Overview

We are a global, specialty minerals company and earn our revenues and profits from a diverse group of industrial and consumer product lines. The principal mineral that we utilize to generate revenues is bentonite. We own or lease bentonite reserves in the United States, Australia, China and Turkey. Additionally, through our affiliates and joint ventures, we have access to bentonite reserves in Egypt, India, Russia, Azerbaijan and Mexico. Bentonite deposits have varying physical properties which require us to identify which markets our reserves can serve. We believe that our understanding of bentonite properties, mining methods, processing and application to markets are the core components of our longevity and future prospects.

We operate in five segments: minerals, environmental, oilfield services, transportation and corporate. Both our minerals and environmental segments operate manufacturing facilities in North America, Europe, and the Asia-Pacific region. Our oilfield services segment operates principally in North America but also has a growing presence in Europe, Africa and Asia. Additionally, we have a transportation segment that performs trucking services for our domestic minerals and environmental businesses as well as third parties.

Our customers are engaged in varied end-markets and geographic regions. 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. Customers in our environmental segment include construction contractors, engineering contractors and government agencies. The oilfield services segment's customer base is primarily comprised of oil and gas service or exploration companies. A significant portion of our products have been used in the same applications for decades and have experienced minimal technological obsolescence. A majority of our business is performed under short-term agreements; therefore, terms of sale, such as pricing and volume, can change within our fiscal year.

Approximately 68% of our revenue is generated in the Americas, principally North America. Consequently, the state of the U.S. economy, and especially the metalcasting and industrial construction industries, impacts our revenues. Our fastest growing markets are in the Asia-Pacific and European regions, which have continued to outpace the United States in economic growth.

Sustainable, long-term profit growth is our primary objective. We employ a number of strategic initiatives to achieve this goal:

· 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: As we have done for decades, we continue to expand our manufacturing and marketing organizations into Europe and Asia-Pacific. This operating experience enables us to expand further into emerging markets. We see the 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 that new reserves meet the physical property requirements for our diverse product lines and are economical to mine. Our organization is committed to developing its global reserve base to meet these requirements.

· Acquisitions: We continually seek opportunities to add complementary businesses to our portfolio of products, as appropriate, when we believe those businesses are fairly valued and fit with our growth strategy. However, the global economic and credit crisis that exists as we begin fiscal 2009 will make it more challenging for us to do this than it has in recent years. In 2008, we paid net cash of $41 million to acquire one business within our oilfield services segment.

There can be no assurance that we will achieve success in implementing any one or more of the strategic initiatives described above.

A number of risks will challenge us in meeting our long-term objectives. We describe certain risks, such as competition and our reliance on economically sensitive markets, under "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." In general, the risks associated with our international operations, including foreign currency and investment risks, our investment in Ashapura, and our exposure to petrochemicals have increased given the status of global capital markets and the global economy. We intend to manage these risks actively, but there can be no assurance of our success to do so.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations describes relevant aspects of our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to select accounting policies that are appropriate for our business, and to make certain estimates, judgments and assumptions about matters that are inherently uncertain in applying those policies. On an ongoing basis, we re-evaluate these estimates, judgments and assumptions for reasonableness because of the critical impact that these factors have on the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates.

Our financial statements are based in part upon critical accounting policies that involve complex and subjective decisions and assessments. Our senior management has discussed the development, selection and disclosure of these policies with the members of the Audit Committee of our Board of Directors. We believe our selection of accounting policies has resulted in actual results approximating the estimated amounts in each respective area. These policies are discussed below and also in Note 1 of the Notes to Consolidated Financial Statements. The discussion which follows should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Valuation of Accounts Receivable

We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Our customer base is diverse and includes customers located throughout the world. Payment terms in certain of the foreign countries in which we do business are longer than those that are customary in the United States, and as a result, may give rise to additional credit risk related to outstanding accounts receivable from these non-U.S. customers. Likewise, a change in the financial position, liquidity or prospects of any of our customers could have an impact on our ability to collect amounts due. While concentrations of credit risk related to trade receivables are somewhat limited by our large customer base, we do extend significant credit to some of our customers.

