e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
_________ to
_________.
Commission File No. 0-28178
CARBO CERAMICS INC.
(Exact name of registrant as specified in its charter)
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| DELAWARE
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72-1100013 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification Number) |
6565 MacArthur Boulevard
Suite 1050
Irving, Texas 75039
(Address of principal executive offices)
(972) 401-0090
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
As of April 30, 2006, 24,331,072 shares of the registrant’s Common Stock, par value $.01 per
share, were outstanding.
CARBO CERAMICS INC.
Index to Quarterly Report on Form 10-Q
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
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March 31, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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(Note 1) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
17,260 |
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$ |
19,695 |
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Short-term investments |
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40,820 |
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41,975 |
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Trade accounts receivable, net |
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58,068 |
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53,918 |
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Inventories: |
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Finished goods |
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21,597 |
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17,981 |
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Raw materials and supplies |
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7,428 |
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8,490 |
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Total inventories |
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29,025 |
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26,471 |
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Prepaid expenses and other current assets |
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2,513 |
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2,433 |
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Deferred income taxes |
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4,019 |
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3,795 |
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Total current assets |
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151,705 |
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148,287 |
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Property, plant and equipment: |
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Land and land improvements |
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2,812 |
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2,812 |
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Land-use and mineral rights |
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5,276 |
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5,271 |
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Buildings |
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24,956 |
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15,051 |
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Machinery and equipment |
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207,863 |
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154,785 |
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Construction in progress |
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23,966 |
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72,074 |
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Total |
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264,873 |
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249,993 |
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Less accumulated depreciation |
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74,925 |
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70,493 |
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Net property, plant and equipment |
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189,948 |
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179,500 |
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Goodwill |
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21,840 |
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21,840 |
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Intangible and other assets, net |
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6,091 |
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6,169 |
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Total assets |
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$ |
369,584 |
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$ |
355,796 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
7,203 |
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$ |
11,277 |
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Accrued payroll and benefits |
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4,619 |
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6,941 |
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Accrued freight |
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1,767 |
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1,356 |
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Accrued utilities |
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3,902 |
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3,389 |
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Accrued income taxes |
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16,230 |
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9,998 |
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Retainage related to construction in progress |
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233 |
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337 |
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Other accrued expenses |
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3,491 |
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3,011 |
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Total current liabilities |
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37,445 |
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36,309 |
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Deferred income taxes |
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26,809 |
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26,121 |
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Shareholders’ equity: |
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Preferred stock, par value $0.01 per share, 5,000 shares authorized,
none outstanding |
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— |
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— |
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Common stock, par value $0.01 per share, 40,000,000 shares authorized;
24,323,961 and 24,286,388 shares issued and outstanding at March 31,
2006 and December 31, 2005, respectively |
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243 |
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243 |
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Additional paid-in capital |
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101,418 |
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102,536 |
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Unearned stock compensation |
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— |
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(2,135 |
) |
Retained earnings |
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202,748 |
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192,196 |
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Accumulated other comprehensive income |
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921 |
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526 |
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Total shareholders’ equity |
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305,330 |
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293,366 |
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Total liabilities and shareholders’ equity |
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$ |
369,584 |
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$ |
355,796 |
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The accompanying notes are an integral part of these statements.
3
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited)
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Three months ended |
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March 31, |
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2006 |
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2005 |
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Revenues |
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$ |
74,278 |
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$ |
61,168 |
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Cost of sales |
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46,912 |
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36,347 |
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Gross profit |
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27,366 |
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24,821 |
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Selling, general and administrative expenses |
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7,473 |
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7,049 |
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Start-up costs |
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351 |
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15 |
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Operating profit |
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19,542 |
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17,757 |
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Other income: |
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Net interest income |
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437 |
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384 |
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Losses in equity-method investee |
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(17 |
) |
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— |
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Other, net |
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355 |
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3 |
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775 |
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|
387 |
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Income before income taxes |
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20,317 |
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18,144 |
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Income taxes |
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7,333 |
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6,550 |
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Net income |
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$ |
12,984 |
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$ |
11,594 |
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Earnings per share: |
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Basic |
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$ |
0.54 |
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$ |
0.48 |
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Diluted |
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$ |
0.53 |
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$ |
0.48 |
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Other information: |
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Dividends declared per common share |
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$ |
0.10 |
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$ |
0.08 |
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The accompanying notes are an integral part of these statements.
