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| ACO > SEC Filings for ACO > Form 10-Q/A on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Quarterly Report
Forward-Looking Statements
From time to time, certain statements we make, including statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations section, constitute "forward-looking statements" made in reliance upon the safe harbor contained in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements relating to our Company or our operations that are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions, and statements relating to anticipated growth and levels of capital expenditures. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our actual results, performance or achievements could differ materially from the results, performance or achievements expressed in, or implied by, these forward-looking statements as a result of various factors, including without limitation the following: actual performance in our various markets; conditions in the metalcasting and construction industries; operating costs; competition; currency exchange rates and devaluations; delays in development, production and marketing of new products; integration of acquired businesses; and other factors set forth from time to time in our reports filed with the Securities and Exchange Commission. We undertake no duty to update any forward looking statements to actual results or changes in our expectations.
Overview
We are a global, specialty minerals company and earn our revenues and profits from a diverse group of industrial and consumer product lines. Our principal operations are located in North America, Europe and the Asia-Pacific region.
We operate in five segments: minerals, environmental, oilfield services, transportation and corporate. Our minerals segment operates in three principal markets: metalcasting, pet products and specialty minerals. The environmental segment's principal markets include lining technologies, building materials and water treatment. Our oilfield services segment provides both onshore and offshore water treatment filtration, pipeline separation, waste fluid treatment, rental tools, coil tubing and well testing data services for the oil and gas industry. Our transportation segment provides trucking services for our domestic businesses as well as third parties. Intersegment shipping revenues are eliminated in our corporate segment.
The principal mineral that we utilize to generate revenues is bentonite. We own or lease bentonite reserves in the United States, China, Turkey and Australia. Additionally, through our affiliates and joint ventures, we have access to bentonite reserves in Egypt, India, Mexico, Russia and Azerbaijan. Bentonite deposits have varying physical properties which require us to identify which markets our reserves can serve. We believe that our understanding of bentonite properties, mining methods, processing and application to markets are the core components of our longevity and future prospects.
Our customers are engaged in various end-markets and geographies. Customers in the minerals segment range from foundries that produce castings for automotive, industrial, and transportation equipment, including heavy-duty trucks and railroad cars, to producers of consumer goods, including cat box filler, cosmetics and detergents. The customers for our environmental segment's lining technologies and building materials products are predominantly engineering contractors. The oilfield services customer base is primarily comprised of oil service or exploration companies. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year.
The majority of our revenues are generated in North America; consequently, the state of the United States economy impacts our revenues. Our fastest growing markets are in the Asia-Pacific and Central European regions, which have continued to outpace the United States in economic growth in recent years.
Sustainable, long-term profit growth is our primary objective. We employ a number of strategic initiatives to achieve this goal:
· Organic growth: The central component of our growth strategy is expansion of our product lines and market presence. We have a history of commitment to research and development and using this resource to bring innovative products to market. We believe this approach to growth offers the best probability of achieving our long-term goals at the lowest risk.
· Globalization: We have expanded our manufacturing and marketing organizations into European and Asia-Pacific regions over the last 40 years. This operating experience enables us to expand further into emerging markets. We see significant opportunities in the Asia-Pacific and Eastern European regions for expanding our revenues and earnings over the long-term as a number of markets we serve, such as metalcasting and lining technologies, are expected to grow. We expect to take advantage of these growth areas either through our wholly owned subsidiaries or investments in affiliates and joint ventures.
· Mineral development: Bentonite is a component in a majority of the products we produce. Since it is a natural material, we must continually expand our reserve base to maintain a long-term business. Our goal is to add new reserves to replace the bentonite mined each year. Furthermore, we need to assure new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization is committed to developing its global reserve base to meet these requirements.
· Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products. Over the last four years, we have acquired a number of businesses. A strong financial position will enable us to continue to acquire businesses which, in our assessment, are fairly valued and fit with our growth strategy.
A number of risks will challenge us in meeting these long-term objectives, and there can be no assurance that we will achieve success in implementing any one or more of them. We describe certain risks under "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosure About Market Risk" within our Annual Report on Form 10-K for the year ended December 31, 2007. In general, the significance of these risks has not materially changed over the past year.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. We evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis. We consider the accounting policies used in preparing our financial statements to be critical accounting policies when they are both important to the portrayal of our financial condition and results of operations, and require us to make estimates, complex judgments, and assumptions, including with respect to events which are inherently uncertain. As a result, actual results could differ from these estimates. For more information on our critical accounting policies, one should also read our Annual Report on Form 10-K for the year ended December 31, 2007.
