**EXHIBIT 13**

 

**ANNUAL REPORT**

 

Exhibit 13 isthe Corporation’s 2004 Annual Report to Stockholders.

 

This 10-KReport should be read only in conjunction with that Annual Report.

 

In the eventyou do not already have a copy of the Annual Report, one may be obtained bycontacting Ameron, attention; Corporate Secretary, Post Office Box 7007,Pasadena, California 91109-7007. The telephone number is (626) 683-4000.

 

Shareholdersmay also obtain a copy of the Form 10-K by accessing the Company website at www.ameron.com.

 

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**2004FINANCIALSECTION**

 
| Selected Consolidated Financial Information                                                 | 24     |
|---------------------------------------------------------------------------------------------|--------|
|                                                                                        |   |
| Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 25     |
|                                                                                        |   |
| Consolidated  Statements of Income                                                          | 35     |
|                                                                                        |   |
| Consolidated Balance Sheets                                                                 | 36     |
|                                                                                        |   |
| Consolidated  Statements of Stockholders’ Equity                                       | 38     |
|                                                                                        |   |
| Consolidated  Statements of Comprehensive Income                                            | 38     |
|                                                                                        |   |
| Consolidated  Statements of Cash Flows                                                      | 39     |
|                                                                                        |   |
| Notes to  Consolidated Financial Statements                                                 | 40     |
|                                                                                        |   |
| Report  of Independent Registered Public Accounting Firm                                    | 54     |
|                                                                                        |   |
| Management’s Report                                                                    | 55     |

 

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**SELEC****TED CONSOLIDATED FINANCIAL INFORMATION**

 
| ** **                                          | ** ** | **Year ended November 30,** | ** **  |
|-----------------------------------------------------|------------|-----------------------------|-------------|
| **(Dollars  in thousands, except per  share data)** | ** ** | **2004**                    | ** **  | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                          | ** ** | ** **                  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **PER COMMON SHARE DATA (1)**                       |       |                        | ** **  |   |   |   |   |   |   |   |   |
| Net income—basic                               | ** ** | **$**                       | **1.63**    | ** ** | $ | 3.77 |   | $ | 3.61 |   | $ | 3.58 |   | $ | 3.21 |   |
| Net income—diluted                             | ** ** | **1.59**                    | ** **  | 3.67 |   | 3.49 |   | 3.45 |   | 3.21 |   |
| Dividends                                           | ** ** | **.80**                     | ** **  | .76 |   | .64 |   | .64 |   | .64 |   |
| Weighted-average shares (basic)                     | ** ** | **8,270,487**               | ** **  | 7,925,229 |   | 7,772,032 |   | 7,742,690 |   | 7,893,132 |   |
| Weighted-average shares (diluted)                   | ** ** | **8,448,987**               | ** **  | 8,149,460 |   | 8,052,164 |   | 8,048,588 |   | 7,905,026 |   |
| Stock price – high                             | ** ** | **40.05**                   | ** **  | 35.53 |   | 38.74 |   | 38.94 |   | 21.50 |   |
| Stock price – low                              | ** ** | **28.60**                   | ** **  | 24.89 |   | 22.26 |   | 17.03 |   | 16.10 |   |
| Price/earnings ratio (range)                        | ** ** | **25-18**                   | ** **  | 10-7 |   | 11-6 |   | 11-5 |   | 7-5 |   |
| **OPERATING RESULTS**                               |       |                        | ** **  |   |   |   |   |   |   |   |   |
| Sales                                               | ** ** | **$**                       | **605,853** | ** ** | $ | 600,495 |   | $ | 539,473 |   | $ | 551,396 |   | $ | 550,661 |   |
| Gross profit                                        | ** ** | **148,411**                 | ** **  | 166,488 |   | 141,883 |   | 138,084 |   | 139,792 |   |
| Interest expense, net                               | ** ** | **(5,313**                  | **)**       | (6,645 | ) | (6,836 | ) | (10,213 | ) | (12,244 | ) |
| Provision for income taxes                          | ** ** | **(8,006**                  | **)**       | (14,017 | ) | (14,166 | ) | (10,624 | ) | (7,928 | ) |
| Equity in earnings of joint venture, net of  taxes  | ** ** | **10,791**                  | ** **  | 614 |   | 3,309 |   | 2,373 |   | 5,985 |   |
| Net income                                          | ** ** | **13,459**                  | ** **  | 29,900 |   | 28,059 |   | 27,741 |   | 25,345 |   |
| Net income/sales                                    | ** ** | **2.2**                     | **%**       | 5.0 | % | 5.2 | % | 5.0 | % | 4.6 | % |
| Return on equity                                    | ** ** | **5.0**                     | **%**       | 12.8 | % | 13.5 | % | 14.3 | % | 14.1 | % |
| **FINANCIAL CONDITION AT YEAR-END**                 |       |                        | ** **  |   |   |   |   |   |   |   |   |
| Working capital                                     | ** ** | **$**                       | **180,813** | ** ** | $ | 177,009 |   | $ | 149,205 |   | $ | 155,356 |   | $ | 135,626 |   |
| Property, plant and equipment, net                  | ** ** | **153,651**                 | ** **  | 150,586 |   | 145,242 |   | 145,801 |   | 145,196 |   |
| Investments in joint ventures                       |       |                        | ** **  |   |   |   |   |   |   |   |   |
| Equity method                                       | ** ** | **16,042**                  | ** **  | 13,064 |   | 12,940 |   | 12,793 |   | 15,786 |   |
| Cost method                                         | ** ** | **5,922**                   | ** **  | 5,479 |   | 5,987 |   | 5,987 |   | 5,987 |   |
| Total assets                                        | ** ** | **543,937**                 | ** **  | 533,492 |   | 462,942 |   | 485,080 |   | 478,449 |   |
| Long-term debt, less current portion                | ** ** | **75,349**                  | ** **  | 86,044 |   | 102,823 |   | 137,197 |   | 140,718 |   |
| **CASH FLOW**                                       |       |                        | ** **  |   |   |   |   |   |   |   |   |
| Expenditures for property, plant and  equipment     | ** ** | **$**                       | **18,312**  | ** ** | $ | 17,107 |   | $ | 14,514 |   | $ | 19,297 |   | $ | 21,050 |   |
| Depreciation and amortization                       | ** ** | **18,897**                  | ** **  | 18,371 |   | 18,572 |   | 18,633 |   | 18,022 |   |
|                                                     |            |                             |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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***(1) Share and per share data reflect a two-for-one stock split declaredin 2003.***

 

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**MANAGEME****NT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Ameron International Corporation (“Ameron” orthe “Company”) is a multinational manufacturer of highly-engineered productsand materials for the chemical, industrial, energy, transportation andinfrastructure markets. Ameron is a leading producer of water transmissionlines; high-performance coatings and finishes for the protection of metals andstructures; fiberglass-composite pipe for transporting oil, chemicals andcorrosive fluids; and specialized materials and products used in infrastructureprojects. The Company operates businesses in North America, South America,Europe, Australasia and Asia. The Company has four reportable segments. ThePerformance Coatings & Finishes Group manufactures and marketshigh-performance industrial and marine coatings. The Fiberglass-Composite PipeGroup manufactures and markets filament-wound and molded composite fiberglasspipe, tubing, fittings and well screens. The Water Transmission Groupmanufactures and supplies concrete and steel pressure pipe, concretenon-pressure pipe, protective linings for pipe, and fabricated steel products.The Infrastructure Products Group manufactures and sells ready-mix concrete,sand and aggregates, concrete pipe and culverts, and concrete and steellighting and traffic poles. The markets served by the Performance Coatings& Finishes Group and the Fiberglass-Composite Pipe Group are worldwide inscope. The Water Transmission Group serves primarily the western U.S. TheInfrastructure Products Group’s quarry and ready-mix business operatesexclusively in Hawaii, and poles are sold throughout the U.S. Ameron alsoparticipates in several joint-venture companies, directly in the U.S. and SaudiArabia, and indirectly in Kuwait and Egypt.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Management’s Discussion and Analysis ofLiquidity and Capital Resources and Results of Operations are based upon theCompany’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires managementto make certain estimates and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities during the reporting periods. Managementbases its estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities. Actual results could differ from those estimates.

 

The Company’s significant accounting policiesare disclosed in Note 1 of Notes to Consolidated Financial Statements in theCompany’s 2004 Annual Report. Management believes the following accountingpolicies affect the more significant estimates used in preparing theconsolidated financial statements.

 

The consolidated financial statements includethe accounts of Ameron International Corporation and all wholly-ownedsubsidiaries. All material intercompany accounts and transactions have beeneliminated. The functional currencies for the Company’s foreign operations arethe applicable local currencies. The translation from the applicable foreigncurrencies to U.S. dollars is performed for balance sheet accounts usingcurrent exchange rates in effect at the balance sheet date and for revenue andexpense accounts using a weighted-average exchange rate during the period. Theresulting translation adjustments are recorded in accumulated othercomprehensive income. The Company advances funds to certain foreign subsidiariesthat are not expected to be repaid in the foreseeable future. Translationadjustments arising from these advances are also included in accumulated othercomprehensive income. The timing of repayments of intercompany advances couldmaterially impact the Company’s consolidated financial statements.Additionally, earnings of foreign subsidiaries are often reinvested outside theU.S. Unforeseen repatriation of such earnings could result in significantunrecognized U.S. tax liability. Gains or losses resulting from foreigncurrency transactions are included in other income.

 

Revenue for the Performance Coatings &Finishes, Fiberglass-Composite Pipe and Infrastructure Products segments isrecognized when risk of ownership and title pass, primarily at the time goodsare shipped, provided that an agreement exists between the customer and theCompany, the price is fixed or determinable and collection is reasonablyassured. In limited circumstances within the Performance Coatings &Finishes Group, revenue recognition associated with shipment of coatings formarine dry dockings is delayed until product returns are processed. Revenue isrecognized for the Water Transmission Group primarily under thepercentage-of-completion method, typically based on completed units of production,since products are manufactured under enforceable and binding constructioncontracts, typically are designed for specific applications, are notinterchangeable between projects, and are not manufactured for stock. In somecases, if products are manufactured for stock or are not related to specificconstruction contracts, revenue is recognized under the same criteria used bythe other three segments. Revenue under the percentage-of-completion method issubject to a greater level of estimation, which affects the timing of revenuerecognition, costs and profits. Estimates are reviewed on a consistent basisand are adjusted periodically to reflect current expectations.

 

The Company expenses environmental clean-upcosts related to existing conditions resulting from past or current operationson a site-by-site basis. Liabilities and costs associated with these matters,as well as other pending litigation and asserted claims arising in the ordinarycourse of business, require estimates of future costs and judgments based onthe knowledge and experience of management and its legal counsel. When theCompany’s exposures can be reasonably estimated and are probable, liabilitiesand expenses are recorded. The ultimate resolution of any such exposure to theCompany may differ due to subsequent developments.

 

Inventories are stated at the lower of costor market with cost determined principally on the first-in, first-out (“FIFO”)method. Certain steel inventories used by the Water Transmission Group arevalued using the last-in, first-out (“LIFO”) method. Significant changes insteel inventory levels or costs could materially impact the Company’s financialstatements.  Reserves are established forexcess, obsolete and rework inventories based on age, estimates of salabilityand forecasted future demand. Management records an allowance for doubtfulaccounts receivable based on historical experience and expected trends. Asignificant reduction in demand or a significant worsening of customer creditquality could materially impact the Company’s consolidated financialstatements.

 

25

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Property, plant and equipment is stated onthe basis of cost and is depreciated principally using a straight-line methodbased on the estimated useful lives of the related assets, generally two to 40years.

 

Investments in unconsolidated joint venturesor affiliates (“joint ventures”) over which the Company has significantinfluence are accounted for under the equity method of accounting, whereby theinvestment is carried at the cost of acquisition, plus the Company’s equity inundistributed earnings or losses since acquisition. Investments in jointventures over which the Company does not have the ability to exert significantinfluence over the investee’s operating and financing activities are accountedfor under the cost method of accounting. The Company’s investment in TAMCO, asteel mini-mill in California, is accounted for under the equity method.Investments in Ameron Saudi Arabia, Ltd., Bondstrand, Ltd. and Oasis-Ameron,Ltd. are accounted for under the cost method due to management’s currentassessment of the Company’s influence over these joint ventures.

 

The Company reviews long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying value of such assets may not be recoverable. If the estimated future,undiscounted cash flows from the use of an asset are less than its carryingvalue, a write-down is recorded to reduce the related assets to estimated fairvalue.  The Company also reviewsintangible assets for impairment at least annually, based on the estimatedfuture, discounted cash flows associated with such assets.  Actual cash flows may differ significantlyfrom estimated cash flows.  Additionally,current estimates of future cash flows may differ from subsequent estimates offuture cash flows.  Changes in estimatedor actual cash flows could materially impact the Company’s consolidatedfinancial statements.

 

The Company is self insured for a portion ofthe losses and liabilities primarily associated with workers’ compensationclaims and general, product and vehicle liability. Losses are accrued basedupon the Company’s estimates of the aggregate liability for claims incurredusing historical experience and certain actuarial assumptions followed in theinsurance industry. The estimate of self insurance liability includes anestimate of incurred but not reported claims, based on data compiled fromhistorical experience. Actual experience could differ significantly from theseestimates and could materially impact the Company’s consolidated financialstatements.

 

The Company follows the guidance of Statementof Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting forPensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement BenefitsOther Than Pensions,” when accounting for pension and other postretirementbenefits. Under these accounting standards, assumptions are made regarding thevaluation of benefit obligations and, in certain cases, the performance of planassets that are controlled and invested by third-party fiduciaries. Delayedrecognition of differences between actual results and expected or estimatedresults is a guiding principle of these standards. Such delayed recognitionprovides a gradual recognition of benefit obligations and investmentperformance over the working lives of the employees who benefit under theplans, based on various assumptions. Assumed discount rates are used tocalculate the present value of benefit payments which are projected to be madein the future, including projections of increases in employees’ annualcompensation and health care costs. Management also projects the future returnon invested assets based principally on prior performance and futureexpectations. These projected returns reduce the net benefit costs the Companyrecords in the current period. Actual results could vary significantly fromprojected results, and such deviation could materially impact the Company’sconsolidated financial statements. Management consults with actuaries when determining theseassumptions.  Unforecasted programchanges, including termination, freezing of benefits or acceleration ofbenefits, could result in an immediate recognition of unrecognized benefitobligations; and such recognition could materially impact the Company’sconsolidated financial statements.

 

During 2004, the Company changed the assumeddiscount rate and projected rates of increase in compensation levels and healthcare costs. The discount rate is based on market interest rates. At November30, 2004, the Company decreased the discount rate from 6.00% to 5.85% based on themarket interest rates on long-term, fixed-rate debt securities of highly-ratedcorporations. In estimating the expected return on assets, the Companyconsiders past performance and future expectations for various types ofinvestments as well as the expected long-term allocation of assets. At November30, 2004, the Company maintained the expected long-term rate of return onassets assumption at 8.75% to reflect the expectations for future returns frominvestments in the equity markets. In projecting the rate of increase incompensation levels, the Company considers movements in inflation rates asreflected by market interest rates. At November 30, 2004, the Company decreasedthe assumed annual rate of compensation increase from 3.50% to 3.35%. Inselecting the rate of increase in health care costs, the Company considers pastperformance and forecasts of future health care cost trends. At November 30,2004, the Company decreased the rate of increase in health care costs from 10%to 9%, decreasing ratably until reaching 5.00% in 2008 and beyond.

 

Different assumptions would impact theCompany’s projected benefit obligations and annual net periodic benefit costsrelated to pensions and the accrued other benefit obligations and benefit costsrelated to postretirement benefits. The following reflects the impactassociated with a change in certain assumptions (in thousands):

 
| ** **                              | ** ** | **1% Increase**                                    | ** ** | **1% Decrease**                              | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                              | ** ** | **Increase/  (Decrease)  in Benefit  Obligations** | ** ** | **Increase/  (Decrease)  in Benefit  Costs** | ** ** | **Increase/  (Decrease)  in Benefit  Obligations** | ** ** | **Increase/  (Decrease)  in Benefit  Costs** | ** ** |
| Discount Rate:                          | ** ** | ** **                                         | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pensions                                |       | $                                                  | (22,346    | )                                            | $          | (2,344 | ) | $ | 30,202 |   | $ | 3,040 |   |
| Other postretirement benefits           |       | (332                                               | )          | (6                                           | )          | 392 |   | (2 | ) |
| Expected rate of return on assets       |       | Not Applicable                                     |       | (1,454                                       | )          | Not Applicable |   | 1,454 |   |
| Rate of increase in compensation levels |       | 6,545                                              |       | 927                                          |       | (5,637 | ) | (827 | ) |
| Rate of increase in health care costs   |       | 148                                                |       | 23                                           |       | (129 | ) | (19 | ) |
|                                         |            |                                                    |            |                                              |            |  |  |  |  |  |  |  |  |

 

Additional information regarding pensions andother postretirement benefits is disclosed in Note 15 of Notes to ConsolidatedFinancial Statements in the Company’s 2004 Annual Report.

 

26

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Management incentive compensation is accruedbased on current estimates of the Company’s ability to achieve short-term andlong-term performance targets.

 

Deferred income tax assets and liabilitiesare computed for differences between the financial statement and income taxbases of assets and liabilities. Such deferred income tax asset and liabilitycomputations are based on enacted tax laws and rates applicable to periods inwhich the differences are expected to reverse.  Valuation allowances are established, whennecessary, to reduce deferred income tax assets to the amounts expected to berealized. Quarterly income taxes are estimated based on the mix of income byjurisdiction forecasted for the full fiscal year. The Company believes that ithas adequately provided for tax-related matters. The Company is subject toexamination by taxing authorities in various jurisdictions. Matters raised uponaudit may involve substantial amounts and could be material.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

During 2004, the Company generated $10.1million of cash from operating activities compared to $43.2 million in the sameperiod in 2003. The lower operating cash flow in 2004 was primarily due tolower earnings, excluding gains on asset sales and earnings from joint venturesin excess of distributions, and reduced liabilities.  Liabilities decreased primarily due to thepayment of benefits associated with the termination of two executive benefitplans, described below.  Receivablesincreased due to higher sales and the timing of collections.

 

Net cash provided by investing activitiestotaled $4.2 million in 2004, compared to $13.9 million used in 2003. Net cash providedby investing activities in 2004 consisted of proceeds from the sale of assets,including $15.3 million from the sale of property vacated as part of a plantconsolidation within the Water Transmission Group, and $7.2 million from theliquidation of life insurance policies offset by capital expenditures whichwere primarily for normal replacement and upgrades of machinery and equipment andfor a new fiberglass pipe plant in Malaysia. In 2003, the Company sold itsminority interest in a Mexican coatings venture for $3.0 million. During thefiscal year ending November 30, 2005, the Company anticipates spending betweenapproximately $25 and $35 million on capital expenditures, including additionalexpenditures on the plant in Malaysia of approximately $8 million. Capitalexpenditures are expected to be funded by existing cash balances, cashgenerated from operations or additional borrowings.

 

Net cash used in financing activities totaled$5.0 million in 2004, compared to $19.8 million in 2003. The net cash used in2004 consisted of the net repayment of debt of $.8 million, debt issuance costsof $.5 million, and payment of common stock dividends of $6.7 million, offsetby a net $3.0 million from the issuance of common stock related to the exerciseof stock options and treasury shares used to pay withholding taxes on vestedrestricted shares.

 

In June 2004, the Company extended a $100.0million revolving credit facility with six banks (the “Revolver”).  Under the Revolver, the Company may, at itsoption, borrow at floating interest rates based on specified margins over moneymarket rates, at any time until June 2008, when all borrowings under theRevolver must be repaid.

 

The Company’s lending agreements containvarious restrictive covenants, including the requirement to maintain specifiedamounts of net worth and restrictions on cash dividends, borrowings, liens,investments and guarantees. The Company is required to maintain consolidatednet worth of $181.4 million plus 50% of net income and 75% of proceeds from anyequity issued after January 24, 2003. The Company’s consolidated net worthexceeded the covenant amount by $76.4 million as of November 30, 2004. TheCompany is required to maintain a consolidated leverage ratio of consolidatedfunded indebtedness to earnings before interest, taxes, depreciation andamortization (“EBITDA”) of no more than 2.75 times. As of November 30, 2004,the Company maintained a consolidated leverage ratio of 2.1 times EBITDA.Lending agreements require that the Company maintain qualified consolidatedtangible assets at least equal to the outstanding secured funded indebtedness.As of November 30, 2004 qualifying tangible assets equaled 1.9 times fundedindebtedness. Under the most restrictive fixed charge coverage ratio, the sumof EBITDA and rental expense less cash taxes must be at least 1.5 times the sumof interest expense, rental expense, dividends and scheduled funded debtpayments. As of November 30, 2004, the Company maintained such a fixed chargecoverage ratio of 1.8 times.