4
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
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Three months ended |
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March 31, |
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2006 |
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2005 |
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Operating activities |
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|
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Net income |
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$ |
12,984 |
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$ |
11,594 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation |
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4,431 |
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|
3,053 |
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Amortization |
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181 |
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151 |
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Provision for doubtful accounts |
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204 |
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|
166 |
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Deferred income taxes |
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|
464 |
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|
594 |
|
Excess tax benefits from stock-based compensation |
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(199 |
) |
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— |
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Loss on disposal of assets |
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— |
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3 |
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Foreign currency transaction gain |
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(355 |
) |
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— |
|
Non-cash stock compensation expense |
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|
447 |
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|
216 |
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Losses in equity-method investee |
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17 |
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— |
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Changes in operating assets and liabilities: |
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Trade accounts receivable |
|
|
(4,295 |
) |
|
|
(1,028 |
) |
Inventories |
|
|
(2,521 |
) |
|
|
731 |
|
Prepaid expenses and other current assets |
|
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(70 |
) |
|
|
117 |
|
Other long-term assets |
|
|
108 |
|
|
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— |
|
Accounts payable |
|
|
(4,076 |
) |
|
|
(2,165 |
) |
Accrued payroll and benefits |
|
|
(2,322 |
) |
|
|
(1,896 |
) |
Accrued freight |
|
|
409 |
|
|
|
42 |
|
Accrued utilities |
|
|
512 |
|
|
|
(92 |
) |
Accrued income taxes |
|
|
6,489 |
|
|
|
1,708 |
|
Other accrued expenses |
|
|
472 |
|
|
|
(177 |
) |
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Net cash provided by operating activities |
|
|
12,880 |
|
|
|
13,017 |
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|
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Investing activities |
|
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Capital expenditures, net |
|
|
(14,578 |
) |
|
|
(7,764 |
) |
Purchases of short-term investments |
|
|
(18,845 |
) |
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(55,825 |
) |
Proceeds from maturities of short-term investments |
|
|
20,000 |
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|
45,300 |
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Net cash used in investing activities |
|
|
(13,423 |
) |
|
|
(18,289 |
) |
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Financing activities |
|
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|
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Proceeds from exercise of stock options |
|
|
313 |
|
|
|
101 |
|
Dividends paid |
|
|
(2,432 |
) |
|
|
(1,918 |
) |
Excess tax benefits from stock-based compensation |
|
|
199 |
|
|
|
— |
|
|
|
|
|
|
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Net cash used in financing activities |
|
|
(1,920 |
) |
|
|
(1,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net decrease in cash and cash equivalents |
|
|
(2,463 |
) |
|
|
(7,089 |
) |
Effect of exchange rate changes on cash |
|
|
28 |
|
|
|
(1 |
) |
Cash and cash equivalents at beginning of period |
|
|
19,695 |
|
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|
33,990 |
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|
|
|
|
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Cash and cash equivalents at end of period |
|
$ |
17,260 |
|
|
$ |
26,900 |
|
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|
|
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|
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|
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Supplemental cash flow information |
|
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|
|
|
|
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Income taxes paid |
|
$ |
380 |
|
|
$ |
4,248 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of CARBO Ceramics Inc. have been
prepared in accordance with accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required by accounting
principles generally accepted in the United States for complete financial statements. In the
opinion of management, all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. The results of the interim periods presented
herein are not necessarily indicative of the results to be expected for any other interim period or
the full year. These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December 31, 2005 included
in the Company’s annual report on Form 10-K for the year ended December 31, 2005.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its
operating subsidiaries (the “Company”). The significant operating subsidiaries include: CARBO
Ceramics (China) Company Limited, CARBO Ceramics (Eurasia) LLC, and Pinnacle Technologies, Inc.
The consolidated financial statements also include a 49% interest in a fracture-related services
company in Canada, acquired April 2005, that is reported under the equity method of accounting.