We make estimates of the amounts of our gross accounts receivable that will not be collectible, and record an allowance for doubtful accounts to reduce the carrying value of accounts receivable to the amount that is expected to be realized. The allowance for doubtful accounts is established based upon the Company's historical bad debt experience, a review of the overall aging of the accounts, and an analysis of specific customer accounts, particularly those with past-due balances. The recorded allowance for doubtful accounts is intended to cover specific customer collection issues identified by management at the balance sheet date, and to provide for potential losses from other accounts based on our historical experience. Increases in the allowance for doubtful accounts are recorded as an expense and included in general, selling and administrative expenses in the period identified. Our estimate of the required allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change from period to period. In addition, it requires us 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 addition, we regularly review inventory quantities on hand and evaluate 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 us to make judgments about the future demand for inventory.

Our process to evaluate inventories for excess or obsolete items is comprehensive. We quantify the amount of inventory on hand that, based on projected demand, is not anticipated to be sold within the next 12 to 24 months or, based on our current product offerings, is excess or obsolete. This involves a review by sales and production management personnel to determine whether this list of potential excess or obsolete inventory is complete. Factors which impact this evaluation include, for example, whether there has been a change in the market or packaging for particular products, and whether there are components of inventory that incorporate obsolete formulations or technology. In certain businesses in which we are engaged, such as the domestic cat litter business, product and packaging changes can occur rapidly and expose us to excess and obsolete inventories.

Goodwill and Long-lived Assets

Our goodwill and intangible assets have resulted largely from business combinations or acquisitions that we have completed. We follow Statement of Financial Accounting Standards No. 141 - Business Combinations when initially recognizing the fair value of assets and liabilities acquired in a business combination. Under these guidelines, we are required to recognize the intangible assets we acquire in a business combination. These are typically customer related assets, trademarks and tradenames and non-compete agreements. We are required to make significant estimates as to the nature of these customer relationships including future profitability and term of the relationships. We are also required to make significant estimates regarding the probability and impact of competition from former owners or management employees of businesses we acquire. These estimates are critical as we make them from the viewpoint of a market participant and they involve forecasting future results and uncertainties on behalf of the customers whom the acquired business serves.

For property, plant and equipment and intangible assets with finite lives, 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 and indefinite lived intangible assets, we perform our impairment assessment annually or more frequently if impairment indicators arise. This assessment is made at the reporting unit level for goodwill and at the individual asset level for indefinite lived intangible assets.

In conducting our impairment tests and in testing the recoverability of long lived assets including property, plant and equipment, we employ models that use estimates of cash flows attributable to the reporting unit or assets being tested, discount rates that reflect the related business risks, and appropriate perpetuity or disposal values. 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 these assets 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 these assets 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 and due to the uncontrollable variability of market factors underlying them. 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 United States employees hired on or before December 31, 2003. In order to measure the expense and obligations associated with these retirement benefits, we estimate various factors used in valuing our assets and liabilities, such as discount rates, expected return on plan assets set aside to fund certain liabilities, rate of compensation increases, employee turnover rates, retirement rates, mortality rates and other factors. Our benefit plan committee determines the key assumptions related to the discount rate, expected investment rate of return and compensation increases after consulting with the actuarial firm that performs the calculations. Other assumptions are also set based on consultation with our actuaries.

To determine our net accrued benefit and net periodic benefit cost, we form judgments about the best estimate for each assumption used in the actuarial computation. The most important assumptions that affect the computations are the discount rate and the expected long-term rate of return on plan assets.

Our discount rate assumption is intended to reflect the rate at which the retirement benefits could be effectively settled based upon the assumed timing of the benefit payments. In determining the discount rate for December 31, 2008, we utilized the Hewitt above median yield curve, which is a hypothetical double A yield curve comprised of a series of annualized individual discount rates, rounded to the nearest 25 basis points. The discount rates are derived from hypothetical zero coupon bonds which are given equal maturities within their maturity groups. The discount rate used to determine our retirement pension benefit obligation at December 31, 2008, was 6.25%. A 50 basis point decrease in this discount rate would have increased the benefit obligation at December 31, 2008 by $3.5 million and would increase net cost expected in 2009 by 19%, or $468 thousand. Likewise at December 31, 2008, a 50 basis point increase in the discount rate would have decreased the benefit obligation by $3.1 million and would decrease the net cost expected in 2009 by 17%, or $424 thousand.

