and $4.8 million, respectively, of a benefit from discontinued operations as previously discussed. The increase in income from continuing operations in both comparison periods (2006 vs. 2005 and 2005 vs. 2004) was attributed to the increase in operating profit for the reasons described earlier in this report. Net income in 2006 and 2004 was also positively impacted by the adjustments to income tax expense, as previously discussed, which reduced the overall effective tax rate. EARNINGS PER SHARE Diluted earnings per share are 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 31.0 million in 2006, 30.8 million in 2005 and 30.7 million in 2004. Diluted earnings per share from continuing operations in 2006 were $1.60 compared with $1.18 and $1.03 in 2005 and 2004, respectively. The improvement for both 2006 and 2005 was commensurate with the increase in income from continuing operations previously described. In 2006, our diluted earnings per share include a $0.09 per share benefit from income associated with tax refunds mentioned earlier. Similarly in 2004, diluted earnings per share include a $0.14 per share benefit associated with the reductions in income tax expense previously mentioned. Net income per diluted share was $1.62, $1.33, and $1.03 in 2006, 2005 and 2004, respectively. Both 2006 and 2005 were positively impacted by discontinued operations. 29 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operations, borrowings from a revolving credit facility and proceeds from the exercise of stock options by employees have been our sources of funds to purchase property, plant and equipment; acquire businesses; repurchase common stock; and pay dividends to shareholders. Effective March 9, 2007, we amended our revolving credit agreement to increase our borrowing capacity from $120 million to $150 million; all other substantive terms and conditions remained the same. We believe cash flows from operations and borrowing capabilities are adequate to support our operating plans for the next 12 to 18 months. Following is a discussion and analysis of our cash flow activities as presented in the Consolidated Statements of Cash Flows within Item 8 of this report. Cash provided by operating activities of continuing operations in 2006 was $46.7 million, compared with $36.3 million in 2005 and $17.4 million in 2004. The improvements in 2006 and 2005 largely result from greater income from continuing operations. Accounts receivable and inventories in 2006 increased by $40.9 million over 2005; they increased in 2005 by $25.9 million over 2004. A large portion of the increase in 2006 was due to acquisitions completed during the year. The remaining increase was commensurate with our sales growth. Net cash used in investing activities in 2006 was $110.9 million, compared with $22.3 million and $26.1 million in 2005 and 2004, respectively. Capital expenditures totaled $42.1 million in 2006, compared with $28.6 and $21.6 million in 2005 and 2004, respectively. The increase in capital expenditures in both comparable periods was due to a number of new sites including a metalcasting products plant in China, a lining technologies manufacturing plant in Spain and infrastructure investments at our U.S. mining site facilities. Acquisitions were $63.2 million, $2.1 million and $13.3 million in 2006, 2005 and 2004, respectively. In 2006, we acquired three businesses. Two of the businesses are included within our Oilfield Services segment and the other in the Minerals segment. Cash provided by financing activities was $59.8 million and $9.3 million in 2006 and 2004, respectively. Cash used in financing activities was $11.8 million in 2005. Financing cash flows are primarily affected by borrowings from our revolving credit facility. We had net borrowings from the revolving credit facility totaling $75.5 million and $20.5 million in 2006 and 2004, respectively. Net borrowings were negligible in 2005. The increase in borrowings in 2006 and 2004 was attributed to acquisitions as well capital expenditures. As noted in Item 5 of this Form 10-K, we repurchased approximately $5.6 million of our common stock in 2006 compared with $2.0 million in 2005 and $2.9 million in 2004. We elect to repurchase our common stock in the open market from time to time when we believe utilizing funds in this manner will provide a good return to our shareholders. We have up to $15 million of funds authorized by our Board of Directors to use for stock repurchases until November 10, 2008. Dividends on our common stock were $14.7 million in 2006, compared with $11.3 million in 2005 and $9.4 million in 2004. Declared dividends were $0.49 per share in 2006, compared with $0.38 per share in 2005 and $0.32 per share in 2004. As of December 31, 2006, we had outstanding debt of $112.5 million and cash of $17.8 million, compared with $34.8 million of outstanding debt and $16 million of cash at December 31, 2005. Total funded debt represented 28%, 12% and 13% of total capitalization at December 31, 2006, 2005 and 2004, respectively. 30 Working capital was approximately $173.3 million and $147.9 million as of December 31, 2006 and 2005, respectively. The current ratio (current assets divided by current liabilities) was 3.2-to-1 and 3.3-to-1 as of the end of 2006 and 2005, respectively. Greater sales generated by our international businesses resulted in increased working capital in 2006 since customer payment terms tend to be longer in those areas. Since the mid-1980s, we and/or our subsidiaries have been named as one of a number of defendants in product liability lawsuits relating to the minor free-silica content of our bentonite products used in the metalcasting industry. The plaintiffs in these lawsuits are primarily employees of our foundry customers. To date, we have not incurred significant costs in defending these matters. We believe we have adequate insurance coverage and do not believe the litigation will have a material adverse impact on our financial condition, liquidity or results of the operations. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS The following schedule sets forth details of our long-term contractual obligations at December 31, 2006:
PAYMENTS DUE BY PERIOD --------------------------------------------------------- LESS THAN 2-3 4-5 AFTER 5 TOTAL 1 YEAR YEARS YEARS YEARS --------- --------- --------- --------- --------- (in millions) Bank debt $ 112.5 $ 0 $ 107.6 $ 0.1 $ 4.8 Lease obligations 13.6 5.9 6.1 1.3 0.3 Capital expenditures 6.9 6.9 -- -- -- --------- --------- --------- --------- --------- Total contractual cash obligations $ 133.0 $ 12.8 $ 113.7 $ 1.4 $ 5.1 ========= ========= ========= ========= =========
Long-term debt includes bank debt of approximately $98.2 million due under a revolving credit agreement, which provides for a commitment of $120 million in borrowing capacity and matures on October 31, 2010. Effective March 9, 2007, we amended this revolving credit agreement to increase the borrowing capacity from $120 million to $150 million and extend the maturity to April 1, 2012; all other substantive terms and conditions remained the same. The agreement is a multi-currency arrangement that allows us to borrow certain foreign currencies at rates that can range from 0.50% to 1.125% above the London Inter Bank Offered Rate (LIBOR), depending upon the amount of the credit line used and certain capitalization ratios. The facility requires us to meet certain covenants, such as specific amounts of net worth, and limits our ability to make additional borrowings and guarantees. We were in compliance with these covenants at December 31, 2006. 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 our Notes to the Consolidated Financial Statements included in Part IV of this report. The Company occasionally enters into unconditional purchase obligations which contemplate future, irrevocable payments under enforceable contracts which can not be cancelled without penalty. Such payments are excluded from the above table as they are entered into in the ordinary course of business, and we believe the anticipated expenditures associated with them are not material. We have recorded $5.7 million of liabilities to satisfy the land reclamation obligations discussed in our Notes to Consolidated Financial Statements. Expenditures to satisfy these liabilities are excluded from the above table of contractual obligations as the timing of these payments are not contractually due until the expiration of individual mining permits, which are frequently renewed. We anticipate our funding obligation for our defined benefit pension plan will approximate $1 million in 2007. That amount principally represents contributions required by regulations or laws. We have not presented this obligation or the obligation for future years in the table above as the funding can vary from year to year based on changes in fair value of pension plan assets and actuarial assumptions. At December 31, 2006 and 2005, we had outstanding standby letters of credit of $17.7 million and $14.2 million, respectively, which are not included in the obligations in the table above. These letters of credit typically serve to guarantee the Company's performance of its obligations related to land reclamation and workers' compensation claims. We have recognized the estimated costs of our obligations related to land reclamation and workers' compensation claims in our consolidated balance sheets as of December 31, 2006 and 2005. 31 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a multinational corporation that manufactures and markets products in countries throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and do not use them for trading or speculative purposes. EXCHANGE RATE SENSITIVITY We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the Euro, the British pound, and the Polish zloty. We also have significant exposure to changes in exchange rates between the British pound and the Euro and the Polish zloty and the Euro. Our various currency exposures often offset each other, providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2006, we did not have any material foreign currency contracts outstanding. INTEREST RATE SENSITIVITY The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates for debt obligations. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The instruments' actual cash flows are denominated in U.S. dollars.
EXPECTED MATURITY DATE ------------------------------------------------------------------------------------------------ 2007 2008 2009 2010 2011 THEREAFTER TOTAL FAIR VALUE -------- -------- -------- -------- -------- ---------- ---------- ---------- (US$ equivalent in thousands) Short-term debt: Fixed rate $ 28 $ -- $ -- $ -- $ -- $ -- $ 28 $ 28 Interest rate 5.69% -- -- -- -- -- Long-term debt: Variable rate (US$) -- 6,695 -- 80,500 85 4,800 92,080 92,080 Average interest rate -- 6.09% -- 5.88% 0.15% 3.95% Fixed rate (THB) 2,624 -- -- -- -- -- 2,624 2,624 Interest rate 7.25% -- -- -- -- -- Variable rate (UK(pound)) -- -- -- 12,341 -- -- 12,341 12,341 Average interest rate -- -- -- 5.76% -- -- Variable rate ((euro)) -- -- -- 2,640 -- -- 2,640 2,640 Average interest rate -- -- -- 4.23% -- -- Variable rate (AUD) -- -- -- 2,763 -- -- 2,763 2,763 Average interest rate -- -- -- 6.83% -- -- -------- -------- -------- -------- -------- ---------- ---------- ---------- Total $ 2,652 $ 6,695 $ -- $ 98,244 $ 85 $ 4,800 $ 112,476 $ 112,476 ======== ======== ======== ======== ======== ========== ========== ==========
We periodically use interest rate swaps to manage interest rate risk on debt securities. These instruments allow us to change the characteristics of variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2006 and 2005, there were no interest rate swaps outstanding. 32 CREDIT RISK We are exposed to credit risk on certain assets, primarily accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks. Our accounts receivable financial instruments are carried at amounts that approximate fair value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to Financial Statements and Financial Statement Schedule on Page F-1. Such financial statements and schedule are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information we are required to disclose in the reports we file or submit under the Exchange Act. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As provided for by current regulation, our evaluation did not include an assessment of the internal control over financial reporting of the three businesses we acquired in 2006. Based on this evaluation, we concluded that our internal control over financial reporting was effective as of December 31, 2006. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Our independent registered public accounting firm has audited our assessment of the effectiveness of our internal control over financial reporting as of the end of the period covered by this report as stated in their report, which appears in Part IV of this Form 10-K. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in our internal control over financial reporting during the year ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding our directors is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. Information regarding our executive officers is included under a separate caption in Part I hereof in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. We have adopted a Code of Business Conduct and Ethics (the "Code") that applies to our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions, as well as other employees. The Code, our Corporate Governance Guidelines and the charters of our Audit Committee, Compensation Committee and Nominating and Governance Committee are publicly available on our website at www.amcol.com and are available in print, free of charge, to any shareholder upon request to our Corporate Secretary at AMCOL International Corporation, One North Arlington, 1500 West Shure Drive, Suite 500, Arlington Heights, Illinois 60004-7803. If we make any substantive amendments to the Code or grant any waiver, including any implicit waiver, from a provision of the Code to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K in accordance with applicable rules and regulations. ITEM 11. EXECUTIVE COMPENSATION Information regarding the above is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. Information regarding our securities authorized for issuance under equity compensation plans is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding the above is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is included in our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, and is incorporated herein by reference. 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: Reports of Independent Registered Public Accounting Firms F-2 Consolidated Balance Sheets, December 31, 2006 and 2005 F-6 Consolidated Statements of Operations, Years ended December 31, 2006, 2005 and 2004 F-8 Consolidated Statements of Comprehensive Income, Years ended December 31, 2006, 2005 and 2004 F-9 Consolidated Statements of Stockholders' Equity, Years ended December 31, 2006, 2005 and 2004 F-10 Consolidated Statements of Cash Flows, Years ended December 31, 2006, 2005 and 2004 F-11 Notes to Consolidated Financial Statements F-12
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 of AMCOL International Corporation We have audited the accompanying consolidated balance sheet of AMCOL International Corporation and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMCOL International Corporation at December 31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. As discussed in Notes 1 and 13 to the consolidated financial statements, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of AMCOL International Corporation's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2007 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP ---------------------- Chicago, Illinois March 16, 2007 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- The Board of Directors and Stockholders of AMCOL International Corporation We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that AMCOL International Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AMCOL International Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the three businesses acquired during the year ended December 31, 2006, which are included in the 2006 consolidated financial statements of AMCOL International Corporation and subsidiaries and constituted $64,052 and $62,063 of total and net assets, respectively, as of December 31, 2006 and $8,536 and $1,737 of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of AMCOL International Corporation also did not include an evaluation of the internal control over financial reporting of these businesses. In our opinion, management's assessment that AMCOL International Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, AMCOL International Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. F-3 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2006 consolidated financial statements of AMCOL International Corporation and subsidiaries and our report dated March 16, 2007, expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP ---------------------- Chicago, Illinois March 16, 2007 F-4 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- The Board of Directors and Stockholders AMCOL International Corporation: We have audited the accompanying consolidated balance sheet of AMCOL International Corporation and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMCOL International Corporation and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. KPMG LLP Chicago, Illinois March 16, 2007 F-5 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
DECEMBER 31, ----------------------- ASSETS 2006 2005 --------------------------------------------------------------- ---------- ---------- Current assets: Cash $ 17,805 $ 15,997 Accounts receivable: Trade, less allowance for doubtful accounts of $3,986 and $2,350 in 2006 and 2005, respectively 127,041 98,824 Other 6,391 2,901 Inventories 84,612 75,455 Prepaid expenses 10,142 9,068 Deferred income taxes 4,648 3,698 Income taxes receivable - 4,864 Other 1,045 402 ---------- ---------- Total current assets 251,684 211,209 ---------- ---------- Investment in and advances to affiliates and joint ventures 31,049 19,730 Property, plant, equipment, and mineral rights and reserves: Land and mineral rights 17,428 12,761 Depreciable assets 305,013 252,430 ---------- ---------- 322,441 265,191 Less: accumulated depreciation 181,669 165,127 ---------- ---------- 140,772 100,064 ---------- ---------- Other assets: Goodwill 40,341 20,644 Intangible assets, less accumulated amortization of $6,948 and $5,479 in 2006 and 2005, respectively 25,611 3,009 Deferred income taxes 6,643 4,579 Other assets 15,124 9,294 ---------- ---------- 87,719 37,526 ---------- ---------- $ 511,224 $ 368,529 ========== ========== Continued... F-6 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) DECEMBER 31, ----------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005 --------------------------------------------------------------- ---------- ---------- Current liabilities: Accounts payable 26,107 24,722 Accrued income taxes 4,844 - Accrued liabilities 47,432 38,547 ---------- ---------- Total current liabilities 78,383 63,269 ---------- ---------- Long-term debt 112,448 34,838 ---------- ---------- Minority interests in subsidiaries 276 259 Deferred compensation 6,880 7,045 Other liabilities 18,419 14,262 ---------- ---------- 25,575 21,566 ---------- ---------- Stockholders' equity: Common stock, par value $.01 per share, Authorized 100,000,000 shares; issued 32,015,771 shares in 2006 and 2005 320 320 Additional paid in capital 76,686 72,194 Retained earnings 219,690 184,125 Accumulated other comprehensive income 16,658 8,644 ---------- ---------- 313,354 265,283 Less: Treasury stock (2,079,415 and 2,232,132 shares in 2006 and 2005, respectively) 18,536 16,427 ---------- ---------- 294,818 248,856 ---------- ---------- $ 511,224 $ 368,529 ========== ==========
See accompanying notes to consolidated financial statements. F-7 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31, -------------------------------------------- 2006 2005 2004 ------------ ------------ ------------ CONTINUING OPERATIONS Net sales $ 611,556 $ 535,924 $ 461,778 Cost of sales 452,090 397,901 343,210 ------------ ------------ ------------ Gross profit 159,466 138,023 118,568 General, selling and administrative expenses 102,078 90,947 82,584 ------------ ------------ ------------ Operating profit 57,388 47,076 35,984 ------------ ------------ ------------ Other income (expense): Interest expense, net (2,951) (1,660) (826) Other, net 231 (393) (86) ------------ ------------ ------------ (2,720) (2,053) (912) ------------ ------------ ------------ Income before income taxes and income from affiliates and joint ventures 54,668 45,023 35,072 Income tax expense 10,425 11,645 4,687 ------------ ------------ ------------ Income before income from affiliates and joint ventures 44,243 33,378 30,385 Income from affiliates and joint ventures 5,420 2,912 1,180 ------------ ------------ ------------ Income from continuing operations 49,663 36,290 31,565 DISCONTINUED OPERATIONS Gain on disposal of discontinued operations 585 4,755 - ------------ ------------ ------------ Net income $ 50,248 $ 41,045 $ 31,565 ============ ============ ============
See accompanying notes to consolidated financial statements. Continued... F-8 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
YEAR ENDED DECEMBER 31, -------------------------------------------- 2006 2005 2004 ------------ ------------ ------------ Earnings per share Basic earnings per share: Continuing operations $ 1.65 $ 1.23 $ 1.08 Discontinued operations 0.02 0.16 - ------------ ------------ ------------ Net income $ 1.67 $ 1.39 $ 1.08 ============ ============ ============ Diluted earnings per share: Continuing operations $ 1.60 $ 1.18 $ 1.03 Discontinued operations 0.02 0.15 - ------------ ------------ ------------ Net income $ 1.62 $ 1.33 $ 1.03 ============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
YEAR ENDED DECEMBER 31, -------------------------------------------- 2006 2005 2004 ------------ ------------ ------------ Net income $ 50,248 $ 41,045 $ 31,565 Other comprehensive income (loss) - Minimum pension liability (net of $125 tax expense in 2006 and $169 tax benefit in 2005) 216 154 (457) Foreign currency translation adjustment 9,787 (6,415) 6,990 ------------ ------------ ------------ Comprehensive income $ 60,251 $ 34,784 $ 38,098 ============ ============ ============
See accompanying notes to consolidated financial statements. F-9 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
COMMON STOCK ACCUMULATED ----------------------- OTHER NUMBER ADDITIONAL COMPREHENSIVE OF PAID-IN RETAINED INCOME TREASURY SHARES AMOUNT CAPITAL EARNINGS (LOSS) STOCK TOTAL ------------ -------- ---------- ---------- ------------- --------- ---------- Balance at December 31, 2003 32,015,771 $ 320 $ 67,513 $ 132,179 $ 8,372 $ (16,934) $ 191,450 Net income 31,565 31,565 Cash dividends ($0.32 per share) (9,378) (9,378) Currency translation adjustment 6,990 6,990 Purchase of 189,800 treasury shares (3,243) (3,243) Sales of 477,809 treasury shares pursuant to options (1,551) 2,757 1,206 Tax benefit from employee stock plans 2,027 2,027 Vesting of common stock in connection with employee stock plans 1,774 1,774 Minimum pension liability (457) (457) ------------ -------- ---------- ---------- ------------- --------- ---------- Balance at December 31, 2004 32,015,771 320 69,763 154,366 14,905 (17,420) 221,934 Net income 41,045 41,045 Cash dividends ($0.38 per share) (11,286) (11,286) Currency translation adjustment (6,415) (6,415) Purchase of 109,629 treasury shares (2,058) (2,058) Sales of 497,513 treasury shares pursuant to options (1,561) 3,051 1,490 Tax benefit from employee stock plans 1,601 1,601 Vesting of common stock in connection with employee stock plans 2,391 2,391 Minimum pension liability 154 154 ------------ -------- ---------- ---------- ------------- --------- ---------- Balance at December 31, 2005 32,015,771 320 72,194 184,125 8,644 (16,427) 248,856 Net income 50,248 50,248 Cash dividends ($0.49 per share) (14,683) (14,683) Currency translation adjustment 9,787 9,787 Purchase of 259,446 treasury shares (6,645) (6,645) Sales of 412,163 treasury shares pursuant to options (385) 4,536 4,151 Tax benefit from employee stock plans 2,241 2,241 Vesting of common stock in connection with employee stock plans 2,636 2,636 Minimum pension liability (net of $125 tax expense) 216 216 Adjustment upon adoption of SFAS 158 (net of tax benefit of $975) (1,989) (1,989) ------------ -------- ---------- ---------- ------------- --------- ---------- Balance at December 31, 2006 32,015,771 $ 320 $ 76,686 $ 219,690 $ 16,658 $ (18,536) $ 294,818 ============ ======== ========== ========== ============= ========= ==========
See accompanying notes to consolidated financial statements. F-10 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, ------------------------------------------ 2006 2005 2004 ------------ ------------ ------------ Cash flow from operating activities: Net income $ 50,248 $ 41,045 $ 31,565 Adjustments to reconcile net income to net cash provided by operating activities: Gain on the disposal of discontinued operations (585) (4,755) - Depreciation, depletion, and amortization 20,483 19,558 20,124 Undistributed earnings from affiliates and joint ventures (4,836) (3,156) (867) Minority interest in income of subsidiaries - 42 7 Increase (decrease) in allowance for doubtful accounts 1,460 (2,381) 1,063 Decrease (increase) in deferred income taxes (3,852) (1,139) (995) Tax benefit from employee stock plans 2,241 1,601 2,027 Gain on sale of depreciable assets (929) (1,433) (311) Impairment charge 950 - - Stock compensation expense 2,636 2,391 1,772 Other - - (457) (Increase) decrease in current assets, net of effects of acquisitions: Accounts receivable (28,452) (10,172) (22,040) Income taxes receivable 4,864 5,886 (3,869) Inventories (5,803) (12,544) (17,463) Prepaid expenses (3,496) (994) (1,357) Increase (decrease) in current liabilities, net of effects of acquisitions: Accounts payable (127) (1,109) 2,897 Accrued liabilities and income taxes 12,675 2,878 5,975 Increase in other noncurrent assets (2,758) (2,362) (1,893) Increase (decrease) in other noncurrent liabilities 3,924 2,934 1,209 Excess tax benefits on stock option exercises (1,955) - - ------------ ------------ ------------ Net cash provided by operating activities 46,688 36,290 17,387 ------------ ------------ ------------ Cash flow from investing activities: Proceeds from sale of depreciable assets 3,155 3,574 739 Capital expenditures for land, mineral reserves, and depreciable assets (42,099) (28,626) (21,627) Investments in and advances to affiliates and joint ventures (5,645) (901) (775) Acquisitions of businesses (63,248) (2,118) (13,333) Net tax refunds from the sale of discontinued operations 585 4,755 8,625 Receipts from (payments to) minority interest partners - 259 (111) Investments in restricted cash (3,706) - - Decrease (increase) in other assets 69 735 427 ------------ ------------ ------------ Net cash used in investing activities (110,889) (22,322) (26,055) ------------ ------------ ------------ Cash flow from financing activities: Proceeds from issuance of debt 160,453 55,785 88,208 Principal payments of debt (84,977) (55,764) (67,718) Proceeds from sales of treasury stock 2,577 1,397 1,090 Purchases of treasury stock (5,554) (1,965) (2,879) Excess tax benefits on stock option exercises 1,955 - - Dividends declared (14,678) (11,286) (9,377) ------------ ------------ ------------ Net cash provided by (used in) financing activities 59,776 (11,833) 9,324 ------------ ------------ ------------ Effect of foreign currency rate changes on cash 6,233 (3,732) 3,413 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,808 (1,597) 4,069 Cash at beginning of year 15,997 17,594 13,525 ------------ ------------ ------------ Cash at end of year $ 17,805 $ 15,997 $ 17,594 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid for: Interest, net $ 2,507 $ 1,755 $ 537 ============ ============ ============ Net income taxes paid (refunded) $ 596 $ 1,451 $ (706) ============ ============ ============
See accompanying notes to consolidated financial statements. F-11 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES New Accounting Standards As discussed later in this Note, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share Based Payment effective January 1, 2006. We adopted Emerging Issues Task Force ("EITF") Issue No. 04-6, Accounting for Stripping Costs Incurred during Production in the Mining Industry, effective January 1, 2006. This guidance requires that, once production has commenced from a mine, production-related stripping costs be accounted for as a current cost of production. It also requires that these costs be included within inventories to the extent that minerals extracted from the mine are still on hand at each period end. Issue No. 04-6 does not address the accounting for stripping costs incurred in the pre-production phase of a mine site. These costs are deferred and amortized on a units-of-production basis over the estimated life of each mine site. Our adoption of this guidance did not have a material impact on our consolidated financial statements. Deferred stripping costs, which had been reported within inventory in periods prior to January 1, 2006, have been reclassified into prepaid expenses. In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15, 2006 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are currently evaluating the impact this standard may have on our financial statements when we adopt it for our fiscal year beginning January 1, 2007. In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not change existing guidance as to whether or not an instrument be carried at fair value but rather eliminates inconsistencies found in various prior accounting guidance. The provisions of SFAS 157 are effective for our fiscal year beginning January 1, 2008 with earlier adoption permitted for our fiscal year beginning January 1, 2007. We do not believe our adoption of this standard in 2007 will have a material impact on our financial statements. In September 2006, the FASB issued SFAS 158, Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires the recognition, in our December 2006 balance sheet, of the underfunded status of our defined benefit and supplemental pension plans as a liability, measured as the difference between the fair value of the plan assets and the projected benefit obligation. Upon adoption, SFAS 158 also requires the recognition of previously unrecognized actuarial gains and losses and prior service costs within Accumulated other comprehensive income, net of tax. Our Notes to Consolidated Financial Statements include a table illustrating the effect the adoption of this standard had on our balance sheet as of December 31, 2006. SFAS 158 also requires that we measure the funded status of our plans as of our year-end balance sheet date (i.e. December 31st); however, this requirement is not mandatory until December 31, 2008. Thus, we continue to measure our plan's funded status as of October 1st of each year. In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. SAB 108 is effective as of the end of our 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. Our adoption of SAB 108 in 2006 did not have an impact on our financial statements. F-12 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Segments We operate in four principal segments with intersegment shipping revenues being eliminated in the corporate segment. The composition of consolidated revenues by segment is as follows: PERCENTAGE OF NET SALES -------------------------------------- 2006 2005 2004 ---------- ---------- ---------- Minerals 52% 55% 57% Environmental 33% 32% 32% Oilfield services 10% 7% 5% Transportation 8% 9% 9% Intersegment shipping -3% -3% -3% ---------- ---------- ---------- 100% 100% 100% ========== ========== ========== Further descriptions of our products, principal markets and the relative significance of segment operations within AMCOL International Corporation (the Company) are included in Note 3. Principles of Consolidation The consolidated financial statements include the accounts of our domestic and foreign subsidiaries. We consolidate all subsidiaries which are greater than 50% owned by us. Our ownership interests in the Mexican, Indian, Japanese and Egyptian ventures range between 20% and 50%. Accordingly, these investments are accounted for using the equity method. All intercompany balances and transactions, including profits on inventories, have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Translation of Foreign Currencies The assets and liabilities of subsidiaries located outside of the United States are translated into U.S. dollars at the rates of exchange at the balance sheet dates. The statements of operations are translated at the weighted average rates during the periods. Foreign exchange translation adjustments are accumulated as a separate component of stockholders' equity, while foreign currency transaction gains or losses are included in income. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) or moving average methods. Exploration costs are expensed as incurred. F-13 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Property, Plant, Equipment, and Mineral Rights and Reserves Property, plant, equipment, and mineral rights and reserves are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method for substantially all of the assets. Certain other assets, primarily field equipment, are depreciated on the units-of-production method. Mineral rights and reserves are depleted using the units-of-production method. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Goodwill is tested annually (or more frequently if impairment indicators arise) for impairment as of October 1st of each year. Other intangibles, including trademarks and non-compete agreements, are amortized on the straight-line method over the expected periods to be benefited, which extend up to 10 years. Impairment of Long-Lived Assets We review the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs of disposal. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We classify interest and penalties associated with income taxes within the income tax line item of our consolidated statement of operations. Revenue Recognition Product revenue is recognized when products are shipped to customers. Allowances for discounts, rebates, and estimated returns are recorded at the time of sale and are reported as a reduction in revenue. We generate some sales through independent, third-party representatives. These sales are recorded in revenues, and the commission compensation paid to the representatives is recorded in general, selling and administrative expenses. Transportation segment revenue for freight delivery services is recognized when the service is provided. Amounts payable for purchased transportation, commissions and insurance are accrued when the related revenue is recognized. Service and rental revenues, primarily earned by the environmental and oilfield services segments, respectively, each comprise less than 10% of consolidated net sales. Service and rental revenues are recognized in the period such services are performed or the period in which customers utilize the rented assets. F-14 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Freight and sales taxes We report amounts charged to customers for shipping and handling fees as revenues and we report amounts incurred for these costs within cost of sales in the consolidated statements of operations (i.e. gross presentation with revenues and cost of sales). Also, we report amounts charged to customers for sales taxes and the related costs incurred for sales tax remittances to governmental agencies within net sales in the consolidated statement of operations (i.e. net presentation within revenues). Product Liability & Warranty Expenses We report expenses incurred for warranty and product costs in general, selling and administrative expenses in the consolidated statements of operations. Our warranty accrual is based on known warranty issues as of the balance sheet date as well as a reserve for unidentified claims based on historical experience. Land Reclamation We mine various minerals using a surface-mining process that requires the removal of overburden. We are obligated to restore the land comprising each mining site upon completion of mining activity. We recognize this liability for land reclamation based on the estimated fair value of the obligation. The obligation is adjusted to reflect the passage of time and changes in estimated future cash outflows. Research and Development Research and development costs are included in general, selling and administrative expenses. Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding after consideration of the dilutive effect of stock options and restricted stock. A reconciliation between the shares used to compute basic and diluted earnings per share follows:
2006 2005 2004 ------------ ------------ ------------ Weighted average common shares outstanding for the year 30,054,267 29,525,033 29,140,892 Dilutive impact of stock equivalents 971,621 1,278,105 1,561,969 ------------ ------------ ------------ Weighted average common and common equivalent shares for the year 31,025,888 30,803,138 30,702,861 ============ ============ ============ Common shares outstanding at December 31 29,936,356 29,783,639 29,395,755 ============ ============ ============ Weighted average anti-dilutive shares excluded from the computation of diluted earnings per share 245,765 248,685 234,970 ============ ============ ============
Stock-Based Compensation Prior to 2003, we accounted for fixed plan stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in operations prior to 2003, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and elected to apply these provisions prospectively, in accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123, to all employee awards granted, modified, or settled after January 1, 2003. Awards granted after 2002 vest over three years. F-15 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Effective January 1, 2006, we adopted SFAS 123(R), Share Based Payment, under the modified prospective transition method. This adoption did not significantly affect our statement of operations, balance sheet or statement of comprehensive income for 2006. SFAS 123(R) does require, however, that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow rather than as an operating cash flow in the statements of cash flows as required prior to January 1, 2006; this has the effect of reducing net operating cash flows and increasing net financing cash flows for all periods after December 31, 2005. For the year ended December 31, 2006, this amount was $1,955. While we cannot estimate what those amounts will be in the future (because they depend on, amongst other factors, when employees exercise options), the amount of operating cash flows recognized for such tax deductions in each year ending December 31, 2005 and 2004 (and hence the amount that would have been reclassified as a cash inflow from financing activities if SFAS 123(R) had been applicable in each prior period) was $1,586 and $1,887, respectively. Derivative Instruments and Hedging Activities Occasionally, we use derivative financial instruments (principally interest rate swaps or options) to manage exposure to changes in interest rates. We do not use derivative instruments for trading or other speculative purposes, and we did not have any material derivative financial instruments outstanding at either December 31, 2006 or 2005. Reclassifications and Revisions Certain items in the prior years consolidated financial statements contained herein and notes thereto have been reclassified to conform with the consolidated financial statement presentation for 2006. These reclassifications did not have a material impact on our financial statements. (2) DISCONTINUED OPERATIONS In 2004, we filed an amended tax return seeking a refund of state taxes paid on the sale of our absorbent polymers segment that occurred in 2000. No amounts for this refund were reflected in the financial statements in 2004. In June 2005, we successfully settled this claim for $7,800 and recorded a net income tax receivable of $5,255, accrued professional fees of $500 and a gain on the sale of discontinued operations of $4,755. (3) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION We operate in five business segments. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, and well testing data services for the oil and gas industry. The transportation segment includes a long-haul trucking business and a freight brokerage business that provides services to our subsidiaries as well as third-party customers. Intersegment shipping revenues are eliminated in our corporate segment. We identify segments based on management responsibility and the nature of the business activities of each component of the Company. Intersegment sales are insignificant, other than intersegment shipping. We measure segment profit based on operating profit, and the costs deducted to arrive at operating profit do not include interest or income taxes. F-16 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Segment assets are those assets used in the operations of that segment. Corporate assets include cash, corporate leasehold improvements, the nanocomposite investment and other miscellaneous equipment. The following table sets forth certain financial information by business segment as of and for the years ended December 31, 2006, 2005 and 2004:
2006 2005 2004 ------------ ------------ ------------ Net Sales: Minerals $ 316,751 $ 295,686 $ 264,167 Environmental 203,128 171,144 147,896 Oilfield services 61,928 39,702 24,827 Transportation 50,228 49,708 40,650 Intersegment shipping (20,479) (20,316) (15,762) ------------ ------------ ------------ Total $ 611,556 $ 535,924 $ 461,778 ============ ============ ============ Operating profit (loss): Minerals $ 36,704 $ 36,502 $ 30,632 Environmental 26,751 23,351 18,610 Oilfield services 11,061 5,317 1,912 Transportation 2,872 2,717 1,720 Corporate (20,000) (20,811) (16,890) ------------ ------------ ------------ Total $ 57,388 $ 47,076 $ 35,984 ============ ============ ============ Assets: Minerals $ 245,417 $ 186,718 $ 172,972 Environmental 145,884 113,565 103,266 Oilfield services 84,917 33,023 24,888 Transportation 3,722 3,027 3,122 Corporate 31,284 32,196 32,194 ------------ ------------ ------------ Total $ 511,224 $ 368,529 $ 336,442 ============ ============ ============ Depreciation, depletion and amortization: Minerals $ 11,125 $ 10,295 $ 10,546 Environmental 4,343 4,193 4,179 Oilfield services 3,143 2,123 2,572 Transportation 69 97 108 Corporate 1,803 2,850 2,719 ------------ ------------ ------------ Total $ 20,483 $ 19,558 $ 20,124 ============ ============ ============ Capital expenditures: Minerals $ 27,281 $ 13,751 $ 9,860 Environmental 9,958 9,549 8,323 Oilfield services 4,024 3,649 2,324 Transportation 50 29 101 Corporate 786 1,648 1,019 ------------ ------------ ------------ Total $ 42,099 $ 28,626 $ 21,627 ============ ============ ============ Research and development expenses: Minerals $ 2,805 $ 2,715 $ 2,517 Environmental 2,390 1,865 1,921 Corporate 1,050 1,665 911 ------------ ------------ ------------ Total $ 6,245 $ 6,245 $ 5,349 ============ ============ ============
Continued... F-17 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The following table sets forth certain geographic financial information by business segment as of and for the years ended December 31, 2006, 2005 and 2004. Geographic revenues and operating profit are determined based on origin rather than destination:
2006 2005 2004 ------------ ------------ ------------ Sales to unaffiliated customers shipped from: Americas $ 422,235 $ 371,836 $ 311,081 Europe 142,979 125,512 122,967 Asia Pacific 46,342 38,576 27,730 ------------ ------------ ------------ Total $ 611,556 $ 535,924 $ 461,778 ============ ============ ============ Operating profit from sales from: Americas $ 32,522 $ 25,213 $ 20,761 Europe 17,201 15,831 12,556 Asia Pacific 7,665 6,032 2,667 ------------ ------------ ------------ Total $ 57,388 $ 47,076 $ 35,984 ============ ============ ============ Identifiable assets in: Americas $ 326,337 $ 227,923 $ 202,766 Europe 120,571 94,165 97,777 Asia Pacific 64,316 46,441 35,899 ------------ ------------ ------------ Total $ 511,224 $ 368,529 $ 336,442 ============ ============ ============
Revenues by product line for each fiscal year are as follows:
2006 2005 2004 ------------ ------------ ------------ Metalcasting $ 136,357 $ 134,138 $ 112,558 Specialty minerals 118,073 97,046 95,142 Lining technologies 112,546 94,942 78,688 Oilfield services and waste water 66,825 45,780 29,950 Drilling products 18,878 16,067 12,714 Pet products 58,332 60,177 53,288 Building materials 70,796 58,382 54,550 Transportation 50,228 49,708 40,650 Intersegment shipping revenue (20,479) (20,316) (15,762) ------------ ------------ ------------ Total $ 611,556 $ 535,924 $ 461,778 ============ ============ ============
(4) BALANCE SHEET RELATED INFORMATION The allowance for doubtful accounts as of and the activity for the years ended December 31 was as follows:
2006 2005 2004 ------------ ------------ ------------ Balance at the beginning of the year $ 2,350 $ 4,637 $ 3,455 Charged to expense (income) 1,159 (731) 2,467 Acquisitions 459 94 - Write-offs and currency translation adjustments 18 (1,650) (1,285) ------------ ------------ ------------ Balance at the end of the year $ 3,986 $ 2,350 $ 4,637 ============ ============ ============
The above allowance is based on historical bad debt experience, an analysis of aged accounts and a consideration of specific accounts. F-18 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Inventories at December 31 consisted of:
2006 2005 ------------ ------------ Crude stockpile inventories $ 26,390 $ 20,833 In-process inventories 32,640 25,935 Other raw material, container, and supplies inventories 25,582 28,687 ------------ ------------ $ 84,612 $ 75,455 ============ ============
Included within Other raw material, container and supplies inventories in the table above is our reserve for slow moving and obsolete inventory. The balance of this reserve as of and the activity for the years ended December 31 was as follows:
2006 2005 2004 ------------ ------------ ------------ Balance at the beginning of the year $ 1,985 $ 1,574 $ 1,747 Charged to costs and expenses 1,022 872 784 Acquisitions - - 277 Disposals and currency translation adjustments (613) (461) (1,234) ------------ ------------ ------------ Balance at the end of the year $ 2,394 $ 1,985 $ 1,574 ============ ============ ============
The following table presents our reclamation liability at the end of and changes during each of the years presented:
2006 2005 ------------ ------------ Balance at beginning of the year $ 4,966 $ 4,850 Settlement of obligations (1,140) (1,403) Liabilities incurred and accretion expense 1,889 1,519 ------------ ------------ Balance at the end of the year $ 5,715 $ 4,966 ============ ============
Accrued liabilities at December 31 consisted of:
2006 2005 ------------ ------------ Accrued severance taxes $ 2,022 $ 1,419 Accrued employee costs 3,852 2,951 Accrued vacation pay 2,438 2,077 Accrued bonus 9,366 6,976 Accrued dividends payable 4,190 2,978 Accrued warranties 911 1,823 Accrued commissions 2,712 2,352 Accrued reclamation costs 1,214 1,004 Other 20,727 16,967 ------------ ------------ $ 47,432 $ 38,547 ============ ============
F-19 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The following table presents our warranty liability at the end of and changes during each of the years presented:
2006 2005 ------------ ------------ Balance at the beginning of the year $ 1,823 $ 2,037 Charged to costs and expenses (274) 1,159 Acquisitions - - Net settlements (709) (1,299) Foreign currency translation 71 (74) ------------ ------------ Balance at the end of the year $ 911 $ 1,823 ============ ============
Accumulated other comprehensive income at December 31 was comprised of the following components:
2006 2005 ------------ ------------ Cumulative foreign currency translation $ 18,734 $ 8,947 Minimum pension liability, net of $169 tax benefit in 2005 - (303) Transition obligation on pension plans (net of tax benefit of $2 in 2006) (4) - Prior service cost on pension plans (net of tax benefit of $204 in 2006) (414) - Net actuarial loss on pension plans (net of tax benefit of $817 in 2006) (1,658) - ------------ ------------ $ 16,658 $ 8,644 ============ ============
(5) PROPERTY, PLANT, EQUIPMENT AND MINERAL RIGHTS AND RESERVES Property, plant, equipment and mineral rights and reserves consisted of the following:
DECEMBER 31, --------------------------- 2006 2005 ------------ ------------ Mineral rights and reserves $ 6,715 $ 3,770 Other land 10,713 8,991 Buildings and improvements 73,086 63,105 Machinery and equipment 221,433 180,181 Construction in progress 10,494 9,144 ------------ ------------ $ 322,441 $ 265,191 ============ ============
The range of useful lives to depreciate plant and equipment is as follows: Buildings and improvements 5-45 years Machinery and equipment 1-20 years Depreciation and depletion were charged to income as follows:
2006 2005 2004 ------------ ------------ ------------ Depreciation expense $ 18,682 $ 18,197 $ 18,895 Depletion expense 340 108 149 ------------ ------------ ------------ $ 19,022 $ 18,305 $ 19,044 ============ ============ ============
F-20 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (6) GOODWILL AND INTANGIBLE ASSETS The balance of goodwill by segment and the activity occurring in the past two fiscal years is as follows:
MINERALS ENVIRONMENTAL OILFIELD SERVICES CONSOLIDATED ----------------- ----------------- ----------------- ----------------- Balance at December 31, 2004 $ 5,773 $ 8,437 $ 5,015 $ 19,225 Change in goodwill relating to: Acquisitions 1,024 1,318 314 2,656 Foreign exchange translation (414) (823) - (1,237) ----------------- ----------------- ----------------- ----------------- Total changes 610 495 314 1,419 ----------------- ----------------- ----------------- ----------------- Balance at December 31, 2005 6,383 8,932 5,329 20,644 Change in goodwill relating to: Acquisitions 6,011 853 11,067 17,931 Foreign exchange translation 616 1,150 - 1,766 ----------------- ----------------- ----------------- ----------------- Total changes 6,627 2,003 11,067 19,697 ----------------- ----------------- ----------------- ----------------- Balance at December 31, 2006 $ 13,010 $ 10,935 $ 16,396 $ 40,341 ================= ================= ================= =================
Annually, we evaluate the goodwill attributable to each reporting unit for impairment. In 2006, we changed this annual testing date to October 1st from December 31st in order for us to complete the required testing prior to our year-end closing activities. This change did not delay, accelerate or avoid an impairment charge. Accordingly, we believe that this accounting change is preferable in our circumstances. This change had no impact on our consolidated financial statements for any period presented. For the years above, we concluded that there was no goodwill impairment. If indicators of impairment are deemed to be present, we would perform an interim impairment test and any resulting impairment loss would be charged to expense in the period identified. Intangible assets were as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005 ------------------------------------------- ------------------------------------------- GROSS CARRYING ACCUMULATED NET CARRYING GROSS CARRYING ACCUMULATED NET CARRYING VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE -------------- ------------ ------------ -------------- ------------ ------------ Intangtibles subject to amortization: Trademarks $ 727 $ (182) $ 545 $ 477 $ (108) $ 369 Patents 642 (280) 362 642 (178) 464 License agreements 6,250 (5,500) 750 6,250 (4,750) 1,500 Customer related assets 22,278 (341) 21,937 - - - Non-compete agreements 1,700 (78) 1,622 - - - Other 928 (567) 361 914 (443) 471 -------------- ------------ ------------ -------------- ------------ ------------ Subtotal 32,525 (6,948) 25,577 8,283 (5,479) 2,804 Intangibles not subject to amortization: Other 34 - 34 - - - Pension related intangibles - - - 205 - 205 -------------- ------------ ------------ -------------- ------------ ------------ Total $ 32,559 $ (6,948) $ 25,611 $ 8,488 $ (5,479) $ 3,009 ============== ============ ============ ============== ============ ============
Intangible assets are being amortized primarily on a straight-line basis over their estimated useful lives of 3 to 20 years. For the years above, there was no impairment related to the intangible assets. Amortization expense on intangible assets for each of the years ending December 31, 2006 and 2005 was $1,469 and $1,253, respectively. We estimate amortization expense of intangible assets for the future years ending December 31 will approximate the following amounts: F-21 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) AMOUNT -------- 2007 $ 3,294 2008 2,513 2009 2,379 2010 1,850 2011 1,633 (7) INVESTMENTS IN JOINT VENTURES Information about our investments in affiliates and joint ventures at December 31, 2006 is as follows:
AMOUNT OF OUR INVESTMENT LESS THE UNDERLYING OWNERSHIP ACCOUNTING NET EQUITY VALUE AT QUOTED INTEREST POLICY OF THE INVESTEE MARKET PRICE --------------- --------------- --------------- --------------- Ashapura Minechem Limited 22% Equity Method $ 2,812 $ 42,681 Ashapura Volclay Limited 50% Equity Method 74 N/A Volclay Japan Co., Ltd. 50% Equity Method 426 N/A Egypt Mining & Drilling Co. and Egypt Bentonite & Derivatives Co. 25% Equity Method 997 N/A Egypt Nano Bentonite Co. 27% Equity Method (46) N/A Volclay de Mexico, S.A. de C.V. 49% Equity Method (61) N/A
Only our investment in Ashapura Minechem Limited is publicly traded on the Bombay Stock Exchange Limited. In 2006, our ownership percentage in this investment experienced a net decrease from 22% to 21% due to the investee's issuance of additional stock offset by additional shares that we purchased. Significant information regarding each investee's financial and operating performance is in the following table. F-22 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2006 2005 ------------ ------------ Ashapura Minechem Limited: Net Sales $ 249,203 $ 175,286 Operating income 32,369 16,903 Affiliate income as reported 21,896 11,379 Current assets 78,884 63,906 Non-current assets 54,958 15,332 Total assets 133,842 79,238 Current liabilities 17,071 12,170 Non-current liabilities 36,774 51,534 Total liabilities 53,845 63,704 Ashapura Volclay Limited: Net Sales 7,392 6,096 Operating income 2,013 1,731 Affiliate income as reported 1,469 1,146 Current assets 4,479 3,718 Non-current assets 11,828 8,637 Total assets 16,307 12,355 Current liabilities 1,607 1,746 Non-current liabilities 8,212 5,516 Total liabilities 9,819 7,262 All other affliates and joint ventures: Net Sales 29,836 30,617 Operating income 2,277 2,729 Affiliate income as reported 2,090 2,081 Current assets 18,596 20,621 Non-current assets 5,289 3,793 Total assets 23,885 24,414 Current liabilities 8,043 11,867 Non-current liabilities 1,155 1,154 Total liabilities 9,198 13,021
We record the majority of our equity in the earnings of our investments in affiliates and joint ventures on a one quarter lag. However, the amounts for Ashapura Minechem Limited's assets and liabilities in the above table are as at March 31, 2005 for 2005 as this was the latest information available for that fiscal year. (8) INCOME TAXES Total income tax expense (benefit) for the years ended December 31 was comprised of the following:
2006 2005 2004 ------------ ------------ ------------ Continuing operations $ 10,425 $ 11,645 $ 4,687 Discontinued operations (585) (5,255) - ------------ ------------ ------------ $ 9,840 $ 6,390 $ 4,687 ============ ============ ============
F-23 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) For each of the years ended December 31 in the table below, domestic and foreign components of income from continuing operations before income taxes and equity in income of affiliates and joint ventures are:
2006 2005 2004 ------------ ------------ ------------ Income from continuing operations before income taxes and income from affiliates and joint ventures: Domestic $ 30,239 $ 22,485 $ 20,662 Foreign 24,429 22,538 14,410 ------------ ------------ ------------ $ 54,668 $ 45,023 $ 35,072 ============ ============ ============
The components of the provision for income taxes attributable to income from continuing operations before income taxes and income from affiliates and of joint ventures for the years ended December 31 consisted of:
2006 2005 2004 ------------ ------------ ------------ Provision (benefit) for income taxes: Federal: Current $ 6,595 $ 6,257 $ 1,170 Deferred (3,090) 210 (95) State: Current 1,229 1,719 1,404 Deferred 83 341 (9) Foreign: Current 5,731 1,192 3,890 Deferred (123) 1,926 (1,673) ------------ ------------ ------------ $ 10,425 $ 11,645 $ 4,687 ============ ============ ============
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of December 31 were as follows:
2006 2005 ------------ ------------ Deferred tax assets attributable to: Accounts receivable $ 537 $ 324 Inventories 2,003 1,734 Employee benefit plans 8,792 6,584 Intangible assets 2,438 2,733 Accrued liabilities 1,030 1,301 Tax credit carryforwards 1,021 - Other 991 1,516 ------------ ------------ Total deferred tax assets 16,812 14,192 Deferred tax liabilities attributable to: Plant and equipment (1,395) (1,793) Land and mineral reserves (1,122) (1,187) Joint ventures (2,579) (1,591) Other (425) (1,344) ------------ ------------ Total deferred tax liabilities (5,521) (5,915) ------------ ------------ Net deferred tax assets $ 11,291 $ 8,277 ============ ============
We believe it is more likely than not that the deferred tax assets above will be realized in the normal course of business. F-24 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The following analysis reconciles the U.S. statutory federal income tax rate to the effective tax rates related to income from continuing operations before income taxes and equity income of affiliates and joint ventures:
2006 2005 2004 ------------------------ ----------------------- ---------------------- PERCENT PERCENT PERCENT OF PRETAX OF PRETAX OF PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ---------- ---------- ---------- ---------- ---------- ---------- Provision for income taxes at U.S. statutory rates $ 19,133 35.0% $ 15,791 35.0% $ 12,275 35.0% Increase (decrease) in taxes resulting from: Percentage depletion (3,208) -5.9% (2,173) -4.8% (1,832) -5.2% State taxes, net of federal benefit 909 1.7% 1,177 2.6% 913 2.6% Foreign tax rates (4,031) -7.4% (4,308) -9.5% (1,445) -4.1% Foreign tax adjustments - - - - (1,119) -3.2% Depletion and research and experimentation adjustments (3,667) -6.7% - - (4,789) -13.7% Dividend pursuant to American Jobs Creation Act of 2004 - - 665 1.5% - - Tax receivable write-off - - 1,448 3.1% - - Other 1,289 2.4% (955) -2.0% 684 2.0% ---------- ---------- ---------- ---------- ---------- ---------- $ 10,425 19.1% $ 11,645 25.9% $ 4,687 13.4% ========== ========== ========== ========== ========== ==========
Tax on reinvested earnings We have not provided for the United States federal income and foreign income withholding taxes on approximately $69,970 of undistributed earnings from international subsidiaries as of December 31, 2006 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce or eliminate the resulting income tax liability in the United States. Tax holidays We benefit from tax holidays in both Poland and Thailand as a result of our locating and investing in special economic zones in each country. In 2006, these tax holidays resulted in a $1,508 reduction in income tax expense and a $0.05 benefit to diluted earnings per share. Our agreement with the Polish tax authorities makes us eligible, based on certain terms and conditions, for a tax holiday exemption for all income tax activities through 2009 and a 50% exemption in 2010, and we have enjoyed tax holidays through 2006. Based on recent events and circumstances, we are evaluating whether we will be able to take advantage of these tax holidays in future years and have not yet concluded on our ability to do so. We continue to seek tax concessions when applicable. Our agreement with the Thai tax authorities provides for tax holidays on several investments. The most significant tax exemption is on all income from manufacturing operations (distributed goods are still subject to taxation) related to our initial investment. These initial manufacturing activities were exempt through December 31, 2005 and are taxable at 50% in years 2006 through 2010. We attempt to modify and obtain tax concessions when applicable. Results of recent IRS audits In July 2006, the United States Internal Revenue Service (IRS) concluded its audit of amended tax returns we filed in 2004, resulting in refunds and interest of $12,636, which we collected in September 2006. As a result of the conclusion of this audit, we recognized additional tax benefits which were not recorded in our financial statements prior to July 2006. Specifically, we recorded the following: a benefit from discontinued operations of $585, a reduction to our income tax expense of $3,412, and $661 of general, selling and administrative expense for professional advisor fees that were contingent upon settlement of the amended tax returns. F-25 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) NOLs and credit carryforwards We have recorded deferred tax assets related to U.S. foreign tax credit carryforwards of approximately $1,021 which expire beginning 2016. Adoption of FIN 48 As previously mentioned, the FASB issued FIN 48 in 2006 to clarify the accounting for uncertainty in income taxes. The provisions of FIN 48 are effective for our calendar year beginning January 1, 2007. We are currently evaluating the provisions of FIN 48 and can not yet estimate the impact it will have on our financial statements. (9) LONG-TERM DEBT Long-term debt consisted of the following:
December 31, --------------------------- 2006 2005 ------------ ------------ Borrowings under revolving credit agreement $ 98,244 $ 25,759 Industrial revenue bond 4,800 4,800 Other notes payable 9,432 4,279 ------------ ------------ 112,476 34,838 Less: current portion (28) - ------------ ------------ $ 112,448 $ 34,838 ============ ============
We have a revolving credit agreement that provides a committed $120,000 revolving line of credit maturing on October 31, 2010. Effective March 9, 2007 we amended this revolving credit agreement to increase the borrowing capacity from $120,000 to $150,000 and extend the maturity to April 1, 2012; all other substantive terms and conditions remained the same. As of December 31, 2006, there was $21,756 in borrowing capacity available under the line of credit. The revolving credit agreement is a multi-currency arrangement that allows us to borrow certain foreign currencies at an adjusted LIBOR rate plus .50% to 1.125%, depending upon the amount of the credit line used and certain capitalization ratios. The facility requires certain covenants to be met, such as specific amounts of net worth, and limits our ability to make additional borrowings and guarantees. We were in compliance with these covenants at December 31, 2006. The borrowings under this revolving credit line at December 31, 2006 carried an average interest rate of 5.85%. We also have an uncommitted, short-term credit facility maturing on November 15, 2008 that allows for maximum borrowings of $12,000, of which $6,695 was outstanding as of December 31, 2006 at an interest rate of 6.09%. Maturities of long-term debt outstanding at December 31, 2006, were as follows:
2007 2008 2009 2010 2011 THEREAFTER ---------- ---------- ---------- ---------- ---------- ---------- Borrowings under revolving credit agreement $ - $ - $ - $ 98,244 $ - $ - Industrial revenue bond and other notes payable 28 6,695 - 2,624 85 4,800 ---------- ---------- ---------- ---------- ---------- ---------- $ 28 $ 6,695 $ - $ 100,868 $ 85 $ 4,800 ========== ========== ========== ========== ========== ==========
The estimated fair value of the above borrowings at December 31, 2006, was approximately equal to their carrying amounts based on discounting future cash payments using current market interest rates for loans with similar terms and maturities. At December 31, 2006 and 2005, we had outstanding standby letters of credit of approximately $17,700 and $14,200, respectively. These letters of credit typically serve to guarantee the Company's performance of its obligations related to land reclamation and workers' compensation claims. The accompanying consolidated balance sheets as of December 31, 2006 and 2005 include amounts accrued for the estimated costs of obligations related to land reclamation and workers' compensation claims. F-26 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (10) ACQUISITIONS On November 10, 2006, our subsidiary, CETCO Oilfield Services Company, acquired substantially all of the net assets of Nitrogen Specialty Company, LLC ("NSC") to complement the filtration, well testing and other services that our oilfield segment currently provides. NSC provides nitrogen pumping, nitrogen delivery and other related services in the oil and gas pipeline, petrochemical and refining industries. We purchased the business for $30,736 and have preliminary allocated the purchase price amongst the assets acquired and liabilities assumed as follows: AT NOVEMBER 10, 2006 --------------- Cash $ 88 Other current assets 3,373 Property, plant and equipment 8,450 Intangible assets 12,500 Goodwill 7,120 Other long term assets 4 --------------- Total assets acquired 31,535 Current liabilities 799 --------------- Total liabilities assumed 799 --------------- Net assets acquired $ 30,736 =============== We expect to deduct the full amount of goodwill from taxable income in accordance with tax regulations. The following table shows the intangible assets acquired and the weighted average amortization period for each class of intangible asset acquired: AT NOVEMBER 10, AMORTIZATION 2006 PERIOD (YEARS) --------------- --------------- Customer related assets $ 10,700 12 Non-compete agreements 1,550 3 Trademarks 250 4 --------------- Total $ 12,500 11 =============== The allocation of the purchase price has not been finalized as we are still determining the fair value of the assets acquired and liabilities assumed. Moreover, $3,706 of additional purchase price could be paid in the future, which would result in additional goodwill, as it is contingent upon the satisfaction of certain representations and warranties made by the former owners. These amounts have been deposited into an escrow account and are reflected as restricted cash, substantially all of which is classified within other assets in our consolidated balance sheet at December 31, 2006. Our results of operations for the year ending December 31, 2006 include the results of NSC from the acquisition date. The table below presents our unaudited, pro forma, combined results of operations as if the acquisition of NSC had occurred at the beginning of each year presented. These results are not necessarily indicative of the combined results that would have occurred had the acquisition taken place at the beginning of the periods presented, nor are they necessarily indicative of future results. F-27 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2006 2005 ------------ ------------ Net sales $ 624,103 $ 546,955 Net income $ 51,542 $ 41,982 Basic earnings per share $ 1.71 $ 1.42 Diluted earnings per share $ 1.66 $ 1.36
In addition, we completed several acquisitions during 2006, 2005 and 2004 which were immaterial to our financial statements. The acquisitions in these years, individually and in aggregate, did not materially affect our operating results or financial position. Summarized information related to these acquisitions is as follows:
2006 2005 2004 ------------ ------------ ------------ Number of acquisitions 2 1 2 Net cash paid $ 31,258 $ 527 $ 13,333 Goodwill and intangible assets recorded 21,648 628 12,742
(11) MARKET RISKS AND FINANCIAL INSTRUMENTS As a multinational corporation that manufactures and markets products in countries throughout the world, we are subject to certain market risks, including those related to foreign currency, interest rates and government actions. We use a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. We use derivative financial instruments only for risk management and not for trading or speculative purposes. We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the Euro, the British pound and the Polish zloty. We also have significant exposure to changes in exchange rates between the British pound and the Euro as well as between the Polish zloty and the Euro. Our various currency exposures often offset each other, providing natural hedges against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2006 and 2005, the notional amount and fair value foreign currency contracts outstanding was not material. We periodically use interest rate swaps to manage interest rate risk on debt securities. These instruments allow us to change variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2006 and 2005, there were no interest rate swaps outstanding. We are exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by our policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising our customer base. We believe our allowance for doubtful accounts is sufficient to cover customer credit risks. Our accounts receivable financial instruments are carried at amounts that approximate fair value. F-28 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (12) LEASES We have several noncancelable leases for railroad cars, trailers, computer software, office equipment, certain automobiles, and office and plant facilities, including three domestic facilities which are also sublet to third parties. Total rent expense under operating lease agreements was approximately $5,923, $4,540, and $3,945 in 2006, 2005 and 2004, respectively. The following is a schedule of future minimum lease payments for operating leases (with initial terms in excess of one year) and related sublease income as of December 31, 2006:
MINIMUM LEASE PAYMENTS SUBLEASE ------------------------------------ RENTAL DOMESTIC FOREIGN TOTAL INCOME ---------- ---------- ---------- ---------- Year ending December 31: 2007 $ 5,211 $ 647 $ 5,858 $ 535 2008 3,616 391 4,007 558 2009 1,769 287 2,056 331 2010 578 198 776 - 2011 307 168 475 - Thereafter 225 118 343 - ---------- ---------- ---------- ---------- Total $ 11,706 $ 1,809 $ 13,515 $ 1,424 ========== ========== ========== ==========
(13) EMPLOYEE BENEFIT PLANS Defined benefit pension plan We have a noncontributory pension plan covering substantially all of our domestic employees for domestic employees hired before January 1, 2004. The benefits are based upon years of service and qualifying compensation. Our funding is calculated using the actuarially determined unit credit cost method. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. F-29 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The following tables set forth our pension obligations at December 31:
PENSION BENEFITS ---------------------------- 2006 2005 ------------ ------------ Change in benefit obligations: Beginning projected benefit obligation $ 38,370 $ 34,807 Service cost 1,738 1,850 Interest cost 1,988 1,973 Plan amendments 385 - Actuarial loss (2,528) 748 Benefits paid (1,001) (1,008) ------------ ------------ Ending projected benefit obligation $ 38,952 $ 38,370 Change in plan assets: Beginning fair value $ 29,541 $ 26,683 Actual return 3,089 3,004 Company contribution 1,000 862 Benefits paid (1,001) (1,008) ------------ ------------ Ending fair value $ 32,629 $ 29,541 Funded status of the plan $ (6,323) $ (8,829) Unrecognized actuarial and investment (gain) loss, net - 2,636 Prior service cost - 349 ------------ ------------ Accrued pension cost liability included in the consolidated financial statements $ (6,323) $ (5,844) ============ ============
Pension cost for each of the following years was comprised of:
2006 2005 2004 ------------ ------------ ------------ Service cost - benefits earned during the year $ 1,738 $ 1,850 $ 1,449 Interest cost on accumulated benefit obligation 1,988 1,973 1,827 Expected return on plan assets (2,521) (2,272) (1,938) Net amortization and deferral 30 (56) (106) ------------ ------------ ------------ Net periodic pension cost $ 1,235 $ 1,495 $ 1,232 ============ ============ ============
The following table summarizes the assumptions used in determining the pension obligation at December 31:
2006 2005 ------------ ------------ Discount rate 5.75% 5.25% Rate of compensation increase 5.75% 5.75% Long-term rate of return 8.25% 8.50%
Each year, we conduct our valuation of the pension benefit plan as of October 1st. We expect to contribute $1,000 to the Plan in 2007. The accumulated benefit obligation (ABO) was $29,790 and $29,887 at December 31, 2006 and 2005, respectively. F-30 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Our Plan assets at December 31 for each year below, by asset category, are as follows:
2006 2005 ------------ ------------ U.S. equity securities 56% 54% AMCOL International common stock 6% 7% International equity securities 7% 5% Fixed income securities and bonds 29% 30% Other investments 2% 4%
We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. The investment objectives emphasize maximizing returns consistent with ensuring that sufficient assets are available to meet liabilities, and minimizing corporate cash contributions. The Plan's assets are managed so as to include investments that balance income and capital appreciation. The Plan has a target range for equity securities of between 60% and 75%. This allocation takes into account factors such as the average age of employees covered by the Plan (benefit obligations) as well as overall market conditions. Interim portfolio reviews result in investment allocations being evaluated at least twice a year by the Pension Committee and rebalancing takes place as needed. Equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalizations. Debt securities include both government and corporate investment vehicles. These include a series of laddered debt securities as well as bond funds. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term rate of return for plan assets is established via a building block approach with proper consideration of diversification and rebalancing. The estimated future benefit payments from the defined benefit plan, reflecting expected future service, as appropriate, are presented in the following table: PER YEAR ------------ 2007 $ 1,113 2008 1,239 2009 1,308 2010 1,415 2011 1,539 2012 through 2016 10,726 ------------ Total $ 17,340 ============ Supplemental pension plan In addition to the qualified plan, we sponsor a supplementary pension plan (SERP) that provides benefits in excess of qualified plan limitations for certain employees. The projected benefit obligation for this plan was $6,887 and $7,155 at December 31, 2006 and 2005, respectively. Also, we have invested assets for the benefit of the employees covered by the supplemental pension plan in the event that there is a change in control. F-31 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Adoption of SFAS 158 As previously mentioned, the FASB issued SFAS 158 in September 2006. This pronouncement requires us to recognize the funded status of our benefit plans as measured by the difference between plan assets at fair value and the projected benefit obligation in the balance sheet. The offset of recognizing the funded status is recorded in accumulated other comprehensive income within stockholders' equity. The following table shows the effect, excluding taxes, of adopting SFAS 158 on our balance sheet at December 31, 2006 by individual balance sheet classification:
CHANGES RESULTING 2006 BALANCE: FROM ADOPTION OF 2006 2005 BALANCE PRE-SFAS 158 SFAS 158 ENDING BALANCE ------------- ------------- ----------------- ----------------- Qualified plan liability $ 5,844 $ 6,080 $ 243 $ 6,323 SERP liability $ 3,275 $ 4,171 $ 2,715 $ 6,886 ------------- ------------- ----------------- ----------------- Amounts included within other long-term liabilities $ 9,119 $ 10,251 $ 2,958 $ 13,209 ============= ============= ================= ================= Intangible asset $ 204 $ 6 $ (6) $ - Accumulated other comprehensive income $ (472) $ (135) $ (2,964) $ (3,099)
The following table shows the amounts included within accumulated other comprehensive income as of December 31, 2006 that have not yet been recognized as components of net periodic benefit cost and the amounts expected to be amortized in the next fiscal year:
EXPECTED TO BE AS OF DECEMBER AMORTIZED IN 31, 2006 2007 -------------- -------------- Unamortized actuarial loss $ 2,475 $ 107 Prior service cost 618 60 Transition obligation 6 3 -------------- -------------- Balances included within accumulated other comprehensive income, excluding taxes $ 3,099 $ 170 ============== ==============
Defined contribution plan Employees hired after December 31, 2003 do not participate in our defined benefit plan. Instead, they participate in a defined contribution plan whereby we make a retirement contribution into the employee's savings plan equal to 3% of their compensation. Under this defined contribution plan, we made total cash contributions of $505, $312 and $148 into employees' savings accounts in 2006, 2005 and 2004, respectively. Savings plan We also have a savings plan for our U.S. personnel. In 2006, we made a contribution in an amount equal to an employee's contributions up to a maximum of 4% of the employee's annual earnings. Company contributions are made using Company stock purchased in the open market. Our contributions under the savings plan were $1,937 in 2006, $1,529 in 2005 and $1,440 in 2004. Other We also have a deferred compensation plan and a 401(k) restoration plan for our executives. F-32 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (14) STOCK OPTION PLANS For purposes of calculating compensation cost, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value calculation included the following weighted average assumptions for grants made in each of the following years:
2006 2005 2004 ------------ ------------ ------------ Risk-free interest rate 4.6% 3.5% 3.0% Expected life of option in years 4 4 5 Expected dividend yield of stock 1.7% 1.7% 1.5% Expected volatility of stock price 43.3% 52.7% 53.3% Weighted-average fair value of options granted $ 7,610 $ 6,143 $ 5,333
The 1983, 1987 and 1993 Plans We previously granted incentive and nonqualified stock options to our directors, officers and key employees under the 1983 Incentive Stock Option Plan, 1993 Stock Plan and 1987 Nonqualified Stock Option Plan. Options awarded under these plans were granted with an exercise price equal to the fair market value of the underlying common stock at the time of grant. The options expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee, or a change in control of the Company. These plans expired as of December 31, 2000, though options that were granted prior to expiration of the plans continue to be valid until the individual option grants expire. Changes in options outstanding are summarized as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005 DECEMBER 31, 2004 --------------------------- --------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXPIRED STOCK OPTION PLANS SHARES PRICE SHARES PRICE SHARES PRICE ---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Options outstanding at January 1 222,657 $ 2.14 472,743 $ 2.10 709,279 $ 2.07 Exercised (97,903) 2.05 (250,086) 2.06 (236,536) 2.01 Cancelled - - - - - - ------------ ------------ ------------ Options outstanding at December 31 124,754 2.21 222,657 2.14 472,743 2.10 ============ ============ ============ Options exercisable at December 31 124,754 222,657 472,743 ============ ============ ============ Shares available for future grant at December 31 - - - ============ ============ ============
1998 Long-Term Incentive Plan We reserved 3,900,000 shares of our common stock for issuance to our officers, directors and key employees. This plan provides for the award of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and phantom stock. Different terms and conditions apply to each form of award made under the plan. Awards granted since 2003 vest ratably over a three year period and expire 6 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Options awarded under these plans prior to 2003 generally vest 40% after two years and continued to vest at the rate of 20% per year for each year thereafter, until they are fully vested. These options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. F-33 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Changes in options outstanding are summarized as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005 DECEMBER 31, 2004 --------------------------- --------------------------- --------------------------- 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 1,673,330 $ 9.68 1,627,144 $ 6.78 1,611,318 $ 4.11 Granted 292,450 26.02 293,900 20.90 294,650 18.10 Exercised (314,136) 7.80 (247,427) 3.95 (258,491) 2.94 Cancelled (14,895) 16.44 (287) 1.57 (20,333) 7.97 ------------ ------------ ------------ Options outstanding at December 31 1,636,749 12.90 1,673,330 9.68 1,627,144 6.78 ============ ============ ============ Options exercisable at December 31 1,019,548 924,673 826,121 ============ ============ ============ Shares available for future grant at December 31 605,140 882,695 1,176,308 ============ ============ ============
Restricted Stock On May 22, 2003, we awarded 141,000 shares of restricted stock to six officers. Restricted stock awards are independent of option grants and are subject to restrictions considered appropriate by the Compensation Committee of the Board of Directors. Restricted stock has the same cash dividend and voting rights as other common stock. The cost of the awards, determined to be the fair market value of the shares at the date of the grant, is expensed ratably over the period the restrictions lapse. Total compensation expense of $921 related to this grant was recorded over the three year period from the date of grant. 2006 Long-Term Incentive Plan On May 11, 2006, our shareholders approved the AMCOL International Corporation 2006 Long-Term Incentive Plan. This plan permits a total of 1,500,000 shares of AMCOL common stock to be awarded to eligible directors and employees through the use of nonqualifed stock options, incentive stock options, restricted stock or restricted stock units, and stock appreciation rights. Different terms and conditions apply to each form of award made under the plan. Awards of stock options have a six year life from the date of grant and vest ratably over a three year period from the date of grant. The Board of Directors may amend the plan at any time. The plan will automatically terminate on May 12, 2016. During 2006, no awards under this plan were granted. All Stock Option Plans The following table summarizes information about stock options outstanding and exercisable at December 31, 2006:
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 ------------------------- ------------ ------------ ------------ ------------ ------------ $ 1.57 - $ 2.45 377,536 1.62 $ 2.02 377,536 $ 2.01 $ 3.88 - $ 5.67 413,054 3.20 5.04 413,054 5.04 $ 5.98 - $ 18.10 419,583 3.97 13.21 276,779 12.82 $ 20.90 - $ 20.90 261,880 4.11 20.90 76,933 20.90 $ 26.02 - $ 26.02 289,450 5.10 26.02 - - ------------ ------------ Total 1,761,503 3.49 12.14 1,144,302 6.99 ============ ============
F-34 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (15) CONTINGENCIES The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial statements. (16) QUARTERLY RESULTS (UNAUDITED) Unaudited summarized results for each quarter of the last two years are as follows:
2006 QUARTERS ------------------------------------------------------------ FIRST SECOND THIRD FOURTH ------------ ------------ ------------ ------------ Minerals $ 80,071 $ 78,118 $ 79,274 $ 79,288 Environmental 40,158 52,718 59,120 51,132 Oilfield services 14,972 14,141 14,157 18,658 Transportation 12,471 12,848 13,300 11,609 Intersegment shipping (4,908) (5,124) (5,679) (4,768) ------------ ------------ ------------ ------------ Net sales $ 142,764 $ 152,701 $ 160,172 $ 155,919 ============ ============ ============ ============ Minerals $ 14,892 $ 15,648 $ 15,771 $ 15,376 Environmental 14,278 17,967 19,817 17,652 Oilfield services 5,077 4,568 5,067 7,283 Transportation 1,482 1,512 1,563 1,513 ------------ ------------ ------------ ------------ Gross profit $ 35,729 $ 39,695 $ 42,218 $ 41,824 ============ ============ ============ ============ Minerals $ 8,767 $ 9,471 $ 9,980 $ 8,486 Environmental 4,786 7,640 8,849 5,476 Oilfield services 2,945 2,022 2,270 3,824 Transportation 683 732 775 682 Corporate (5,134) (5,037) (5,466) (4,363) ------------ ------------ ------------ ------------ Operating profit $ 12,047 $ 14,828 $ 16,408 $ 14,105 ============ ============ ============ ============ Income from continuing operations $ 9,711 $ 11,919 $ 16,034 $ 11,999 ============ ============ ============ ============ Net income $ 9,711 $ 11,919 $ 16,619 $ 11,999 ============ ============ ============ ============ Basic earnings per share (A) $ 0.33 $ 0.40 $ 0.56 $ 0.40 ============ ============ ============ ============ Diluted earnings per share (A) $ 0.31 $ 0.39 $ 0.54 $ 0.39 ============ ============ ============ ============
F-35 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
2005 QUARTERS ------------------------------------------------------------ FIRST SECOND THIRD FOURTH ------------ ------------ ------------ ------------ Minerals $ 73,448 $ 74,877 $ 74,318 $ 73,043 Environmental 33,872 44,801 49,832 42,639 Oilfield services 8,432 9,033 11,245 10,992 Transportation 10,985 12,595 13,224 12,904 Intersegment shipping (4,687) (4,962) (5,691) (4,976) ------------ ------------ ------------ ------------ Net sales $ 122,050 $ 136,344 $ 142,928 $ 134,602 ============ ============ ============ ============ Minerals $ 13,474 $ 16,783 $ 15,043 $ 13,470 Environmental 12,225 15,316 17,833 14,955 Oilfield services 2,635 2,933 3,640 3,783 Transportation 1,346 1,536 1,581 1,470 ------------ ------------ ------------ ------------ Gross profit $ 29,680 $ 36,568 $ 38,097 $ 33,678 ============ ============ ============ ============ Minerals $ 7,795 $ 10,665 $ 9,799 $ 8,243 Environmental 4,064 6,439 8,441 4,407 Oilfield services 1,073 1,068 1,677 1,499 Transportation 573 720 751 673 Corporate (5,270) (5,431) (4,709) (5,401) ------------ ------------ ------------ ------------ Operating profit $ 8,235 $ 13,461 $ 15,959 $ 9,421 ============ ============ ============ ============ Income from continuing operations $ 6,952 $ 9,518 $ 11,442 $ 8,378 ============ ============ ============ ============ Net income $ 6,952 $ 14,273 $ 11,442 $ 8,378 ============ ============ ============ ============ Basic earnings per share (A) $ 0.24 $ 0.48 $ 0.39 $ 0.28 ============ ============ ============ ============ Diluted earnings per share (A) $ 0.23 $ 0.46 $ 0.37 $ 0.27 ============ ============ ============ ============
(A) Earnings per share (EPS) for each quarter is computed using the weighted-average number of shares outstanding during the quarter, while EPS for the year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the EPS for each of the four quarters may not equal the EPS for the year. F-36 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 16, 2007 AMCOL INTERNATIONAL CORPORATION By: /s/ Lawrence E. Washow ------------------------------------- Lawrence E. Washow President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ John Hughes March 16, 2007 ------------------------------------- John Hughes Chairman of the Board and Director /s/ Lawrence E. Washow March 16, 2007 ------------------------------------- Lawrence E. Washow President and Chief Executive Officer and Director /s/ Gary L. Castagna March 16, 2007 ------------------------------------- Gary L. Castagna Senior Vice President and Chief Financial Officer; Treasurer and Chief Accounting Officer /s/ Arthur Brown March 16, 2007 ------------------------------------- Arthur Brown Director /s/ Daniel P. Casey March 16, 2007 ------------------------------------- Daniel P. Casey Director /s/ Jay D. Proops March 16, 2007 ------------------------------------- Jay D. Proops Director /s/ Clarence O. Redman March 16, 2007 ------------------------------------- Clarence O. Redman Director /s/ Dale E. Stahl March 16, 2007 ------------------------------------- Dale E. Stahl Director /s/ Audrey L. Weaver March 16, 2007 ------------------------------------- Audrey L. Weaver Director /s/ Paul C. Weaver March 16, 2007 ------------------------------------- Paul C. Weaver Director F-37 INDEX TO EXHIBITS EXHIBIT NUMBER ------- 3.1 Restated Certificate of Incorporation of the Company (1), as amended (2), as amended (3) 3.2 Bylaws of the Company (2) 4 Article Four of the Company's Restated Certificate of Incorporation (1), as amended (3) 10.1 Lease Agreement for office space dated September 29, 1986, between the Company and American National Bank and Trust Company of Chicago (4); First Amendment dated June 2, 1994 (5); Second Amendment dated June 2, 1997 (6) 10.2 AMCOL International Corporation 1987 Non-Qualified Stock Option Plan (7); as amended (8) 10.3 AMCOL International Corporation Dividend Reinvestment and Stock Purchase Plan (9); as amended (8) 10.4 AMCOL International Corporation 1993 Stock Plan, as amended and restated* (2) 10.5 AMCOL International Corporation 1998 Long-Term Incentive Plan (10), as amended* (11) 10.6 AMCOL International Corporation 2006 Long-Term Incentive Plan* (12) 10.7 AMCOL International Corporation Annual Cash Incentive Plan* (12) 10.8 AMCOL International Corporation Discretionary Cash Incentive Plan* (12) 10.9 Employment Agreement effective as of March 24, 2006 by and between Registrant and Gary D. Morrison* (13) 10.10 Employment Agreement effective as of March 24, 2006 by and between Registrant and Gary Castagna* (13) 10.11 Employment Agreement effective as of March 24, 2006 by and between Registrant and Ryan F. McKendrick* (13) 10.12 Employment Agreement effective as of March 24, 2006 by and between Registrant and Lawrence E. Washow* (13) 10.13 A written description of compensation for the Board of Directors of the Company is set forth under the caption "Director Compensation" in the definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to the Company's shareholders in connection with the Annual Meeting of Shareholders to be held on May 10, 2007, and is hereby incorporated by reference.* 10.14 Credit Agreement by and among AMCOL International Corporation and Harris Trust and Savings Bank, individually and as agent, Wells Fargo Bank, N.A., Bank of America N.A. and the Northern Trust Company dated October 31, 2003 (14), as amended (15) 10.15 Asset Purchase Agreement dated as of November 10, 2006 by and among CETCO Oilfield Services Company and Nitrogen Specialty Company, L.L.C., together with its members (16) 18 Letter regarding change in Accounting Principles 21 AMCOL International Corporation Subsidiary Listing 23.1 Consent of Independent Registered Public Accounting Firm 23.2 Consent of former Independent Registered Public Accounting Firm 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 F-38 ---------- (1) Exhibit is incorporated by reference to the Registrant's Form S-3 filed with the Securities and Exchange Commission on September 15, 1993. (2) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1995. (3) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1998. (4) Exhibit is incorporated by reference to the Registrant's Form 10 filed with the Securities and Exchange Commission on July 27, 1987. (5) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1994. (6) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1997. (7) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1988. (8) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1993. (9) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1992. (10) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-56017) filed with the Securities and Exchange Commission on June 4, 1998. (11) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-68664) filed with the Securities and Exchange Commission on August 30, 2001. (12) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on May 12, 2006. (13) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on March 29, 2006. (14) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on November 15, 2005. (15) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on June 19, 2006. (16) Exhibit is incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on November 14, 2006. *Management compensatory plan or arrangement F-39