 

Cash and cash equivalents at November 30,2004 totaled $30.1 million, an increase of $9.7 million from November 30, 2003.At November 30, 2004 the Company had total debt outstanding of $93.7 millionand approximately $104 million in unused committed and uncommitted credit linesavailable from foreign and domestic banks. The Company’s highest borrowing andthe average borrowing levels during 2004 were $108.3 million and $96.3 million,respectively.

 

In June 2004, the Company terminated twoexecutive benefit programs in consideration of ongoing costs, anticipatedlegislative restrictions on such programs, and a preference for executivebenefit plans having more predictable costs.  Ameron had previouslypurchased life insurance policies which had been set aside to pay benefitsunder these plans. At the time of termination of the plans, the cashsurrender value of such life insurance policies totaled approximately $26.9million and exceeded the amount that was required if immediate lump-sumpayments were elected by all participants, which totaled $25.6 million.Following termination of the plans, $24.7 million was paid to participants tosettle most of the obligations of the Company under the plans, initially usingexisting cash balances and then the cash surrender value of a portion of thelife insurance policies. Management anticipates that the remaining portion ofthe life insurance policies with a cash surrender value of $20.0 million as ofNovember 30, 2004 will continue to be held for general investment purposes andto defer income taxes.

 

Management believes that cash flows from operationsand current cash balances, together with currently available lines of creditwill be sufficient to meet operating requirements in 2005. Cash available fromoperations could be affected by any general economic downturn or any downturnor any decline or adverse changes in the Company’s business, such as loss ofcustomers or significant raw material price increases. Management believes itis unlikely that business or economic conditions will worsen or that operatingcosts will increase sufficiently to impact short-term liquidity.

 

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The Company’s contractual obligations andcommercial commitments at November 30, 2004 are summarized as follows (inthousands):

 
| ** **                        | ** ** | **Payments Due by Period**           | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| **Contractual  Obligations**      | ** ** | **Total**                            | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **After 5  years** | ** ** |
| ** **                        | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-Term Debt (a)                |       | $                                    | 93,682     |   | $ | 18,333 |   | $ | 28,334 |   | $ | 31,315 |   | $ | 15,700 |   |
|                              |       |                                 |       |   |   |   |   |   |   |   |   |
| Operating Leases                  |       | 40,203                               |       | 4,590 |   | 7,262 |   | 6,549 |   | 21,802 |   |
|                              |       |                                 |       |   |   |   |   |   |   |   |   |
| Total Contractual Obligations (b) |       | $                                    | 133,885    |   | $ | 22,923 |   | $ | 35,596 |   | $ | 37,864 |   | $ | 37,502 |   |
|                              |       |                                 |       |   |   |   |   |   |   |   |   |
| ** **                        | ** ** | **Commitments  Expiring Per Period** | ** ** |
| **Commercial  Commitments**       | ** ** | **Total**                            | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **After 5  years** | ** ** |
| Standby Letters of Credit (c)     |       | $                                    | 2,307      |   | $ | 2,307 |   | $ | — |   | $ | — |   | $ | — |   |
|                              |       |                                 |       |   |   |   |   |   |   |   |   |
| Total Commercial Commitments (b)  |       | $                                    | 2,307      |   | $ | 2,307 |   | $ | — |   | $ | — |   | $ | — |   |
|                                   |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)   Included in long-term debt is $915outstanding under a revolving credit facility which is supported by theRevolver.

(b)   The Company has no capitalized leaseobligations, unconditional purchase obligations, or standby repurchaseobligations.

(c)   Not included are standby letters of credittotaling $16,065 supporting industrial development bonds with a principal of$15,700. The principal amount of the industrial development bonds is includedin long-term debt.  The standby lettersof credit are issued under the Revolver.

 

**RESULTS OFOPERATIONS: 2004 COMPARED WITH 2003**

 

***General***

 

Net income totaled $13.5 million, or $1.59per diluted share, on sales of $605.9 million for the year ended November 30,2004, compared to net income of $29.9 million, or $3.67 per diluted share, onsales of $600.5 million for the same period in 2003.  All operating segments had higher salesexcept the Water Transmission Group. Sales of the Water Transmission Group declined in 2004 because of labordisputes that resulted in strikes at two of its plants and weak demand in itsprimary market, the western U.S.   Netincome was lower in 2004 as lower gross profits, higher selling, general andadministrative expenses (“SG&A”) and the curtailment and settlement costsassociated with the termination of the benefit plans were partially offset byhigher other income, lower taxes and higher equity in the earnings ofTAMCO.  Excluding income from jointventures, the Fiberglass-Composite Pipe Group had higher segment income, whilethe Performance Coatings & Finishes, Water Transmission and InfrastructureProducts Groups had lower segment income.

 

***Sales***

 

Sales increased $5.4 million in 2004,compared to 2003.  Sales increased due tothe impact of changing foreign exchange rates on the Company’s foreign coatingsand fiberglass pipe operations and higher demand for poles, partially offset byreduced demand in markets served by the Water Transmission Group.

 

Performance Coatings & Finishes’ salesincreased $9.3 million in 2004 due to the appreciation of foreign currenciesrelative to the U.S. dollar. Sales in local currencies by operations outsidethe U.S. increased, while sales in the U.S. were lower.  Improvements came from sales of fireprotection coatings in Europe and coil coatings in New Zealand.  Sales of protective coatings in the U.S. andEurope declined as a result of continued weakness in spending in theheavy-industrial and chemical markets. Additionally, sales of coatings for use in offshore oil and gasexploration and production weakened in 2004 as offshore construction slowed inthe U.S.  The anticipated upturn inspending by industrial customers in the U.S. and Europe remained slower thanexpected in 2004, and markets served by the Performance Coatings & FinishesGroup are not forecasted to improve in the near term.

 

Fiberglass-Composite Pipe’s sales increased$1.7 million in 2004 due primarily to the impact of favorable foreign exchangerates and partly to the strength of Asian operations. Asian operations, whichserve the marine construction markets located in Korea, China and Japan,benefited from the strong worldwide demand for oil tankers and offshoreproduction vessels. New marine construction in Asia increased due to high oilprices and regulations requiring double-hull tankers.  The industrial markets in the U.S. and Europeremained slow due to general economic conditions and a shift of new facilitiesto Asia and other developing markets. Sales in the U.S. were down due to theweak industrial market and lower activity in the U.S. offshore constructionmarket.  Sales of oilfield tubing foronshore applications were flat as spending was concentrated on larger offshoreprojects constructed in Asia.   Overall,expected demand for fiberglass piping remains robust, driven by higher oilprices and the increased cost of substitute products, especially steel piping.

 

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The Water Transmission Group’s salesdecreased $11.3 million in 2004 due to weak market conditions and labordisputes at two of the Group’s principal plants in Southern California in thefirst half of 2004.  Workers at the twoplants struck in early February.  Agreement was reached at one of the plants in the first quarter, at theend of February, and the second plant in the second quarter, at the end ofMarch.  Sales of protective-liningproducts for sewer pipe also declined due to a cyclical slowdown in the wastewater market and increased competition from alternative products andsuppliers.  Revenue is recognized in theWater Transmission Group primarily under the percentage-of-completion methodand is subject to a certain level of estimation, which affects the timing ofrevenue recognition, costs and profits. Estimates are reviewed on a consistentbasis and are adjusted when actual results are expected to significantly differfrom those estimates. Water Transmission’s year-end backlog was significantlyhigher than at the end of 2003 as a series of large projects were successfullybid; however, the market for concrete and steel pressure pipe remains soft inthe western U.S., affected by a cyclical lull in infrastructure spending and governmentbudgetary constraints.  The backlog bodeswell for 2005, and the expected long-term outlook for the Water TransmissionGroup remains positive based on the needs for water infrastructure in thewestern U.S.

 

Infrastructure Products’ sales increased $5.8million in 2004 due to strong housing and commercial construction spending,which was spurred by low interest rates. Ameron’s Hawaiian operations recoveredfrom a labor dispute at the Company’s principal aggregates and ready-mixconcrete operations on Oahu in Hawaii which began in February and ended inearly April.  Construction spending inHawaii was deferred during the strikes, and demand for aggregates, ready-mixconcrete and concrete pipe used for public infrastructure, housing and militaryconstruction remains strong. Ameron’s pole business had higher sales ofconcrete poles used in street lighting, primarily associated with housingstarts. Sales of steel traffic poles also increased. The forecast for theInfrastructure Products Group remains positive due to expectations of continuedspending on residential, commercial, government and military construction.

 

***Gross Profit***

 

Gross profit in 2004 was $148.4 million, or24.5% of sales, compared to gross profit of $166.5 million, or 27.7% of sales,in 2003. Gross profit decreased $18.1 million due to lower margins, the impactin the first half of the strikes on plant utilization and a net $7.3 millionexpense related to an increase in LIFO reserves caused by higher steel prices.

 

In 2004, gross profit of the PerformanceCoatings & Finishes Group was flat compared to gross profit in 2003.  Higher profit of $2.8 million from increasedsales was offset by a similar reduction in gross profit due to lower margins.  Profit margins were adversely impacted byhigher manufacturing costs of $1.8 million in the U.S. and Europe, due toinefficient plant utilization, and higher raw material costs of $.7million.  The Group was unable toincrease prices sufficiently to cover additional costs due to competitivepressures, especially in dollar-based markets in the Middle East and the formerSoviet Union served by the Company’s European operations.

 

The Fiberglass-Composite Pipe Group’s grossprofit increased $2.4 million in 2004 due to higher sales and improvedmargins.  Higher sales generated $.6million higher gross profit, while improved margins contributed $1.8million.  The margin increase resultedfrom the mix of products sold in 2004, especially from Asian operations whichbenefited from the strength of local markets, and improved conditions inworldwide oilfield markets.

 

Gross profit of the Water Transmission Groupdecreased $11.1 million in 2004.  Grossprofit decreased $2.7 million because of lower sales and $8.4 million due tolower margins.  Profit margins were lowerdue to competitive pressures brought on by slow market conditions and increasedworkers’ compensation costs of $1.2 million. Margins in 2004 and 2003 were adversely affected by the SanFrancisco/Oakland Bay Bridge project, for which the Water Transmission Groupprovided lower-margin steel pilings. Deliveries to the San Francisco/Oakland Bay Bridge project werecompleted in 2004.

 

The Infrastructure Products Group’s grossprofit declined slightly as profit on higher sales was offset by slightly lowermargins. Margins declined due to wet weather and the labor dispute in Hawaii inthe first half of 2004, reducing profits $1.6 million.  Higher concrete poles sales generatedincreased gross profit of approximately $1.3 million.

 

Additionally, consolidated gross profit was$7.8 million lower in 2004 compared to the same period in 2003 due primarily toincreased reserves associated with LIFO accounting of certain steel inventoriesused by the Water Transmission Group.  TheLIFO method is used to defer income taxes on operating profit of the WaterTransmission Group.  Income taxes and theLIFO reserves are not allocated to the operating segments.  Gross profit was also $1.3 million lower as aresult of other inventory adjustments.

 

***Selling, General and Administrative Expenses (“SG&A”)***

 

SG&A totaled $137.5 million, or 22.7% ofsales, in 2004, compared to $127.4 million, or 21.2%, in 2003. SG&Aincreased $10.1 million due to higher costs of third-party insurance coverageof $2.2 million, higher legal and consulting expenses of $3.4 million andSarbanes-Oxley 404 auditing and implementation costs of $3.5 million, offset bylower compensation expenses of $1.9 million. The appreciation of foreigncurrencies increased SG&A of foreign operations by approximately $3.9 million.Additionally in 2003, SG&A included a legal expense recovery of $1.0million, representing amounts agreed to be reimbursed to the Company by its ownand a supplier’s insurance companies for past legal fees and costs in excess ofthe negotiated settlement of the Central Arizona Project lawsuit.

 

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***Pension Plan Curtailment/Settlement***

 

In June2004, the Company terminated two executive benefit plans in consideration ofongoing costs, anticipated legislative restrictions on such programs, and apreference for executive benefit plans having more predictable costs.  TheCompany incurred a pretax expense of $12.8 million due to the termination ofthe plans and distributions to plan participants.  The Company recordedthis expense in accordance with SFAS No. 88, “Employers’ Accounting forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits.” SFAS No. 88 requires settlement accounting if the costof all settlements, including lump-sum retirement benefits paid, in a yearexceeds, or is expected to exceed, the total of the service and interest costcomponents of pension expense for the same period.

 

Terminationand settlement of the plans is expected to reduce benefit expenses in futureyears.  In addition to the termination and settlement costs, Ameronexpensed $1.8 million under the plans in 2004 and $2.1 million in 2003.

 

***Other Income***

 

Other income increased to $17.9 million in2004 from $10.9 million in 2003. Other income included royalties and fees fromlicensees, foreign currency transaction gains and losses, and othermiscellaneous income. Included in 2004 was a gain of $13.1 million on the saleof excess property vacated as part of a program to streamline pipe manufacturingoperations within the Water Transmission Group. Included in 2003 was a gain of $2.5 million on the sale of Ameron’sminority interest in a Mexican coatings venture.  Income from investments accounted for underthe cost method decreased from $6.3 million in 2003 to $.5 million in 2004 dueto the timing of dividend payments.  Thefiberglass pipe and coatings ventures continued to perform well due to thestrength of oilfield and infrastructure markets in Saudi Arabia.  The concrete pipe venture experienced acyclical lull and increased competition from alternative products.  Dividends from Ameron’s Saudi Arabianventures are expected to increase in 2005.

 

***Interest***

 

Interest expense totaled $5.3 million in2004, compared to $6.6 million in 2003. The decrease reflected lower averageborrowing levels in combination with lower average effective interest ratesrelated to the repayment of fixed-rate debt with a higher interest rate andincreased utilization of floating rate debt.

 

***Provision for Income Taxes***

 

Income taxes declined to $8.0 millioncompared to $14.0 million in 2003.   Theeffective tax rate increased from 32% in 2003 to 75% in 2004.  The effective tax rate was significantly higherin 2004 due to IRS limitations on the deductibility of a portion of thesettlements associated with the executive benefit plan terminations.  Approximately $18.5 million of the $24.7million paid to participants of the terminated plans is not expected to receivean associated tax benefit.  Excluding theimpact of the termination of the benefit plans, the effective rate in 2004would have been less than in 2003 due to lower levels of earnings from domesticoperations.  Income from certain foreignoperations is taxed at rates that are lower than the U.S. statutory tax rates.

 

***Equity in Earnings of Joint Venture, Net of Taxes***

 

Equity income, which consists of Ameron’sshare of the results of TAMCO, increased from $.6 million in 2003 to $10.8million in 2004.  Ameron owns 50% ofTAMCO, a mini-mill that produces steel rebar for the construction industry inthe western U.S.  TAMCO performed wellthroughout 2004 due to increased demand for steel rebar and higher sellingprices.  The worldwide market for steelproducts increased dramatically in 2004 because of demand for steel in China.  Demand declined at the end of the fourthquarter as TAMCO’s customers adjusted inventory levels to reflect confidence incontinued supply of product.  The recentdecline could be a signal of softening in 2005 from the record level of2004.  Nevertheless, the outlook forTAMCO remains strong.  Equity income isshown net of income taxes.  Dividendsfrom TAMCO are taxed at an effective rate of 9.3%, reflecting the dividendexclusion provided to the Company under current tax laws.

 

**RESULTS OFOPERATIONS: 2003 COMPARED WITH 2002**

 

***General***

 

Net income totaled $29.9 million, or $3.67per diluted share, on sales of $600.5 million for the year ended November 30,2003, compared to net income of $28.1 million, or $3.49 per diluted share, onsales of $539.5 million for the same period in 2002. All operating segments hadhigher sales. The Performance Coatings & Finishes and Fiberglass-CompositePipe Groups had higher segment income, while the Water Transmission andInfrastructure Products Groups had lower segment income. The increase in netincome came from higher sales and higher gross profit, offset by higherselling, general and administrative expenses and lower equity in earnings ofTAMCO.

 

***Sales***

 

Sales increased by $61.0 million in 2003.While all operating segments improved, the largest gains came from the Company’sFiberglass-Composite Pipe and the Water Transmission businesses. TheFiberglass-Composite Pipe Group benefited from strong demand in Asia forfiberglass piping for construction of offshore oil and marine vessels, and theWater Transmission Group’s increase came from the fabrication of steel pilingsfor the San Francisco/Oakland Bay Bridge.

 

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Performance Coatings & Finishes’ salesincreased $7.0 million due to the appreciation of foreign currencies relativeto the U.S. dollar. Sales in local currencies by operations outside the U.S.were relatively flat, while sales in the U.S. were lower.  Sales of protective coatings in the U.S.declined due to continued sluggishness in U.S. chemical, industrial and marinemarkets caused by general economic conditions. The industrial markets in Europewere similarly sluggish. However, the international demand for offshore andmarine coatings improved in 2003.

 

Fiberglass-Composite Pipe’s sales increased$26.2 million due primarily to the strength of Asian operations and partly tothe impact of favorable foreign exchange rates. Asian operations benefited fromthe strong worldwide demand for oil tankers and offshore production vesselsdriven by high oil prices. The industrial markets in the U.S. and Europeremained depressed due to general economic conditions. Sales of onshoreoilfield piping improved during 2003 as oil prices remained at a relativelyhigh level and oilfield spending increased.

 

The Water Transmission Group’s salesincreased in 2003 by $20.5 million due to sales of steel pilings for the SanFrancisco/Oakland Bay Bridge. Sales of concrete and steel pipe for fresh andwaste water applications declined during the year due to a cyclical slowdown inthe water market in the western U.S. Water Transmission’s year-end backlog waslower than at the end of 2002, reflecting the lull in water projects in thewestern U.S.

 

Infrastructure Products’ sales increased $6.9million due to strong housing and commercial construction spending, which wasspurred by low interest rates. Ameron’s Hawaiian operations benefited fromimproved demand for ready-mix concrete and concrete pipe used for publicinfrastructure, housing and military construction. Ameron’s pole business hadhigher sales of concrete poles used in street lighting, primarily associatedwith housing starts. Sales of steel traffic poles declined due to the lack ofsteel tubes.

 

***Gross Profit***

 

Gross profit in 2003 was $166.5 million, or27.7% of sales, compared to gross profit of $141.9 million, or 26.3% of sales,in 2002. Gross profit increased $24.6 million due to higher sales and improvedmargins. Overall margins improved primarily due to a change in product mix asthe proportion of higher-margin fiberglass-pipe sales increased.

 

Gross profit of the Performance Coatings& Finishes Group increased $2.8 million, with $2.0 million from higherprofit on increased sales and $.8 million from higher margins. Margins improveddue to better inventory management in 2003, with lower reserves needed forobsolete and slow-moving inventory.

 

The Fiberglass-Composite Pipe Group’s grossprofit increased $14.3 million in 2003. The increase was based almost equallyon higher sales and higher margins. Gross profit margins improved due to lowerraw material costs of $2.0 million, and improved plant efficiencies of $5.2million. Plant efficiencies improved due to more balanced use of capacity andcost containment programs initiated in 2002.

 

Gross profit of the Water Transmission Groupincreased $4.2 million due to higher sales. However, profit margins decreased,offsetting the increase in gross profit by approximately $1.0 million. Marginswere impacted by a change in product mix in 2003 due to the higher level oflower-margin steel pilings. The supply of steel pilings for the SanFrancisco/Oakland Bay Bridge was roughly 50% completed at the end of 2003.

 

The Infrastructure Products Group’s grossprofit increased $1.1 million, on slightly lower margins, due to higher sales.Margins declined as the mix of concrete pole sales included a higher proportionof lower-margin, smaller poles.

 

Additionally, gross profit was $2.1 millionhigher in 2003 due primarily to the establishment in 2002 of reserves associatedwith LIFO accounting of certain steel inventories and certain slow-movingfiberglass-pipe inventories which did not repeat in 2003.

 

***Selling, General and Administrative Expenses***

 

SG&A expenses totaled $127.4 million, or21.2% of sales, in 2003, compared to $105.9 million, or 19.6%, in 2002.SG&A increased $21.5 million due to higher pension costs of $9.6 millionand higher costs for third-party insurance coverage of $2.9 million.Additionally, SG&A in 2003 included higher new product development andmarketing costs of $3.5 million, higher employee benefit costs of $2.8 million,higher legal fees of $1.4 million and higher marketing costs associated withhigher sales of $.7 million. The appreciation of foreign currencies increasedSG&A of the Company’s foreign operations by about $4.7 million in 2003;however, the increase was more than offset by the estimated impact of costreduction programs initiated in 2002. Legal fees were higher due to asbestosand silica claims and due to lower recovery related to the Central ArizonaProject lawsuits. In 2003, $1.0 million was recovered representing amountsagreed to be reimbursed to the Company by its own and a supplier’s insurancecompanies for past legal fees and costs in excess of the negotiated settlementof the Central Arizona Project lawsuits reached in January 2003. The resolutionof the lawsuit enabled the reversal in 2002 of reserves totaling $1.7 million.