All significant intercompany transactions have been eliminated.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
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Three months ended |
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March 31, |
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2006 |
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2005 |
|
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
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Net income |
|
$ |
12,984 |
|
|
$ |
11,594 |
|
Denominator: |
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|
|
|
|
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Denominator
for basic earnings per share —
Weighted-average shares |
|
|
24,243,415 |
|
|
|
23,952,456 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
120,013 |
|
|
|
181,996 |
|
Nonvested stock awards |
|
|
20,507 |
|
|
|
11,608 |
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
140,520 |
|
|
|
193,604 |
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share —
adjusted weighted-average shares |
|
|
24,383,935 |
|
|
|
24,146,060 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.54 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.53 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2006, employees exercised stock options to acquire
15,750 common shares at a weighted-average exercise price of $19.87 per share and restrictions
lapsed on 8,346 nonvested shares. The Company recognized a related income tax benefit, of which
$257 was credited directly to shareholders’ equity.
During the three months ended March 31, 2005, employees exercised stock options to acquire
9,000 common shares at a weighted-average exercise price of $11.25 per share. The Company
recognized a related income tax benefit, of which $122 was credited directly to shareholders’
equity.
6
3. Stock-Based Compensation
The Company has three stock-based compensation plans: a restricted stock plan and two stock
option plans. The restricted stock plan provides for granting shares of Common Stock in the form
of restricted stock awards to employees and non-employee directors of the Company. Under the
restricted stock plan, the Company may issue up to 375,000 shares, plus (i) the number of shares
that are forfeited, and (ii) the number of shares that are withheld from the participants to
satisfy tax withholding obligations. No more than 75,000 shares may be granted to any single
employee. Transfer and forfeiture restrictions are lifted on one-third of the shares subject to
award (i.e., shares vest) on each of the first three anniversaries of the grant date. The stock
option plans provide for granting options to purchase shares of the Company’s Common Stock to
employees and non-employee directors. Under the stock option plans, the Company may grant options
for up to 2,175,000 shares. The exercise price of each option generally is equal to the market
price on the date of grant. The maximum term of an option is ten years and options generally
become exercisable (i.e., vest) proportionately on each of the first four anniversaries of the
grant date. As of March 31, 2006, 285,522 shares were available for issuance under the restricted
stock plan and 52,650 shares were available for issuance under the stock option plans.
Prior to January 1, 2006 the Company accounted for its stock-based compensation plans using
the intrinsic value method under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees (“APB 25”), and related interpretations as permitted by
FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Under the intrinsic
value method, compensation expense was recognized in the income statement to the extent the
exercise price of the award was less than the market value of the underlying common stock. Since
the Company historically has granted stock options with an exercise price equal to the market price
on the date of grant, stock option awards had no intrinsic value and, therefore, no compensation
expense was recognized. Because restricted stock awards had no exercise price, the resulting
intrinsic value was equal to the market price on the date of grant and recognized as compensation
expense on a straight-line basis over the vesting period of each award. Pro forma disclosures were
provided to illustrate the effects on net income and earnings per share as if the Company had
applied the fair value recognition provisions of SFAS 123 and recognized expense for both
restricted stock awards and stock option awards.
Effective January 1, 2006 the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment (“SFAS 123(R)”), which is a revision of SFAS 123 and
supersedes APB 25. SFAS 123(R) requires the Company to recognize compensation expense in the
income statement for all share-based payments to employees. Pro forma disclosure is no longer an
alternative. The Company elected to adopt SFAS 123(R) using the modified prospective transition
method, under which compensation expense includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123 used in the Company’s pro
forma disclosures, and (b) compensation cost for all share-based payments granted on or after
January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of
SFAS 123(R). Results for prior periods have not been restated as provided under the modified
prospective approach, therefore pro forma disclosures will continue to be provided for periods
prior to January 1, 2006.