The expected long-term rate of return on plan assets was based on our current asset allocations and the historical long-term performance, as adjusted for existing market conditions. Information regarding our asset allocations is included in the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data." We assumed a weighted-average expected long-term rate of return on pension plan assets of 8.25% to determine our net benefit cost in 2008. A 50 basis point decrease in the expected return would increase the net cost expected in 2009 by approximately 5%, or $134 thousand. Likewise, a 50 basis point increase in the expected return would decrease the net cost expected in 2009 by approximately 5%, or $134 thousand.

Income Taxes

Our effective tax rate is based on the income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We account for our tax positions in accordance with the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and thus our effective tax rate includes the impact of changes to our liability for uncertain tax positions. 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 rulings by various taxing authorities, changes in tax laws, changes in projected levels of taxable income and availability of future tax planning strategies.

Valuation allowances are recorded, if necessary, to measure a deferred tax asset at an estimated realizable value. Both positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is appropriate. Changes in a valuation allowance are recorded in the period when we determine events have occurred that will impact the realizable value of the asset.

A number of years may elapse before a particular matter is audited and finally resolved. Audits of our United States federal income tax returns have been completed for our income tax returns relating to fiscal years of 2003 and prior. State income tax returns are audited more infrequently. Unfavorable settlement of any particular issue would require use of our cash and could result in the recording of additional tax expense. Favorable resolution would be recognized as a reduction to our tax provision in the year of resolution.

Results of Operations for the Three Years Ended December 31, 2008

The discussion below references the consolidated statement of operations included in "Item 8. Financial Statements and Supplementary Data."

Consolidated Review

The following table compares our operating results for the past three years.

                                                        Year Ended December 31,
                                                                             2008 vs.       2007 vs.
         Consolidated               2008          2007          2006           2007           2006
                                                        (Dollars in Thousands)
Net sales                         $ 883,552     $ 744,334     $ 611,556           18.7 %         21.7 %
Cost of sales                       658,653       547,820       452,090
Gross profit                        224,899       196,514       159,466           14.4 %         23.2 %
margin %                               25.5 %        26.4 %        26.1 %
General, selling and
administrative expenses             145,653       121,187       102,078           20.2 %         18.7 %
Operating profit                     79,246        75,327        57,388            5.2 %         31.3 %
margin %                                9.0 %        10.1 %         9.4 %
Other income (expense):
Interest expense, net               (12,154 )      (8,915 )      (2,951 )         36.3 %        202.1 %
Other, net                           (4,880 )      (1,139 )         231          328.4 %       -593.1 %
                                    (17,034 )     (10,054 )      (2,720 )

Income before income taxes and
income (loss) from affiliates
and joint ventures                   62,212        65,273        54,668
Income tax expense                   15,167        16,646        10,425           -8.9 %         59.7 %
Income before income (loss)
from affiliates and joint
ventures                             47,045        48,627        44,243
Income (loss) from affiliates
and joint ventures                  (21,714 )       8,394         5,420         -358.7 %         54.9 %
Income from continuing
operations                           25,331        57,021        49,663

Discontinued Operations
Gain (loss) on disposal of
discontinued operations                   -          (286 )         585         -100.0 %       -148.9 %

Net income                           25,331        56,735        50,248          -55.4 %         12.9 %

The following table details 2008 consolidated sales growth components over 2007:

                                                                                   Foreign
                                            Base Business       Acquisitions       Exchange        Total
Minerals                                               8.7 %              1.3 %         -0.3 %         9.7 %
Environmental                                          2.1 %              0.8 %          0.6 %         3.5 %
Oilfield services                                      2.8 %              1.7 %         -0.1 %         4.4 %
Transportation & intersegment shipping                 1.1 %              0.0 %          0.0 %         1.1 %
Total                                                 14.7 %              3.8 %          0.2 %        18.7 %
% of growth                                           78.4 %             20.4 %          1.2 %       100.0 %

Base business represents operations owned for more than one year. Acquisitions are those businesses owned less than one year during 2008. Acquisitions in the table above in 2008 are comprised of five businesses: one acquired in the oilfield services segment in 2008 and four acquired in 2007, three in the minerals segment and one in the environmental segment. Foreign exchange isolates the impact of currency changes over the prior-year period.