Analysis of Results of Operations
Following is a discussion and analysis that describes certain factors that have affected, and may continue to affect, our financial position and operating results. This discussion should be read with the accompanying condensed consolidated financial statements.
Three months ended June 30, 2008 vs. June 30, 2007
Consolidated Review
The following table compares our operating results for the quarters ended June 30, 2008 and June 30, 2007:
Three Months Ended June 30,
2008
(Restated)
Consolidated (Note 2) 2007 2008 vs. 2007
(Dollars in Thousands)
Net sales $ 233,847 $ 182,454 28.2 %
Cost of sales 171,187 132,663
Gross profit 62,660 49,791 25.8 %
margin % 26.8 % 27.3 %
General, selling and
administrative expenses 39,209 30,654 27.9 %
Operating profit 23,451 19,137 22.5 %
margin % 10.0 % 10.5 %
Other income (expense):
Interest expense, net (2,837 ) (2,155 ) 31.6 %
Other, net 523 (3 ) *
(2,314 ) (2,158 )
Income before income taxes and income (loss) from
affiliates and joint ventures 21,137 16,979
Income tax expense 5,666 4,190 35.2 %
effective tax rate 26.8 % 24.7 %
Income before income (loss) from affiliates and
joint ventures 15,471 12,789
Income (loss) from affiliates and joint ventures (637 ) 2,466 -125.8 %
Income from continuing operations 14,834 15,255
Gain (loss) on disposal of discontinued operations - (286 ) -100.0 %
Net income $ 14,834 $ 14,969 -0.9 %
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We measure sales growth by the relevant components: organic or base businesses, acquisitions, and foreign currency exchange. Growth due to foreign currency exchange is measured as the change in revenues resulting from differences in currency exchange rates between periods. Acquisition growth is measured as the growth resulting from businesses within the first year (twelve consecutive months) we own them. Any remaining growth is organic or base business growth. The table details the consolidated sales growth components over the prior year's comparable period:
Foreign
Base Business Acquisitions Exchange Total
Minerals 9.1 % 1.8 % 0.8 % 11.7 %
Environmental 3.9 % 1.0 % 2.2 % 7.1 %
Oilfield services 6.1 % 1.9 % 0.0 % 8.0 %
Transportation 1.4 % 0 % 0.0 % 1.4 %
Total 20.5 % 4.7 % 3.0 % 28.2 %
% of growth 72.7 % 16.9 % 10.4 % 100.0 %
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In addition, the following table shows the distribution of sales across our three principal geographic regions (Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific) and the comparable total from the prior year's period:
Americas EMEA Asia Pacific Total
Minerals 32.2 % 7.0 % 6.6 % 45.8 %
Environmental 17.1 % 13.9 % 2.4 % 33.4 %
Oilfield services 13.1 % 2.4 % 0.6 % 16.1 %
Transportation 4.8 % 0.0 % 0.0 % 4.8 %
Total - current year's period 67.1 % 23.3 % 9.6 % 100.0 %
Total from prior year's comparable period 70.3 % 22.1 % 7.6 % 100.0 %
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Net sales:
Our overall increase in net sales was driven by increases from base businesses (those operations owned for greater than one year) predominantly within our minerals and oilfield services segments. Marginal increases in net sales resulted from foreign currency fluctuations and acquisitions.
Gross profit:
Overall gross profit increased due to the increase in net sales. The decrease in gross profit margin is driven by our minerals segment.
General, selling & administrative expenses (GS&A):
GS&A expenses increased in all segments with the largest increases coming from our oilfield services and corporate segments. Overall increases in GS&A are being driven by acquisitions, increased infrastructure to support sales and business growth, and increased employee related benefit expenses.
Operating profit:
Operating profit increased across all segments, except corporate, due to increased gross profits. Our environmental and oilfield services segments increased the most due to the seasonality of these businesses, organic growth, acquisitions and the ability to leverage increased sales without commensurate increases in GS&A expenses.
Interest expense, net:
Net interest expense increased due to increased average debt levels required to fund acquisitions, increased capital spending and working capital levels. We began 2008 with debt levels significantly greater than those that existed at the beginning of 2007 due to increased capital spending and acquisitions in 2007. The majority of our long-term debt has a variable rate of interest which is primarily influenced by changes in LIBOR.
Other income (expense):
Other income includes the foreign currency transaction and translation gains and losses for third party and intercompany related activity. It also includes the net effect of foreign currency derivatives. Other income increased in 2008 largely due to a $1.7 million gain on a foreign currency derivative related to our potential purchase of a chrome mine in South Africa, the purchase price of which is payable in Australian dollars. A future gain or loss of this size is unlikely.
Income tax expense:
Our effective tax rate increased in 2008 to 26.8% due largely to an increase in income being generated from domestic businesses, especially our oilfield services operations, which are taxed at greater rates. Our effective tax rate in both reporting periods continues to differ from the U.S. federal statutory 35.0% rate due to depletion deductions and differences in local tax rates on the income of our foreign subsidiaries which are generally lower than the U.S. rates.
Income (loss) from affiliates & joint ventures:
Our investment in Ashapura gave rise to the loss from affiliates and joint ventures due to the significant loss in fair value of derivative instruments held by them. See Note 2 of Notes to Condensed Consolidated Financial Statements for more information.
Net income:
The decrease in current-period net income results largely from the increase in operating profits previously discussed offset by the loss from affiliates and joint ventures.
Diluted earnings per share:
Earnings per share decreased commensurately with the decrease in net income. The weighted average common and common shares outstanding increased by 0.1 million shares.
Segment analysis:
Following is a review of operating results for each of our five reporting segments:
Minerals Segment
Three Months Ended June 30,
Minerals 2008 2007 2008 vs. 2007
(Dollars in Thousands)
Net sales $ 107,003 100.0 % $ 85,713 100.0 % $ 21,290 24.8 %
Cost of sales 88,659 82.9 % 69,381 80.9 % 2,012 12.3 %
Gross profit 18,344 17.1 % 16,332 19.1 %
General, selling and
administrative
expenses 9,824 9.2 % 8,018 9.4 % 1,806 22.5 %
Operating profit 8,520 7.9 % 8,314 9.7 % 206 2.5 %
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Three Months Ended June 30,
Minerals Product Line Sales 2008 2007 % change
(Dollars in Thousands)
Metalcasting $ 44,709 $ 37,283 19.9 %
Specialty materials 27,328 20,031 36.4 %
Pet products 19,179 15,593 23.0 %
Basic minerals 13,317 11,636 14.4 %
Other product lines 2,470 1,170 *
Total 107,003 85,713
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* Not meaningful.
Organic, or base business, growth comprised the majority of the growth in 2008 due to strong demand across all product lines. Pass thru freight revenues comprised approximately one quarter of the growth. The metalcasting product group revenues increased due to strong demand in the Asia-Pacific region and selling price increases in our domestic markets. Specialty materials revenues grew due to revenues being generated from our new and developing operations overseas, notably South Africa and China.
Although tempered by sales price increases mentioned above, gross profit margins decreased mainly due to increased energy, production and mining costs in the United States. The decrease was also impacted by a greater concentration of sales being derived from freight revenues, which do not generate profits.
Approximately one third of the increase in GS&A expenses in 2008 is due to acquisitions. The remainder is attributable to greater expenditures on research and development activities within our specialty materials division and personnel costs in our Asia-Pacific businesses.
Operating margin decreased due to decreased gross margins and increased GS&A expenses as previously discussed.
Environmental Segment
Three Months Ended June 30,
Environmental 2008 2007 2008 vs. 2007
(Dollars in Thousands)
Net sales $ 78,041 100.0 % $ 65,108 100.0 % $ 12,933 19.9 %
Cost of sales 51,165 65.6 % 42,521 65.3 %
Gross profit 26,876 34.4 % 22,587 34.7 % 4,289 19.0 %
General, selling and
administrative
expenses 14,621 18.7 % 12,652 19.4 % 1,969 15.6 %
Operating profit 12,255 15.7 % 9,935 15.3 % 2,320 23.4 %
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Three Months Ended June 30,
Environmental Product Line Sales 2008 2007 % change
(Dollars in Thousands)
Lining technologies $ 48,452 $ 39,753 21.9 %
Building materials 22,858 19,862 15.1 %
Other product lines 6,731 5,493 *
Total 78,041 65,108
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Revenues in the environmental segment grew significantly within base businesses and due to foreign currency fluctuations. Increased shipments in lining technologies, building materials and more installation services in Western Europe and Poland were the main drivers of organic growth and foreign currency growth.