Under SFAS 123(R), the cost of employee services received in exchange for stock is measured
based on the grant-date fair value. The Company recognizes that cost on a straight-line basis over
the period during which an employee is required to provide service in exchange for the award
(usually the vesting period). The fair value of stock options is estimated using a Black-Scholes
option-pricing model and the fair value of restricted stock is determined based on the market price
of the Company’s Common Stock on the date of grant. Compensation expense is recognized only for
share based payments expected to vest, therefore the Company estimates forfeitures at the time of
grant based on historical forfeiture rates and future expectations and reduces compensation expense
accordingly. Forfeitures rates are revised, if necessary, in subsequent periods, with the Company
ultimately recognizing expense only on awards that actually vest. Excess tax benefits, as defined
in SFAS 123(R), are recognized as additions to paid-in capital.
As a result of adopting SFAS 123(R), the Company’s income before income taxes and net income
for the three months ended March 31, 2006 were lower by $107 and $68, respectively, than if it had
continued to account for stock-based compensation under APB 25. Diluted earning per share was
lower by $0.01 per share. Prior to adoption of SFAS 123(R), the Company presented all tax benefits
of deductions resulting from stock compensation as operating cash flows in the statement of cash
flows. SFAS 123(R) requires the cash flows from tax benefits resulting from tax deductions in
excess of compensation cost recognized in the income statement (excess tax benefits) to be
classified as financing cash flows. The $199 excess tax benefit classified as a financing cash
inflow for the three months ended March 31, 2006 would have been classified as an
7
operating cash inflow if the Company had not adopted SFAS 123(R). Under SFAS 123(R), the
Company’s unearned stock compensation balance of $2,135 included in shareholder equity at December
31, 2005 was reclassified to additional paid-in capital during the quarter ended March 31, 2006.
The following table illustrates the pro forma effect on net income and earnings per share for
the three months ended March 31, 2005 if the Company had applied the fair value recognition
provisions of SFAS 123 to the Company’s stock-based employee compensation:
| |
|
|
|
|
Net income, as reported |
|
$ |
11,594 |
|
Add: stock-based employee compensation
expense included in reported net income, net
of related tax effects |
|
|
136 |
|
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects |
|
|
(389 |
) |
|
|
|
|
Pro forma net income |
|
$ |
11,341 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic — as reported |
|
$ |
0.48 |
|
|
|
|
|
Basic — pro forma |
|
$ |
0.47 |
|
|
|
|
|
Diluted — as reported |
|
$ |
0.48 |
|
|
|
|
|
Diluted — pro forma |
|
$ |
0.47 |
|
|
|
|
|
A summary of stock option activity and related information for the three months ended March
31, 2006 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
Aggregate |
| |
|
|
|
|
|
Average |
|
Intrinsic |
| |
|
Options |
|
Exercise Price |
|
Value |
Outstanding at January 1, 2006 |
|
|
291,248 |
|
|
$ |
22.16 |
|
|
|
|
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(15,750 |
) |
|
$ |
19.87 |
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
275,498 |
|
|
$ |
22.29 |
|
|
$ |
9,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
190,104 |
|
|
$ |
20.05 |
|
|
$ |
7,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006, there was $418 of total unrecognized compensation cost related to stock
options granted under the plans. The weighted-average remaining contractual term of options
outstanding at March 31, 2006 is 5.7 years. There have been no stock options granted since 2004.
A summary of restricted stock activity and related information for the three months ended
March 31, 2006 is presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant-Date |
| |
|
Shares |
|
Fair Value |
Nonvested at January 1, 2006 |
|
|
58,634 |
|
|
$ |
47.03 |
|
Granted |
|
|
23,010 |
|
|
$ |
61.95 |
|
Vested |
|
|
(8,346 |
) |
|
$ |
45.80 |
|
Forfeited |
|
|
(1,187 |
) |
|
$ |
49.21 |
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006 |
|
|
72,111 |
|
|
$ |
51.90 |
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006, there was $2,782 of total unrecognized compensation cost related to
restricted shares granted under the plan. That cost is expected to be recognized over a
weighted-average period of 2.2 years.
8
4. Segment Information
The Company has two operating segments: 1) Proppant and 2) Fracture and Reservoir Diagnostics.