 

***Other Income***

 

Other income increased to $10.9 million in2003 from $9.8 million in 2002. Other income included earnings from investmentsaccounted for under the cost method, royalties and fees from licensees, foreigncurrency transaction gains and losses, and other miscellaneous income. Includedin 2003 was a gain of $2.5 million on the sale of Ameron’s minority interest ina Mexican coatings venture. Income from investments accounted for under thecost method increased from $5.9 million in 2002 to $6.3 million in 2003. Theincrease was due primarily to higher dividends received from Ameron’s fiberglass-pipejoint venture in Saudi Arabia.

 

***Interest***

 

Interest expense totaled $6.6 million in2003, compared to $6.8 million in 2002. The decrease reflected lower averageborrowing levels in 2003 offset by the higher interest on the fixed-rate notesplaced early in 2003.

 

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***Provision for Income Taxes***

 

The provision for income taxes in 2003 was$14.0 million, a decrease of $.2 million from 2002. The effective tax ratedecreased to 32% in 2003 from 36% in 2002. The effective tax rate was lower dueto the increase of foreign profits, especially from Asia, and lower foreignincome tax rates.

 

***Equity in Earnings of Joint Venture, Net of Taxes***

 

Equity in earnings of joint venture decreasedto $.6 million in 2003 from $3.3 million in 2002. Equity income declined due toTAMCO. Ameron’s equity in TAMCO’s earnings decreased as TAMCO sufferedthroughout 2003 from higher energy and scrap costs. Energy costs reflected thelingering impact of California’s electricity crisis. Scrap costs rose due todemand for Asian consumption.

 

**OFF-BALANCESHEET FINANCING**

 

The Company does not have any off-balancesheet financing, other than listed in the Liquidity and Capital Resourcessection herein. All of the Company’s subsidiaries are included in the financialstatements, and the Company does not have relationships with any specialpurpose entities.

 

**MARKETRISKS**

 

***Foreign Currency Risk***

 

The Company operates internationally, givingrise to exposure to market risks from changes in foreign exchange rates. Fromtime to time, the Company borrows in various currencies to reduce the level ofnet assets subject to changes in foreign exchange rates or purchases foreignexchange forward and option contracts to hedge firm commitments, such asreceivables and payables, denominated in foreign currencies. The Company doesnot use the contracts for speculative or trading purposes. At November 30,2004, the Company had 25 foreign currency forward contracts expiring at variousdates through May 2005, with an aggregate face value and fair value of $9.8million and $10.2 million, respectively. Such instruments are carried at fairvalue, with related adjustments recorded in other income.

 

***Debt Risk***

 

TheCompany has variable-rate, short-term and long-term debt as well as fixed-rate,long-term debt. The fair value of the Company’s fixed-rate debt is subject tochanges in interest rates. The estimated fair value of the Company’svariable-rate debt approximates the carrying value of such debt since thevariable interest rates are market-based, and the Company believes such debtcould be refinanced on materially similar terms. The Company is subject to theavailability of credit to support new requirements, to refinance amortizinglong-term debt and to refinance short-term debt.

 

As of November 30, 2004, the estimated fairvalue of notes payable by the Company totaling $16.7 million, with a fixed rateof 7.92%, was $17.8 million. The Company is required to repay these notes ininstallments of $8.3 million in 2005 and $8.4 million in 2006.  As of November 30, 2004, the estimated fairvalue of notes payable by the Company totaling $50.0 million, with a fixed rateof 5.36%, was $51.8 million. The Company is required to repay these notes inannual installments of $10.0 million from 2005 to 2009, inclusive. The Companyhad $7.2 million of variable-rate industrial development bonds payable at arate of 1.86% as of November 30, 2004, payable in 2016. The Company also had$8.5 million of variable-rate industrial development bonds payable at a rate of1.86% as of November 30, 2004, payable in 2021. As of November 30, 2004, theCompany borrowed $10.4 million under the Revolver, which permits borrowings upto $100.0 million through June 2008. The average interest rate of such borrowingswas 4.16% as of November 30, 2004.  TheCompany also borrowed $.9 million under various foreign short-term bankfacilities, that are supported by the Revolver. The average interest rate of such borrowings was 9.31% as of November30, 2004.

 

**CONTINGENCIES**

 

The Company is one of numerous defendants invarious asbestos-related personal injury lawsuits. These cases generally seekunspecified damages for asbestos-related diseases based on alleged exposure toproducts previously manufactured by the Company and others, and, at this time,the Company is generally not aware of the extent of injuries allegedly sufferedby the individuals or the facts supporting the claim that injuries were causedby the Company’s products. Based upon the information available to it at thistime, the Company is not in a position to evaluate its potential exposure, ifany, as a result of such claims. Hence, no amounts have been accrued for losscontingencies related to these lawsuits in accordance with SFAS No. 5, “Accountingfor Contingencies.” The Company continues to vigorously defend all suchlawsuits. As of November 30, 2004, the Company was a defendant inasbestos-related cases involving 18,298 claimants, compared to 17,447 claimantsas of November 30, 2003.  The Company isnot in a position to estimate the number of additional claims that may be filedagainst it in the future. For the fiscal year ended November 30, 2004, therewere new claims involving 1,633 claimants, dismissals and/or settlementsinvolving 782 claimants and no judgments. Net costs and expenses incurred by the Company for the fiscal year endedNovember 30, 2004 in connection with asbestos-related claims were approximately$.5 million.

 

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The Company is one of numerous defendants invarious silica-related personal injury lawsuits. These cases generally seekunspecified damages for silica-related diseases based on alleged exposure toproducts previously manufactured by the Company and others, and, at this time,the Company is not aware of the extent of injuries allegedly suffered by theindividuals or the facts supporting the claim that injuries were caused by theCompany’s products.  Based upon theinformation available to it at this time, the Company is not in a position toevaluate its potential exposure, if any, as a result of such claims.  Hence, no amounts have been accrued for losscontingencies related to these lawsuits in accordance with SFAS No. 5.  The Company continues to vigorously defendall such lawsuits.  As of November 30,2004, the Company was a defendant in silica-related cases involving 8,226claimants, compared to 6,847 claimants as of November 30, 2003.  The Company is not in a position to estimatethe number of additional claims that may be filed against it in thefuture.  For the fiscal year endedNovember 30, 2004, there were new claims involving 1,966 claimants, dismissalsand/or settlements involving 587 claimants and no judgments.  Net costs and expenses incurred by theCompany for the fiscal year ended November 30, 2004 in connection withsilica-related claims were approximately $.4 million.

 

In April 2003, the Company was served with acomplaint in an action brought by J. Ray McDermott, Inc., J. Ray McDermott,S.A. and SparTEC, Inc. (collectively “McDermott”) in the District Court ofHarris County, Texas against the Company and two co-defendants, in connectionwith certain coatings supplied by the defendants in 2002 for an offshoreproduction facility known as a SPAR being constructed by McDermott for DominionExploration and Production, Inc. and Pioneer Natural Resources USA, Inc.(collectively “Dominion”).  McDermottalleges that the Company’s co-defendants improperly supplied coatings whichcontained lead and/or lead chromate, and that as a result the Company and itsco-defendants are liable to McDermott for all costs associated with removal andreplacement of those coatings. McDermott’s petition as filed alleged a claimfor damages in an unspecified amount; however, McDermott’s economic expertsubsequently estimated McDermott’s damages at approximately $21 million, afigure which the Company contests.  Trialof this matter is expected in August 2005. The Company believes that it has meritorious defenses to thisaction.  Based upon the informationavailable to it at this time, the Company is not in a position to evaluate theultimate outcome of this matter.

 

Separately, in May 2003, Dominion brought anaction against the Company in Civil District Court for the Parish of Orleans,Louisiana as owners of the SPAR seeking additional damages allegedly sustainedby Dominion resulting from delays in McDermott’s delivery of the SPAR caused bythe removal and replacement of coatings containing lead and/or leadchromate.  Dominion contends that the Companymade certain misrepresentations and warranties to Dominion concerning thelead-free nature of those coatings. Dominion’s petition as filed alleged a claim for damages in anunspecified amount; however, Dominion’s economic expert recently estimated Dominion’sdamages at approximately $128 million, a figure which the Companycontests.  This matter is in discovery,and no trial date has yet been established. The Company believes that it has meritorious defenses to thisaction.   Based upon the informationavailable to it at this time, the Company is not in a position to evaluate theultimate outcome of this matter.

 

In addition, certain other claims, suits andcomplaints that arise in the ordinary course of business, have been filed orare pending against the Company. Management believes that these matters areeither adequately reserved, covered by insurance, or would not have a materialeffect on the Company’s financial position or its results of operations ifdisposed of unfavorably.

 

The Company is subject to federal, state andlocal laws and regulations concerning the environment and is currentlyparticipating in administrative proceedings at several sites under these laws.While the Company finds it difficult to estimate with any certainty the total costof remediation at the several sites, on the basis of currently availableinformation and reserves provided, the Company believes that the outcome ofsuch environmental regulatory proceedings will not have a material effect onthe Company’s financial position or its results of operations.

 

**CONTROLSAND PROCEDURES**

 

The Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures as of November 30, 2004 pursuant to Exchange Act Rule13a-14.  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the Company’s periodic Securities andExchange Commission filings.  Nosignificant changes were made in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to November30, 2004.

 

**NEWACCOUNTING PRONOUNCEMENTS**

 

In December 2003, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46-R, “Consolidationof Variable Interest Entities,” to replace FIN No. 46.  FIN No. 46-Raddresses the consolidation of business enterprises (“variable interestentities”) to which the usual condition (ownership of a majority votinginterest) of consolidation does not apply.  FIN No. 46-R focuses onfinancial interests that indicate control. It concludes that in the absence ofclear control through voting interests or sufficient equity, a company’sexposure (“variable interest”) to the economic risks and potential rewards fromthe variable interest entity’s assets and activities are the best evidence ofcontrol. Variable interests are rights and obligations that convey economicgains or losses from changes in the values of the variable interest entity’sassets and liabilities. Variable interests may arise from financialinstruments, service contracts, nonvoting ownership interests and otherarrangements. If an enterprise holds a majority of the variable interests of anentity, it would be considered the primary beneficiary. The primary beneficiaryis required to consolidate the assets, liabilities and the results ofoperations of the variable interest entity in its financial statements. The adoption of FIN No. 46-R did not have a material impact on the Company’sconsolidated financial statements.

 

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In December 2003, the FASB issued a revisionto SFAS No. 132, “Employers’ Disclosures about Pensions and OtherPostretirement Benefits.”  The revision to SFAS No. 132 requiresadditional disclosures relating to the description of the types of plan assets,investment strategy, measurement dates, plan obligations, cash flows, andcomponents of net periodic benefit cost of defined benefit pension plans andother defined benefit postretirement plans recognized during interimperiods.  These disclosure requirements are effective for the Company forthe year ended November 30, 2004.  Disclosures required under SFAS No. 132are included in Note 15 of the Notes to the Consolidated Financial Statementsin the Company’s 2004 Annual Report.

 

In January 2004, the FASB issued a FASB StaffPosition (“FSP”) regarding SFAS No. 106, “Employers’ Accounting for PostretirementBenefits Other Than Pensions.”  FSP 106-1, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003,” discusses the effect of the Medicare PrescriptionDrug, Improvement and Modernization Act (“the Act”) enacted on December 8,2003.  FSP 106-1 considers the effect of the two new features introducedin the Act in determining accumulated postretirement benefit obligation (“APBO”)and net periodic postretirement benefit cost, which may serve to reduce acompany’s post-retirement benefit costs.  Companies may elect to deferaccounting for this benefit or may attempt to reflect the best estimate of theimpact of the Act on net periodic costs currently.  The Company has chosento defer accounting for the benefit until the FASB issues final accountingguidance due to various uncertainties related to this legislation and theappropriate accounting.  The Company’s measures of APBO and net periodicpostretirement benefit costs as of and for the periods ended November 30, 2004do not reflect the effect of the Act.

 

In May 2004, the FASB issued a second FSPregarding SFAS No. 106. FSP 106-2, “Accounting and Disclosure RequirementsRelated to the Medicare Prescription Drug, Improvement and Modernization Act of2003,” discusses the effect of the Act.  FSP 106-2 considers the effect ofthe two new features introduced in the Act in determining APBO and net periodicpostretirement benefit cost, which may serve to reduce a company’spostretirement benefit costs. The adoption of FSP 106-2 did not have a materialimpact on the Company’s financial position or results of operations.

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which clarifiesthe accounting for abnormal amounts of idle facility expense, freight, handlingcosts and wasted material. SFAS No. 151 will be effective for inventory costsincurred during fiscal years beginning after June 15, 2005.  The adoption of SFAS No. 151 is not expectedto have a material impact on the Company’s consolidated financial statements.

 

In December 2004, the FASBissued SFAS No. 123 (revised 2004), “Share-Based Payments.”  SFAS No. 123(R) would require the Company tomeasure all employee stock-based compensation awards using a fair-value methodand record such expense in its consolidated financial statements.  The adoption of SFAS No. 123(R) will require additionalaccounting related to the income tax effects and additional disclosureregarding the cash flow effects resulting from share-based paymentarrangements.  SFAS No. 123(R) iseffective beginning in the quarter ending November 30, 2005.  The effect of the adoption of SFAS No. 123(R)is expected to be comparable to the effect disclosed on a pro forma basis as aresult of applying the current fair value recognition provisions of SFAS No.123 as shown in Note 12 of Notes to Consolidated Financial Statements in theCompany’s 2004 Annual Report.

 

**CAUTIONARYSTATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995**

 

Any of the statements contained in thisAnnual Report that refer to the Company’s forecasted, estimated or anticipatedfuture results are forward-looking and reflect the Company’s current analysisof existing trends and information. Actual results may differ from currentexpectations based on a number of factors affecting Ameron’s businesses,including competitive conditions and changing market conditions. In addition,matters affecting the economy generally, including the state of economiesworldwide, can affect the Company’s results. These forward-looking statementsrepresent the Company’s judgment only as of the date of this Annual Report.Since actual results could differ materially, the reader is cautioned not torely on these forward-looking statements. Moreover, the Company disclaims anyintent or obligation to update these forward-looking statements.

 

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**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                                                    | ** ** | **Year ended November 30,** | ** **  |
|-------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| **(Dollars in thousands, except per share data)**                             | ** ** | **2004**                    | ** **  | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                    | ** ** | ** **                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Sales                                                                         | ** ** | **$**                       | **605,853** | ** ** | $ | 600,495 |   | $ | 539,473 |   |
| Cost of sales                                                                 | ** ** | **(457,442**                | **)**       | (434,007 | ) | (397,590 | ) |
|                                                                          |       |                        | ** **  |   |   |   |   |
| Gross profit                                                                  | ** ** | **148,411**                 | ** **  | 166,488 |   | 141,883 |   |
| Selling, general and administrative  expenses                                 | ** ** | **(137,468**                | **)**       | (127,392 | ) | (105,898 | ) |
| Pension plan curtailment/settlement                                           | ** ** | **(12,817**                 | **)**       | — |   | — |   |
| Other income, net                                                             | ** ** | **17,861**                  | ** **  | 10,852 |   | 9,767 |   |
| Income before interest, income taxes  and equity in earnings of joint venture | ** ** | **15,987**                  | ** **  | 49,948 |   | 45,752 |   |
| Interest expense, net                                                         | ** ** | **(5,313**                  | **)**       | (6,645 | ) | (6,836 | ) |
| Income before income taxes and equity  in earnings of joint venture           | ** ** | **10,674**                  | ** **  | 43,303 |   | 38,916 |   |
| Provision for income taxes                                                    | ** ** | **(8,006**                  | **)**       | (14,017 | ) | (14,166 | ) |
| Income before equity in earnings of joint venture                             | ** ** | **2,668**                   | ** **  | 29,286 |   | 24,750 |   |
| Equity in earnings of joint venture, net of  taxes                            | ** ** | **10,791**                  | ** **  | 614 |   | 3,309 |   |
| Net income                                                                    | ** ** | **$**                       | **13,459**  | ** ** | $ | 29,900 |   | $ | 28,059 |   |
|                                                                          |       |                        | ** **  |   |   |   |   |
| Net income per share (basic)                                                  | ** ** | **$**                       | **1.63**    | ** ** | $ | 3.77 |   | $ | 3.61 |   |
| Net income per share (diluted)                                                | ** ** | **$**                       | **1.59**    | ** ** | $ | 3.67 |   | $ | 3.49 |   |
|                                                                          |       |                        | ** **  |   |   |   |   |
| Weighted-average shares (basic)                                               | ** ** | **8,270,487**               | ** **  | 7,925,229 |   | 7,772,032 |   |
| Weighted-average shares (diluted)                                             | ** ** | **8,448,987**               | ** **  | 8,149,460 |   | 8,052,164 |   |

 

***The accompanying notes are an integral partof these consolidated financial statements.***

 

35

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**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                 | ** ** | **As of November 30,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|------------------------|-------------|
| **(Dollars in thousands, except per share data)**                                          | ** ** | **2004**               | ** **  | **2003** | ** ** |
|                                                                                       |       |                   |        |   |   |
| **ASSETS**                                                                                 |       |                   |        |   |   |
| Current assets                                                                             |       |                   |        |   |   |
| Cash and cash equivalents                                                                  | ** ** | **$**                  | **30,124**  | ** ** | $ | 20,390 |   |
| Receivables, less allowances of $7,984 in  2004 and $8,168 in 2003                         | ** ** | **162,636**            | ** **  | 155,629 |   |
| Inventories                                                                                | ** ** | **90,297**             | ** **  | 91,371 |   |
| Deferred income taxes                                                                      | ** ** | **15,526**             | ** **  | 19,241 |   |
| Prepaid expenses and other current assets                                                  | ** ** | **11,032**             | ** **  | 8,882 |   |
|                                                                                       |       |                   | ** **  |   |   |
| Total current assets                                                                       | ** ** | **309,615**            | ** **  | 295,513 |   |
|                                                                                       |       |                   | ** **  |   |   |
| Investments in joint ventures                                                              |       |                   | ** **  |   |   |
| Equity method                                                                              | ** ** | **16,042**             | ** **  | 13,064 |   |
| Cost method                                                                                | ** ** | **5,922**              | ** **  | 5,479 |   |
|                                                                                       |       |                   | ** **  |   |   |
| Property, plant and equipment                                                              |       |                   | ** **  |   |   |
| Land                                                                                       | ** ** | **38,875**             | ** **  | 37,787 |   |
| Buildings                                                                                  | ** ** | **87,159**             | ** **  | 84,426 |   |
| Machinery and equipment                                                                    | ** ** | **286,769**            | ** **  | 283,123 |   |
| Construction in progress                                                                   | ** ** | **8,812**              | ** **  | 6,169 |   |
|                                                                                       |       |                   | ** **  |   |   |
| Total property, plant and equipment at cost                                                | ** ** | **421,615**            | ** **  | 411,505 |   |
| Accumulated depreciation                                                                   | ** ** | **(267,964**           | **)**       | (260,919 | ) |
|                                                                                       |       |                   | ** **  |   |   |
| Total property, plant and equipment, net                                                   | ** ** | **153,651**            | ** **  | 150,586 |   |
| Deferred income taxes                                                                      | ** ** | **6,029**              | ** **  | 6,744 |   |
| Intangible assets, net of accumulated amortization  of $10,550 in 2004 and  $9,738 in 2003 | ** ** | **13,795**             | ** **  | 13,526 |   |
| Other assets                                                                               | ** ** | **38,883**             | ** **  | 48,580 |   |
|                                                                                       |       |                   | ** **  |   |   |
| Total assets                                                                               | ** ** | **$**                  | **543,937** | ** ** | $ | 533,492 |   |

 

***The accompanying notes are an integral partof these consolidated financial statements.***

 

36

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| ** **                                                                                                                                                        | ** ** | **As of November 30,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                                                                                                        | ** ** | **2004**               | ** **  | **2003** | ** ** |
|                                                                                                                                                              |       |                   |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                     |       |                   |        |   |   |
| Current liabilities                                                                                                                                               |       |                   |        |   |   |
|                                                                                                                                                              |       |                   | ** **  |   |   |
| Current portion of long-term debt                                                                                                                                 | ** ** | **$**                  | **18,333**  | ** ** | $ | 8,333 |   |
| Trade payables                                                                                                                                                    | ** ** | **49,156**             | ** **  | 47,512 |   |
| Accrued liabilities                                                                                                                                               | ** ** | **53,221**             | ** **  | 53,091 |   |
| Income taxes payable                                                                                                                                              | ** ** | **8,092**              | ** **  | 9,568 |   |
|                                                                                                                                                              |       |                   | ** **  |   |   |
| Total current liabilities                                                                                                                                         | ** ** | **128,802**            | ** **  | 118,504 |   |
|                                                                                                                                                              |       |                   | ** **  |   |   |
| Long-term debt, less current portion                                                                                                                              | ** ** | **75,349**             | ** **  | 86,044 |   |
| Other long-term liabilities                                                                                                                                       | ** ** | **60,619**             | ** **  | 72,832 |   |
|                                                                                                                                                              |       |                   | ** **  |   |   |
| Total liabilities                                                                                                                                                 | ** ** | **264,770**            | ** **  | 277,380 |   |
|                                                                                                                                                              |       |                   | ** **  |   |   |
| Commitments and contingencies                                                                                                                                     |       |                   | ** **  |   |   |
| Stockholders’ equity                                                                                                                                         |       |                   | ** **  |   |   |
|                                                                                                                                                              |       |                   | ** **  |   |   |
| Common stock, par value $2.50 a share,  authorized 24,000,000 shares,  outstanding 8,431,471 shares in 2004 and 8,214,563 shares in 2003, net  of treasury shares | ** ** | **27,745**             | ** **  | 27,186 |   |
| Additional paid-in capital                                                                                                                                        | ** ** | **21,903**             | ** **  | 16,443 |   |
| Unearned restricted stock                                                                                                                                         | ** ** | **(2,300**             | **)**       | (1,481 | ) |
| Retained earnings                                                                                                                                                 | ** ** | **301,013**            | ** **  | 294,255 |   |
| Accumulated other comprehensive loss                                                                                                                              | ** ** | **(20,420**            | **)**       | (31,768 | ) |
| Treasury stock (2,666,670 shares in 2004  and 2,659,810 in 2003)                                                                                                  | ** ** | **(48,774**            | **)**       | (48,523 | ) |
|                                                                                                                                                              |       |                   | ** **  |   |   |
| Total stockholders’ equity                                                                                                                                   | ** ** | **279,167**            | ** **  | 256,112 |   |
|                                                                                                                                                              |       |                   | ** **  |   |   |
| Total liabilities and stockholders’ equity                                                                                                                   | ** ** | **$**                  | **543,937** | ** ** | $ | 533,492 |   |

 

37

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**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 
| ** **                                           | ** ** | **Common  Stock**       | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **                                  | ** ** | ** **          | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|------------|------------|----------------------------------|------------|---------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|
| **(Dollars in thousands)**                           | ** ** | **Shares  Outstanding** | ** ** | **Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Unearned  Restricted  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
| Balance, November 30, 2001                           |       | 3,873,007               |       | $          | 13,017     |                             | $          | 19,457                          |       | $                      | —     |                                        | $          | 247,406             |       | $ | (26,974 | ) | $ | (48,659 | ) | $ | 204,247 |   |
| Net Income - 2002                                    |       | —                  |       | —     |       | —                           |       | —                          |       | 28,059                 |       | —                                      |       | —              |       | 28,059 |   |
| Exercise of stock options                            |       | 32,655                  |       | 81         |       | 1,146                            |       | —                          |       | —                 |       | —                                      |       | —              |       | 1,227 |   |
| Foreign currency translation adjustment              |       | —                  |       | —     |       | —                           |       | —                          |       | —                 |       | 7,182                                       |       | —              |       | 7,182 |   |
| Minimum pension liability adjustment, net of tax     |       | —                  |       | —     |       | —                           |       | —                          |       | —                 |       | (25,171                                     | )          | —              |       | (25,171 | ) |
| Comprehensive income from joint venture              |       | —                  |       | —     |       | —                           |       | —                          |       | —                 |       | 15                                          |       | —              |       | 15 |   |
| Cash dividends on common stock                       |       | —                  |       | —     |       | —                           |       | —                          |       | (5,016                 | )          | —                                      |       | —              |       | (5,016 | ) |
| Stock compensation expense                           |       | —                  |       | —     |       | 713                              |       | —                          |       | —                 |       | —                                      |       | —              |       | 713 |   |
| Issuance of restricted stock                         |       | 40,000                  |       | 100        |       | 2,634                            |       | (2,734                          | )          | —                 |       | —                                      |       | —              |       | — |   |
| Amortization of restricted stock                     |       | —                  |       | —     |       | —                           |       | 570                             |       | —                 |       | —                                      |       | —              |       | 570 |   |
| Balance, November 30, 2002                           |       | 3,945,662               |       | 13,198     |       | 23,950                           |       | (2,164                          | )          | 270,449                |       | (44,948                                     | )          | (48,659             | )          | 211,826 |   |
| Net Income - 2003                                    |       | —                  |       | —     |       | —                           |       | —                          |       | 29,900                 |       | —                                      |       | —              |       | 29,900 |   |
| Stock dividends                                      |       | 3,945,662               |       | 13,224     |       | (13,224                          | )          | —                          |       | —                 |       | —                                      |       | —              |       | — |   |
| Exercise of stock options                            |       | 323,239                 |       | 764        |       | 5,722                            |       | —                          |       | —                 |       | —                                      |       | 136                 |       | 6,622 |   |
| Foreign currency translation adjustment              |       | —                  |       | —     |       | —                           |       | —                          |       | —                 |       | 14,847                                      |       | —              |       | 14,847 |   |
| Minimum pension liability adjustment, net of tax     |       | —                  |       | —     |       | —                           |       | —                          |       | —                 |       | (2,399                                      | )          | —              |       | (2,399 | ) |
| Comprehensive income from joint venture              |       | —                  |       | —     |       | —                           |       | —                          |       | —                 |       | 732                                         |       | —              |       | 732 |   |
| Cash dividends on common stock                       |       | —                  |       | —     |       | —                           |       | —                          |       | (6,094                 | )          | —                                      |       | —              |       | (6,094 | ) |
| Stock compensation expense                           |       | —                  |       | —     |       | (5                               | )          | —                          |       | —                 |       | —                                      |       | —              |       | (5 | ) |
| Amortization of restricted stock                     |       | —                  |       | —     |       | —                           |       | 683                             |       | —                 |       | —                                      |       | —              |       | 683 |   |
| **Balance, November 30, 2003**                       | ** ** | **8,214,563**           | ** ** | **27,186** | ** ** | **16,443**                       | ** ** | **(1,481**                      | **)**      | **294,255**            | ** ** | **(31,768**                                 | **)**      | **(48,523**         | **)**      | **256,112** | ** ** |
| **Net Income - 2004**                                |       | —                  | ** ** | —     |       | —                           |       | —                          | ** ** | **13,459**             | ** ** | —                                      |       | —              | ** ** | **13,459** | ** ** |
| **Exercise of stock options**                        | ** ** | **167,768**             | ** ** | **419**    | ** ** | **2,896**                        |       | —                          | ** ** | —                 | ** ** | —                                      |       | —              | ** ** | **3,315** | ** ** |
| **Foreign currency translation adjustment**          |       | —                  | ** ** | —     |       | —                           |       | —                          | ** ** | —                 | ** ** | **10,175**                                  |       | —              | ** ** | **10,175** | ** ** |
| **Minimum pension liability adjustment, net of tax** |       | —                  | ** ** | —     |       | —                           |       | —                          | ** ** | —                 | ** ** | **411**                                     |       | —              | ** ** | **411** | ** ** |
| **Comprehensive income from joint venture**          |       | —                  | ** ** | —     |       | —                           |       | —                          | ** ** | —                 | ** ** | **762**                                     |       | —              | ** ** | **762** | ** ** |
| **Cash dividends on common stock**                   |       | —                  | ** ** | —     |       | —                           |       | —                          | ** ** | **(6,701**             | **)**      | —                                      |       | —              | ** ** | **(6,701** | **)** |
| **Stock compensation expense**                       |       | —                  | ** ** | —     | ** ** | **772**                          |       | —                          | ** ** | —                 | ** ** | —                                      |       | —              | ** ** | **772** | ** ** |
| **Issuance of restricted stock**                     | ** ** | **56,000**              | ** ** | **140**    | ** ** | **1,792**                        | ** ** | **(1,932**                      | **)**      | —                 | ** ** | —                                      |       | —              | ** ** | **—** | ** ** |
| **Amortization of restricted stock**                 |       | —                  | ** ** | —     |       | —                           | ** ** | **1,113**                       | ** ** | —                 | ** ** | —                                      |       | —              | ** ** | **1,113** | ** ** |
| **Treasury stock purchase**                          | ** ** | **(6,860**              | **)**      | —     |       | —                           |       | —                          | ** ** | —                 | ** ** | —                                      | ** ** | **(251**            | **)**      | **(251** | **)** |
| **Balance, November 30, 2004**                       | ** ** | **8,431,471**           | ** ** | **$**      | **27,745** | ** **                       | **$**      | **21,903**                      | ** ** | **$**                  | **(2,300** | **)**                                       | **$**      | **301,013**         | ** ** | **$** | **(20,420** | **)** | **$** | **(48,774** | **) ** | **$** | **279,167** | ** ** |

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

 
| ** **                                        | ** ** | **Year ended November 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                              |       |                        |       |   |   |   |   |
| Net income                                        | ** ** | **$**                       | **13,459** |   | $ | 29,900 |   | $ | 28,059 |   |
| Foreign currency translation adjustment           | ** ** | **10,175**                  |       | 14,847 |   | 7,182 |   |
| Minimum pension liability adjustment, net  of tax | ** ** | **411**                     |       | (2,399 | ) | (25,171 | ) |
| Comprehensive income from joint venture           | ** ** | **762**                     |       | 732 |   | 15 |   |
| Comprehensive income                              | ** ** | **$**                       | **24,807** |   | **$** | 43,080 |   | $ | 10,085 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

38

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                          | ** ** | **Year ended November 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                                                  | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                          | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **OPERATING ACTIVITIES**                                                            | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                          | ** ** | **$**                       | **13,459** | ** ** | $ | 29,900 |   | $ | 28,059 |   |
| Adjustments to reconcile net income to net  cash provided  by operating activities: |       |                        | ** ** |   |   |   |   |
| Depreciation                                                                        | ** ** | **18,673**                  | ** ** | 18,093 |   | 18,032 |   |
| Amortization                                                                        | ** ** | **224**                     | ** ** | 278 |   | 540 |   |
| Provision/(benefit) for deferred income  taxes                                      | ** ** | **3,689**                   | ** ** | (4,654 | ) | 5,960 |   |
|                                                                                | ** ** | ** **                  | ** ** |   |   |   |   |
| Net earnings and distributions from joint  ventures                                 | ** ** | **(2,217**                  | **)**      | 609 |   | (132 | ) |
|                                                                                | ** ** | ** **                  | ** ** |   |   |   |   |
| Gain from sale of investments, property,  plant and equipment                       | ** ** | **(13,140**                 | **)**      | (2,385 | ) | (71 | ) |
| Stock compensation expense                                                          | ** ** | **1,885**                   | ** ** | 678 |   | 1,283 |   |
| Other, net                                                                          |       | —                      | ** ** | 401 |   | — |   |
| Changes in operating assets and  liabilities:                                       |       |                        | ** ** |   |   |   |   |
| Receivables                                                                         | ** ** | **(1,690**                  | **)**      | (16,457 | ) | 8,194 |   |
| Inventories                                                                         | ** ** | **3,665**                   | ** ** | 125 |   | 6,249 |   |
| Prepaid expenses and other current assets                                           | ** ** | **(1,792**                  | **)**      | (1,973 | ) | 105 |   |
| Other assets                                                                        | ** ** | **2,789**                   | ** ** | (14,113 | ) | (1,635 | ) |
| Trade payables                                                                      | ** ** | **64**                      | ** ** | (1,343 | ) | (2,147 | ) |
| Accrued liabilities and income taxes  payable                                       | ** ** | **(2,597**                  | **)**      | 12,963 |   | (3,134 | ) |
| Other long-term liabilities                                                         | ** ** | **(12,949**                 | **)**      | 21,104 |   | (6,669 | ) |
|                                                                                |       |                        | ** ** |   |   |   |   |
| Net cash provided by operating activities                                           | ** ** | **10,063**                  | ** ** | 43,226 |   | 54,634 |   |
|                                                                                |       |                        | ** ** |   |   |   |   |
| **INVESTING ACTIVITIES**                                                            |       |                        | ** ** |   |   |   |   |
| Proceeds from sale of property, plant and  equipment                                | ** ** | **15,702**                  | ** ** | 239 |   | 504 |   |
| Proceeds from sale of investment in joint  venture                                  | ** ** | **—**                  | ** ** | 2,985 |   | — |   |
| Proceeds from sale of other investments                                             | ** ** | **7,214**                   | ** ** | — |   | — |   |
| Additions to investments, property, plant  and equipment                            | ** ** | **(18,755**                 | **)**      | (17,107 | ) | (14,514 | ) |
|                                                                                |       |                        | ** ** |   |   |   |   |
| Net cash provide by/(used in) investing  activities                                 | ** ** | **4,161**                   | ** ** | (13,883 | ) | (14,010 | ) |
|                                                                                |       |                        | ** ** |   |   |   |   |
| **FINANCING ACTIVITIES**                                                            |       |                        | ** ** |   |   |   |   |
| Issuance of debt                                                                    | ** ** | **11,033**                  | ** ** | 59,664 |   | 825 |   |
| Repayment of debt                                                                   | ** ** | **(11,874**                 | **)**      | (78,456 | ) | (38,918 | ) |
| Debt issuance costs                                                                 | ** ** | **(477**                    | **)**      | (1,581 | ) | — |   |
| Dividends on common stock                                                           | ** ** | **(6,701**                  | **)**      | (6,094 | ) | (5,016 | ) |
| Issuance of common stock                                                            | ** ** | **3,315**                   | ** ** | 6,486 |   | 1,227 |   |
| Change in treasury stock                                                            | ** ** | **(251**                    | **)**      | 136 |   | — |   |
|                                                                                |       |                        | ** ** |   |   |   |   |
| Net cash used in financing activities                                               | ** ** | **(4,955**                  | **)**      | (19,845 | ) | (41,882 | ) |
| ** **                                                                          |       |                        | ** ** |   |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                       | ** ** | **465**                     | ** ** | 532 |   | 303 |   |
|                                                                                |       |                        | ** ** |   |   |   |   |
| Net change in cash and cash equivalents                                             | ** ** | **9,734**                   | ** ** | 10,030 |   | (955 | ) |
| Cash and cash equivalents at beginning of  year                                     | ** ** | **20,390**                  | ** ** | 10,360 |   | 11,315 |   |
|                                                                                |       |                        | ** ** |   |   |   |   |
| Cash and cash equivalents at end of year                                            | ** ** | **$**                       | **30,124** | ** ** | $ | 20,390 |   | $ | 10,360 |   |

 

***The accompanying notes are an integral partof these consolidated financial statements.***

 

39

----

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Principles of Consolidation***

Theconsolidated financial statements include the accounts of Ameron InternationalCorporation and all wholly-owned subsidiaries (“Ameron” or the “Company”). Allmaterial intercompany accounts and transactions have been eliminated.

 

***Reclassifications***

Certainprior-year balances have been reclassified to conform with the current-yearpresentation.

 

***Use of Estimates***

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities and the reported amounts ofrevenues and expenses. Significant estimates include revenue and costs recordedunder percentage-of-completion accounting, assumptions related to benefitplans, goodwill, and reserves associated with management incentives,receivables, inventories, income taxes, self insurance and environmental andlegal contingencies. Actual results could differ from those estimates.

 

***Revenue Recognition***

Revenuefor the Performance Coatings & Finishes, Fiberglass-Composite Pipe andInfrastructure Products segments is recognized when risk of ownership and titlepass, primarily at the time goods are shipped, provided that an agreementexists between the customer and the Company, the price is fixed or determinableand collection is reasonably assured. In limited circumstances within thePerformance Coatings & Finishes Group, revenue recognition associated withshipment of coatings for marine dry dockings is delayed until product returnsare processed. Revenue is recognized for the Water Transmission Group primarilyunder the percentage-of-completion method, typically based on completed unitsof production, since products are manufactured under enforceable and bindingconstruction contracts, typically are designed for specific applications, arenot interchangeable between projects, and are not manufactured for stock. Insome cases, if products are manufactured for stock or are not related tospecific construction contracts, revenue is recognized under the same criteriaused by the other three segments. Revenue under the percentage-of-completion method is subject to agreater level of estimation, which affects the timing of revenue recognition,costs and profits. Estimates are reviewed on a consistent basis and areadjusted periodically to reflect current expectations.

 

***Research and Development Costs***

Researchand development costs, which relate primarily to the development, design andtesting of products, are expensed as incurred. Such costs, which are includedin selling, general and administrative expenses, were approximately $5,645,000in 2004, $5,653,000 in 2003, and $4,356,000 in 2002.

 

***Environmental Clean-up Costs***

TheCompany expenses environmental clean-up costs related to existing conditionsresulting from past or current operations. The Company determines its liabilityon a site-by-site basis and records a liability at the time when assessmentsand/or remediation are probable and can be reasonably estimated.

 

***Income Taxes***

Deferredincome tax assets and liabilities are computed for differences between thefinancial statement and income tax bases of assets and liabilities. Suchdeferred income tax asset and liability computations are based on enacted taxlaws and rates applicable to periods in which the differences are expected toreverse. Valuation allowances are established to reduce deferred income taxassets to the amounts expected to be realized.

 

***Net Income Per Share***

Basicnet income per share is computed on the basis of the weighted-average number ofcommon shares outstanding during the periods presented. Diluted net income pershare is computed on the basis of the weighted-average number of common sharesoutstanding plus the effect of outstanding stock options and restricted stock,using the treasury stock method.

 

***Cash and Cash Equivalents***

Cashequivalents represent liquid investments with maturities of three months or lesswhen purchased.

 

***Inventory Valuation***

Inventoriesare stated at the lower of cost or market with cost determined principally onthe first-in, first-out (FIFO) method. Certain steel inventories used by theWater Transmission Group are valued using the last-in, first-out

 

----

 

(LIFO)method. Reserves are established for excess, obsolete and rework inventoriesbased on age, estimates of salability and forecasted future demand.

*** ***

***Joint Ventures***

Investmentsin unconsolidated joint ventures or affiliates (“joint ventures”) over whichthe Company has significant influence are accounted for under the equity methodof accounting, whereby the investment is carried at the cost of acquisition,plus the Company’s equity in undistributed earnings or losses since acquisition.Investments in joint ventures over which the Company does not have the abilityto exert significant influence over the investee’s operating and financingactivities are accounted for under the cost method of accounting. The Company’sinvestment in TAMCO is accounted for under the equity method. Investments inAmeron Saudi Arabia, Ltd., Bondstrand, Ltd. and Oasis-Ameron, Ltd. areaccounted for under the cost method due to management’s current assessment ofthe Company’s influence over these joint ventures.

 

***Property, Plant and Equipment***

Itemscapitalized as property, plant and equipment, including improvements toexisting facilities, are recorded at cost. Construction in progress representscapital expenditures incurred for assets not yet placed in service. Capitalizedinterest was not material for the periods presented.

 

Depreciationis computed principally using the straight-line method based on estimateduseful lives of the assets. Leasehold improvements are amortized over theshorter of the life of the improvement or the term of the lease. Useful livesare as follows:

 
| ** **                 | ** ** | **Useful Lives in  Years** | ** ** |
|----------------------------|------------|----------------------------|------------|
| Buildings                  |       | 10-40                      |       |
| Machinery and equipment    |       |                       |       |
| Autos, trucks and trailers |       | 3-8                        |       |
| Cranes and tractors        |       | 5-15                       |       |
| Manufacturing equipment    |       | 3-15                       |       |
| Other                      |       | 2-20                       |       |

 

40

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***Goodwill and Intangible Assets***

 

Intangibleassets are amortized on a straight-line basis over periods ranging from threeto 15 years.

 

Thecost of an acquired business is allocated to the acquired net assets based onthe estimated fair values at the date of acquisition. The excess of the cost ofan acquired business over the aggregate fair value is recorded asgoodwill.  Effective December 1, 2002,the Company adopted Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill and Other Intangible Assets.” As a result, goodwill is not amortized but instead tested for impairmentat least annually. Such tests require management to make estimates about futurecash flows and other factors to determine the fair value of the respectiveassets. Prior to 2003, goodwill was amortized using the straight-line methodover periods ranging up to 40 years.

 

TheCompany reviews the recoverability of intangible and other long-lived assetsfor impairment whenever events or changes in circumstances indicate that thecarrying value of such assets may not be recoverable. If the estimated future,undiscounted cash flows from the use of an asset are less than its carryingvalue, a write-down is recorded to reduce the related asset to estimated fairvalue.

 

***Self Insurance***

TheCompany typically utilizes third-party insurance subject to varying retentionlevels or self insurance. The Company is self insured for a portion of thelosses and liabilities primarily associated with workers’ compensation claimsand general, product and vehicle liability. Losses are accrued based upon theCompany’s estimates of the aggregate liability for claims incurred usinghistorical experience and certain actuarial assumptions followed in theinsurance industry. The estimate of self insurance liability includes anestimate of incurred but not reported claims, based on data compiled fromhistorical experience.

 

***Foreign Currency Translation***

Thefunctional currencies for the Company’s foreign operations are the applicablelocal currencies. The translation from the applicable foreign currencies toU.S. dollars is performed for balance sheet accounts using current exchangerates in effect at the balance sheet date and for revenue and expense accountsusing a weighted-average exchange rate during the period. The resultingtranslation adjustments are recorded in accumulated other comprehensive income.The Company advances funds to certain foreign subsidiaries that are notexpected to be repaid in the foreseeable future. Translation adjustmentsarising from these advances are also included in accumulated othercomprehensive income. Gains or losses resulting from foreign currencytransactions are included in other income.