Gross profit increased due to increased sales whilst gross margins remained relatively constant.
GS&A expenses increased mostly due to greater employee related costs and increased expenses, such as compensation and sales commissions, in our faster growing markets overseas, especially our Polish and Chinese operations.
Operating profits increased due to the increase in gross profits previously mentioned and the ability of this segment to leverage profits off less increases in GS&A expenses.
Oilfield Services Segment
Three Months Ended June 30,
Oilfield Services 2008 2007 2008 vs. 2007
(Dollars in Thousands)
Net sales $ 37,655 100.0 % $ 23,030 100.0 % $ 14,625 63.5 %
Cost of sales 21,904 58.2 % 13,660 59.3 %
Gross profit 15,751 41.8 % 9,370 40.7 % 6,381 68.1 %
General, selling and
administrative
expenses 7,003 18.6 % 4,446 19.3 % 2,557 57.5 %
Operating profit 8,748 23.2 % 4,924 21.4 % 3,824 77.7 %
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Oilfield services revenues grew significantly in the 2008 period due to organic growth and an acquisition made in the quarter, Premium Reeled Tubing ("PRT"). Demand for domestic waste water treatment services in the Gulf of Mexico was the largest contributor to organic growth, but was significantly helped by strong increases in our West African and Malaysian operations. In May 2008, we acquired PRT, whose operations are based in Louisiana. PRT provides coil tubing services to both on and offshore operations used as a means for customers to deliver liquids or gasses into production wells beneath the earth's surface. PRT added $3.5 million of revenues in the second quarter of 2008 versus the comparable 2007 period.
Gross profit and operating margins increased due to a greater portion of revenues being derived in more profitable service lines and geographies (especially our overseas markets), the acquisition of PRT, and an ability to generate the increased revenues without comparable increases in GS&A expenses.
Transportation Segment
Three Months Ended June 30,
Transportation 2008 2007 2008 vs. 2007
(Dollars in Thousands)
Net sales $ 16,883 100.0 % $ 13,380 100.0 % $ 3,503 26.2 %
Cost of sales 15,194 90.0 % 11,878 88.8 %
Gross profit 1,689 10.0 % 1,502 11.2 % 187 12.5 %
General, selling and
administrative
expenses 856 5.1 % 770 5.8 % 86 11.2 %
Operating profit 833 4.9 % 732 5.4 % 101 13.8 %
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Traffic levels increased as compared to the prior year period due to greater demand from consumer products shippers, leading to the increase in net sales. Unrecovered fuel surcharges led to the decrease in gross and operating profit margins.
Corporate Segment
Three Months Ended June 30,
Corporate 2008 2007 2008 vs. 2007
(Dollars in Thousands)
Intersegment shipping sales $ (5,735 ) $ (4,777 ) (958 )
Intersegment shipping costs (5,735 ) (4,777 )
Gross profit - -
General, selling and administrative expenses 6,905 4,768 2,137 44.8 %
Operating loss 6,905 4,768 2,137 44.8 %
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Intersegment shipping revenues and costs are related to billings from the transportation segment to the domestic minerals and environmental segments for services. These services are invoiced to the minerals and environmental segments at arms-length rates and those costs are subsequently charged to customers. Intersegment sales and costs reported above reflect the elimination of these transactions.
Corporate GS&A expenses increased due to greater employee benefit related expenses and IT infrastructure investments.
Six months ended June 30, 2008 vs. June 30, 2007
Consolidated Review
The following table compares our year-to-date operating results for the period ended June 30, 2008 and June 30, 2007:
Six Months Ended June 30,
2008
(Restated) 2007 2008 vs. 2007
Consolidated (Note 2)
(Dollars in Thousands)
Net sales $ 425,256 $ 346,182 22.8 %
Cost of sales 316,246 252,892
Gros s profit 109,010 93,290 16.9 %
margin % 25.6 % 26.9 %
General, selling and administrative expenses 72,847 59,459 22.5 %
Operating profit 36,163 33,831 6.9 %
margin % 8.5 % 9.8 %
Other income (expense):
Interest expense, net (5,238 ) (4,097 ) 27.8 %
Other, net 288 (170 ) -269.4 %
(4,950 ) (4,267 )
. . .
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