Services and software sold by the Fracture and Reservoir Diagnostics segment are provided through
the Company’s wholly-owned subsidiary Pinnacle Technologies, Inc. (“Pinnacle”).
Goodwill totaling $21,840 arising from the Company’s acquisition of Pinnacle is not assigned
to an operating segment because that information is not used by the Company’s chief operating
decision maker in allocating resources. An inter-segment note receivable totaling $13,579 and
$10,004 at March 31, 2006 and 2005, respectively and the costs of the Company’s corporate offices
are reported in the Proppant segment. Inter-segment sales are not material.
Summarized financial information for the Company’s reportable segments is shown in the
following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fracture |
|
|
| |
|
|
|
|
|
and |
|
|
| |
|
|
|
|
|
Reservoir |
|
|
| |
|
Proppant |
|
Diagnostics |
|
Total |
Three Months Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
67,000 |
|
|
$ |
7,278 |
|
|
$ |
74,278 |
|
Income before income taxes |
|
|
19,605 |
|
|
|
712 |
|
|
|
20,317 |
|
Segment assets as of March 31, 2006 |
|
|
333,046 |
|
|
|
28,277 |
|
|
|
361,323 |
|
Three Months Ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
55,160 |
|
|
$ |
6,008 |
|
|
$ |
61,168 |
|
Income before income taxes |
|
|
17,847 |
|
|
|
297 |
|
|
|
18,144 |
|
Segment assets as of March 31, 2005 |
|
|
272,128 |
|
|
|
21,595 |
|
|
|
293,723 |
|
5. Dividends Paid
On January 17, 2006, the Board of Directors declared a cash dividend of $0.10 per common share
payable to shareholders of record on January 31, 2006. The dividend was paid on February 15, 2006.
6. Comprehensive Income
Comprehensive income, which includes net income and all other changes in equity during a
period except those resulting from investments and distributions to owners, was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
March 31, |
|
| |
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
12,984 |
|
|
$ |
11,594 |
|
Foreign currency translation adjustment |
|
|
395 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
13,379 |
|
|
$ |
11,593 |
|
|
|
|
|
|
|
|
7. Legal Proceedings
The Company is subject to legal proceedings, claims and litigation arising in the ordinary
course of business. While the outcome of these matters is currently not determinable, management
does not expect that the ultimate cost to resolve these matters will have a material adverse effect
on the Company’s consolidated financial position, results of operations, or cash flows.
8. Subsequent Event
On April 18, 2006, the shareholders approved Amendment Number One to the 2004 CARBO Ceramics
Inc. Long-Term Incentive Plan. The primary changes to the plan are to permit the issuance of
restricted shares to non-employee directors of the Company and to lift the transfer restrictions
upon retirement after achieving 62 years of age (i.e., shares
immediately vest). In addition, each of the six non-employee
directors received 2,000 restricted shares of common stock. The
Company will recognize compensation cost in the second quarter of
2006 related to these grants in the amount of approximately $500.
9
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business
The Company manufactures ceramic proppant and provides services that are used in the hydraulic
fracturing of natural gas and oil wells. Goods and services are provided through two operating
segments: 1) Proppant and 2) Fracture and Reservoir Diagnostics. The Company’s Proppant segment
manufactures and sells ceramic proppants. The Company’s Fracture and Reservoir Diagnostics segment
provides fracture mapping and reservoir diagnostic services, sells fracture simulation software and
provides engineering services to oil and gas companies worldwide. These services and software are
provided through the Company’s wholly-owned subsidiary, Pinnacle Technologies, Inc.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require the Company to make estimates and
assumptions (see Note 1 to the consolidated financial statements included in the annual report on
Form 10-K for the year ended December 31, 2005). The Company believes that some of its accounting
policies involve a higher degree of judgment and complexity than others. Critical accounting
policies for the Company include revenue recognition, estimating the recoverability of accounts
receivable, inventory valuation, accounting for income taxes, accounting for long-lived assets and
accounting for legal contingencies. Critical accounting policies are discussed more fully in the
annual report on Form 10-K for the year ended December 31, 2005 and there have been no changes in
the Company’s evaluation of its critical accounting policies since the preparation of that report.