 

***Derivative Financial Instruments and RiskManagement***

TheCompany operates internationally, giving rise to exposure to market risks fromchanges in foreign exchange rates. From time to time, derivative financialinstruments, primarily foreign exchange contracts, are used by the Company toreduce those risks. The Company does not hold or issue financial or derivativefinancial instruments for trading or speculative purposes. As of November 30,2004 and 2003, the Company had foreign currency forward contracts with anaggregate face value of approximately $9,774,000 and $9,367,000, respectively.

 

***Fair Value of Financial Instruments***

Thefair value of financial instruments, other than long-term debt or derivatives,approximates the carrying value because of the short-term nature of suchinstruments.

 

***Concentration of Credit Risk***

Financialinstruments that subject the Company to credit risk consist primarily of cashequivalents, trade accounts receivable, and forward foreign exchange contracts.Credit risk with respect to trade accounts receivable is generally distributedover a large number of entities comprising the Company’s customer base and isgeographically dispersed. The Company performs ongoing credit evaluations ofits customers, maintains an allowance for potential credit losses and, in certaininstances, maintains credit insurance. The Company actively evaluates thecreditworthiness of the financial institutions with which it conducts business.

 

***Stock-Based Compensation***

TheCompany recognizes compensation expense associated with stock-based awardsunder the recognition and measurement principles of Accounting Principles Board(“APB”) No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. Accordingly, compensation expense is measured by the excess ofthe quoted market price of the stock over the option exercise price on thegrant date. No compensation expense associated with a stock-based award isrecorded if the stock option exercise price equals the market price of theCompany’s stock on the date of the grant.

 

----

 

InDecember 2002, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 148, “Accounting for Stock-Based Compensation-Transition and Disclosures.”SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,”and provides alternative methods of transition for a voluntary change to thefair-value-based method of accounting for stock-based employee compensation.SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to includepro forma presentation of net income and earnings per share as if the Companyrecorded compensation expense based on the fair value of stock-based awards.The Company has adopted the disclosure-only provisions of SFAS No. 123.Disclosures required under SFAS No. 123 and SFAS No. 148 are included in Note12 herein.

 

***New Accounting Pronouncements***

 

InDecember 2003, the FASB issued FASB Interpretation (“FIN”) No. 46-R, “Consolidationof Variable Interest Entities,” to replace FIN No. 46.  FIN No. 46-Raddresses the consolidation of business enterprises (“variable interestentities”) to which the usual condition (ownership of a majority votinginterest) of consolidation does not apply.  FIN No. 46-R focuses onfinancial interests that indicate control. It concludes that in the absence ofclear control through voting interests or sufficient equity, a company’sexposure (“variable interest”) to the economic risks and potential rewards fromthe variable interest entity’s assets and activities are the best evidence ofcontrol. Variable interests are rights and obligations that convey economicgains or losses from changes in the values of the variable interest entity’sassets and liabilities. Variable interests may arise from financialinstruments, service contracts, nonvoting ownership interests and other arrangements.If an enterprise holds a majority of the variable interests of an entity, itwould be considered the primary beneficiary. The primary beneficiary isrequired to consolidate the assets, liabilities and the results of operationsof the variable interest entity in its financial statements.  The adoptionof FIN No. 46-R did not have a material impact on the Company’s consolidatedfinancial statements.

 

41

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InDecember 2003, the FASB issued a revision to SFAS No. 132, “Employers’Disclosures about Pensions and Other Postretirement Benefits.”  Therevision to SFAS No. 132 requires additional disclosures relating to thedescription of the types of plan assets, investment strategy, measurementdates, plan obligations, cash flows, and components of net periodic benefitcost of defined benefit pension plans and other defined benefit postretirementplans recognized during interim periods.  These disclosure requirementsare effective for the Company.  Disclosures required under SFAS No. 132are included in Note 15 herein.

 

InJanuary 2004, the FASB issued a FASB Staff Position (“FSP”) regarding SFAS No.106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” FSP 106-1, “Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003,” discusses theeffect of the Medicare Prescription Drug, Improvement and Modernization Act (“theAct”) enacted on December 8, 2003.  FSP 106-1 considers the effect of thetwo new features introduced in the Act in determining accumulatedpostretirement benefit obligation (“APBO”) and net periodic postretirementbenefit cost, which may serve to reduce a company’s postretirement benefitcosts.  Companies may elect to defer accounting for this benefit or mayattempt to reflect the best estimate of the impact of the Act on net periodiccosts currently.  The Company has chosen to defer accounting for thebenefit until the FASB issues final accounting guidance due to variousuncertainties related to this legislation and the appropriate accounting. The Company’s measures of APBO and net periodic postretirement benefit costs asof and for the periods ended November 30, 2004 do not reflect the effect of theAct.

 

InMay 2004, the FASB issued a second FSP regarding SFAS No. 106. FSP 106-2, “Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003,” discusses the effect of theAct.  FSP 106-2 considers the effect of the two new features introduced inthe Act in determining APBO and net periodic postretirement benefit cost, whichmay serve to reduce a company’s post-retirement benefit costs. The adoption ofFSP 106-2 did not have a material impact on the Company’s financial position orresults of operations.

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which clarifiesthe accounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material. SFAS No. 151 will be effective for inventory costsincurred during fiscal years beginning after June 15, 2005. The adoption ofSFAS No. 151 is not expected to have a material impact on the Company’sconsolidated financial statements.

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayments.”  SFAS No. 123(R) would requirethe Company to measure all employee stock-based compensation awards using afair-value method and record such expense in its consolidated financialstatements.  The adoption of SFAS No. 123(R)will require additional accounting related to the income tax effects andadditional disclosure regarding the cash flow effects resulting fromshare-based payment arrangements.  SFASNo. 123(R) is effective beginning in the quarter ending November 30, 2005.  The effect of the adoption of SFAS No. 123(R)is expected to be comparable to the effect disclosed in on a pro forma basis asa result of applying the current fair-value recognition provisions of SFAS No.123 as shown in Note 12 herein.

 

### ***Supplemental Cash FlowInformation***

 
| **(In thousands)** | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------|------------|-----------|------------|----------|------------|----------|------------|
| Interest paid      | ** ** | **$**     | **6,509**  |     | $          | 4,997    |       | $ | 6,996 |   |
|               |       |      |       |     |       |     |       |
| Income taxes paid  | ** ** | **6,103** |       | 10,268   |       | 8,457    |       |
|                    |            |           |            |          |            |          |            |  |  |  |

 

**NOTE 2 OTHER INCOME**

 

Otherincome was as follows for the year ended November 30:

 
| **(In thousands)**                                    | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Gain/(loss) on sale of property, plant and  equipment | ** ** | **$**     | **13,140** |     | $          | (92      | )          | $ | 71 |   |
| Royalties, fees and other income                      | ** ** | **3,122** |       | 2,866    |       | 2,962    |       |
| Income from joint ventures-cost method                | ** ** | **506**   |       | 6,311    |       | 5,900    |       |
| Foreign currency gain/(loss)                          | ** ** | **30**    |       | (269     | )          | (539     | )          |
| Gain on sale of investment                            |       | —    |       | 2,477    |       | —   |       |
| Miscellaneous                                         | ** ** | **1,063** |       | (441     | )          | 1,373    |       |
| ** **                                            |       | **$**     | **17,861** |     | $          | 10,852   |       | $ | 9,767 |   |

 

**NOTE 3 RECEIVABLES**

 

Receivableswere as follows at November 30:

 
| **(In thousands)** | ** ** | **2004**   | ** **  | **2003**   | ** ** |
|--------------------|------------|------------|-------------|------------|------------|
| Trade              | ** ** | **$**      | **160,743** | ** ** | $          | 153,041 |   |
| Joint ventures     | ** ** | **1,858**  | ** **  | 2,461      |       |
| Other              | ** ** | **8,019**  | ** **  | 8,295      |       |
| Allowances         | ** ** | **(7,984** | **)**       | (8,168     | )          |
| ** **         |       | **$**      | **162,636** | ** ** | $          | 155,629 |   |

 

----

 

TheCompany’s provision for bad debts was $1,991,000 in 2004, $3,071,000 in 2003,and $1,300,000 in 2002. Trade receivables included unbilled receivables relatedto the percentage-of-completion method of revenue recognition of $29,438,000and $25,371,000 at November 30, 2004 and 2003, respectively.

 

**NOTE 4 INVENTORIES**

 

Inventorieswere as follows at November 30:

 
| **(In thousands)**     | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------|------------|------------|------------|----------|------------|
| Finished products      | ** ** | **$**      | **52,489** |     | $          | 52,821 |   |
| Materials and supplies | ** ** | **23,809** |       | 22,037   |       |
| Products in process    | ** ** | **13,999** |       | 16,513   |       |
| ** **             |       | **$**      | **90,297** |     | $          | 91,371 |   |

 

Certainsteel inventories are valued using the last-in, first-out (LIFO) method.  Inventories valued using the LIFO methodcomprised 8.3% and 13.3% of consolidated inventories at November 30, 2004 and2003, respectively.  During 2004,inventory quantities subject to valuation using the LIFO method were reducedwhile steel prices increased sharply. The net impact was an approximate $7,300,000 increase in cost of goodssold in 2004, which included the decrease in cost of goods sold ofapproximately $4,200,000 associated with the liquidation of LIFO inventoryquantities carried at historically lower costs. The after-tax impact of the LIFO quantity reduction was an increase innet income of $2,500,000, or $.30 per share. If inventories valued using the LIFO method had been valued using thefirst-in, first-out (FIFO) method, total inventories would have increased by$7,929,000 and $630,000 at November 30, 2004 and 2003, respectively.

 

42

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** **

**NOTE 5 JOINT VENTURES**

 

Investments,advances and equity in undistributed earnings of joint ventures were as followsat November 30:

 
| **(In thousands)**            | ** ** | **2004**  | ** ** | **2003** | ** ** |
|-------------------------------|------------|-----------|------------|----------|------------|
| Investment—equity method | ** ** | **$**     | **16,042** |     | $          | 13,064 |   |
| Investments—cost method  | ** ** | **5,922** |       | 5,479    |       |
| ** **                    |       | **$**     | **21,964** |     | $          | 18,543 |   |

 

TheCompany’s ownership of joint ventures is summarized below:

 
| **Products**    | ** ** | **Joint Ventures**         | ** ** | **Ownership  Interest** | ** ** |
|-----------------|------------|----------------------------|------------|-------------------------|------------|
| Coatings        |       | Oasis-Ameron,  Ltd.        |       | 40                      | %          |
| Fiberglass pipe |       | Bondstrand,  Ltd.          |       | 40                      | %          |
| Concrete pipe   |       | Ameron Saudi  Arabia, Ltd. |       | 30                      | %          |
| Steel products  |       | TAMCO                      |       | 50                      | %          |

 

Investmentsin joint ventures and the amount of undistributed earnings were as follows:

 
| **(In thousands)**                                | ** ** | **Coatings** | ** ** | **Fiberglass  Pipe** | ** ** | **Concrete  Pipe** | ** ** | **Steel  Products** | ** ** | **Total**  | ** ** |
|---------------------------------------------------|------------|--------------|------------|----------------------|------------|--------------------|------------|---------------------|------------|------------|------------|
| **Cost**                                          | ** ** | **$**        | **2,138**  | ** **           | **$**      | **3,784**          | ** ** | **$**               | **—** | ** ** | **$**      | **8,482** | ** ** | **$** | **14,404** | ** ** |
| **Comprehensive loss from joint venture**         | ** ** | **—**   | ** ** | **—**           | ** ** | **—**         | ** ** | **(1,178**          | **)**      | **(1,178** | **)**      |
| **Accumulated equity in undistributed  earnings** | ** ** | **—**   | ** ** | **—**           | ** ** | **—**         | ** ** | **8,738**           | ** ** | **8,738**  | ** ** |
| ** **                                        | ** ** | ** **   | ** ** | ** **           | ** ** | ** **         | ** ** | ** **          | ** ** | ** ** | ** ** |
| **Investment, November 30, 2004**                 | ** ** | **$**        | **2,138**  | ** **           | **$**      | **3,784**          | ** ** | **$**               | **—** | ** ** | **$**      | **16,042** | ** ** | **$** | **21,964** | ** ** |
| ** **                                        | ** ** | ** **   | ** ** | ** **           | ** ** | ** **         | ** ** | ** **          | ** ** | ** ** | ** ** |
| **2004 Dividends**                                | ** ** | **$**        | **506**    | ** **           | **$**      | **—**         | ** ** | **$**               | **—** | ** ** | **$**      | **9,680** | ** ** | **$** | **10,186** | ** ** |
|                                              |       |         |       |                 |       |               |       |                |       |       |       |
| Cost                                              |       | $            | 1,695      |                 | $          | 3,784              |       | $                   | —     |       | $          | 8,482 |   | $ | 13,961 |   |
| Comprehensive loss from joint venture             |       | —       |       | —               |       | —             |       | (1,941              | )          | (1,941     | )          |
| Accumulated equity in undistributed  earnings     |       | —       |       | —               |       | —             |       | 6,523               |       | 6,523      |       |
|                                              |       |         |       |                 |       |               |       |                |       |       |       |
| Investment, November 30, 2003                     |       | $            | 1,695      |                 | $          | 3,784              |       | $                   | —     |       | $          | 13,064 |   | $ | 18,543 |   |
|                                              |       |         |       |                 |       |               |       |                |       |       |       |
| 2003 Dividends                                    |       | $            | 636        |                 | $          | 3,042              |       | $                   | 2,633      |       | $          | 1,276 |   | $ | 7,587 |   |

 

In2003, the Company sold its 25% ownership of Amercoat Mexicana for a pretax gainof $2,477,000. Income from Amercoat Mexicana totaled $312,000 and $327,000 inthe years ended November 30, 2003, and 2002, respectively.

 

TheCompany provides for income taxes on the undistributed earnings of its jointventures to the extent such earnings are included in the consolidatedstatements of income.

 

Theinvestment in TAMCO was recorded based on audited financial statements as ofNovember 30, 2004. Condensed financial data of TAMCO, an investment which isaccounted for under the equity method, were as follows:

 

FinancialCondition

 
| **(In thousands)**        | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|
| Current assets            | ** ** | **$**      | **66,494** |     | $          | 39,412 |   |
| Noncurrent assets         | ** ** | **27,943** |       | 30,862   |       |
| ** **                |       | **$**      | **94,437** |     | $          | 70,274 |   |
|                      |       |       |       |     |       |
| Current liabilities       | ** ** | **$**      | **38,119** |     | $          | 17,598 |   |
| Noncurrent liabilities    | ** ** | **8,603**  |       | 10,808   |       |
| Stockholders’ equity | ** ** | **47,715** |       | 41,868   |       |
| ** **                |       | **$**      | **94,437** |     | $          | 70,274 |   |

 

Resultsof Operations

 
| **(In thousands)** | ** ** | **2004**   | ** **  | **2003** | ** ** | **2002** | ** ** |
|--------------------|------------|------------|-------------|----------|------------|----------|------------|
| Net sales          | ** ** | **$**      | **215,849** |     | $          | 163,277  |       | $ | 130,893 |   |
| Gross profit       | ** ** | **45,885** |        | 8,658    |       | 21,924   |       |
| Net income         | ** ** | **23,427** |        | 1,333    |       | 6,745    |       |
|                    |            |            |             |          |            |          |            |  |  |  |

 

In2001, TAMCO entered into a swap agreement intended to hedge expected cash flowsrelated to the purchase of natural gas used in its manufacturing process. TheCompany recognized $1,178,000 and $1,941,000 in accumulated other comprehensiveloss at November 30, 2004 and 2003, respectively, which represents its proportionateshare of amounts recognized by TAMCO to record the fair value of the swapagreement.

 

Salesto joint ventures totaled $1,613,000 in 2004, $4,004,000 in 2003, and$4,848,000 in 2002.

 

**NOTE 6 OTHER ASSETS**

 

Otherassets were as follows at November 30:

 
| **(In thousands)**                         | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|
|                                       |       |       |       |     |       |
| Cash surrender value of insurance policies | ** ** | **$**      | **24,208** |     | $          | 29,312 |   |
| Pension related assets                     | ** ** | **13,775** |       | 15,134   |       |
| Other                                      | ** ** | **900**    |       | 4,134    |       |
| ** **                                 |       | **$**      | **38,883** |     | $          | 48,580 |   |

 

**NOTE 7 ACCRUED LIABILITIES**

 

Accruedliabilities were as follows at November 30:

 
| **(In thousands)**                         | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|
| Compensation and benefits                  | ** ** | **$**      | **18,517** |     | $          | 19,909 |   |
| Self insurance reserves                    | ** ** | **15,909** |       | 14,988   |       |
| Product warranties and guarantees          | ** ** | **4,297**  |       | 3,770    |       |
| Taxes (other than income taxes)            | ** ** | **3,398**  |       | 3,196    |       |
| Reserves for pending claims and litigation | ** ** | **3,083**  |       | 4,547    |       |
| Commissions and royalties                  | ** ** | **1,562**  |       | 1,490    |       |
| Advances from customers                    | ** ** | **726**    |       | 1,254    |       |
| Interest                                   | ** ** | **405**    |       | 1,937    |       |
| Other                                      | ** ** | **5,324**  |       | 2,000    |       |
| ** **                                 |       | **$**      | **53,221** |     | $          | 53,091 |   |

 

TheCompany’s product warranty accrual reflects management’s estimate of probableliability associated with product warranties. Management establishes product warranty accruals based on historicalexperience and other currently available information. Changes in the product warrantyaccrual for the year ended November 30 were as follows:

 
| **(In thousands)**                  | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|
|                                |       |       |       |       |       |
| Balance, beginning of period        | ** ** | **$**      | **3,770**  | ** ** | $          | 4,257 |   |
|                                | ** ** | ** ** | ** ** |       |       |
| Payments                            | ** ** | **(4,632** | **)**      | (3,158     | )          |
|                                | ** ** | ** ** | ** ** |       |       |
| Warranties issued during the period | ** ** | **5,159**  | ** ** | 2,671      |       |
|                                | ** ** | ** ** | ** ** |       |       |
| Balance, end of period              | ** ** | **$**      | **4,297**  | ** ** | $          | 3,770 |   |

 

**NOTE 8 OTHER LONG-TERM LIABILITIES**

 

Otherlong-term liabilities were as follows at November 30:

 
| **(In thousands)**              | ** ** | **2004**  | ** ** | **2003** | ** ** |
|---------------------------------|------------|-----------|------------|----------|------------|
|                            |       |      |       |     |       |
| Accrued pension cost            | ** ** | **$**     | **54,076** |     | $          | 63,320 |   |
| Compensation and benefits       | ** ** | **3,273** |       | 5,289    |       |
| Deferred income tax liabilities | ** ** | **3,148** |       | 3,931    |       |
| Other                           | ** ** | **122**   |       | 292      |       |
| ** **                      |       | **$**     | **60,619** |     | $          | 72,832 |   |

 

43

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** **

**NOTE 9 INCOME TAXES**

 

Theprovision for income taxes included the following for the year ended November30:

 
| **(In thousands)** | ** ** | **2004**  | ** ** | **2003**   | ** ** | **2002** | ** ** |
|--------------------|------------|-----------|------------|------------|------------|----------|------------|
| Current            |       |      |       |       |       |     |       |
| Federal            | ** ** | **$**     | **(261**   | **)**      | $          | 11,059   |       | $ | 4,370 |   |
| Foreign            | ** ** | **5,393** | ** ** | 5,445      |       | 3,508    |       |
| State              | ** ** | **(567**  | **)**      | 2,118      |       | 339      |       |
| ** **         |       | **4,565** | ** ** | 18,622     |       | 8,217    |       |
|               |       |      | ** ** |       |       |     |       |
| Deferred           |       |      | ** ** |       |       |     |       |
| Federal            | ** ** | **3,160** | ** ** | (3,977     | )          | 5,096    |       |
| Foreign            | ** ** | **(162**  | **)**      | 20         |       | (99      | )          |
| State              | ** ** | **443**   | ** ** | (648       | )          | 952      |       |
| ** **         |       | **3,441** | ** ** | (4,605     | )          | 5,949    |       |
| ** **         |       | **$**     | **8,006**  | ** ** | $          | 14,017   |       | $ | 14,166 |   |

 

Deferredincome tax assets/(liabilities) were comprised of the following as of November30:

 
| **(In thousands)**                        | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|-------------------------------------------|------------|-------------|------------|------------|------------|
| Current deferred income taxes             |       |        |       |       |       |
| Self-insurance and claims reserves        | ** ** | **$**       | **12,089** | ** ** | $          | 11,558 |   |
| Inventories                               | ** ** | **4,532**   | ** ** | 4,667      |       |
| Employee benefits                         | ** ** | **2,026**   | ** ** | 3,037      |       |
| Accounts receivable                       | ** ** | **1,266**   | ** ** | 1,921      |       |
| Valuation allowances                      | ** ** | **(1,760**  | **)**      | (1,713     | )          |
| Other                                     | ** ** | **(2,627**  | **)**      | (229       | )          |
|                                      |       |        | ** ** |       |       |
| Net current deferred income tax assets    | ** ** | **15,526**  | ** ** | 19,241     |       |
|                                      |       |        | ** ** |       |       |
| Noncurrent deferred income taxes          |       |        | ** ** |       |       |
| Net operating loss carry-overs            | ** ** | **16,027**  | ** ** | 13,035     |       |
| Prepaid pension benefit costs             | ** ** | **15,547**  | ** ** | 13,251     |       |
| Employee benefits                         | ** ** | **10,524**  | ** ** | 5,834      |       |
| Investments                               | ** ** | **3,107**   | ** ** | 3,280      |       |
| Valuation allowances                      | ** ** | **(24,324** | **)**      | (14,035    | )          |
| Property, plant and equipment             | ** ** | **(17,404** | **)**      | (17,412    | )          |
| Other                                     | ** ** | **(596**    | **)**      | (1,140     | )          |
|                                      |       |        | ** ** |       |       |
| Net noncurrent deferred income tax assets | ** ** | **2,881**   | ** ** | 2,813      |       |
|                                      |       |        | ** ** |       |       |
| Net deferred income tax assets            | ** ** | **$**       | **18,407** | ** ** | $          | 22,054 |   |

 

Asof November 30, 2004, the Company had foreign net operating loss carry-overs ofapproximately $47,700,000. A full valuation allowance has been provided againstthese net operating losses.  The balanceof the valuation allowances applies to certain foreign deferred tax assets andcertain other deferred tax assets that will likely not result in a taxbenefit.  Approximately $7,100,000 of theincrease in the valuation allowances was related to the probable loss ofdeductions for executive compensation paid in connection with the terminationof the two executive benefit programs. The balance of the increase was related to foreign net operating losscarry-overs and other foreign deferred tax assets for which no benefit has beenrecognized.

 

Thetax provision represents effective tax rates of 75%, 32% and 36% of incomebefore income taxes for the years ended November 30, 2004, 2003 and 2002,respectively.  A reconciliation of incometaxes provided at the effective income tax rate and the amount computed at thefederal statutory income tax rate of 35% is as follows for the year endedNovember 30:

 
| **(In thousands)**                          | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                        |       |       |       |       |       |     |       |
| Domestic pretax income                      | ** ** | **$**      | **(7,782** | **)**      | $          | 25,132   |       | $ | 34,111 |   |
| Foreign pretax income                       | ** ** | **18,456** | ** ** | 18,171     |       | 4,805    |       |
| ** **                                  |       | **$**      | **10,674** | ** ** | $          | 43,303   |       | $ | 38,916 |   |
| Taxes at federal statutory rate             | ** ** | **$**      | **3,736**  | ** ** | $          | 15,156   |       | $ | 13,620 |   |
| State taxes, net of federal tax benefit     | ** ** | **(495**   | **)**      | 966        |       | 1,335    |       |
| Net effect of utilization of foreign losses | ** ** | **(59**    | **)**      | (27        | )          | 3,306    |       |
| Foreign income taxed at lower rates         | ** ** | **(2,188** | **)**      | (2,089     | )          | (2,414   | )          |
| Foreign tax credit                          | ** ** | **(1,451** | **)**      | (1,485     | )          | (1,432   | )          |
| Foreign branch and withholding taxes        | ** ** | **1,019**  | ** ** | 1,114      |       | 833      |       |
| Percentage depletion                        | ** ** | **(421**   | **)**      | (375       | )          | (364     | )          |
| Non-deductible compensation                 | ** ** | **7,709**  | ** ** | 336        |       | 1,083    |       |
| Research and development credits            | ** ** | **(437**   | **)**      | (584       | )          | (598     | )          |
| Foreign dividend income                     | ** ** | **1,738**  | ** ** | 1,584      |       | 900      |       |
| Other, net                                  | ** ** | **(1,145** | **)**      | (579       | )          | (2,103   | )          |
| ** **                                  |       | **$**      | **8,006**  | ** ** | $          | 14,017   |       | $ | 14,166 |   |

 

The1996 through 1998 federal income tax returns are currently under examination bythe U.S. Internal Revenue Service (“IRS”). While the audit is nearingcompletion, no assessments have been issued. Although it cannot predict with certainty the ultimate outcome of thisexamination, the Company believes it has adequately provided for any potentialliabilities that may result.

 

In2001, the Company filed federal and state income tax claims for research anddevelopment credits for tax years 1990 through 2000.  The claims are currently under IRS review.

 

Thecumulative amount of undistributed earnings of foreign subsidiaries that theCompany currently does not intend to repatriate was $83,698,000 at November 30,2004.  The Company has provided nodeferred taxes on the earnings, and the additional U.S. income tax on theunremitted foreign earnings, if repatriated, may be offset in whole or in partby foreign tax credits.

 

TheCompany intends to permanently reinvest the foreign earnings outside the U.S.,subject to its review of the new repatriation provisions in the 2004 AmericanJobs Creation Act (the “AJC Act”).  TheAJC Act creates a temporary incentive for U.S. corporations to repatriateaccumulated income earned abroad by providing an 85 percent dividends receiveddeduction for certain dividends from controlled foreign corporations.  The Company is currently reviewing whetherany foreign earnings will be repatriated in 2005 under these provisions, andexpects to complete its evaluation in the third quarter of 2005.  At this time the Company cannot reasonablyestimate an amount of unremitted earnings that may be repatriated.

 

Otherareas of the AJC Act that impact the Company are also under review and are notexpected to be material in the current or future years.

 

**NOTE 10 DEBT**

 

Short-termborrowings consisted of loans payable under bank credit lines.  There were no short-term borrowingsoutstanding at November 30, 2004 and at November 30, 2003.  At November 30, 2004, the equivalent of$9,106,000 was available under short-term credit lines.

 

44

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Domestically,as of November 30, 2004, the Company maintained a $100,000,000 revolving creditfacility with six banks (the “Revolver”). At November 30, 2004, $18,302,000 was utilized for standby letters ofcredit and $10,400,000 was borrowed under the Revolver; therefore, $71,298,000was available.  Under the Revolver, theCompany may, at its option, borrow at floating interest rates based onspecified margins over money market rates, at any time until June 2008, whenall borrowings under the Revolver must be repaid.

 

Foreignsubsidiaries also maintain unsecured revolving credit facilities and short-termfacilities with banks. Foreign subsidiaries may borrow in various currencies,at interest rates based upon specified margins over money market rates.  The equivalent of $3,000,000 may be borrowedat any time through July 2006 under one facility.  Other short-term lines permit borrowings upto $22,000,000. At November 30, 2004, $915,000 was borrowed under thesefacilities.

 

Borrowingsunder certain bank facilities by the Company and its foreign subsidiaries aresupported by the Revolver and, accordingly, have been classified as long-termdebt and are considered payable when the Revolver is due.

 

Long-termdebt consisted of the following as of November 30:

 
| **(In thousands)**                                                   | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| Fixed-rate notes:                                                    |       |        |       |       |       |
| 7.92%, payable in annual principal  installments of $8,333           | ** ** | **$**       | **16,667** | ** ** | $          | 25,000 |   |
| 5.36%, payable in annual principal  installments of $10,000          | ** ** | **50,000**  | ** ** | 50,000     |       |
| Variable-rate industrial development bonds,                          | ** ** | ** **  | ** ** |       |       |
| payable in 2016  (1.862% at November 30, 2004)                       | ** ** | **7,200**   | ** ** | 7,200      |       |
| payable in 2021  (1.86% at November 30, 2004)                        | ** ** | **8,500**   | ** ** | 8,500      |       |
| Variable-rate bank                                                   | ** ** | ** **  | ** ** | ** ** | ** ** |
| revolving credit facilities - domestic  (4.16% at November 30, 2004) | ** ** | **10,400**  | ** ** | —     |       |
| Variable-rate bank                                                   | ** ** | ** **  | ** ** | ** ** | ** ** |
| revolving credit facilities - foreign  (9.31% at November 30, 2004)  | ** ** | **915**     | ** ** | 3,677      |       |
| ** **                                                           |       | **93,682**  | ** ** | 94,377     | ** ** |
| Less current portion                                                 | ** ** | **(18,333** | **)**      | (8,333     | )          |
| ** **                                                           |       | **$**       | **75,349** | ** ** | $          | 86,044 | ** ** |

 

Futurematurities of long-term debt were as follows as of November 30, 2004:

 
| **(In thousands)** | ** ** | **Year ending  November 30,** | ** ** | **Amount** | ** ** |
|--------------------|------------|-------------------------------|------------|------------|------------|
|               | ** ** | 2005                          | ** ** | **$**      | **18,333** |   |
|               | ** ** | 2006                          | ** ** | **18,334** |       |
|               | ** ** | 2007                          | ** ** | **10,000** |       |
|               | ** ** | 2008                          | ** ** | **21,315** |       |
|               | ** ** | 2009                          | ** ** | **10,000** |       |
|               | ** ** | Thereafter                    | ** ** | **15,700** |       |
| ** **         |       | ** **                    |       | **$**      | **93,682** |   |

 

Thelending agreements contain various restrictive covenants, including the requirementto maintain specified amounts of net worth and restrictions on cash dividends,borrowings, liens, investments and guarantees. Under the most restrictiveprovisions of the Company’s lending agreements, approximately $4,589,000 ofretained earnings was not restricted, as of November 30, 2004, as to thedeclaration of cash dividends or the repurchase of Company stock. At November30, 2004, the Company was in compliance with all covenants.

 

TheRevolver, the 5.36% term notes and the 7.92% term notes are secured bysubstantially all of the Company’s assets. The industrial revenue bonds are supported by standby letters of creditthat are issued under the Revolver. Certain note agreements contain provisions regarding the Company’sability to grant security interests or liens in association with other debtinstruments. If the Company grants such a security interest or lien, then suchnotes will be secured equally and ratably as long as such other debt shall besecured.

 

Interestincome and expense were as follows for the year ended November 30:

 
| **(In thousands)**    | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-----------------------|------------|----------|------------|------------|------------|----------|------------|
| Interest expense      | ** ** | **$**    | **5,645**  | ** ** | $          | 6,793    |       | $ | 7,024 |   |
| Interest income       | ** ** | **(332** | **)**      | (148       | )          | (188     | )          |
| Interest expense, net | ** ** | **$**    | **5,313**  | ** ** | $          | 6,645    |       | $ | 6,836 |   |

 

Thefollowing disclosure of the estimated fair value of the Company’s debt is madein accordance with the requirements of SFAS 107, “Disclosures about Fair Valueof Financial Instruments.” The estimated fair value amounts have beendetermined by the Company using available market information and appropriatevaluation methodologies. Considerable judgment is required to develop theestimated fair value, thus the estimates provided herein are not necessarilyindicative of the amounts that could be realized in a current market exchange.

 
| **(In thousands)**                | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
|-----------------------------------|------------|----------------------|------------|-----------------|------------|
| **November 30, 2004**             | ** ** | ** **           | ** ** | ** **      | ** ** |
| **Fixed-rate, long-term debt**    | ** ** | **$**                | **66,667** | ** **      | **$**      | **69,616** | ** ** |
| **Variable-rate, long-term debt** | ** ** | **27,015**           | ** ** | **27,015**      | ** ** |
|                              |       |                 |       |            |       |
| November 30, 2003                 |       |                 |       |            |       |
| Fixed-rate, long-term debt        |       | 75,000               |       | 77,458          |       |
| Variable-rate, long-term debt     |       | 19,377               |       | 19,377          |       |
|                                   |            |                      |            |                 |            |  |  |

 

Theestimated fair value of the Company’s variable-rate debt approximates thecarrying value of the debt since the variable interest rates are market-based,and the Company believes such debt could be refinanced on materially similarterms.  The estimated fair value of theCompany’s fixed-rate, long-term debt is based on U.S. government notes atNovember 30, 2004 plus an estimated spread for similar securities with similarremaining maturities.

 

**NOTE 11 LEASE COMMITMENTS**

 

TheCompany leases facilities and equipment under non-cancelable operatingleases.  Rental expense under long-termoperating leases of real property, vehicles and other equipment was $5,025,000in 2004, $4,773,000 in 2003 and $5,071,000 in 2002.  Future rental commitments were as follows asof November 30, 2004:

 
| **(In thousands)** | ** ** | **Year  ending  November  30,** | ** ** | **Amount** | ** ** |
|--------------------|------------|---------------------------------|------------|------------|------------|
|               | ** ** | 2005                            | ** ** | **$**      | **4,590**  |   |
|               | ** ** | 2006                            | ** ** | **3,880**  |       |
|               | ** ** | 2007                            | ** ** | **3,382**  |       |
|               | ** ** | 2008                            | ** ** | **3,285**  |       |
|               | ** ** | 2009                            | ** ** | **3,264**  |       |
|               | ** ** | Thereafter                      | ** ** | **21,802** |       |
| ** **         |       | ** **                      |       | **$**      | **40,203** |   |

 

Futurerental commitments for leases are not reduced by minimum non-cancelablesublease rentals aggregating $2,119,000 at November 30, 2004.

 

45

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**NOTE 12 INCENTIVE STOCK COMPENSATION PLANS**

The Company has adopted thedisclosure-only provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation.”

In 2004, the 2004 StockIncentive Plan (“2004 Plan”) was approved by the stockholders of the Company.The 2004 Plan serves as the successor to the 2001 Stock Incentive Plan andsupercedes that plan.  Under the terms ofthe 2004 Plan, 525,000 new shares of common stock were made available forawards both to non-employee directors and to key employees of the Company.  Awards to key employees may include, but arenot limited to, stock options, restricted stock, performance shares andperformance unit awards.  Restrictionsmay limit the sale, transfer, voting rights and dividends on these awards. AtNovember 30, 2004, 96,000 restricted shares were outstanding.

At November 30, 2004, theCompany had 694,351 non-qualified stock options outstanding with terms of from10 to 15 years from the date of grant, and 445,000 shares available for futuregrants under the 2004 plan. The exercise price for outstanding stock options isgenerally the fair market value of the Company’s stock on the date of theoriginal grant. Such options vest in equal annual installments over four years.Certain options have a cashless exercise feature.

SFAS No. 123 requires proforma information regarding net income and earnings per share as ifcompensation expense for stock options had been determined based on the fairvalue of the options on the grant date. The Company estimates the fair value ofstock options at the grant date by using the Black-Scholes option pricing modelwith the following weighted-average assumptions used for grants in 2002, 2003and 2004, respectively: dividend yields of 2.01%, 2.21%, and 2.38%; an expectedvolatility of 35.08%, 36.92% and 37.68%; risk-free rates of 4.84%, 2.93% and2.71%; and an expected life of five years for all years.

Under the accountingprovisions of SFAS No. 123, the Company’s net income and earnings per sharewould have been as indicated below for the year ended November 30:

 
| **(In thousands, except per share  data)**                                                   | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
|                                                                                         |       |      |       |     |       |     |       |
| Reported net income                                                                          | ** ** | **$**     | **13,459** |     | $          | 29,900   |       | $ | 28,059 |   |
|                                                                                         |       |      |       |     |       |     |       |
| Add: Stock-based employee compensation  expense included in reported net income, net of tax  | ** ** | **1,149** |       | 461      |       | 847      |       |
| Deduct: Stock-based employee compensation  expense determined under SFAS No. 123, net of tax | ** ** | **(889**  | )          | (832     | )          | (925     | )          |
| Pro forma net income                                                                         | ** ** | **$**     | **13,719** |     | $          | 29,529   |       | $ | 27,981 |   |
|                                                                                         |       |      |       |     |       |     |       |
| Earning per share (basic)                                                                    |       |      |       |     |       |     |       |
|                                                                                         |       |      |       |     |       |     |       |
| As reported                                                                                  | ** ** | **$**     | **1.63**   |     | $          | 3.77     |       | $ | 3.61 |   |
| Pro forma                                                                                    | ** ** | **1.66**  |       | 3.73     |       | 3.60     |       |
|                                                                                         |       |      |       |     |       |     |       |
| Earning per share (diluted)                                                                  |       |      |       |     |       |     |       |
|                                                                                         |       |      |       |     |       |     |       |
| As reported                                                                                  | ** ** | **$**     | **1.59**   |     | $          | 3.67     |       | $ | 3.49 |   |
| Pro forma                                                                                    | ** ** | **1.62**  |       | 3.62     |       | 3.47     |       |

 

A summary of the Company’s stock options asof November 30, 2002, 2003 and 2004, and changes during the year then ended,follows:

 
| ** **                                                  | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|
|                                                        |       |                   |       |                             |       |
| Outstanding at November 30, 2001                            |       | 1,194,518              |       | $                                | 20.86      |   |
| Granted                                                     |       | 21,000                 |       | 35.28                            |       |
| Exercised                                                   |       | (65,310                | )          | 18.80                            |       |
| Outstanding at November 30, 2002                            |       | 1,150,208              |       | 21.24                            |       |
| Options exercisable at November 30, 2002                    |       | 863,708                |       | 21.29                            |       |
| Weighted-average fair value of options  granted during 2002 |       |                   |       | 11.31                            |       |
|                                                        |       |                   |       |                             |       |
| Outstanding at November 30, 2002                            |       | 1,150,208              |       | 21.24                            |       |
| Granted                                                     |       | 24,000                 |       | 27.95                            |       |
| Exercised                                                   |       | (323,239               | )          | 19.41                            |       |
| Forfeited                                                   |       | (12,850                | )          | 20.54                            |       |
| Outstanding at November 30, 2003                            |       | 838,119                |       | 22.15                            |       |
| Options exercisable at November 30, 2003                    |       | 665,119                |       | 22.02                            |       |
| Weighted-average fair value of options  granted during 2003 |       |                   |       | 8.31                             |       |
|                                                        |       |                   |       |                             |       |
| Outstanding at November 30, 2003                            | ** ** | **838,119**            | ** ** | **22.15**                        | ** ** |
| Granted                                                     | ** ** | **24,000**             | ** ** | **34.00**                        | ** ** |
| Exercised                                                   | ** ** | **(167,768**           | **)**      | **19.38**                        | ** ** |
| Outstanding at November 30, 2004                            | ** ** | **694,351**            | ** ** | **23.22**                        | ** ** |
| -Options exercisable at November 30, 2004                   | ** ** | **594,351**            | ** ** | **22.65**                        | ** ** |
| Weighted-average fair value of options  granted during 2004 | ** ** | ** **             | ** ** | **10.00**                        | ** ** |
|                                                             |            |                        |            |                                  |            |  |

 

The following summarizes information aboutstock options outstanding as of November 30, 2004:

 
| **Range of  Exercise Prices**      | ** ** | **Options  Outstanding** | ** ** | **Weighted-Average  Remaining  Contractual Life  (in years)** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|------------------------------------|------------|--------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------|------------|
| $15.00 to $25.00                   |       | 485,101                  |       | 6.43                                                          |       | $                                      | 20.41      |   |
|   25.00  to   35.00 |       | 188,250                  |       | 8.37                                                          |       | 29.14                                  |       |
|   35.00  to   45.00 |       | 21,000                   |       | 7.30                                                          |       | 35.28                                  |       |
|   15.00  to   45.00 |       | 694,351                  |       | 6.98                                                          |       | 23.22                                  |       |
|                                    |            |                          |            |                                                               |            |                                        |            |  |

 
| **Range of  Exercise Prices**      | ** ** | **Options  Exercisable** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| $15.00 to $25.00                   |       | 437,601                  |       | $                                      | 20.39      |   |
|   25.00  to   35.00 |       | 146,250                  |       | 28.49                                  |       |
|   35.00  to   45.00 |       | 10,500                   |       | 35.28                                  |       |
|   15.00  to   45.00 |       | 594,351                  |       | 22.65                                  |       |
|                                    |            |                          |            |                                        |            |  |

 

## **NOTE 13 GOODWILL AND OTHER INTANGIBLE ASSETS**

 

In 2001, the FASB issued SFAS No. 142,“Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill andintangible assets with indefinite useful lives no longer be amortized butinstead be tested for impairment at least annually. SFAS No. 142 also requiresthat intangible assets with definite useful lives be amortized over theirrespective estimated useful lives to their estimated residual values. TheCompany adopted SFAS No. 142 effective December 1, 2002.

