e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
or
| |
|
|
| o |
|
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)
| |
|
|
| DELAWARE
|
|
72-1100013 |
| (State or other jurisdiction of
|
|
(I.R.S. Employer |
| incorporation or organization)
|
|
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.
Large Accelerated Filer þ Accelerated Filer o 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 October 23, 2006, 24,391,102 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)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(Unaudited) |
|
|
(Note 1) |
|
ASSETS
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,511 |
|
|
$ |
19,695 |
|
Short-term investments |
|
|
21,690 |
|
|
|
41,975 |
|
Trade accounts receivable, net |
|
|
62,664 |
|
|
|
53,918 |
|
Inventories: |
|
|
|
|
|
|
|
|
Finished goods |
|
|
28,078 |
|
|
|
17,981 |
|
Raw materials and supplies |
|
|
8,605 |
|
|
|
8,490 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
36,683 |
|
|
|
26,471 |
|
Prepaid expenses and other current assets |
|
|
3,125 |
|
|
|
2,433 |
|
Deferred income taxes |
|
|
4,472 |
|
|
|
3,795 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
143,145 |
|
|
|
148,287 |
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Land and land improvements |
|
|
2,812 |
|
|
|
2,812 |
|
Land-use and mineral rights |
|
|
6,089 |
|
|
|
5,271 |
|
Buildings |
|
|
26,935 |
|
|
|
15,051 |
|
Machinery and equipment |
|
|
211,125 |
|
|
|
154,785 |
|
Construction in progress |
|
|
54,313 |
|
|
|
72,074 |
|
|
|
|
|
|
|
|
Total |
|
|
301,274 |
|
|
|
249,993 |
|
Less accumulated depreciation |
|
|
84,061 |
|
|
|
70,493 |
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
217,213 |
|
|
|
179,500 |
|
Goodwill |
|
|
21,840 |
|
|
|
21,840 |
|
Intangible and other assets, net |
|
|
7,096 |
|
|
|
6,169 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
389,294 |
|
|
$ |
355,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,460 |
|
|
$ |
11,277 |
|
Accrued payroll and benefits |
|
|
6,506 |
|
|
|
6,941 |
|
Accrued freight |
|
|
2,151 |
|
|
|
1,356 |
|
Accrued utilities |
|
|
3,071 |
|
|
|
3,389 |
|
Accrued income taxes |
|
|
7,765 |
|
|
|
9,998 |
|
Retainage related to construction in progress |
|
|
158 |
|
|
|
337 |
|
Other accrued expenses |
|
|
5,451 |
|
|
|
3,011 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
31,562 |
|
|
|
36,309 |
|
Deferred income taxes |
|
|
27,764 |
|
|
|
26,121 |
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share, 5,000 shares authorized,
none outstanding |
|
|
— |
|
|
|
— |
|
Common stock, par value $0.01 per share, 40,000,000 shares authorized;
24,391,102 and 24,286,388 shares issued and outstanding at September 30,
2006 and December 31, 2005, respectively |
|
|
244 |
|
|
|
243 |
|
Additional paid-in capital |
|
|
104,274 |
|
|
|
102,536 |
|
Unearned stock compensation |
|
|
— |
|
|
|
(2,135 |
) |
Retained earnings |
|
|
223,704 |
|
|
|
192,196 |
|
Accumulated other comprehensive income |
|
|
1,746 |
|
|
|
526 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
329,968 |
|
|
|
293,366 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
389,294 |
|
|
$ |
355,796 |
|
|
|
|
|
|
|
|
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)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
77,410 |
|
|
$ |
64,104 |
|
|
$ |
225,173 |
|
|
$ |
189,106 |
|
Cost of sales |
|
|
48,545 |
|
|
|
39,155 |
|
|
|
141,552 |
|
|
|
113,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
28,865 |
|
|
|
24,949 |
|
|
|
83,621 |
|
|
|
75,402 |
|
Selling, general and administrative expenses |
|
|
8,408 |
|
|
|
6,491 |
|
|
|
24,674 |
|
|
|
20,317 |
|
Start-up costs |
|
|
28 |
|
|
|
219 |
|
|
|
449 |
|
|
|
473 |
|
Loss on disposal of assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
20,429 |
|
|
|
18,239 |
|
|
|
58,498 |
|
|
|
54,517 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
394 |
|
|
|
430 |
|
|
|
1,318 |
|
|
|
1,340 |
|
Earnings in equity-method investee |
|
|
21 |
|
|
|
21 |
|
|
|
51 |
|
|
|
116 |
|
Other, net |
|
|
232 |
|
|
|
(119 |
) |
|
|
889 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
647 |
|
|
|
332 |
|
|
|
2,258 |
|
|
|
1,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
21,076 |
|
|
|
18,571 |
|
|
|
60,756 |
|
|
|
55,846 |
|
Income taxes |
|
|
7,624 |
|
|
|
6,119 |
|
|
|
21,458 |
|
|
|
19,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,452 |
|
|
$ |
12,452 |
|
|
$ |
39,298 |
|
|
$ |
36,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.55 |
|
|
$ |
0.52 |
|
|
$ |
1.62 |
|
|
$ |
1.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.55 |
|
|
$ |
0.51 |
|
|
$ |
1.61 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.12 |
|
|
$ |
0.10 |
|
|
$ |
0.32 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
4
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Nine months ended |
|
| |
|
September 30, |
|
| |
|
2006 |
|
|
2005 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
39,298 |
|
|
$ |
36,223 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
13,558 |
|
|
|
9,467 |
|
Amortization |
|
|
584 |
|
|
|
499 |
|
Provision for doubtful accounts |
|
|
490 |
|
|
|
506 |
|
Deferred income taxes |
|
|
966 |
|
|
|
2,148 |
|
Excess tax benefits from stock-based compensation |
|
|
(400 |
) |
|
|
— |
|
Loss on disposal of assets |
|
|
— |
|
|
|
95 |
|
Foreign currency transaction (gain) loss |
|
|
(826 |
) |
|
|
100 |
|
Stock compensation expense |
|
|
2,257 |
|
|
|
681 |
|
Earnings in equity-method investee |
|
|
(51 |
) |
|
|
(116 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(8,980 |
) |
|
|
(12,773 |
) |
Inventories |
|
|
(10,097 |
) |
|
|
(1,244 |
) |
Prepaid expenses and other current assets |
|
|
(650 |
) |
|
|
(1,440 |
) |
Other long-term assets |
|
|
108 |
|
|
|
(1,233 |
) |
Accounts payable |
|
|
(4,856 |
) |
|
|
(1,468 |
) |
Accrued payroll and benefits |
|
|
(441 |
) |
|
|
85 |
|
Accrued freight |
|
|
792 |
|
|
|
267 |
|
Accrued utilities |
|
|
(320 |
) |
|
|
23 |
|
Accrued income taxes |
|
|
(1,639 |
) |
|
|
1,101 |
|
Other accrued expenses |
|
|
2,442 |
|
|
|
93 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
32,235 |
|
|
|
33,014 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Capital expenditures, net |
|
|
(51,292 |
) |
|
|
(44,873 |
) |
Investment in equity-method investee |
|
|
— |
|
|
|
(611 |
) |
Purchases of short-term investments |
|
|
(26,765 |
) |
|
|
(77,425 |
) |
Proceeds from maturities of short-term investments |
|
|
47,050 |
|
|
|
78,000 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(31,007 |
) |
|
|
(44,909 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
1,022 |
|
|
|
1,779 |
|
Dividends paid |
|
|
(7,790 |
) |
|
|
(6,348 |
) |
Excess tax benefits from stock-based compensation |
|
|
400 |
|
|
|
— |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(6,368 |
) |
|
|
(4,569 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(5,140 |
) |
|
|
(16,464 |
) |
Effect of exchange rate changes on cash |
|
|
(44 |
) |
|
|
(50 |
) |
Cash and cash equivalents at beginning of period |
|
|
19,695 |
|
|
|
33,990 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
14,511 |
|
|
$ |
17,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
— |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
22,132 |
|
|
$ |
16,361 |
|
|
|
|
|
|
|
|
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. The consolidated balance sheet as of December 31, 2005 has been derived from the
audited financial statements at that date. 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 in 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,452 |
|
|
$ |
12,452 |
|
|
$ |
39,298 |
|
|
$ |
36,223 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share —
Weighted-average shares |
|
|
24,294,421 |
|
|
|
24,013,691 |
|
|
|
24,270,965 |
|
|
|
23,979,355 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
88,742 |
|
|
|
188,965 |
|
|
|
106,609 |
|
|
|
183,612 |
|
Nonvested stock awards |
|
|
19,827 |
|
|
|
2,425 |
|
|
|
18,568 |
|
|
|
7,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
108,569 |
|
|
|
191,390 |
|
|
|
125,177 |
|
|
|
191,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share —
Adjusted weighted-average shares |
|
|
24,402,990 |
|
|
|
24,205,081 |
|
|
|
24,396,142 |
|
|
|
24,170,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.55 |
|
|
$ |
0.52 |
|
|
$ |
1.62 |
|
|
$ |
1.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.55 |
|
|
$ |
0.51 |
|
|
$ |
1.61 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2006, employees exercised stock options to acquire
49,736 common shares at a weighted-average exercise price of $20.55 per share and restrictions
lapsed on 27,311 nonvested shares. The Company recognized a related income tax benefit, of which
$595 was credited directly to additional paid-in capital within shareholders’ equity.
During the nine months ended September 30, 2005, employees exercised stock options to acquire
79,739 common shares at a weighted-average exercise price of $22.32 per share and restrictions
lapsed on 9,021 nonvested shares. The Company recognized a related income tax benefit, of which
$987 was credited directly to additional paid-in capital within 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. One-third of the shares subject to award vest (i.e., transfer and forfeiture restrictions
on these shares are lifted) on each of the first three anniversaries of the grant date. All
unvested shares granted to an individual vest when the individual reaches age 62. 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
September 30, 2006, 252,357 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 adjusted for estimated forfeitures, 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 permitted 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. Forfeiture 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 for the three
and nine months ended September 30, 2006 was lower by $25 and $231, respectively, than it would
have been if the Company had continued to account for stock-based compensation under APB 25. Net
income for the three and nine months ended September 30, 2006 was lower by $16 and $146,
respectively. Basic and diluted earnings per share were unchanged by the adoption of SFAS 123(R)
for the three months ended September 30, 2006 but were each lower by $0.01 per share for the nine
months ended September 30, 2006. Prior to adoption of SFAS 123(R), the Company presented all tax
benefits of deductions resulting from stock compensation as operating
7
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 $400 excess tax benefit classified as a financing cash
inflow for the nine months ended September 30, 2006 would have been classified as an 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 shareholders’ 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 prior year net income and earnings per
share as if the Company had applied the fair value recognition provisions of SFAS 123 to the
Company’s stock-based employee compensation during those periods:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income, as reported |
|
$ |
12,452 |
|
|
$ |
36,223 |
|
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects |
|
|
144 |
|
|
|
429 |
|
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects |
|
|
(259 |
) |
|
|
(964 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
12,337 |
|
|
$ |
35,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic — as reported |
|
$ |
0.52 |
|
|
$ |
1.51 |
|
|
|
|
|
|
|
|
Basic — pro forma |
|
$ |
0.51 |
|
|
$ |
1.49 |
|
|
|
|
|
|
|
|
Diluted — as reported |
|
$ |
0.51 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
Diluted — pro forma |
|
$ |
0.51 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
A summary of stock option activity and related information for the nine months ended September
30, 2006 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted-Average |
|
Aggregate Intrinsic |
| |
|
Options |
|
Exercise Price |
|
Value |
Outstanding at January 1, 2006 |
|
|
291,248 |
|
|
$ |
22.16 |
|
|
|
|
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(49,736 |
) |
|
$ |
20.55 |
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
241,512 |
|
|
$ |
22.49 |
|
|
$ |
3,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
209,883 |
|
|
$ |
21.24 |
|
|
$ |
3,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $243 of total unrecognized compensation cost related to
stock options granted under the plans. The weighted-average remaining contractual term of options
outstanding at September 30, 2006 is 5.3 years. There have been no stock options granted since
2004.
A summary of restricted stock activity and related information for the nine months ended
September 30, 2006 is presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant-Date |
| |
|
Shares |
|
Fair Value |
Nonvested at January 1, 2006 |
|
|
58,634 |
|
|
$ |
47.03 |
|
Granted |
|
|
57,510 |
|
|
$ |
57.52 |
|
Vested |
|
|
(27,311 |
) |
|
$ |
50.05 |
|
Forfeited |
|
|
(2,522 |
) |
|
$ |
50.26 |
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
86,311 |
|
|
$ |
52.97 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $3,108 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 2.0 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 intersegment note receivable totaling $16,608 at
September 30, 2006 and the costs of the Company’s corporate offices are reported in the Proppant
segment. Intersegment 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 September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
69,290 |
|
|
$ |
8,120 |
|
|
$ |
77,410 |
|
Income before income taxes |
|
|
19,949 |
|
|
|
1,127 |
|
|
|
21,076 |
|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
57,357 |
|
|
$ |
6,747 |
|
|
$ |
64,104 |
|
Income before income taxes |
|
|
17,685 |
|
|
|
886 |
|
|
|
18,571 |
|
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
201,960 |
|
|
$ |
23,213 |
|
|
$ |
225,173 |
|
Income before income taxes |
|
|
58,400 |
|
|
|
2,356 |
|
|
|
60,756 |
|
Segment assets as of September 30, 2006 |
|
|
350,948 |
|
|
|
33,114 |
|
|
|
384,062 |
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
169,650 |
|
|
$ |
19,456 |
|
|
$ |
189,106 |
|
Income before income taxes |
|
|
54,107 |
|
|
|
1,739 |
|
|
|
55,846 |
|
5. Dividends Paid
On July 18, 2006, the Board of Directors declared a cash dividend of $0.12 per common share
payable to shareholders of record on July 31, 2006. The dividend was paid on August 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 by and distributions to owners, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
13,452 |
|
|
$ |
12,452 |
|
|
$ |
39,298 |
|
|
$ |
36,223 |
|
Foreign currency translation adjustment |
|
|
397 |
|
|
|
543 |
|
|
|
1,220 |
|
|
|
517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
13,849 |
|
|
$ |
12,995 |
|
|
$ |
40,518 |
|
|
$ |
36,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. New Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements.
FIN 48 also provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 31, 2006. The Company is evaluating FIN 48 and has not yet
determined the impact of adoption.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company is evaluating SFAS
157 and has not yet determined the impact of adoption.
9
8. 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.
10
| |
|
|
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 September 30, 2006
Revenues. Consolidated revenues of $77.4 million for the quarter ended September 30, 2006 set a
new quarterly record and represented a 21% increase compared to $64.1 million in revenues for the
quarter ended September 30, 2005. The improvement was due to increases of 21% and 20%,
respectively, in Proppant segment revenues and Fracture and Reservoir Diagnostics segment revenues.
Proppant segment revenues of $69.3 million for the quarter ended September 30, 2006 surpassed
revenues of $57.4 million for the same period in 2005 by 21% as the result of a 16% increase in
proppant sales volume and a 4% increase in the average selling price of proppant. Worldwide
proppant sales totaled 221 million pounds for the quarter compared to 191 million pounds for the
third quarter of 2005. North American proppant sales volume increased 21% compared to the same
period last year, driven by continued strength in the U.S. market and an increase in Canadian sales
volume despite no change in the Canadian rig count versus last year’s third quarter. