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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2003
|_| 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
One North Arlington,
1500 West Shure Drive, Suite 500
Arlington Heights, Illinois 60004-7803
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 394-8730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the registrant's $.01 par value Common Stock
held by non-affiliates of the registrant (based upon the per share closing price
of $8.00 per share on June 30, 2003, and, for the purpose of this calculation
only, the assumption that all of the registrant's directors and executive
officers are affiliates) was approximately $166.4 million.
Registrant had 29,260,056 shares of $.01 par value Common Stock
outstanding as of February 26, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement, which will be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this Form 10-K, are incorporated by reference
into Part III hereof.
PART I
Item 1. Business
INTRODUCTION
AMCOL International Corporation was originally incorporated in South
Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was
changed to American Colloid Company in 1927, and in 1959, the Company was
reincorporated in Delaware. In 1995, its name was changed to AMCOL International
Corporation. Except as otherwise noted or indicated by context, the term
"Company" refers to AMCOL International Corporation and its subsidiaries.
The Company operates in two major industry segments: minerals and
environmental. The Company also operates a transportation business. The minerals
segment mines, processes and distributes clays and products with similar
applications to various industrial and consumer markets. The environmental
segment processes and distributes clays and products with similar applications
for use as a moisture barrier in commercial construction, landfill liners and in
a variety of other industrial and commercial applications. The transportation
segment includes a long-haul trucking business and a freight brokerage business,
which provide services to both the Company's plants and unrelated customers.
The following table sets forth the percentage contributions to net sales
of the Company attributable to its minerals, environmental and transportation
segments for the last three calendar years. The percentages include intersegment
shipping revenues.
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Percentage of Sales
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2003 2002 2001
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Minerals 57% 55% 52%
Environmental 33% 34% 36%
Transportation 10% 11% 12%
--- --- ---
100% 100% 100%
=== === ===
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Net revenues, operating profit, assets, depreciation, depletion and
amortization, capital expenditures and research and development expenditures
attributable to each of the Company's business segments are set forth in Note 3
of the Company's Notes to Consolidated Financial Statements included elsewhere
herein.
DISCONTINUED OPERATIONS
In 2000, the Company closed its U.K. cat litter business. Certain assets
were sold to various outside parties for $.7 million. The closure was completed
in 2001. The U.K. cat litter business was a component entity of the Company's
minerals segment.
In 2001, the Company sold its U.K. metalcasting business to a group
comprised in part of former management of the business. Included in the sale
were machinery and equipment. The acquirer entered into a license agreement for
the right to use trademarks for a period of 10 years, and leases land and
buildings from the Company. The Company did not receive any proceeds from the
sale. The U.K. metalcasting business was a component entity of the Company's
minerals segment.
In 2003, the Internal Revenue Service concluded audits which resulted in a
reduction of the Company's income taxes payable of approximately $8.9 million
related to the sale of the U.K. metalcasting and closure of the U.K. cat litter
businesses. Those audits resulted in an actual tax liability that was lower than
the estimate of taxes payable related to those periods. Therefore, the Company
adjusted its estimate of taxes payable to reflect the actual amount due as of
December 31, 2003 and recorded $8.9 million of income to discontinued
operations.
2
MINERALS
The Company's minerals business is principally conducted through its
wholly-owned subsidiaries: American Colloid Company in the United States and
Canada; Colin Stewart Minchem Limited in the United Kingdom; Volclay Siam Ltd.
in Thailand; Volclay Korea Ltd. in South Korea; Volclay Pty., Ltd. in Australia;
and through its joint venture companies: Volclay de Mexico in Mexico; Ashapura
Volclay Ltd. in India; Egypt Mining & Drilling Chemicals Co. in Egypt; Volclay
DongMing Industrial Minerals Co. in China; and a 19% equity interest in Nissho
Iwai Bentonite Company in Japan. The Company also has a 20% equity interest in
Ashapura Minechem Ltd., a publicly traded Indian bentonite producer.
Commercially produced bentonite is a type of montmorillonite clay found in
beds ranging in thickness from two to 50 feet under overburden of up to 60 feet.
There are two basic types of bentonite, each having different chemical and
physical properties. These are commonly known as sodium bentonite and calcium
bentonite. Sodium bentonite is generally referred to as Western bentonite
because it predominately occurs in the Western United States. Sodium bentonites
of lesser purity occur outside the United States. Calcium bentonite is generally
referred to as Southern bentonite in the United States and as fuller's earth
outside the United States. Calcium bentonites mined outside the United States
are commonly activated with sodium carbonate to produce properties similar to
natural sodium bentonite.
The Company's principal bentonite products are marketed under various
internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R),
PREMIUM GEL(R) and ADDITROL(R). The Company's cat litter is sold under various
trade names and private labels. Trade names include NATURAL SELECT(R), CAREFREE
KITTY(R), PREMIUM CHOICE(R), CAT TAILS(R), CATS PAW(R) and PAMPER CAT(R).
Principal Products and Markets
Metalcasting. In the formation of sand molds for metal castings, sand is
bonded with bentonite and various other additives to yield desired casting form
and surface finish. The Company serves the foundry and casting industry
throughout North America, Asia and Australia with custom-blended bentonite and
allied non-bentonite products to strengthen sand molds for cast auto parts, farm
implements, railcars, home appliances and metallurgical products. The blended
mineral binders containing sodium and calcium bentonite are sold under the trade
name ADDITROL(R).
Cat Litter. The Company produces and markets sodium bentonite-based,
scoopable (clumping), traditional and alternative cat litters as well as
specialty pet products to grocery and drug stores, mass merchandisers, wholesale
clubs and pet specialty stores throughout the U.S. The Company's scoopable
products' clump-forming capability traps urine, allowing for easy removal of the
odor-producing elements from the litter box. The Company's products are marketed
under various trade names.
Specialty Minerals. This category includes several business units that are
major suppliers of gelling, binding, thickening, plasticizing and emulsifying
agents for cosmetics, pharmaceuticals, drilling fluids or household products.
The Company is a leading producer of products for agricultural use. The Company
is also a global supplier of nanoclays.
Detergents. The Company supplies high-grade agglomerated bentonite to the
detergent industry.
Health and Beauty. The Company manufactures polymer and purified grades of
sodium bentonite-based products for the pharmaceutical and cosmetics industries.
Bentonite also acts as a thickening and suspension agent in lotions.
Iron Ore Pelletizing. The Company supplies sodium bentonite for use as a
pelletizing aid in the production of taconite pellets.
Well Drilling. Sodium bentonite and leonardite, a form of oxidized lignite
mined and processed by the Company in North Dakota, are components of drilling
fluids used in oil and gas well drilling. Bentonite imparts thickening and
suspension properties, which facilitate the transport of rock cuttings to the
surface during the drilling process. Drilling
3
fluids lubricate the drilling bit and coat the underground formations to prevent
hole collapse and drill bit seizing. The Company's primary trademark for this
application is PREMIUM GEL(R).
Other Industrial. The Company produces bentonite and bentonite blends for
the construction industry, which are used as a plasticizing agent in cement,
plaster and bricks, and as an emulsifier in asphalt.
Agricultural. Sodium bentonite and calcium bentonite are sold as
pelletizing aids in livestock feed and as anti-caking agents for livestock feed
in storage or during transit.
Sales and Distribution
In 2003, the top five customers of the minerals segment accounted for
approximately 35% of the segment sales worldwide.
The Company has established industry-specialized sales groups staffed with
technically oriented salespersons serving each of the Company's major markets.
Certain groups have networks of distributors and representatives, including
companies that warehouse products at strategic locations.
Most customers in the metalcasting industry are served on a direct basis
by teams of Company sales, technical and manufacturing personnel. The Company
also provides training courses and laboratory testing for customers who use the
Company's products in the metalcasting process.
Sales to the oil and gas well drilling industry are primarily made
directly to oil and gas well drilling fluid service companies, both under the
Company's trade name and under private label. Because bentonite is a major
component of drilling fluids, two service companies have captive bentonite
operations. The Company's potential market, therefore, generally is limited to
those service organizations that are not vertically integrated or do not have
long-term supply arrangements with other bentonite producers.
Sales to the cat litter market are made on a direct basis and through
industry brokers. All sales to the iron ore pelletizing industry are made
directly to the end user. Sales to the Company's remaining markets are made
primarily through independent distributors and representatives.
Competition
The Company is one of the largest producers of bentonite products
globally. There is substantial domestic and international competition, which is
essentially a matter of product quality, price, logistics, service and technical
support. There are at least 15 other major sodium bentonite or sodium activated
calcium bentonite producers throughout the world including several importers
into the U.S. market. There are also numerous major producers of calcium
bentonite as well as various regional suppliers in the areas the Company serves.
Some of the producers are companies primarily in other lines of business with
substantially greater financial resources than the Company.
Seasonality
Although business activities in certain portions of the industries in
which the Company's mineral products are sold, e.g. oil and gas well drilling
and construction, are subject to seasonal factors such as weather, the Company
does not consider its minerals business, as a whole, to be seasonal.
4
ENVIRONMENTAL
Principal Products and Markets
Through its wholly-owned subsidiaries, Colloid Environmental Technologies
Company (CETCO) and CETCO Oilfield Services, Inc. in the United States and
Canada, CETCO Korea Ltd. in South Korea, CETCO Poland Sp. z o.o. in Poland, and
CETCO (Europe) Ltd. in the United Kingdom, the Company sells sodium bentonite,
products containing sodium bentonite, and other products, services and equipment
for use in environmental and construction applications.
Lining Technologies. CETCO sells bentonite and its geosynthetic clay liner
products under the BENTOMAT(R) and CLAYMAX(R) trade names for lining and capping
landfills and for containment in tank farms, storm water containment systems,
waste stabilization lagoons, slurry walls, sewage lagoons and mine site and
wetlands reclamation applications.
Building Materials. The Company's VOLCLAY(R) Waterproofing System is sold
to the non-residential construction industry. This line includes VOLTEX(R), a
waterproofing composite comprised of two polypropylene geotextiles filled with
sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground
foundation walls and slabs. The following products round out the principal
components of the product line: VOLCLAY PANELS(R), also used for below-grade
waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and
VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and
plaza areas. In addition, the Company's Strong Seal and Ducks Back roofing
underlayment systems are sold to the residential and non-residential roofing
industry.
Industrial Water Treatment. Bentonite-based flocculants and customized
equipment are used to remove emulsified oils and heavy metals from wastewater.
Bentonite-based products are formulated to solidify liquid waste for proper
disposal in landfills. These products are sold primarily under the SYSTEM-AC(R),
RM-10(R) and SORBOND(R) trade names.
Oilfield Services. CETCO's oilfield services group employs CRUDESORB(R)
and CRUDESEP(R) filtration technology, used primarily on offshore oil production
platforms. CETCO employs several technologies to allow platform operators to
maintain compliance with regulatory requirements governing discharge of waste
generated during oil production. CETCO's filtration technology is marketed with
all necessary equipment, proprietary filter media and trained professional
service personnel. The Company is also actively involved in providing wastewater
treatment solutions to pipeline operators to enable them to meet wastewater
discharge requirements. Well testing services are also provided by the Company
as a result of the acquisition of Lafayette Well Testing, Inc., completed in
early 2004. The Company provides equipment and personnel for production well
control, clean-up, unload, separation, measure of component flow and disposal of
fluids from oil and gas wells.
Drilling Products. CETCO's drilling products are used in environmental and
geotechnical drilling applications, horizontal directional drilling, mineral
exploration and foundation construction. The products are used to install
monitoring wells, facilitate horizontal drilling and water wells, rehabilitate
existing water wells and seal abandoned exploration drill holes. VOLCLAY(R)
GROUT, HYDRAUL-EZ(R), BENTOGROUT(R) and VOLCLAY(R) TABLETS are among the trade
names for products used in these applications. Geothermal grouting applications
utilizing GEOTHERMAL GROUT(TM) represent a developing area for CETCO drilling
products. VOLCLAY(R) SHORE PAC is used in special foundation drilling
applications.
Competition
CETCO principally competes with eight regional geosynthetic clay liner
manufacturers worldwide and several suppliers of alternative liner technologies.
The construction and wastewater treatment product lines are specialized
businesses that compete primarily with alternative technologies. The groundwater
monitoring, well drilling and sealants products compete with the Company's
traditional rivals in the sodium bentonite business. The oilfield services group
5
competes with several larger oil services companies using different technology.
Competition is based on product quality, service, price, technical support and
availability of product. Historically, the competition has been vigorous.
Sales and Distribution
CETCO products are sold domestically and internationally. CETCO sells most
of its products through direct sales and marketing personnel specializing in the
Company's major product lines. CETCO employs technically oriented marketing
personnel to support its network of distributors and representatives for several
other product lines. Oilfield Services customers are primarily major oil
companies to which products are sold on a direct basis.
Seasonality
Much of the business in the environmental sector is impacted by weather
and soil conditions. Many of the products cannot be applied in harsh weather
conditions and, as such, sales and profits tend to be stronger during the period
from April through October. As a result, the Company considers the business of
this segment to be seasonal.
MINERALS/ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS
Mineral Reserves
The Company has reserves of sodium and calcium bentonite at various
locations throughout North America, including Wyoming, South Dakota, Montana and
Alabama. The Company, indirectly through its joint venture companies, has access
to bentonite deposits in China, Egypt, India and Mexico. At 2003 consumption
rates and product mix, the Company estimates its proven reserves of commercially
usable sodium bentonite at approximately 22 years. The Company estimates its
proven reserves of calcium bentonite at approximately 23 years in North America.
While the Company, based upon its experience, believes that its reserve
estimates are reasonable and its title and mining rights to its reserves are
valid, the Company has not obtained any independent verification of such reserve
estimates or such title or mining rights. The Company owns or controls the
properties on which its reserves are located through long-term leases, royalty
agreements and patented and unpatented mining claims. A majority of the
Company's bentonite reserves are owned. All of the properties on which the
Company's reserves are located are either physically accessible for the purposes
of mining and hauling or the cost of obtaining physical access would not be
material.
To retain possessory rights in unpatented mining claims, a fee of $100 per
year for each unpatented mining claim is required. The validity of title to
unpatented mining claims is dependent upon numerous factual matters. The Company
believes that the unpatented mining claims that it owns have been located in
compliance with all applicable federal, state and local mining laws, rules and
regulations. The Company is not aware of any material conflicts with other
parties concerning its claims. From time to time, members of Congress and
members of the executive branch of the federal government have proposed
amendments to existing federal mining laws. The various amendments would have
had a prospective effect on mining operations on federal lands and include,
among other things, the imposition of royalty fees on the mining of unpatented
claims, the elimination or restructuring of the patent system and an increase in
fees for the maintenance of unpatented claims. To the extent that future
proposals may result in the imposition of royalty fees on unpatented lands, the
mining of the Company's unpatented claims may become uneconomic and royalty
rates for privately leased lands may be affected. The Company cannot predict the
form that any amendments might ultimately take or whether or when any such
amendments might be adopted.
The Company maintains a continuous program of worldwide exploration for
additional reserves and attempts to acquire reserves sufficient to replenish its
consumption each year, but it cannot assure that additional reserves will
continue to become available.
The Company oversees all of its mining operations, including its
exploration activity and securing the necessary state and federal mining
permits.
6
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.
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All amounts are in Tons Sold
thousands of tons ----------------------
2003 2002 2001 Wet Tons Assigned Unassigned Conversion
of Reserves Reserves Reserves Factor
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Sodium Bentonite
Assigned
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Belle/Colony, WY/SD 1,088 941 876 20,047 20,047 -- 76.22%
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Lovell, WY 477 379 382 25,139 25,139 -- 76.22%
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TOTAL ASSIGNED 1,565 1,320 1,258 45,186 45,186 --
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Other / Unassigned
(SD, WY, MT, NV) 1 62 152 65,786 36 65,750 76.22%
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TOTAL OTHER / UNASSIGNED 1 62 152 65,786 36 65,750
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TOTAL SODIUM BENTONITE 1,566 1,381 1,410 110,972 45,222 65,750 --
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41% 59%
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Calcium Bentonite
Assigned
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Sandy Ridge, AL 132 138 145 4,165 4,165 -- 72.70%
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Chao Yang, Liaoning, China 57 31 -- 2,733 2,733 -- 71.00%
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TOTAL ASSIGNED 189 169 145 6,898 6,898 --
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Other / Unassigned -- -- -- 115 -- 115 77.31%
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TOTAL OTHER / UNASSIGNED -- -- -- 115 -- 115
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TOTAL CALCIUM BENTONITE 189 169 145 7,013 6,898 115
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98% 2%
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Leonardite
Gascoyne, ND 34 25 25 612 612 -- 63.43%
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TOTAL LEONARDITE 34 25 25 612 612 --
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100%
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GRAND TOTALS 1,789 1,575 1,580 118,597 52,732 65,865
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44% 56%
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All amounts are in Mining Claims
thousands of tons --------------------------------------
Owned Unpatented Leased
**
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Sodium Bentonite
Assigned
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Belle/Colony, WY/SD 865 169 19,013
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Lovell, WY 14,717 10,013 409
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TOTAL ASSIGNED 15,582 10,182 19,422
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Other / Unassigned
(SD, WY, MT, NV) 55,448 4,154 6,184
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TOTAL OTHER / UNASSIGNED 55,448 4,154 6,184
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TOTAL SODIUM BENTONITE 71,030 14,336 25,606
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64% 13% 23%
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Calcium Bentonite
Assigned
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Sandy Ridge, AL 1,874 -- 2,291
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Chao Yang, Liaoning, China -- -- 2,733
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TOTAL ASSIGNED 1,874 -- 5,024
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Other / Unassigned -- -- 115
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TOTAL OTHER / UNASSIGNED -- -- 115
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TOTAL CALCIUM BENTONITE 1,874 -- 5,139
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27% 73%
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Leonardite
Gascoyne, ND -- -- 612
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TOTAL LEONARDITE -- -- 612
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100%
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GRAND TOTALS 72,904 14,336 31,357
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61% 12% 27%
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** Quantity of reserves that would be owned if patent was granted.
Assigned reserves means reserves which could be reasonably expected to be
processed in existing plants. Unassigned reserves means reserves which will
require additional expenditures for processing facilities. Conversion factor
means the percentage of reserves that will be available for sale after
processing.
The Company estimates that available supplies of other materials utilized
in its minerals business are sufficient to meet its production requirements for
the foreseeable future.
Mining and Processing
Bentonite is surface mined, generally with large earthmoving scrapers, and
then loaded into trucks and off-highway-haul wagons for movement to processing
plants. The mining and hauling of the Company's clay is done both by the Company
and by independent contractors. Each of the Company's bentonite processing
plants generally maintains stockpiles of unprocessed clay equaling approximately
4 to 8 months production requirements.
At the processing plants, bentonite is dried, crushed and sent through
grinding mills, where it is sized to customer requirements, then chemically
modified where needed and transferred to silos for automatic bagging or bulk
shipment. Virtually all production is shipped as processed rather than stored
for inventory.
7
Product Development and Patents
The Company works actively with customers in each of its major markets to
develop commercial applications of specialized grades of bentonite. It maintains
a bentonite research center and laboratory testing facility adjacent to its
corporate headquarters. When a need for a product that will accomplish a
particular goal is perceived, the Company works to develop the product, research
its marketability and study the feasibility of its production. The Company also
co-develops products with customers, or others, as needs arise. The Company's
development efforts emphasize markets with which it is familiar and products for
which it believes there is a viable market.
The Company holds a number of U.S. and international patents covering the
use of bentonite and products containing bentonite. The Company follows the
practice of obtaining patents on new developments whenever feasible. The
Company, however, does not consider that any one or any combination of such
patents is material to its minerals and environmental businesses as a whole.
Research and Development
All Company business segments share research and laboratory facilities
adjacent to the corporate headquarters. Technological developments are shared
among the companies, subject to license agreements where appropriate.
Regulation and Environmental
The Company believes it is in material compliance with applicable
regulations now in effect for surface mining. Since reclamation of exhausted
mining sites has been a regular part of the Company's surface mining operations
for the past 35 years, maintaining compliance with current regulations has not
had a material effect on mining costs. Reclamation costs are reflected in the
prices of the bentonite sold.
The grinding and handling of dried clay is part of the production process
and because it generates dust, the Company's mineral processing plants are
subject to applicable clean air standards (including Title V of the Clean Air
Act). All of the Company's plants are equipped with dust collection systems. The
Company has not had, and does not presently anticipate, any significant
regulatory problems in connection with its dust emission, though it expects
ongoing expenditures for the maintenance of its dust collection systems and
required annual fees.
The Company's mineral operations are also subject to other federal, state,
local and foreign laws and regulations relating to the environment and to health
and safety matters. Certain of these laws and regulations provide for the
imposition of substantial penalties for noncompliance. While the costs of
compliance with, and penalties imposed under, these laws and regulations have
not had a material adverse effect on the Company, future events, such as changes
in or modified interpretations of existing laws and regulations, enforcement
policies, and further investigation or evaluation of potential health hazards of
certain products, may give rise to additional compliance and other costs that
could have a material adverse effect on the Company.
TRANSPORTATION
The Company operates a long-haul trucking business and a freight brokerage
business primarily for delivery of finished products throughout the continental
United States. Through its transportation operation, the Company is better able
to control costs, maintain delivery schedules and assure equipment availability
for delivery of its products. The long-haul trucking subsidiary performs
transportation services on outbound movements from the Company's production
plants and attempts to haul third parties' products on return trips whenever
possible. In 2003, approximately 37% of the revenues of this operation involved
services provided to the Company's domestic minerals and environmental segments.
8
CORPORATE ACTIVITIES - NANOCOMPOSITE PRODUCT DEVELOPMENT
The Company is always seeking to develop broader-based technologies that
may use bentonite for new, value-added applications. One such technology is
nanocomposites for the plastics industry. In 1995, the Company established its
Nanocor subsidiary to develop surface-modified bentonites suitable for the
emerging nanocomposite market. The primary raw material is bentonite. For some
applications, material will be purchased from third-party suppliers.
Surface-treatment chemicals, added in the production process, are readily
available on the merchant market.
The Company continues to focus its development on the use of bentonite as
a functional additive for plastics. The technology consists of dispersing highly
purified bentonite of nanometer size (one-billionth of a meter) in plastic
resins. Nanocor has identified commercial applications for Nanomer(R) products
in the consumer packaging, engineered products and performance coatings markets.
Plastic nanocomposites provide improved physical properties in products used in
these markets. Those improved physical properties include heat resistance,
dimensional stability and strength for engineered materials and gas, and
moisture barrier for packaging materials.
The Company has a nanocomposite production facility in Aberdeen,
Mississippi. Sales to date have been insignificant. All costs, in excess of
sales, associated with the development, production and sales of nanocomposites
are included in corporate costs.
During 2002, the Company reviewed its alternatives in improving the sales
opportunities for its nanocomposite products. In connection with that review,
the Company determined its best interest was served by finding partners that had
a strong presence in markets where nanocomposites could gain significant
business. The result was the execution of two strategic alliance agreements in
2003.
In January 2003, an agreement was reached with Mitsubishi Gas Chemical
Company, Inc. (MGC) which involves the manufacture and sale of high-barrier
plastics that will combine the Company's patented nanocomposite technology and
MXD6, a form of nylon. MGC is the world's largest producer of MXD6, which is an
established product used in consumer and industrial packaging due to its
inherent gas barrier properties. A MXD6-nanocomposite has significantly higher
gas-barrier properties, which will greatly improve sales potential in the
packaging market. MGC will lead sales and marketing of the product line with
assistance from the Company's sales staff. Additionally, the companies will
combine research and development resources to create new product variations. The
Company has licensed to MGC its intellectual property that relates to MXD6. In
addition to the sale of Nanomer products to MGC for use in the production of the
MXD6-nanocomposite, the Company will earn revenue from the profit generated from
sales of those nanocomposites by MGC.
The Company also reached an agreement with PolyOne Corporation (PolyOne)
in January 2003 that involves the sales, marketing and development of
polyolefin-nanocomposite concentrates and, in some cases, nanocomposite
plastics. PolyOne is the world's largest polymer services company which includes
the production of plastic compounds. The focus of the alliance will be on
improving strength and fire-resistant properties of polyolefin plastics as well
as their heat stability, gas barrier and electrostatic dissipation. Polyolefins
include a wide variety of plastic resins that are used in a multitude of
consumer and industrial products, including the electronics, telecommunications,
automotives, household and packaging sectors. The companies believe that
polyolefin-nanocomposite concentrates will be easy to process and allow
production of lighter weight plastics. PolyOne will lead sales of the products
with assistance from the Company's personnel, and the companies will combine
research and development resources engaged in the creation of
polyolefin-nanocomposite compounds. Similar to its alliance agreement with MGC,
the Company has licensed its intellectual property that relates to
polyolefin-nanocomposites to PolyOne. In addition to earning profits from the
sale of Nanomer products to PolyOne for use in the production of
polyolefin-nanocomposites, the Company will earn revenue from the profit
generated from sales of those nanocomposites.
Sales to date from these alliances have been insignificant.
9
FOREIGN OPERATIONS AND EXPORT SALES
Approximately 34% of the Company's 2003 net sales were to customers in
countries other than the United States and Canada. To enhance its overseas
market penetration, the Company maintains mineral processing plants in the
United Kingdom, China, Australia, South Korea, Poland and Thailand, as well as a
blending plant in Canada. Through joint ventures, the Company also has the
capability to process minerals in Egypt, India and Mexico. Chartered vessels
deliver large quantities of the Company's bulk, dried sodium bentonite to the
plants in the United Kingdom, Australia, Thailand and South Korea where it is
processed and mixed with other clays and distributed throughout Europe,
Australia and Southeast Asia. The Company's U.S. bentonite is also shipped in
bulk to Japan where it is sold by the Japanese joint venture. In addition, the
Company also maintains a worldwide network of independent dealers, distributors
and representatives.
The Company manufactures geosynthetic clay liners in the United Kingdom,
Poland and South Korea, primarily for the European and Asian markets.
The Company's international operations are subject to the usual risks of
doing business abroad, such as currency fluctuations and devaluation,
restrictions on the transfer of funds, and import and export duties.
See Note 3 of the Company's Notes to Consolidated Financial Statements
included elsewhere herein. This Note is incorporated by reference for sales
attributed to foreign operations and export sales from the United States.
EMPLOYEES
As of December 31, 2003, the Company employed 1,185 persons, 403 of whom
were employed outside of the United States. At December 31, 2003, there were
approximately 745, 352 and 27 persons employed in the Company's minerals,
environmental and transportation segments, respectively, along with 61 corporate
employees. The corporate employees include personnel engaged in the
nanocomposite research and development effort. Operating plants are adequately
staffed, and no significant labor shortages are presently foreseen.
Approximately 43 of the Company's employees in the United States are represented
by four labor unions, all of which have entered into separate collective
bargaining agreements with the Company. Employee relations are considered good.
AVAILABLE INFORMATION
The Company files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements and other information filed by the Company at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. Please call
(800) SEC-0330 for further information on the Public Reference Room. The SEC
maintains a website that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC. The
Company's filings are also available to the public at the website maintained by
the SEC, www.sec.gov.
The Company's principal Internet address is www.amcol.com. The Company's
annual, quarterly and current reports, and amendments to those reports are
available free of charge on www.amcol.com, as soon as reasonably practicable
after the Company electronically files such material with, or furnishes it to,
the SEC.
10
Item 2. Properties
The Company and its subsidiaries operate the following principal plants,
mines and other facilities, all of which are owned, except as noted below. The
Company also has numerous other facilities which blend Additrol (R), package cat
litter and chromite sand, warehouse products and serve as sales offices.
===============================================================================================================================
LOCATION PRINCIPAL FUNCTION
- -------------------------------------------------------------------------------------------------------------------------------
MINERALS
- -------------------------------------------------------------------------------------------------------------------------------
Belle Fourche, SD Mine and process sodium bentonite
- -------------------------------------------------------------------------------------------------------------------------------
Colony, WY (two plants) Mine and process sodium bentonite, package cat litter
- -------------------------------------------------------------------------------------------------------------------------------
Gascoyne, ND Mine and process leonardite
- -------------------------------------------------------------------------------------------------------------------------------
Lovell, WY (1) Mine and process sodium bentonite
- -------------------------------------------------------------------------------------------------------------------------------
Sandy Ridge, AL Mine and process calcium bentonite; blend ADDITROL(R)
- -------------------------------------------------------------------------------------------------------------------------------
Chao Yang, Liaoning, China (2) Mine and process calcium bentonite
- -------------------------------------------------------------------------------------------------------------------------------
Geelong, Victoria, Australia (1)(3) Process bentonite; blend ADDITROL(R)
- -------------------------------------------------------------------------------------------------------------------------------
Rayong, Thailand Process bentonite
- -------------------------------------------------------------------------------------------------------------------------------
Winsford, Cheshire, U.K. Process calcium bentonite and other minerals
- -------------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL
- -------------------------------------------------------------------------------------------------------------------------------
Broussard, LA Environmental Offshore operations and distribution
- -------------------------------------------------------------------------------------------------------------------------------
Fairmount, GA Manufacture Bentomat(R)and Claymax(R) geosynthetic clay liners
- -------------------------------------------------------------------------------------------------------------------------------
Lovell, WY (1) Manufacture Bentomat(R)and Claymax(R) geosynthetic clay liners
- -------------------------------------------------------------------------------------------------------------------------------
Villa Rica, GA Manufacture components for geosynthetic clay liners
- -------------------------------------------------------------------------------------------------------------------------------
Birkenhead, Merseyside, U.K. (1)(3) Manufacture Bentomat(R) geosynthetic clay liner; research laboratory;
headquarters for CETCO (Europe) Ltd.
- -------------------------------------------------------------------------------------------------------------------------------
Pyeongtaek, South Korea Manufacture Bentomat(R) geosynthetic clay liners
- -------------------------------------------------------------------------------------------------------------------------------
Suzhou, Jiangsu, China Manufacture Bentomat(R) geosynthetic clay liners
- -------------------------------------------------------------------------------------------------------------------------------
Szczytno, Poland Manufacture Bentomat(R)and Claymax(R) geosynthetic clay liners
- -------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION
- -------------------------------------------------------------------------------------------------------------------------------
Scottsbluff, NE Transportation headquarters and terminal
- -------------------------------------------------------------------------------------------------------------------------------
CORPORATE
- -------------------------------------------------------------------------------------------------------------------------------
Arlington Heights, IL (3) Corporate headquarters; CETCO headquarters; American Colloid Company
headquarters; Nanocor, Inc. headquarters; research laboratory
- -------------------------------------------------------------------------------------------------------------------------------
Aberdeen, MS Process purified bentonite (Nanocor, Inc.)
- -------------------------------------------------------------------------------------------------------------------------------
(1) Shared facilities between minerals and environmental segments.
(2) 96% owned joint venture.
(3) Certain offices and facilities are leased.
Item 3. Legal Proceedings
The Company is party to a number of lawsuits arising in the normal course
of its business. The Company does not believe that any pending litigation will
have a material adverse effect on its consolidated financial position.
The Company's processing operations require permits from various
governmental authorities. From time to time, the Company has been contacted by
government agencies with respect to required permits or compliance with existing
permits. While the Company has been notified of certain situations of
non-compliance, management does not expect the fines or the cost of compliance,
if any, to be significant.
Item 4. Submission of Matters to a Vote of Security Holders
None.
11
Executive Officers of Registrant
- ------------------------------------------------------------------------------------------------------------
NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
Gary L. Castagna 42 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; prior
thereto, Vice President of Finance for Chemdal International Corporation.
Since January 2000, Director of M-Wave Incorporated, a manufacturer and
distributor of printed circuit boards.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Peter L. Maul 54 Vice President of the Company since 1993 and President of Nanocor,
Inc. since 1995.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Ryan F. McKendrick 52 Vice President of the Company and President of Colloid Environmental
Technologies Company since November 1998; President of Volclay
International Corporation since 2002; prior thereto, Vice President
of Colloid Environmental Technologies Company since 1994.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Gary Morrison 48 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; prior thereto, Vice
President of American Colloid Company since 1994.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Clarence O. Redman 61 Secretary of the Company since 1982. Clarence O. Redman is of
counsel to the law firm of Lord, Bissell & Brook LLP, the law firm
that serves as Corporate Counsel to the Company, since October 1997.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Lawrence E. Washow 50 Chief Executive Officer since May 2000; President of the Company
since May 1998; Chief Operating Officer of the Company since 1997;
prior thereto, Senior Vice President of the Company since 1994 and
President of Chemdal International Corporation since 1992; 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
The Company's common stock trades on the New York Stock Exchange under the
symbol "ACO." The following table sets forth, for the periods indicated, the
high and low closing sale prices of the common stock, as reported by the New
York Stock Exchange, and cash dividends declared per share.
- -----------------------------------------------------------------------------------------------------------------
Stock Price
----------------------- Cash Dividends
High Low Declared Per Share
- -----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, 2003: 1st Quarter $ 6.19 $ 5.40 $ 0.030
----------------------------------------------------------------------
2nd Quarter $ 8.30 $ 5.68 0.040
----------------------------------------------------------------------
3rd Quarter $ 14.45 $ 7.83 0.040
----------------------------------------------------------------------
4th Quarter $ 23.30 $ 12.36 0.050
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, 2002: 1st Quarter $ 7.35 $ 6.04 $ 0.015
----------------------------------------------------------------------
2nd Quarter $ 6.60 $ 5.57 0.020
----------------------------------------------------------------------
3rd Quarter $ 6.65 $ 4.75 0.030
----------------------------------------------------------------------
4th Quarter $ 6.09 $ 4.81 0.030
- -----------------------------------------------------------------------------------------------------------------
The Company has paid cash dividends every year for 67 years.
As of February 26, 2004, there were 2,562 holders of record of the common
stock, excluding shares held in street name.
12
Item 6. Selected Financial Data
The following is selected financial data for the Company as of and for the
five years ended December 31, 2003.
SUMMARY OF OPERATIONS
(In thousands, except ratios and share and per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Operations Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 363,966 $ 298,873 $ 275,288 $ 284,142 $ 296,118
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 89,551 71,868 66,305 68,398 67,313
- ------------------------------------------------------------------------------------------------------------------------------------
General, selling and administrative expenses 60,614 52,210 47,740 48,071 56,925
- ------------------------------------------------------------------------------------------------------------------------------------
Business realignment and other charges -- -- -- 2,357 11,575
- ------------------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) 28,937 19,658 18,565 17,970 (1,187)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income -- -- 3,015 9,816 --
- ------------------------------------------------------------------------------------------------------------------------------------
Change in value of interest rate swap -- -- (401) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest expense (280) (512) (2,196) (3,160) (3,440)
- ------------------------------------------------------------------------------------------------------------------------------------
Net other income (expense) (4) 604 43 223 (23) (1,069)
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income (loss) (4) 29,261 19,189 19,206 24,603 (5,696)
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefit) (4) 9,946 6,916 6,155 6,981 (1,815)
- ------------------------------------------------------------------------------------------------------------------------------------
Income from joint ventures 600 531 28 470 448
- ------------------------------------------------------------------------------------------------------------------------------------
Minority interest in net loss of subsidiary -- 164 59 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (4) 19,915 12,968 13,138 18,092 (3,433)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations -- -- (879) (8,185) 25,667
- ------------------------------------------------------------------------------------------------------------------------------------
Gain on disposal of discontinued operations 8,950 -- 1,154 316,330 --
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle (net of tax) -- -- (182) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 28,865 12,968 13,231 326,237 22,234
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Continuing operations (4) 0.70 0.46 0.47 0.65 (0.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Discontinued operations 0.32 -- 0.01 11.20 0.96
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle (net of tax) -- -- (0.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1.02 0.46 0.47 11.85 0.83
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Continuing operations (4) 0.67 0.43 0.43 0.61 (0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Discontinued operations 0.30 -- 0.01 10.29 0.94
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle (net of tax) -- -- (0.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 0.97 0.43 0.43 10.90 0.82
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (3) 6.35 5.43 4.98 4.69 6.94
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends 0.16 0.10 0.06 0.16 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
Partial liquidation distribution -- -- -- 14.00 --
- ------------------------------------------------------------------------------------------------------------------------------------
13
SUMMARY OF OPERATIONS
(In thousands, except ratios and share and per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding Data
- ------------------------------------------------------------------------------------------------------------------------------------
End of period 29,107,746 27,881,903 28,256,389 28,781,304 26,852,056
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average for the period-basic 28,357,009 28,133,795 28,193,234 27,523,157 26,772,569
- ------------------------------------------------------------------------------------------------------------------------------------
Incremental impact of stock options 1,492,569 2,014,725 2,412,826 2,433,533 426,694
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average for the period-diluted 29,849,578 30,148,520 30,606,060 29,956,690 27,199,263
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at end of period)
- ------------------------------------------------------------------------------------------------------------------------------------
Current assets $ 138,296 $ 111,133 $ 101,177 $ 259,980 $ 138,614
- ------------------------------------------------------------------------------------------------------------------------------------
Cash equivalents included in current assets -- -- -- 168,549 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net current assets of discontinued
operations included in current assets -- -- 798 -- 47,668
- ------------------------------------------------------------------------------------------------------------------------------------
Net property and equipment 86,996 81,847 72,348 74,665 78,911
- ------------------------------------------------------------------------------------------------------------------------------------
Other long-term assets 33,485 28,848 22,805 31,122 102,164
- ------------------------------------------------------------------------------------------------------------------------------------
Net long-term assets of discontinued
operations included in long-term assets -- -- 311 6,932 87,554
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 258,777 221,828 196,330 365,767 319,689
- ------------------------------------------------------------------------------------------------------------------------------------
Current liabilities 51,351 52,639 31,083 169,584 33,557
- ------------------------------------------------------------------------------------------------------------------------------------
Net current liabilities of discontinued
operations included in current liabilities -- -- -- 1,484 --
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued income taxes related to sale of
discontinued operations included in
current liabilities -- -- -- 135,095 --
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt 9,006 5,573 13,245 51,334 91,067
- ------------------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 13,522 12,233 11,275 9,942 7,692
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 184,898 151,383 140,727 134,907 186,448
- ------------------------------------------------------------------------------------------------------------------------------------
Other Statistics for Continuing Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation, depletion and amortization $ 18,160 $ 20,009 $ 17,427 $ 17,000 $ 19,093
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 15,795 16,223 14,730 14,975 15,796
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit margin 24.6% 24.0% 24.1% 24.1% 22.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) margin 8.0% 6.6% 6.7% 6.3% (0.4%)
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax profit (loss) margin 8.0% 6.4% 7.0% 8.9% (1.9%)
- ------------------------------------------------------------------------------------------------------------------------------------
Effective tax (benefit) rate 34.0% 36.0% 32.0% 28.4% (31.9%)
- ------------------------------------------------------------------------------------------------------------------------------------
Net profit (loss) from continuing operations margin 5.5% 4.3% 4.8% 6.5% (1.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average equity 11.9% 8.6% 9.3% 13.7% (1.8%)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Based on the weighted average common shares outstanding for the year.
(2) Based on the weighted average common shares outstanding, including common
stock equivalents, for the year.
(3) Based on the number of common shares outstanding at the end of the year.
(4) Reflects reclassification of loss on early extinguishment of debt and
related tax effect to net other income (expense) and income taxes in 2000.
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 the sale of products and services that serve over 12 product
markets. Our minerals segment operates 26 manufacturing facilities in six
countries and has three business units: metalcasting, pet products and specialty
minerals. Our environmental segment operates seven manufacturing facilities in
six countries and has three business units: lining technologies, building
materials and water treatment. Additionally, we have a transportation segment
that performs trucking services for the minerals and environmental segments as
well as unrelated parties and a developing nanocomposite business that is
reported within our corporate segment.
The principal mineral that we utilize to generate revenues is bentonite.
We own or lease bentonite reserves in the United States and China. Additionally,
through our joint ventures and minority interests, we have access to bentonite
reserves in Egypt, India and Mexico. Bentonite deposits have varying physical
properties which require us to characterize which
14
markets our reserves can serve. We believe that our understanding of bentonite
properties, mining methods, processing and application to markets are the core
components of the longevity of our Company and our future prospects.
Our customer base is diverse in regard to their end-markets and geography.
They range from foundries that produce castings for automotive and
transportation products--heavy-duty trucks and railroad cars--to producers of
consumer goods--cat box filler, cosmetics and detergents. A majority 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 two-thirds of our revenue is generated in North America,
consequently, the state of the U.S. economy impacts our revenues. Our fastest
growing markets are in Central Europe and Asia, which have continued to outpace
the U.S. in economic growth. The weakening of the U.S. dollar has been a benefit
to our revenues and profits over the past year, however our operating results
may be affected in the future by the change in the euro and British pound
compared to the U.S. dollar.
Sustainable, long-term profit growth is our primary objective. We are
undertaking a number of strategic initiatives to achieve this goal:
o Organic growth: The central component of our growth strategy is
expansion of our product lines and market presence. We have had a
history of commitment to research and development and using this
resource to bring innovative products to market. We believe this
approach to growth offers the best probability of achieving our
long-term goals at the lowest risk.
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 China and India as significant opportunities for
expanding our revenues and earnings over the long-term as a number
of markets we serve, such as metalcasting and lining technologies,
are expected to grow.
o Mineral development: Bentonite is a component in over 90% of the
products we produce. Since it is a natural material, we must
continually expand our reserve base to maintain a long-term
business. Our goal is to add new reserves to replace the bentonite
mined each year. Furthermore, we need to assure new reserves meet
the physical property requirements for our diverse product lines and
are economical to mine. Our organization that is committed to
developing its global reserve base to meet these requirements.
o Acquisitions: We continually seek opportunities to add complementary
businesses to our portfolio of products. Over the last two years, we
have acquired five businesses for a total cost of approximately $24
million. A strong financial position will enable us to continue to
acquire businesses which, in our assessment, are valued fairly and
fit with our growth strategy.
There can be no assurance that we will achieve success in implementing any
one or more of the strategic initiatives described above.
A number of risks will challenge us in meeting our long-term objectives.
We describe certain risks, such as competition and our reliance on economically
sensitive markets, under "Item 7A. Quantitative and Qualitative Disclosures
About Market Risk". In general, the significance of these risks has not changed
over the past year. One particular situation, however, does present a challenge
to manage in the near term. Bulk cargo shipping costs are rising significantly
due to acute demand from China. We rely on shipping bulk cargos of bentonite
from the U.S. and China to customers, as wells as our own subsidiaries. This
issue is not isolated to AMCOL; however, we may need to offset additional
shipping costs with price increases to customers in order to maintain our
profitability. There can be no assurance that we will be successful in achieving
these price increases. We are also reviewing our shipping patterns to determine
more cost-effective means of transporting bulk cargos.
15
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations describes relevant aspects of our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to select accounting policies that are
appropriate for our business, and to make certain estimates, judgments and
assumptions about matters that are inherently uncertain in applying those
policies. On an ongoing basis, we re-evaluate these estimates, judgments and
assumptions for reasonableness because of the critical impact that these factors
have on the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. Actual results may differ from these estimates.
Our management has identified the most critical accounting policies upon
which the financial statements are based and that involve the most complex and
subjective decisions and assessments. These policies relate to the valuation of
accounts receivable and inventories, the recognition of depreciation and
impairment in the carrying value of property, plant and equipment, and
accounting for pension benefits. Our senior management has discussed the
development, selection and disclosure of these policies with the members of the
Audit Committee of our Board of Directors. These accounting policies are
disclosed in the notes to the consolidated financial statements. The discussion
which follows should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K.
Valuation of Accounts Receivable
We provide credit to customers in the ordinary course of business and
perform ongoing credit evaluations. Our customer base is diverse and includes
customers located throughout the world. Payment terms in certain of the foreign
countries in which we do business are longer than those that are customary in
the United States, and as a result, may give rise to additional credit risk
related to outstanding accounts receivable from these non-U.S. customers.
Likewise, a change in the financial position, liquidity or prospects of any of
our customers could have an impact on our ability to collect amounts due. While
concentrations of credit risk related to trade receivables are somewhat limited
by our large customer base, we do extend significant credit to some of our
customers.
We make estimates of the amounts of our gross accounts receivable that
will not be collectible, and record an allowance for doubtful accounts to reduce
the carrying value of accounts receivable to the amount that is expected to be
realized. The allowance for doubtful accounts is established based upon the
Company's historical bad debt experience, a review of the overall aging of the
accounts, and an analysis of specific customer accounts, particularly those with
past-due balances. The recorded allowance for doubtful accounts is intended to
cover specific customer collection issues identified by management at the
balance sheet date, and to provide for potential losses from other accounts
based on our historical experience. Increases in the allowance for doubtful
accounts are recorded as an expense and included in general, selling and
administrative expenses in the period identified. Our estimate of the required
allowance for doubtful accounts is a critical accounting estimate because it is
susceptible to change from period to period. In addition, it requires management
to make judgments about the future collectibility of customer accounts.
Inventory Valuation
Inventories are recorded at the lower of actual manufactured or purchased
cost, or estimated net realizable value. In order to determine net realizable
value, management regularly reviews inventory quantities on hand and evaluates
significant items to determine whether they are excess or obsolete. We record
the value of estimated excess or obsolete inventory as a reduction of inventory
and as an expense which is included in cost of sales in the period it is
identified. Our estimate of excess and obsolete inventory is a critical
accounting estimate because it is susceptible to change from period to period.
In addition, it requires management to make judgments about the future demand
for inventory.
In order to quantify excess or obsolete inventory, management prepares
lists of inventory quantities on hand and determines the amount of such
inventories that, based on projected demand, are not anticipated to be sold
within the next 12 to 24 months or, based on our current product offerings, are
excess or obsolete. This list is then reviewed with sales and
16
production management personnel to determine whether this list of potential
excess or obsolete inventory is complete. Factors which impact this evaluation
include, for example, whether there has been a change in the market or packaging
for particular products, and whether there are components of inventory that
incorporate obsolete formulations or technology. In certain businesses in which
we are engaged, such as the domestic cat litter business, product and packaging
changes can occur rapidly and expose us to excess and obsolete inventories.
Goodwill and Long-lived Assets
We have made substantial investments in property, plant and equipment and
have a moderate investment in goodwill. For property, plant and equipment, we
evaluate the recoverability of these assets whenever events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. For goodwill, we perform an annual impairment assessment (or more
frequently if impairment indicators arise) as required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
In analyzing the fair value of goodwill and assessing the recoverability
of the carrying value of property, plant and equipment, management uses models
which are based on estimates of future operating performance and related cash
flows. In preparing these models, management must make estimates in projecting
future cash flows attributable to the reporting unit or assets being tested, in
selecting a discount rate that reflects the related business risks, and in
determining the appropriate perpetuity or disposal value. In developing these
projections of future cash flows, we make a variety of important assumptions and
estimates that have a significant impact on management's assessments of whether
the carrying values of goodwill and property, plant and equipment should be
adjusted to reflect impairment. Among these are assumptions and estimates about
the future growth and profitability of the related business unit or asset, and
assumptions about anticipated future economic, regulatory and political
conditions in the relevant market.
Our estimates related to the carrying values of goodwill and property,
plant and equipment are considered to be critical accounting estimates because
they are susceptible to change from period to period based on our judgments
about a variety of factors. For example, judgment is required to determine
whether events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. In addition, in performing assessments of the
carrying values of these assets, we must make judgments about the future
business, economic, regulatory, and political conditions affecting these assets,
as well as to select the appropriate risk-related rates for discounting
estimated future cash flows, and to develop reasonable estimates of disposal
values.
Retirement Benefits
We sponsor a defined-benefit pension plan for substantially all of our
domestic employees hired on or before December 31, 2003. In order to measure the
expense and obligations associated with these retirement benefits, management
must make a variety of estimates including discount rates used to value certain
liabilities, expected return on plan assets set aside to fund these liabilities,
rate of compensation increase, employee turnover rates, retirement rates,
mortality rates and other factors. Our benefit plan committee determines the key
assumptions related to the discount rate, expected investment rate of return and
compensation increases after consulting with the actuarial firm that performs
the calculations. Other assumptions are also set based on consultation with our
actuaries.
We base our estimates on our historical experience as well as current
facts and circumstances. The discount rate reflects the market rate for
high-quality fixed income debt instruments on the measurement date. The rate is
used to discount the future cash flows of benefit obligations back to the
measurement date. An increase in the discount rate reduces pension expense and
liabilities. The expected long-term rate of return on plan assets is determined
using historic market return trends together with, current market conditions and
actual plan experience. An increase in the expected long-term rate of return on
plan assets reduces pension expense and liabilities. The expected rate of
compensation increase is determined based on our near-term outlook and assumed
inflation. Higher compensation rates increase the pension expense and
liabilities. Retirement rates are based primarily on actual plan experience.
Mortality rates are based on tables published by the insurance industry.
Different estimates used by management could result in our recognizing different
amounts of expense over different periods of time. Note 11 to Notes to
Consolidated Financial Statements describes details of our pension obligations
and the expense for the year ended December 31, 2003.
17
Income Taxes
Our reported effective tax rate applicable to continuing operations was
34% for 2003, compared with 36% for 2002. The decline reflected the higher
proportion of taxable income reported from lower tax jurisdictions. Most of our
international operations are located in jurisdictions with lower statutory
income tax rates than the United States.
Our effective tax rate is based on the expected income, statutory tax
rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. Significant judgment is required in
determining our effective tax rate and in evaluating our tax positions. We
establish reserves when, despite our belief that our tax return positions are
fully supportable, we believe those positions are likely to be challenged and
that we may not succeed. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. Our effective tax rate
includes the impact of reserve positions and changes to reserves that we
consider appropriate. The rate is then applied to pre-tax income reported in our
consolidated statements of operations. Our estimates of income tax items,
expense and reserves are considered to be critical accounting estimates because
they are susceptible to change from period to period based on our judgments
about a variety of factors.