 

46

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During 2004, the Company completed therequired goodwill and intangible asset impairment tests. No impairment losseswere identified as a result of these tests. The changes in the carrying amountof goodwill by business segment were as follows:

 
| **(In thousands)**                  | ** ** | **November 30, 2003** | ** ** | **Foreign Currency  Translation  Adjustments** | ** ** | **November 30, 2004** | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------------------------------------------|------------|-----------------------|------------|
| Business Segment:                   | ** ** | ** **            | ** ** | ** **                                     | ** ** | ** **            | ** ** |
| Performance Coatings & Finishes |       | $                     | 11,473     |                                           | $          | 436                   | ** ** | **$** | **11,909** | ** ** |
| Fiberglass-Composite Pipe           |       | 1,440                 |       | —                                         | ** ** | **1,440**             | ** ** |
| Infrastructure Products             |       | 201                   |       | —                                         | ** ** | **201**               | ** ** |
|                                |       | $                     | 13,114     |                                           | $          | 436                   | ** ** | **$** | **13,550** | ** ** |

 

The Company’s intangible assets and relatedaccumulated amortization consisted of the following at November 30:

 
| ** **             | ** ** | **2004**                      |       | **2003**                      | ** ** |
|------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **(In thousands)**     | ** ** | **Gross  Intangible  Assets** | ** ** | **Accumulated  Amortization** |       | **Gross  Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** |
|                   |       |                          |       |                          |       |   |   |   |   |
| Trademarks             | ** ** | **$**                         | **2,227**  | ** **                    | **$**      | **(2,121** | **)** | $ | 2,076 |   | $ | (1,975 | ) |
| Non-compete agreements | ** ** | **2,105**                     | ** ** | **(1,966**                    | **)**      | 2,105 |   | (1,794 | ) |
| Patents                | ** ** | **212**                       | ** ** | **(212**                      | **)**      | 212 |   | (212 | ) |
| Leasehold interests    | ** ** | **1,930**                     | ** ** | **(1,930**                    | **)**      | 1,930 |   | (1,930 | ) |
| ** **             | ** ** | **$**                         | **6,474**  | ** **                    | **$**      | **(6,229** | **)** | $ | 6,323 |   | $ | (5,911 | ) |

 

Amortization expenses related to intangibleassets for the fiscal years ended November 30, 2004, 2003, and 2002 were$224,000, $278,000, and $540,000, respectively. At November 30, 2004, estimatedfuture amortization expenses for each of the years in the three-year periodending November 30, 2007 were as follows: $187,000 for 2005, $48,000 for 2006,and $10,000 for 2007.

 

The following is a summary of net income andearnings per share for the year ended November 30, adjusted to remove theamortization of goodwill:

 
| **(In thousands, except per share  data)** | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Reported net income                        | ** ** | **$**      | **13,459** |     | $          | 29,900   |       | $ | 28,059 |   |
| Add: Goodwill amortization, net of tax     | ** ** | **—** |       | —   |       | 168      |       |
| Pro forma net income                       | ** ** | **$**      | **13,459** |     | $          | 29,900   |       | $ | 28,227 |   |
|                                       |       |       |       |     |       |     |       |
| Basic net income per share                 |       |       |       |     |       |     |       |
| As reported                                | ** ** | **$**      | **1.63**   |     | $          | 3.77     |       | $ | 3.61 |   |
| Pro forma                                  | ** ** | **1.63**   |       | 3.77     |       | 3.63     |       |
|                                       |       |       |       |     |       |     |       |
| Diluted net income per share               |       |       |       |     |       |     |       |
| As reported                                | ** ** | **1.59**   |       | 3.67     |       | 3.49     |       |
| Pro forma                                  | ** ** | **1.59**   |       | 3.67     |       | 3.51     |       |

 

**NOTE****14COMMITMENTS AND CONTINGENCIES**

 

The Company is one of numerous defendants invarious asbestos-related personal injury lawsuits. These cases generally seekunspecified damages for asbestos-related diseases based on alleged exposure toproducts previously manufactured by the Company and others, and, at this time,the Company is generally not aware of the extent of injuries allegedly sufferedby the individuals or the facts supporting the claim that injuries were causedby the Company’s products. Based upon the information available to it at thistime, the Company is not in a position to evaluate its potential exposure, ifany, as a result of such claims. Hence, no amounts have been accrued for losscontingencies related to these lawsuits in accordance with SFAS No. 5,“Accounting for Contingencies.” The Company continues to vigorously defend allsuch lawsuits. As of November 30, 2004, the Company was a defendant inasbestos-related cases involving 18,298 claimants, compared to 17,447 claimantsas of November 30, 2003.  The Company isnot in a position to estimate the number of additional claims that may be filedagainst it in the future. For the fiscal year ended November 30, 2004, therewere new claims involving 1,633 claimants, dismissals and/or settlementsinvolving 782 claimants and no judgments. Net costs and expenses incurred by the Company for the fiscal year endedNovember 30, 2004 in connection with asbestos-related claims were approximately$500,000.

 

47

----

 

The Company is one of numerous defendants invarious silica-related personal injury lawsuits. These cases generally seekunspecified damages for silica-related diseases based on alleged exposure toproducts previously manufactured by the Company and others, and, at this time,the Company is not aware of the extent of injuries allegedly suffered by theindividuals or the facts supporting the claim that injuries were caused by theCompany’s products.  Based upon theinformation available to it at this time, the Company is not in a position toevaluate its potential exposure, if any, as a result of such claims.  Hence, no amounts have been accrued for losscontingencies related to these lawsuits in accordance with SFAS No. 5.  The Company continues to vigorously defendall such lawsuits.  As of November 30,2004, the Company was a defendant in silica-related cases involving 8,226claimants, compared to 6,847 claimants as of November 30, 2003.  The Company is not in a position to estimatethe number of additional claims that may be filed against it in thefuture.  For the fiscal year endedNovember 30, 2004, there were new claims involving 1,966 claimants, dismissalsand/or settlements involving 587 claimants and no judgments.  Net costs and expenses incurred by theCompany for the fiscal year ended November 30, 2004 in connection withsilica-related claims were approximately $400,000.

 

In April 2003, the Company was served with acomplaint in an action brought by J. Ray McDermott, Inc., J. Ray McDermott,S.A. and SparTEC, Inc. (collectively “McDermott”) in the District Court ofHarris County, Texas against the Company and two co-defendants, in connectionwith certain coatings supplied by the defendants in 2002 for an offshoreproduction facility known as a SPAR being constructed by McDermott for DominionExploration and Production, Inc. and Pioneer Natural Resources USA, Inc.(collectively “Dominion”).  McDermottalleges that the Company’s co-defendants improperly supplied coatings whichcontained lead and/or lead chromate, and that as a result the Company and itsco-defendants are liable to McDermott for all costs associated with removal andreplacement of those coatings. McDermott’s petition as filed alleged a claim fordamages in an unspecified amount; however, McDermott’s economic expertsubsequently estimated McDermott’s damages at approximately $21,000,000, afigure which the Company contests.  Trial of this matter is expected in August 2005.  The Company believes that it has meritoriousdefenses to this action.  Based upon theinformation available to it at this time, the Company is not in a position toevaluate the ultimate outcome of this matter.

 

Separately, in May 2003, Dominion brought anaction against the Company in Civil District Court for the Parish of Orleans,Louisiana as owners of the SPAR seeking additional damages allegedly sustainedby Dominion resulting from delays in McDermott’s delivery of the SPAR caused bythe removal and replacement of coatings containing lead and/or leadchromate.  Dominion contends that theCompany made certain misrepresentations and warranties to Dominion concerningthe lead-free nature of those coatings. Dominion’s petition as filed alleged a claim for damages in an unspecifiedamount; however, Dominion’s economic expert recently estimated Dominion’sdamages at approximately $128,000,000, a figure which the Companycontests.  This matter is in discoveryand no trial date has yet been established. The Company believes that it has meritorious defenses to thisaction.   Based upon the informationavailable to it at this time, the Company is not in a position to evaluate theultimate outcome of this matter.

 

In addition, certain other claims, suits andcomplaints that arise in the ordinary course of business, have been filed orare pending against the Company. Management believes that these matters areeither adequately reserved, covered by insurance, or would not have a materialeffect on the Company’s financial position or its results of operations ifdisposed of unfavorably.

 

The Company is subject to federal, state andlocal laws and regulations concerning the environment and is currentlyparticipating in administrative proceedings at several sites under these laws.While the Company finds it difficult to estimate with any certainty the totalcost of remediation at the several sites, on the basis of currently availableinformation and reserves provided, the Company believes that the outcome ofsuch environmental regulatory proceedings will not have a material effect onthe Company’s financial position or its results of operations.

 

**NOTE 15 EMPLOYEE BENEFITPLANS**

 

The Company has a qualified, defined benefit,noncontributory pension plan for certain U.S. employees not covered by unionpension plans.  The Company’s subsidiaryin the Netherlands provides defined retirement benefits to its employees.  The Company also provides health and lifeinsurance to a limited number of eligible retirees and eligible survivors ofretirees.

 

The Company’s defined benefit pension andother postretirement benefit costs and obligations are dependent on assumptionsused by actuaries in calculating such amounts. These assumptions, which are reviewed annually, include discount rates,long-term expected rates of return on plan assets and expected rates ofincreases in compensation.  Assumeddiscount rates are used to calculate the present value of benefit paymentswhich are projected to be made in the future, including projections ofincreases in employees’ annual compensation and health care costs.  A decrease in the discount rate wouldincrease the Company’s obligation and expense. The long-term expected rate of return on plan assets is basedprincipally on prior performance and future expectations for various types ofinvestments as well as the expected long-term allocation of assets.  Changes in the allocation of plan assetswould impact the expected rate of return. The expected rate of increase in compensation is based upon movements ininflation rates as reflected by market interest rates.  Benefits paid to participants are based uponage, years of credited service and average compensation or negotiated benefitrates.

 

Assets of the Company’s U.S. defined benefitplan are invested in a directed trust. Assets in the trust are invested indomestic and foreign equity securities of corporations (including $6,159,000 ofthe Company’s common stock at November 30, 2004), U.S. government obligations,derivative securities, corporate bonds and money market funds. The Dutchsubsidiary contracts with a third-party insurance company to pay benefits toretirees.

 

Prior to June 2004, the Company had a supplementalretirement plan (“SERP”) and an income deferral plan (“EDP”) for certain U.S. executives.  The SERP and the EDP were terminated in June2004.

 

48

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The following sets forth the change inbenefit obligations, change in plan assets, funded status and amountsrecognized in the balance sheets as of November 30, 2004 and 2003 for theCompany’s U.S. defined benefit retirement plans and postretirement health careand life insurance benefits.  Themeasurement date of plan assets and obligations is as of October 1 for eachyear presented.

 
| ** **                                      | ** ** | **U.S. Pension Benefits** | ** **  | **Other U.S. Postretirement  Benefits** | ** ** |
|-------------------------------------------------|------------|---------------------------|-------------|-----------------------------------------|------------|
| **(In thousands)**                              | ** ** | **2004**                  | ** **  | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Change in Benefit Obligation**                |       |                      |        |                                    |       |   |   |   |   |
| Projected benefit obligation-beginning of  year | ** ** | **$**                     | **181,280** | ** **                              | $          | 158,708 |   | **$** | **3,480** | ** ** | $ | 2,903 |   |
| Service cost                                    | ** ** | **3,171**                 | ** **  | 2,851                                   |       | **112** | ** ** | 105 |   |
| Interest cost                                   | ** ** | **10,563**                | ** **  | 10,648                                  |       | **201** | ** ** | 191 |   |
| Benefit adjustments                             | ** ** | **105**                   | ** **  | 2,191                                   |       | **—** | ** ** | — |   |
| Actuarial loss                                  | ** ** | **13,977**                | ** **  | 16,988                                  |       | **73** | ** ** | 501 |   |
| Curtailment                                     | ** ** | **(200**                  | **)**       | —                                  |       | **—** | ** ** | — |   |
| Settlement                                      | ** ** | **(23,415**               | **)**       | —                                  |       | **—** | ** ** | — |   |
| Benefit payments                                | ** ** | **(10,509**               | **)**       | (10,106                                 | )          | **(249** | **)** | (220 | ) |
| Projected benefit obligation-end of year        | ** ** | **$**                     | **174,972** | ** **                              | $          | 181,280 |   | **$** | **3,617** | ** ** | $ | 3,480 |   |
| **Change in Plan Assets**                       |       |                      | ** **  |                                    |       |   | ** ** |   |   |
| Plan assets at fair value-beginning of year     | ** ** | **$**                     | **123,167** | ** **                              | $          | 113,738 |   | **$** | **348** | ** ** | $ | 354 |   |
| Actual return on plan assets                    | ** ** | **11,769**                | ** **  | 19,287                                  |       | **30** | ** ** | 13 |   |
| Employer contributions                          | ** ** | **7,107**                 | ** **  | 248                                     |       | **—** | ** ** | 201 |   |
| Settlement                                      | ** ** | **23,415**                | ** **  | —                                  |       | **—** | ** ** | — |   |
| Benefit payments                                | ** ** | **(33,924**               | **)**       | (10,106                                 | )          | **(29** | **)** | (220 | ) |
| Plan assets at fair value-end of year           | ** ** | **$**                     | **131,534** | ** **                              | $          | 123,167 |   | **$** | **349** | ** ** | $ | 348 |   |
| **Funded Status**                               |       |                      | ** **  |                                    |       |   | ** ** |   |   |
| Funded status                                   | ** ** | **$**                     | **(43,438** | **)**                                   | $          | (58,113 | ) | **$** | **(3,268** | **)** | $ | (3,132 | ) |
| Unrecognized actuarial loss                     | ** ** | **49,020**                | ** **  | 52,923                                  |       | **895** | ** ** | 868 |   |
| Unrecognized transition obligation              | ** ** | **—**                | ** **  | —                                  |       | **643** | ** ** | 700 |   |
| Unrecognized prior service cost                 | ** ** | **430**                   | ** **  | 2,805                                   |       | **(106** | **)** | (120 | ) |
| Net amount recognized                           | ** ** | **$**                     | **6,012**   | ** **                              | $          | (2,385 | ) | **$** | **(1,836** | **)** | $ | (1,684 | ) |
| **Balance Sheet Amounts**                       |       |                      | ** **  |                                    |       |   | ** ** |   |   |
| Prepaid cost                                    | ** ** | **$**                     | **—**  | ** **                              | $          | — |   | **$** | **—** | ** ** | $ | 49 |   |
| Accrued cost                                    | ** ** | **(36,272**               | **)**       | (50,387                                 | )          | **(1,836** | **)** | (1,733 | ) |
| Intangible asset                                | ** ** | **430**                   | ** **  | 2,805                                   |       | **—** | ** ** | — |   |
| Accumulated other comprehensive loss,  pretax   | ** ** | **41,854**                | ** **  | 45,197                                  |       | **—** | ** ** | — |   |
| Net amount recognized                           | ** ** | **$**                     | **6,012**   | ** **                              | $          | (2,385 | ) | **$** | **(1,836** | **)** | $ | (1,684 | ) |

 

The Company’s policy is to make pension plancontributions to the extent such contributions are mandatory, actuariallydetermined and tax deductible. The Company expects to contribute $3,716,000 tothe U.S. pension plan in 2005.

 

Expected future pension benefit payments,which reflect expected future service, were as follows as of November 30, 2004:

 
| **(In thousands)** | ** ** | **Year Ending  November 30,** | ** ** | **Amount** | ** ** |
|--------------------|------------|-------------------------------|------------|------------|------------|
|               | ** ** | 2005                          | ** ** | **$**      | **10,747** |   |
|               | ** ** | 2006                          | ** ** | **11,088** |       |
|               | ** ** | 2007                          | ** ** | **11,443** |       |
|               | ** ** | 2008                          | ** ** | **11,781** |       |
|               | ** ** | 2009 - 2013                   | ** ** | **64,887** |       |
|                    |            |                               |            |            |            |  |

 

49

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Net periodic benefit costs for the Company’sdefined benefit retirement plans and postretirement health care and lifeinsurance benefits for 2004, 2003 and 2002 included the following components:

 
| ** **                                                       | ** ** | **U.S. Pension Benefits** | ** ** | **Other U.S. Postretirement Benefits** | ** ** |
|------------------------------------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                                               | ** ** | **2004**                  | ** ** | **2003**                               | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost                                                     | ** ** | **$**                     | **3,171**  | ** **                             | $          | 2,851 |   | $ | 2,506 |   | **$** | **112** | ** ** | $ | 105 |   | $ | 98 |   |
| Interest cost                                                    | ** ** | **10,563**                | ** ** | 10,648                                 |       | 10,353 |   | **201** | ** ** | 191 |   | 192 |   |
| Expected return on plan assets                                   | ** ** | **(10,628**               | **)**      | (9,521                                 | )          | (12,711 | ) | **(30** | **)** | (33 | ) | (33 | ) |
| Amortization of unrecognized prior service  cost                 | ** ** | **565**                   | ** ** | 925                                    |       | 520 |   | **(14** | **)** | (14 | ) | (14 | ) |
| Curtailment                                                      | ** ** | **1,916**                 | ** ** | —                                 |       | — |   | **—** | ** ** | — |   | — |   |
| Settlement                                                       | ** ** | **10,901**                | ** ** | —                                 |       | — |   | **—** | ** ** | — |   | — |   |
| Amortization of unrecognized  net transition (asset)/ obligation | ** ** | **—**                | ** ** | —                                 |       | (35 | ) | **71** | ** ** | 71 |   | 71 |   |
| Amortization of accumulated loss                                 | ** ** | **5,638**                 | ** ** | 5,379                                  |       | 671 |   | **51** | ** ** | 21 |   | 25 |   |
| Net periodic cost                                                | ** ** | **$**                     | **22,126** | ** **                             | $          | 10,282 |   | $ | 1,304 |   | **$** | **391** | ** ** | $ | 341 |   | $ | 339 |   |

 

The following table provides theweighted-average assumptions used to compute the actuarial present value ofprojected benefit obligations:

 
| ** **                              | ** ** | **U.S. Pension Benefits** | ** ** | **Other U.S. Postretirement Benefits** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2004**                  | ** ** | **2003**                               | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Weighted-average discount rate          |       | **5.85**                  | **%**      | 6.00                                   | %          | 6.75 | % | **5.85** | **%** | 6.00 | % | 6.75 | % |
| Rate of increase in compensation levels |       | **3.35**                  | **%**      | 3.50                                   | %          | 4.25 | % | **3.35** | **%** | 3.50 | % | 4.25 | % |

 

The following table provides theweighted-average assumptions used to compute the actuarial net periodic benefitcost:

 
| ** **                                        | ** ** | **U.S. Pension Benefits** | ** ** | **Other U.S. Postretirement Benefits** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2004**                  | ** ** | **2003**                               | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Weighted-average discount rate                    | ** ** | **6.00**                  | **%**      | 6.75                                   | %          | 7.25 | % | **6.00** | **%** | 6.75 | % | 7.25 | % |
| Expected long-term rate of return on plan  assets | ** ** | **8.75**                  | **%**      | 9.75                                   | %          | 9.75 | % | **N/A** | ** ** | **N/A** | ** ** | **N/A** | ** ** |
| Rate of increase in compensation levels           | ** ** | **3.50**                  | **%**      | 4.25                                   | %          | 4.75 | % | **3.50** | **%** | 4.25 | % | 4.75 | % |

 

The following table shows the Company’starget allocation range for the U.S. defined benefit pension plan, along withthe actual allocations:

 
| ** **              | ** ** | **Target** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|------------|------------|----------|------------|----------|------------|
| Domestic equities       |       | 65         | %          | **66**   | **%**      | 62       | %          |
| International equities  |       | 10         | %          | **8**    | **%**      | 5        | %          |
| Fixed-income securities |       | 25         | %          | **26**   | **%**      | 33       | %          |

 

The following shows the Company’s accumulatedbenefit obligation in excess of plan assets at November 30:

 
| ** **                                                                       | ** ** | **U.S. Pension Benefits** | ** **  |
|----------------------------------------------------------------------------------|------------|---------------------------|-------------|
| **(In thousands)**                                                               | ** ** | **2004**                  | ** **  | **2003** | ** ** |
| Projected benefit obligation                                                     | ** ** | **$**                     | **174,973** | ** ** | $ | 181,280 |   |
| Accumulated benefit obligation                                                   | ** ** | **167,806**               | ** **  | 173,554 |   |
| Fair value of plan assets                                                        | ** ** | **131,534**               | ** **  | 123,167 |   |
| (Decrease)/increase in minimum liability  included in other comprehensive income | ** ** | **(3,343**                | **)**       | 3,933 |   |
|                                                                                  |            |                           |             |  |  |  |  |

 

On December 8, 2003, the MedicarePrescription Drug Improvement and Modernization Act of 2003 was signed intolaw. The Act introduces a Medicare prescription drug benefit beginning in 2006as well as a federal subsidy to sponsors of retirement health care plans thatprovide a benefit at least “actuarially equivalent” to the Medicare benefit.The effects of the Act did not have a material impact.

 

50

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The assumed health care cost trend decreasedfrom 10% to 9% in 2004; it is assumed that the rate will decline gradually to5% in 2008 and beyond. The effect of a one-percentage-point change in theassumed health care cost trend would have altered the amounts of the benefitobligation and the sum of the service cost and interest cost components ofpostretirement benefit expense for 2004, as follows:

 
| **(In thousands)**                                                               | ** ** | **Increase** | ** ** | **Decrease** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| Effect on total of service and interest  cost components of net periodic expense |       | $            | 23         |         | $          | (19 | ) |
| Effect on postretirement benefit obligation                                      |       | 148          |       | (129         | )          |
|                                                                                  |            |              |            |              |            |  |  |

 

For the Dutch pension plan, the projectedbenefit obligation and plan assets at November 30, 2004 were $41,450,000 and$28,090,000, respectively. Net accrued pension liabilities of $1,667,000 and$651,000 were recorded as of November 30, 2004 and 2003, respectively. Theprojected benefit obligation and plan assets at November 30, 2003 were$32,239,000 and $23,433,000, respectively.

 

Approximately 15% of the Company’s employeesare covered by union-sponsored, collectively-bargained, multi-employer pensionplans.  Related to these plans, theCompany contributed and charged to expense $2,161,000, $2,340,000 and$2,242,000 in 2004, 2003 and 2002, respectively. These contributions aredetermined in accordance with the provisions of negotiated labor contracts andgenerally are based on the number of hours worked. The Company has no intentionof withdrawing from any of these plans, nor is there any intention to terminatesuch plans.

 

In June 2004, the Company terminated the twoexecutive benefit plans in consideration of ongoing costs, anticipatedlegislative restrictions on such programs, and a preference for executivebenefit plans having more predictable costs.  The Company incurred apretax expense of $12,817,000 due to the termination of the plans anddistributions to plan participants.  The Company recorded this expense inaccordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailmentsof Defined Benefit Pension Plans and for Termination Benefits.”  Ameronhad previously purchased life insurance policies to cover benefits under theplans.  At the time of termination of theplans, the cash surrender value of such life insurance policies totaledapproximately $26,900,000 and exceeded the amount that was required ifimmediate lump-sum payments were elected by all participants, which totaled$25,600,000.  In addition to thetermination and settlement costs, Ameron expensed approximately $2,100,000under the plans in 2003 and $1,800,000 in 2004.

 

The Company has a life insurance plan whichprovides eligible executives with life insurance protection equal to threetimes base salary. Upon retirement, the executive is provided with life insuranceprotection equal to final base salary. Benefits may be paid as a lump sum or asan annual income to the identified survivor over ten years. The expensesrelated to this plan were $267,000 in 2004, $264,000 in 2003 and $148,000 in2002.

 

The Company has severance agreements withcertain key employees that could provide benefits upon termination of up to 3.5times total annual compensation of such employees.

 

The Company provides to certain employees asavings plan under Section 401(k) of the U.S. Internal Revenue Code. Thesavings plan allows for deferral of income up to a certain percentage throughcontributions to the plan, within certain restrictions. Company matchingcontributions are in the form of cash. In 2004, 2003 and 2002, the Companyrecorded expenses for matching contributions of $436,000, $880,000 and$602,000, respectively.

 

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**NOTE 16CAPITAL STOCK**

 

The Company is incorporated in Delaware. Thearticles of incorporation authorize 24,000,000 shares of $2.50 par value commonstock, 1,000,000 shares of $1.00 par value preferred stock and 100,000 sharesof $1.00 par value series A junior participating cumulative preferred stock.The preferred stock may be issued in series, with the rights and preferences ofeach series to be established by the Board of Directors. As of November 30,2004, no shares of preferred stock or series A junior participating cumulativepreferred stock were outstanding.

 

On March 26, 2003, the Company’s Board ofDirectors declared a two-for-one stock split in the form of a stock dividend ofone additional common share for every outstanding common share held bystockholders of record on May 1, 2003, payable May 27, 2003. Theweighted-average number of shares and per share information presented hereinreflect the Company’s shares and earnings and dividends per share on apost-split basis.

 

As of November 30, 2004, 8,431,471 shares ofcommon stock were issued and outstanding, including 96,000 restricted shares.Restrictions limit the sale and transfer of these shares. On each anniversaryof the grant date, a percentage of the shares (determined at the time of thegrant) becomes unrestricted.  Therestrictions will lapse on 34,000 shares in 2005, 34,000 shares in 2006, and14,000 shares in both 2007 and 2008.

 

The Company has a Stockholders’ Rights Plan,which, among other things, entitles stockholders to purchase common stock at asignificant discount if a party acquires 15% or more of the Company’s commonstock or announces a tender offer for at least 15% of the Company’s commonstock outstanding.

 

**NOTE 17 QUARTERLY FINANCIALDATA (UNAUDITED)**

 

Summarized quarterly financial data for theyear ended November 30, 2004 and 2003, follow:

 
| **(In thousands,  except per share data)** | ** ** | **First  Quarter** | ** **  | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** **  |
|--------------------------------------------|------------|--------------------|-------------|---------------------|------------|--------------------|------------|---------------------|-------------|
| **2004**                                   | ** ** | ** **         | ** **  | ** **          | ** ** | ** **         | ** ** | ** **          | ** **  |
| **Sales**                                  | ** ** | **$**              | **129,668** | ** **          | **$**      | **150,516**        | ** ** | **$**               | **155,413** | ** ** | **$** | **170,256** | ** ** |
| **Gross profit**                           | ** ** | **29,939**         | ** **  | **36,586**          | ** ** | **38,245**         | ** ** | **43,641**          | ** **  |
| **Net income/(loss)**                      | ** ** | **(2,753**         | **)**       | **6,873**           | ** ** | **(8,775**         | **)**      | **18,114**          | ** **  |
| **Diluted net income/(loss) per share**    | ** ** | **(.34**           | **)**       | **.82**             | ** ** | **(1.05**          | **)**      | **2.13**            | ** **  |
| **Stock price per share-high**             | ** ** | **40.05**          | ** **  | **39.60**           | ** ** | **35.60**          | ** ** | **38.02**           | ** **  |
| **Stock price per share-low**              | ** ** | **32.40**          | ** **  | **28.60**           | ** ** | **30.96**          | ** ** | **32.21**           | ** **  |
| **Dividends per share**                    | ** ** | **.20**            | ** **  | **.20**             | ** ** | **.20**            | ** ** | **.20**             | ** **  |
| ** **                                 | ** ** | ** **         | ** **  | ** **          | ** ** | ** **         | ** ** | ** **          | ** **  |
| 2003                                       |       |               |        |                |       |               |       |                |        |
| Sales                                      |       | $                  | 130,621     |                | $          | 147,844            |       | $                   | 155,174     |   | $ | 167,856 |   |
| Gross profit                               |       | 32,665             |        | 40,317              |       | 42,444             |       | 51,062              |        |
| Net income                                 |       | 2,175              |        | 7,825               |       | 7,711              |       | 12,189              |        |
| Diluted net income per share               |       | .27                |        | .97                 |       | .94                |       | 1.47                |        |
| Stock price per share-high                 |       | 30.99              |        | 35.53               |       | 35.35              |       | 34.93               |        |
| Stock price per share-low                  |       | 24.89              |        | 25.05               |       | 30.00              |       | 28.49               |        |
| Dividends per share                        |       | .16                |        | .20                 |       | .20                |       | .20                 |        |

 

The Company traditionally experiences lowersales during the first fiscal quarter because of seasonal patterns associatedwith weather and contractor schedules.

 

**NOTE 18SEGMENT INFORMATION**

 

The Company adopted SFAS No. 131, “Disclosureabout Segments of an Enterprise and Related Information.” SFAS No. 131 requiresdisclosure of certain information about operating segments, geographic areas inwhich the Company operates, major customers, and products and services. Inaccordance with SFAS No. 131, the Company has determined it has four operatingsegments. The Performance Coatings & Finishes Group manufactures andmarkets high-performance industrial and marine coatings. TheFiberglass-Composite Pipe Group manufactures and markets filament-wound andmolded composite fiberglass pipe, tubing, fittings and well screens. The WaterTransmission Group manufactures and supplies concrete and steel pressure pipe,concrete non-pressure pipe, protective linings for pipe, and fabricatedproducts. The Infrastructure Products Group manufactures and sells ready-mixconcrete, sand and aggregates, concrete pipe and culverts, and concrete andsteel lighting and traffic poles. Each of these segments has a dedicatedmanagement team and is managed separately, primarily because of differences inproducts.

 

The markets served by the PerformanceCoatings & Finishes Group and the Fiberglass-Composite Pipe Group areworldwide in scope. The Water Transmission Group serves primarily the westernUnited States. The Infrastructure Products Group’s quarry and ready-mixbusiness operates exclusively in Hawaii, and poles are sold throughout the U.S.Sales for export or to any individual customer did not exceed 10% ofconsolidated sales in 2004, 2003, or 2002. In accordance with SFAS No. 131, thefollowing table presents information related to each operating segment includedin, and in a manner consistent with, internal management reports. The Companyallocates certain selling, general and administrative expenses to operatingsegments utilizing assumptions believed to be appropriate in the circumstances.

 

Inter-segment sales were not significant.Income from reportable segments is exclusive of certain unallocated income andexpenses, including LIFO adjustments, interest expense and income taxes. Totalassets by segment are those assets that are used exclusively by suchsegment.  Unallocated assets areprincipally cash, corporate property and equipment, and investments. Long-livedassets consist of all long-term assets, excluding investments and deferred taxassets.

 

52

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| ** **                                                                        | ** ** | **SEGMENT INFORMATION**                   | ** **  |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| **(In thousands)**                                                                | ** ** | **Performance  Coatings &  Finishes** | ** **  | **Fiberglass-  Composite  Pipe** | ** ** | **Water  Transmission** | ** ** | **Infrastructure  Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **2004**                                                                          | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Sales**                                                                         | ** ** | **$**                                     | **199,623** | ** ** | **$** | **116,289** | ** ** | **$** | **154,231** | ** ** | **$** | **136,312** | ** ** | **$** | **—** | ** ** | **$** | **(602** | **)** | **$** | **605,853** | ** ** |
| **Income before interest, income taxes and  equity in earnings of joint venture** | ** ** | **4,458**                                 | ** **  | **21,429** | ** ** | **13,458** | ** ** | **14,519** | ** ** | **(37,877** | **)** | **—** | ** ** | **15,987** | ** ** |
| **Equity in earnings of joint venture, net of  taxes**                            | ** ** | **—**                                | ** **  | **—** | ** ** | **—** | ** ** | **—** | ** ** | **10,791** | ** ** | **—** | ** ** | **10,791** | ** ** |
| **Income from joint ventures-cost method**                                        | ** ** | **506**                                   | ** **  | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **506** | ** ** |
| **Investments in joint ventures**                                                 | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Equity method**                                                                 | ** ** | **—**                                | ** **  | **—** | ** ** | **—** | ** ** | **—** | ** ** | **16,042** | ** ** | **—** | ** ** | **16,042** | ** ** |
| **Cost method**                                                                   | ** ** | **2,138**                                 | ** **  | **3,784** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **5,922** | ** ** |
| **Long-lived assets**                                                             | ** ** | **58,320**                                | ** **  | **27,793** | ** ** | **37,970** | ** ** | **40,765** | ** ** | **41,481** | ** ** | **—** | ** ** | **206,329** | ** ** |
| **Total assets**                                                                  | ** ** | **173,807**                               | ** **  | **155,390** | ** ** | **120,921** | ** ** | **74,623** | ** ** | **198,797** | ** ** | **(179,601** | **)** | **543,937** | ** ** |
| **Capital expenditures**                                                          | ** ** | **5,291**                                 | ** **  | **4,777** | ** ** | **2,693** | ** ** | **5,045** | ** ** | **506** | ** ** | **—** | ** ** | **18,312** | ** ** |
| **Depreciation and amortization**                                                 | ** ** | **5,597**                                 | ** **  | **4,115** | ** ** | **3,977** | ** ** | **4,507** | ** ** | **701** | ** ** | **—** | ** ** | **18,897** | ** ** |
| 2003                                                                              |       |                                      |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                                             |       | $                                         | 190,280     |   | $ | 114,613 |   | $ | 165,497 |   | $ | 130,493 |   | $ | — |   | $ | (388 | ) | $ | 600,495 |   |
| Income before interest, income taxes and  equity in earnings of joint venture     |       | 9,383                                     |        | 21,881 |   | 26,634 |   | 15,509 |   | (23,459 | ) | — |   | 49,948 |   |
| Equity in earnings of joint venture, net of  taxes                                |       | —                                    |        | — |   | — |   | — |   | 614 |   | — |   | 614 |   |
| Income from joint ventures-cost method                                            |       | 636                                       |        | 3,042 |   | 2,633 |   | — |   | — |   | — |   | 6,311 |   |
| Investments in joint ventures                                                     |       |                                      |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity method                                                                     |       | —                                    |        | — |   | — |   | — |   | 13,064 |   | — |   | 13,064 |   |
| Cost method                                                                       |       | 1,695                                     |        | 3,784 |   | — |   | — |   | — |   | — |   | 5,479 |   |
| Long-lived assets                                                                 |       | 54,921                                    |        | 26,141 |   | 39,470 |   | 40,323 |   | 51,837 |   | — |   | 212,692 |   |
| Total assets                                                                      |       | 164,399                                   |        | 147,326 |   | 125,501 |   | 70,202 |   | 184,839 |   | (158,775 | ) | 533,492 |   |
| Capital expenditures                                                              |       | 5,901                                     |        | 2,542 |   | 2,656 |   | 5,041 |   | 967 |   | — |   | 17,107 |   |
| Depreciation and amortization                                                     |       | 5,206                                     |        | 3,940 |   | 4,124 |   | 4,382 |   | 719 |   | — |   | 18,371 |   |
| 2002                                                                              |       |                                      |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                                             |       | $                                         | 183,311     |   | $ | 88,393 |   | $ | 145,024 |   | $ | 123,610 |   | $ | — |   | $ | (865 | ) | $ | 539,473 |   |
| Income before interest, income taxes and  equity in earnings of joint venture     |       | 9,122                                     |        | 10,862 |   | 27,347 |   | 17,019 |   | (18,598 | ) | — |   | 45,752 |   |
| Equity in earnings of joint venture, net of  taxes                                |       | —                                    |        | — |   | — |   | — |   | 3,309 |   | — |   | 3,309 |   |
| Income from joint ventures-cost method                                            |       | 327                                       |        | 2,263 |   | 3,310 |   | — |   | — |   | — |   | 5,900 |   |
| Investments in joint ventures                                                     |       |                                      |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity method                                                                     |       | —                                    |        | — |   | — |   | — |   | 12,940 |   | — |   | 12,940 |   |
| Cost method                                                                       |       | 2,203                                     |        | 3,784 |   | — |   | — |   | — |   | — |   | 5,987 |   |
| Long-lived assets                                                                 |       | 49,314                                    |        | 28,338 |   | 40,966 |   | 39,694 |   | 32,841 |   | — |   | 191,153 |   |
| Total assets                                                                      |       | 138,616                                   |        | 138,712 |   | 115,078 |   | 68,272 |   | 140,233 |   | (137,969 | ) | 462,942 |   |
| Capital expenditures                                                              |       | 3,697                                     |        | 1,642 |   | 4,331 |   | 3,696 |   | 1,148 |   | — |   | 14,514 |   |
| Depreciation and amortization                                                     |       | 5,224                                     |        | 4,002 |   | 4,160 |   | 4,367 |   | 819 |   | — |   | 18,572 |   |

 

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| ** **                      | ** ** | **GEOGRAPHIC AREAS** | ** **  |
|---------------------------------|------------|----------------------|-------------|
| **(In thousands)**              | ** ** | **United  States**   | ** **  | **Europe** | ** ** | **Asia** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **2004**                        | ** ** | ** **           | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Sales to external customers** | ** ** | **$**                | **405,731** | ** ** | **$** | **96,682** | ** ** | **$** | **58,508** | ** ** | **$** | **44,932** | ** ** | **$** | **—** | ** ** | **$** | **605,853** | ** ** |
| **Long-lived assets**           | ** ** | **143,941**          | ** **  | **33,212** | ** ** | **13,133** | ** ** | **16,043** | ** ** | **—** | ** ** | **206,329** | ** ** |
| **Total assets**                | ** ** | **476,486**          | ** **  | **108,135** | ** ** | **97,172** | ** ** | **41,745** | ** ** | **(179,601** | **)** | **543,937** | ** ** |
| 2003                            |       |                 |        |   |   |   |   |   |   |   |   |   |   |
| Sales to external customers     |       | $                    | 422,091     |   | $ | 92,104 |   | $ | 51,228 |   | $ | 35,072 |   | $ | — |   | $ | 600,495 |   |
| Long-lived assets               |       | 156,676              |        | 31,001 |   | 10,692 |   | 14,323 |   | — |   | 212,692 |   |
| Total assets                    |       | 464,548              |        | 106,637 |   | 80,826 |   | 40,256 |   | (158,775 | ) | 533,492 |   |
| 2002                            |       |                 |        |   |   |   |   |   |   |   |   |   |   |
| Sales to external customers     |       | $                    | 396,668     |   | $ | 77,429 |   | $ | 34,309 |   | $ | 31,067 |   | $ | — |   | $ | 539,473 |   |
| Long-lived assets               |       | 136,712              |        | 31,690 |   | 10,715 |   | 12,036 |   | — |   | 191,153 |   |
| Total assets                    |       | 415,709              |        | 88,547 |   | 69,358 |   | 27,297 |   | (137,969 | ) | 462,942 |   |
|                                 |            |                      |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

53

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**To theBoard of Directors and Stockholders of Ameron International Corporation:**

 

We have completed an integrated audit ofAmeron International Corporation’s 2004 consolidated financial statements andof its internal control over financial reporting as of November 30, 2004 and anaudit of its 2003 consolidated financial statements in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Our opinions, based on ouraudits, are presented below.

 

**Consolidatedfinancial statements**

 

In our opinion, the accompanying consolidatedbalance sheets and the related consolidated statements of income, ofstockholders’ equity, of comprehensive income and of cash flows present fairly,in all material respects, the financial position of Ameron InternationalCorporation and its subsidiaries at November 30, 2004 and 2003, and the resultsof their operations and their cash flows for each of the two years in theperiod ended November 30, 2004 in conformity with accounting principlesgenerally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statements includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.  Thefinancial statements of the Company for the year ended November 30, 2002 wereaudited by other auditors whose report dated February 3, 2003, except as to Note16 which is dated as of February 24, 2004, expressed an unqualified opinion onthose statements.

 

As discussed in Note 1 to the consolidatedfinancial statements, the Company changed its method of accounting for goodwilleffective December 1, 2002.

 

**Internalcontrol over financial reporting**

 

Also, in our opinion, management’sassessment, included in the accompanying Management’s Report on InternalControl Over Financial Reporting, that the Company maintained effectiveinternal control over financial reporting as of November 30, 2004 based on criteriaestablished in Internal Control - Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO), is fairlystated, in all material respects, based on those criteria.  Furthermore, in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of November 30, 2004, based on criteria established in InternalControl - Integrated Framework issued by COSO. The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting.  Our responsibility is to express opinions onmanagement’s assessment and on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.  We conducted our audit of internal controlover financial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.  An audit of internal control over financialreporting includes obtaining an understanding of internal control overfinancial reporting, evaluating management’s assessment, testing and evaluatingthe design and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal controlover financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 
| [PricewaterhouseCoopers  LLP (signed)] |
|----------------------------------------|
| Los Angeles, California                |
| February 9, 2005                       |

 

54

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**MANAGEMENT’S REPORT**

 

# **MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATEDFINANCIAL STATEMENTS**

 

Management isresponsible for the preparation of the consolidated financial statements andrelated information of Ameron International Corporation and subsidiaries inconformity with accounting principles generally accepted in the United Statesof America. Management is responsible for the integrity of the financialinformation included in this Annual Report. In preparing the financialstatements, management makes estimates as necessary based upon currentlyavailable information and judgments of current conditions and circumstances.

 

The independentregistered public accounting firm of PricewaterhouseCoopers LLP, audits theCompany’s consolidated financial statements in accordance with the standards ofthe Public Company Accounting Oversight Board and provides an objective, independentreview of the fairness of reported operating results and financial position.

 

# **MANAGEMENT’S REPORT ON INTERNAL CONTROL OVERFINANCIAL REPORTING**

 

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange ActRule 13a-15(f). Under the supervision and with the participation ofmanagement, including the principal executive officer and principal financialofficer, management conducted an evaluation of the effectiveness of internalcontrol over financial reporting based on the framework in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”). Based on such evaluation under the framework in Internal Control - Integrated Framework,issued by COSO, managementconcluded that internal control over financial reporting was effective as ofNovember 30, 2004. Management’s assessment of the effectiveness ofinternal control over financial reporting as of November 30, 2004 has beenaudited by PricewaterhouseCoopers LLP, as stated in its report which isincluded herein.

 

 

The Audit Committee of the Board of Directorsis composed of three directors who are not officers or employees of theCompany.  They meet periodically withmanagement, PricewaterhouseCoopers LLP and the internal auditors to review theaudit scope and results, discuss internal controls and financial reportingsubjects, and review management actions on these matters.  PricewaterhouseCoopers LLP and the internalauditors have full and free access to the members of the Audit Committee.

** **
| **/S/ JAMES S. MARLEN**                                             | ** **                                          | **/S/ GARY WAGNER** | ** ** |
|---------------------------------------------------------------------|-----------------------------------------------------|---------------------|------------|
| ** **                                                          | ** **                                          |
| **JAMES S. MARLEN**                                                 | **GARY WAGNER**                                     |
| **CHAIRMAN OF THE BOARD, PRESIDENT & CHIEF  EXECUTIVE OFFICER** | **SENIOR VICE PRESIDENT, CHIEF FINANCIAL  OFFICER** |

 

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