Results of Operations
Three Months Ended March 31, 2006
Revenues. Consolidated revenues of $74.3 million for the quarter ended March 31, 2006 set a new
quarterly record and represented a 21% increase compared to $61.2 million in revenues for the
quarter ended March 31, 2005. The increase was attributable to a higher average selling price for
ceramic proppant, higher sales volume of proppant and an increase in revenues from fracture and
reservoir diagnostics.
Proppant segment revenues of $67.0 million for the quarter ended March 31, 2006 exceeded revenues
of $55.2 million for the same period in 2005 by 21% due to a 17% increase in the average selling
price of proppant and a 4% increase in proppant sales volume. Worldwide proppant sales totaled 209
million pounds for the quarter compared to 201 million pounds for the first quarter of 2005. The
increased sales volume was the result of record sales volume in the U.S., which increased 21%
compared to the first quarter of 2005, and Canada, which increased 5% compared to last year’s first
quarter. These sales volume increases were driven by continued strong demand due to increased
natural gas drilling activity in North America. After having sales volume constrained by
manufacturing capacity throughout 2005, initial production from the Company’s new manufacturing
facility in Toomsboro, Georgia allowed the Company to respond to this demand. Sales outside of
North America declined 32% compared to last year’s first quarter, due to a significant decline in
Russian sales. The Company’s sales in Russia have been impacted by an increase in the availability
of proppant produced by Russian manufacturers, the pricing of which excludes customs duties,
tariffs and transportation expenses associated with products imported by the Company. However, the
Company anticipates that its sales in Russia will improve during the remainder of this year due to
new marketing initiatives and beyond 2006 due to the construction of a manufacturing facility in
Kopeysk, Russia, which is expected to be completed in the fourth quarter of 2006. Excluding
Russia, sales outside of North America increased 38% versus the first quarter of 2005 due to
improved activity in China, the Middle East and West Africa.
The average selling price of proppant in the first quarter of 2006 was $0.321 per pound, an
increase of 17% compared to the first quarter 2005 average selling price of $0.274. The higher
average selling price was due to increases in list prices and fuel surcharges that went into effect
during 2005 and an increase in freight premiums passed on to customers requesting expedited
shipments in the U.S.
Fracture and Reservoir Diagnostics segment revenues for the quarter ended March 31, 2006 were $7.3
million, 21% higher than revenues of $6.0 million for the same period in 2005. The increase was
primarily due to increased use of mapping services in North America by production companies.
10
Gross Profit. Consolidated gross profit for the first quarter of 2006 was $27.4 million, or 37% of
revenues, compared to $24.8 million, or 41% of revenues, for the first quarter of 2005. Gross
profit increased by 10% compared to last year’s first quarter as a result of increased revenues in
both the Proppant and Fracture and Reservoir Diagnostics segments. The decline in gross profit as
a percentage of revenues was primarily due to a decrease in the margin on proppant sales, which was
partially offset by an improvement in the margin for fracture and reservoir diagnostics.
Proppant segment gross profit was $24.3 million for the first quarter of 2006, a 7% increase over
gross profit of $22.7 million for the first quarter of 2005. This increase was primarily due to
the increase in sales volume. Gross profit as a percentage of revenues declined to 36% in the
first quarter of 2006 from 41% in the first quarter of 2005. This decline was primarily due to an
increase in the Company’s manufacturing costs which were adversely impacted by higher prices paid
for natural gas and raw materials. The delivered cost of natural gas consumed in the Company’s
domestic proppant manufacturing facilities averaged $12.39/mmbtu for the quarter compared to
$7.20/mmbtu for the first quarter of 2005. The increase in the average selling price of the
Company’s ceramic proppant marginally exceeded increased costs and, as a result, there was a slight
increase in the profit generated per pound of proppant sold despite a decline in the gross profit
margin as a percentage of revenues.
Fracture and Reservoir Diagnostics segment gross profit for the first quarter of 2006 was $3.1
million, or 42% of revenues, compared to $2.1 million, or 36% of revenues, for the first quarter of
2005. The increase in gross profit margin is attributable to a reduction in third party
subcontractor expenses due to a change in service mix.
Selling, General and Administrative (SG&A) and Other Operating Expenses. Consolidated SG&A and
other operating expenses of $7.8 million for the first quarter of 2006 increased by 11% compared to
$7.1 million for the corresponding period in 2005. As a percentage of revenues, SG&A and other
operating expenses decreased to 10.5% for the quarter ended March 31, 2006 compared to 11.5% for
the quarter ended March 31, 2005.
Proppant segment SG&A and other operating expenses totaled $5.5 million for the first quarter of
2006 compared to $5.3 million for the corresponding period in 2005. The increase was primarily due
to final start-up costs for the Company’s new manufacturing facility in Toomsboro, Georgia and
expenses related to the search for a new president, partially offset by reduced legal expense.
Fracture and Reservoir Diagnostics segment SG&A and other operating expenses totaled $2.3 million
for the first quarter of 2006 compared to $1.8 million for the corresponding period in 2005. The
increase was primarily due to increased headcount in the technical development, finance and
administrative support groups to support increased sales.
Income Tax Expense. Consolidated income tax expense of $7.3 million for the quarter ended March
31, 2006 increased 12% compared to $6.6 million for the same period a year ago primarily due to the
increase in taxable income resulting from the Company’s improved performance.
Liquidity and Capital Resources
At March 31, 2006, the Company had cash and cash equivalents of $17.3 million and short-term
investments of $40.8 million compared to cash and cash equivalents of $19.7 million and short-term
investments of $42.0 million at December 31, 2005. The Company generated $12.9 million cash from
operations, of which $6.2 million originated from the deferral of income tax payments resulting
from the extension of tax payment deadlines to August 28, 2006 for those tax payers affected by
Hurricane Katrina. The Company also received $0.3 million proceeds from employee exercises of
stock options, retained $0.2 million cash from tax benefits relating to stock-based compensation to
employees and received $1.2 million for net purchases and maturities of short-term investments.
Uses of cash included $14.6 million of capital spending and $2.4 million of cash dividends. Major
capital spending included $5.5 million on the new proppant manufacturing facility in Toomsboro,
Georgia that commenced operations in the first quarter of 2006 and $4.4 million on a new proppant
manufacturing facility in Kopeysk, Russia that is expected to be completed in the fourth quarter of
2006. The Toomsboro facility was completed slightly below the planned expenditure of $62 million.
The Company believes that the relatively high prices for oil and natural gas in the current spot
and futures markets will continue to spur drilling and fracturing activity worldwide.
Consequently, the Company expects demand for its products to remain strong. The Company intends to
continue operating all of its manufacturing
11
facilities near full capacity for the remainder of the year. Production from the new Toomsboro
facility during the first quarter of 2006 met the Company’s objective of 50% of final capacity and
is expected to improve to 75% of final capacity during the second quarter.
Subject to its financial condition, the amount of funds generated from operations and the level of
capital expenditures, the Company’s current intention is to continue to pay quarterly dividends to
shareholders of its Common Stock. On January 17, 2006, the Company’s Board of Directors approved
the payment of a quarterly cash dividend of $0.10 per share to shareholders of the Company’s Common
Stock on January 31, 2006. The Company has total projected capital expenditures of $65.0 million
to $70.0 million for the remainder of 2006, including spending to complete its manufacturing
facility in Kopeysk, Russia, initial spending to expand the Company’s Toomsboro, Georgia
manufacturing facility, expansion of distribution facilities and acquisition or construction of
additional fracture mapping tools. The new Russian plant is designed to have annual capacity of
100 million pounds at an expected total cost of $41.0 million. The expected cost of the Russian
plant exceeds the Company’s previous estimate of $32.0 million due to higher than anticipated
installation and construction costs. Expansion of the Toomsboro facility entails construction of a
second production line that is anticipated to be completed in the third quarter of 2007 at an
expected cost of $54 million. The second production line is expected to have annual capacity of
250 million pounds, bringing the Toomsboro facility’s total capacity to 500 million pounds per
year.