A number of years may elapse before a particular matter, for which we have
established a reserve, is audited and finally resolved. Audits of our United
States federal income tax returns have been completed through 2001. State income
tax returns are audited more infrequently. We also have unresolved audits of
certain subsidiary income tax filings in the United Kingdom for 1999 through
2002. Unfavorable settlement of any particular issue would require use of our
cash and could result in the recoding of additional tax expense. Favorable
resolution would be recognized as a reduction to our tax provision in the year
of resolution.
We have not recognized any United States tax expense on undistributed
international earnings since we intend to reinvest the earnings outside the
United States for the foreseeable future. These undistributed earnings are
approximately $16.8 million at December 31, 2003.
Results of Operations for the Three Years Ended December 31, 2003
The discussion below references the consolidated statement of operations
on page F-4 in Part IV of this document.
Net sales for the year ended December 31, 2003 were $364.0 million
compared with $298.9 million for 2002 and $275.3 million for 2001. In 2003, the
minerals segment accounted for 57% of net sales while the environmental and
transportation segments represented 33% and 10%, respectively. Minerals
contributed approximately 68% of the increase in net sales over 2002. The
environmental and transportation segments contributed 28% and 4%, respectively,
to the increase in net sales. The largest component of the increase in net sales
in 2003 and 2002 was recorded by Colin Stewart Minchem (CSM), which was acquired
as of May 1, 2002, and is included in the minerals segment. Other elements of
the increase in net sales are described in the operating segment discussions
below.
Gross profit was $89.6 million for the year ended December 31, 2003
compared with $71.9 million for 2002 and $66.3 million in 2001. The 25% increase
in gross profit in 2003 over 2002 resulted from the increase in net sales and
lower production costs in the mineral segment businesses. CSM accounted for
approximately 70% of the increase. Gross margin improved to 24.6% compared to
24.0% in 2002 and 24.1% in 2001. The 60 basis point improvement in gross margin
in 2003 followed the increase in net sales and lower production costs.
General, selling and administrative expenses were $60.6 million for the
year ended December 31, 2003 compared with $52.2 million in 2002 and $47.7
million in 2001. Higher compensation and employee benefit costs were the primary
causes for the increase in 2003 over 2002. CSM was accounted for the largest
component of the increase in general, selling and administrative expenses in
2002 compared with 2001.
Operating profit was $28.9 million for the year ended December 31, 2003,
compared with $19.7 million in 2002 and $18.6 million in 2001. Operating profit
margin for 2003 was 8.0% compared with 6.6% in 2002 and 6.7% in 2001. The
18
improvement in operating profit, and the operating profit margin, was attributed
to the increase in net sales and lower production costs in the minerals segment
businesses.
A review of sales, gross profit, general, selling and administrative
expenses and operating profit by segment follows.
Minerals Segment
- ------------------------------------------------------------------------------------------------------------------------------------
Minerals Year Ended December 31,
-----------------------------------------------------------------------------------------------------
2003 2002 2001 2003 vs. 2002 2002 vs. 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Product sales $197,282 91.3% $156,174 91.0% $133,903 89.3%
Shipping revenue 18,764 8.7% 15,369 9.0% 16,042 10.7%
-------- ----- -------- ----- -------- -----
Net sales 216,046 100.0% 171,543 100.0% 149,945 100.0% $44,503 25.9% $21,598 14.4%
-------- ----- -------- ----- -------- -----
Cost of sales - product 155,284 71.9% 124,267 72.4% 106,314 70.9%
Cost of sales - shipping 18,764 8.7% 15,369 9.0% 16,042 10.7%
-------- ----- -------- ----- -------- -----
Cost of sales 174,048 80.6% 139,636 81.4% 122,356 81.6%
-------- ----- -------- ----- -------- -----
Gross profit 41,998 19.4% 31,907 18.6% 27,589 18.4% 10,091 31.6% 4,318 15.7%
General, selling and
administrative expenses 18,575 8.6% 16,037 9.3% 12,892 8.6% 2,538 15.8% 3,145 24.4%
-------- ----- -------- ----- -------- -----
Operating profit $ 23,423 10.8% $ 15,870 9.3% $ 14,697 9.8% $ 7,553 47.6% $ 1,173 8.0%
- ------------------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
Approximately 24% of the $44.5 million increase in minerals net sales over
2002 was attributed to the January through April period in 2003, which is the
period in 2002 that CSM was not owned. Net sales improved over 2002 in all three
business units, metalcasting, pet products and specialty minerals. Metalcasting
volumes improved in North America primarily from increased demand from certain
foundry customers. Pricing also improved in certain product lines to offset
higher raw material and shipping costs. Our Asian metalcasting businesses also
increased volumes over 2002, particularly in China. Pet products sales increased
due to higher volume and improved pricing, which was aided by lower customer
discounts. Specialty minerals sales primarily improved due to higher volume to
detergent customers. Oil and gas drilling volume also improved over 2002.
Gross profit increased over 2002 primarily as a result of the improvement
in net sales described above. In addition, productivity improvements in the pet
products business decreased unit manufacturing costs. Higher volume and
productivity improvements expanded gross margin by 80 basis points to 19.4% in
2003.
The inclusion of a full year of costs related to CSM, together with higher
compensation and employee benefit costs accounted for a majority of the increase
in general, selling and administrative expenses.
2002 vs. 2001
CSM contributed sales in 2002 of $20.5 million following the acquisition,
which was effective from May 1, 2002. Increased sales from the international
subsidiaries accounted for the remainder of the increase. Within the domestic
minerals business, sales to the metalcasting market increased, but that was
offset by declines in the pet products and export units. Overall, sales from the
domestic minerals business were flat in 2002 compared to 2001.
Approximately $4.0 million of the improvement in gross profit in 2002 was
attributed to CSM. Gross profit from the domestic minerals business was flat in
2002 compared to 2001.
CSM accounted for approximately $2.0 million of the increase in general,
selling and administrative expenses in 2002. Higher personnel and benefit
expenses in the domestic minerals business accounted for the remaining increase.
19
Environmental Segment
- ------------------------------------------------------------------------------------------------------------------------------------
Environmental Year Ended December 31,
----------------------------------------------------------------------------------------------------
2003 2002 2001 2003 vs. 2002 2002 vs. 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Product sales $114,853 92.3% $ 98,208 92.7% $ 96,046 92.6%
Shipping revenue 9,556 7.7% 7,718 7.3% 7,720 7.4%
-------- ----- ------- ----- -------- -----
Net sales 124,409 100.0% 105,926 100.0% 103,766 100.0% $18,483 17.4% $2,160 2.1%
-------- ----- ------- ----- -------- -----
Cost of sales - product 71,341 57.3% 61,615 58.2% 60,850 58.6%
Cost of sales - shipping 9,556 7.7% 7,718 7.3% 7,720 7.4%
-------- ----- ------- ----- -------- -----
Cost of sales 80,897 65.0% 69,333 65.5% 68,570 66.1%
Gross profit 43,512 35.0% 36,593 34.5% 35,196 33.9% 6,919 18.9% 1,397 4.0%
General, selling and
administrative expenses 25,657 20.6% 22,220 21.0% 20,042 19.3% 3,437 15.5% 2,178 10.9%
-------- ----- ------- ----- -------- -----
Operating profit $ 17,855 14.5% $ 14,373 13.6% $ 15,154 14.6% $ 3,482 24.2% (781) -5.2%
- ------------------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
Lining technologies shipments in the U.S. and Europe primarily accounted
for the increase in net sales. Building materials shipments in Europe also
improved over 2002. Water treatment revenues declined from 2002 primarily due to
the lower sales in the offshore services group.
The increase in gross profit over 2002 corresponds with the increase in
sales. Unit production costs in 2003 were comparable to the prior year levels.
Higher compensation and benefit costs accounted for the increase in
general, selling and administrative expenses over the prior year period.
2002 vs. 2001
International sales accounted for all of the increase in sales in 2002
over 2001. The segment's European offshore drilling service and building
materials businesses contributed to the increase in international sales. Exports
from the domestic business increased in 2002 over 2001, but that was offset by a
decrease in the domestic offshore business.
Improved production costs in the segment's domestic lining technology
business contributed all of the increase in gross profit in 2002 from 2001.
Gross profits from the international business declined even with the increase in
sales. Higher production costs at the segment's European operations caused the
decline. Improved production costs at the domestic lining technology operations
increased gross profit to offset the decline in the European operations.
General, selling and administrative expenses increased due to higher
compensation and benefit expenses, information technology costs, marketing and
promotion costs, and research and development spending.
20
Transportation Segment
- ------------------------------------------------------------------------------------------------------------------------------------
Transportation Year Ended December 31,
------------------------------------------------------------------------------------------------------
2003 2002 2001 2003 vs. 2002 2002 vs. 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 37,549 100.0% $ 32,509 100.0% $ 33,133 100.0% $ 5,040 15.5% $ (624) (1.9%)
Cost of sales 33,508 89.2% 29,141 89.6% 29,613 89.4%
-------- ----- -------- ----- -------- -----
Gross profit 4,041 10.8% 3,368 10.4% 3,520 10.6% 673 20.0% (152) (4.3%)
General, selling and
administrative expenses 2,494 6.6% 2,401 7.4% 2,157 6.5% 93 3.9% 244 11.3%
-------- ----- -------- ----- -------- -----
Operating profit $ 1,547 4.1% $ 967 3.0% $ 1,363 4.1% $ 580 60.0% $ (396) (29.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
Approximately 37% of the segment's sales in 2003 were to the domestic
minerals and environmental segments. Intersegment sales contributed
approximately 58% of the sales increase over 2002. Higher traffic levels and new
customer sales accounted for the remainder of the increase. Gross margin
increased 40 basis points due to higher equipment utilization rates and better
sales pricing. General, selling and administrative expenses increased due to
higher compensation and employee benefit costs.
2002 vs. 2001
Net sales declined in 2002 compared to 2001 due to lower third-party
customer and intersegment shipments. The minerals and environmental segments
represented approximately 34% of sales in 2002. Fuel costs remained flat with
2001 levels. Increased general, selling and administrative expenses were
associated with higher information technology and compensation costs.
Corporate Segment
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Year Ended December 31,
---------------------------------------------------------------------------------------
2003 2002 2001 2003 vs. 2002 2002 vs. 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Intersegment shipping sales $(14,038) $(11,105) $(11,556)
Intersegment shipping costs (14,038) (11,105) (11,556)
-------- -------- --------
Gross profit -- -- --
Corporate general, selling
and administrative expenses 10,090 7,108 8,020 $ 2,982 42.0% $ (912) (11.4%)
Nanocomposite business
development expenses 3,798 4,444 4,629 (646) (14.5%) (185) (4.0%)
-------- -------- -------- ------- -------
Operating loss $(13,888) $(11,552) $(12,649) $(2,336) (20.2%) $ 1,097 8.7%
- ------------------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
Intersegment shipping sales and costs are related to billings from the
transportation segment to the domestic minerals and environmental segments for
services. These services are invoiced to the minerals and environmental segments
at arms-length rates and those costs are subsequently charged to customers.
Intersegment sales and costs reported above reflect the elimination of these
transactions.
Corporate costs include management information systems, human resources,
investor relations, corporate communications and finance. Additionally,
marketing, research and operating costs related to the development of the
nanocomposite business are included in this segment.
The increase in corporate general, selling and administrative expenses in
2003 related to higher compensation and
21
employee benefit costs. Included in compensation costs in the current period
were costs associated with stock-options granted to employees in the current
year. As disclosed in Note 1 to the Consolidated Financial Statements included
in Item IV of this document, effective from January 1, 2003, we adopted the fair
value recognition provisions of Financial Accounting Standards Board (FASB)
Statement No. 123, Accounting for Stock-Based Compensation. We elected to record
stock-based compensation costs using fair value under the prospective method.
Lower nanocomposite development expenses in 2003 were due to a decline in
research and development costs and increased revenue over 2002.
2002 vs. 2001
Intersegment shipping revenues and costs in 2002 were related to services
provided by the transportation segment for certain domestic minerals and
environmental segment businesses. The services were provided at arms-length
rates and billed by the transportation segment to the minerals and environmental
segments, which in turn billed their customers. The intersegment shipping sales
and costs in the table above reflect the elimination of these intersegment
transactions.
Approximately 60% of the lower corporate administrative expenses in 2002
were associated with increased allocation of certain costs to the mineral,
environmental and transportation segments. The remaining decrease was attributed
to lower personnel and legal costs. The decline in nanocomposite expenses in
2002 was associated with a restructuring of the business that was implemented in
the second quarter of 2001.
Investment Income
Investment income in 2001 of $3.0 million, or $0.06 per diluted share, was
associated with earnings on the temporary investment of proceeds received on the
sale of the absorbent polymers segment. The invested funds were liquidated in
the third quarter of 2001 and used to pay down long-term debt by $40 million.
Net Interest Expense
Net interest expense was $0.3 million, $0.5 million and $2.2 million in
2003, 2002, and 2001, respectively. As discussed above, we reduced debt in the
third quarter of 2001 by liquidating funds previously invested in cash
equivalent securities. Consequently, the decreases in 2003 and 2002 as compared
to 2001 were primarily due to lower average debt levels.
Other Income (Expense)
Other income in 2003 was approximately $0.6 million. In 2002 and 2001,
other income was less than $0.1 million and approximately $0.2 million,
respectively. This item reflects a number of miscellaneous transactions
including gains and losses related to foreign exchange transactions and
disposals of fixed assets. The increase in 2003 was primarily attributed to
recognized foreign exchange gains at our U.K. and Poland businesses.
Income Taxes
The effective income tax rate for 2003 was 34.0% compared to 36.0% in 2002
and 32.0% in 2001. The principal driver of changes in our effective tax rate is
the mix of earnings. The decrease in the 2003 rate was due to increased taxable
income in foreign jurisdictions which have lower statutory rates than the U.S.
The increased tax rate in 2002 was attributed to a greater portion of earnings
generated in foreign jurisdictions with higher corporate income tax rates.
Discontinued Operations
Discontinued operations reflect the operating results of the U.K.
metalcasting and cat litter businesses, which were sold or closed in 2001.
Income from discontinued operations was $8.9 million in 2003, or $0.30 per
diluted share, and $0.3 million in 2001, or $0.01 per diluted share.
22
No proceeds were received in connection with the sale of the U.K.
metalcasting business. The acquirer leased certain land and buildings and pays
us a royalty related to a license for use of certain trademarks. The license
agreement has a 10-year term and the royalty is based on sales by the acquiring
entity. In connection with the sale of the U.K. metalcasting business, we
realized a loss on the disposal of assets of $4.8 million and recognized a tax
benefit of $6.0 million in 2001. The tax benefit recorded in 2001 was associated
with the write-off of our investment in our U.K. minerals subsidiary.
On February 18, 2004, the Internal Revenue Service notified us that audits
of certain federal income tax returns, including 2001, had been completed and
approved by the Committee on Joint Taxation. The 2001 return included deductions
for certain loss associated with the disposal of the U.K. metalcasting and cat
litter businesses. Upon receiving this notification, effective as of December
31, 2003, we revised our estimate of income taxes payable previously recorded to
recognize an income tax receivable of $8.9 million, including interest on the
forthcoming refund.
Other Items
A charge of $0.01 per diluted share was recorded in 2001 related to the
cumulative effect of a change in accounting principle. The charge relates to the
adoption of Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
Net Income
Net income for 2003 was $28.9 million compared with $13.0 million and
$13.2 million in 2002 and 2001, respectively. Income from continuing operations
in 2003 was $19.9 million compared with $13.0 million and $13.1 million in 2002
and 2001, respectively. The differences between net income and income from
continuing operations in 2003 and 2001 was attributed to income from
discontinued operations, the major components of which were described
previously. The improvement in income from continuing operations in 2003 over
2002 was attributed to the increase in operating profit for the reasons
described earlier in this report.
Earnings Per Share
Diluted earnings per share were calculated using the weighted average
number of shares of common stock, including common share equivalents,
outstanding during the year. Stock options issued to key employees and directors
are considered common share equivalents. The weighted average number of shares
of common stock and common stock equivalent shares outstanding was approximately
29.8 million in 2003, 30.1 million in 2002 and 30.6 million in 2001.
There were 29.1 million shares outstanding, excluding common share
equivalents, at December 31, 2003, compared to 27.9 million at December 31,
2002, and 28.3 million at December 31, 2001. The 1.2 million share increase in
2003 was related to the issuance of 1.5 million shares of treasury stock to
employees in connection with the exercise of stock options. This was offset by
the repurchase of 267,000 shares of common stock on the open market.
Diluted earnings per sha