In comparing 2008 with 2007, our minerals segment accounted for approximately 52% of the growth in sales, while our environmental and oilfield services segments contributed 19% and 24%, respectively. Transportation segment revenues increased by approximately 6%. Approximately 22% of the growth in net sales for 2008 was attributed to acquisitions and favorable foreign currency translation combined.

The following table provides a comparison of consolidated sales by geographical region over the last three years:

                                      2008        2007        2006

                      Americas          68.2 %      68.2 %      69.0 %
                      EMEA *            22.4 %      23.8 %      23.4 %
                      Asia Pacific       9.4 %       8.0 %       7.6 %

                      Total            100.0 %     100.0 %     100.0 %

* Europe, Middle East and Africa

Sales in our foreign markets continued their strong growth in 2008 as our market share grows in these areas in addition to the economies of these regions also experiencing stronger growth for our products.

Gross profit

Although cost pressures were experienced, increased sales generated the 14% increase in gross profit in 2008 over 2007. On a segment basis, minerals contributed 48% of the increase over 2007, while environmental and oilfield services accounted for 20% and 29%, respectively. In comparison of 2007 with 2006, the 23% increase in gross profit also followed sales growth but more of the growth came from our environmental and oilfield services groups, each comprising 44% of the growth, while our minerals segment comprised 12% of the growth. The strong growth in 2008 from our minerals segment reflects the selling price increases and strong growth from investments we made in overseas businesses whereas our oilfield services and environmental businesses started to experience a slow down in their sales due to contraction in the markets they serve in late 2008.

Gross margin decreased in 2008 as, proportionally, less sales were derived from our oilfield services and environmental segments. These segments generate greater margins than our minerals business due to the value-added nature and technical demands of their products. Gross margin increased in 2007 due to a similar dynamic - sales being more concentrated in the higher margin businesses of our oilfield services and environmental segments.

General, selling and administrative expenses (GS&A)

Acquired businesses accounted for 16% of the increase, or $3.9 million, in GS&A expenses over the 2007 period, which also includes a $2.4 million benefit from a gain on the sale of vacant land. In 2007, acquisitions comprised $9.5 million, or 50% of the increase in GS&A. Increased personnel and employee benefit expenses coupled with expenses associated with investments in growing businesses overseas represent the largest portions of the remaining increases in both years.

Operating profit

Organic growth comprised 38% of the growth in operating profit over the 2007 period whereas acquisitions comprised 36%. Operating profit growth was largest in our minerals and oilfield services segments, partly reflective of sales increases being largest in these segments as well. Excluding the $2.4 million gain on the sale of vacant land that occurred in 2007 in our environmental segment, that segment's operating profit increased marginally in 2008. In 2007, acquisitions represented a similar portion, 35%, of the growth in operating profits. In addition, a greater proportion of 2007 profits were generated in our oilfield services and environmental segments, contributing to the increase in operating profit margin in 2007 over the 2006 period as these are our higher margin businesses.

Net interest expense

Net interest expense continued to increase in 2008 as it did in 2007, both due to greater average debt levels. Average debt levels were $210.5 million, $138.3 million and $73.6 million in 2008, 2007 and 2006, respectively. Debt has increased in both of the last two years to support acquisitions and working capital requirements as our businesses continue to grow. Average interest rates on our funded debt were 5.2%, 5.6% and 5.8% in 2008, 2007 and 2006, respectively. A majority of the interest on our debt is based upon LIBOR rates.

Other income (expense), net

Other income (expense), net is composed of a number of miscellaneous transactions, primarily foreign currency transaction gains and losses and gains and losses on foreign currency derivatives. The losses increase significantly in 2008 as we entered into several derivative transactions to hedge the purchase of certain mineral rights in South Africa, the price of which was denominated in Australian Dollars (AUD). Of the $4.9 million of losses in 2008, $2.4 million relates to these AUD derivative hedges. The remainder relates to unfavorable movements in foreign currency exchange rates on financial assets in our overseas businesses. We are particularly sensitive to exchange rate fluctuations between the U.S. dollar versus the Euro, British pound and Polish zloty. We also have significant exposure to changes in exchange rates between the British pound and the Euro as well as between the Polish zloty and the Euro.

Income taxes

. . .