The Company maintains an unsecured line of credit of $10.0 million. As of March 31, 2006, there
was no outstanding debt under the credit agreement. The Company anticipates that cash on hand and
available through liquidation of short-term investments, cash provided by operating activities and
funds available under its line of credit will be sufficient to meet planned operating expenses, tax
obligations and capital expenditures for the next 12 months. The Company also believes that it
could acquire additional debt financing, if needed. Based on these assumptions, we believe that
the Company’s fixed costs could be met even with a moderate decrease in demand for the Company’s
products.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of March 31, 2006.
Forward-Looking Information
The statements in this Form 10-Q that are not historical statements, including statements regarding
our future financial and operating performance, are forward-looking statements within the meaning
of the federal securities laws. All forward-looking statements are based on management’s current
expectations and estimates, which involve risks and uncertainties that could cause actual results
to differ materially from those expressed in forward-looking statements. Among these factors are
changes in overall economic conditions, changes in the cost of raw materials and natural gas used
in manufacturing our products, changes in demand for our products, changes in the demand for, or
price of, oil and natural gas, risks of increased competition, technological, manufacturing and
product development risks, loss of key customers, changes in government regulations, foreign and
domestic political and legislative risks, the risks of war and international and domestic
terrorism, risks associated with foreign operations and foreign currency exchange rates and
controls, weather-related risks and other risks and uncertainties. Additional factors that could
affect our future results or events are described from time to time in our Securities and Exchange
Commission reports. See in particular our Form 10-K for the fiscal year ended December 31, 2005
under the caption “Risk Factors” and similar disclosures in subsequently filed reports with the
Securities and Exchange Commission. We assume no obligation to update forward-looking statements,
except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s major market risk exposure is to foreign currency fluctuations that could impact its
investments in China and Russia. When necessary, the Company may enter into forward foreign
exchange contracts to hedge the impact of foreign currency fluctuations. There were no such foreign
exchange contracts outstanding at March 31, 2006. The Company has a $10.0 million line of credit
with its primary commercial bank. Under the terms of the revolving credit agreement, the Company
may elect to pay interest at either a fluctuating base rate established by the bank from time to
time or at a rate based on the rate established in the London inter-bank market. As of March 31,
2006, there was no outstanding debt under the credit agreement. The Company does not believe that
it has any material exposure to market risk associated with interest rates.
12
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed
in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports filed under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
As of the end of the quarter ended March 31, 2006, management carried out an evaluation, under the
supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures. There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the circumvention of the
controls and procedures. Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their control objectives. Based upon and as of the end
of the quarter for which this report is made, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported as and when
required.
(b) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter
ended March 31, 2006 that materially affected, or are reasonably likely to materially affect, those
controls.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three month period ended March 31, 2006, the Company credited 565 aggregate
shares of Common Stock to bookkeeping accounts for three non-employee directors under the
CARBO Ceramics Inc. Director Deferred Fee Plan as a result of such directors’ prior fee
deferral elections. The fees so deferred were denominated in a number of shares of the
Company’s Common Stock determined by reference to the closing price of a share of Common
Stock on the New York Stock Exchange on the day [immediately prior to the day] that the
fees otherwise would have been paid. Shares of Common Stock equal to the number of shares
credited to a non-employee director’s account will be issued to the director on the later
of (a) a date certain selected by the director on the date of his or her first fee
deferral election or (b) the first date on which he or she ceases to be a director. These
transactions are exempt from the registration requirements of the Securities Act of 1933,
as amended, pursuant to Section 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
The following exhibits are filed as part of the Quarterly Report on Form 10-Q:
| |
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification by Jesse P. Orsini. |
| |
| |
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification by Paul G. Vitek.
|
| |
| |
32 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
|
|
|
|
|
|
CARBO CERAMICS INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jessie P. Orsini
Jesse P. Orsini
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Paul G. Vitek
Paul G. Vitek
|
|
|
|
|
|
|
Sr. Vice President, Finance and |
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
| |
|
Date: May 10, 2006 |
|
|
15
EXHIBIT INDEX
| |
|
|
| EXHIBIT |
|
DESCRIPTION |
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification by Jesse P. Orsini. |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification by Paul G. Vitek. |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
16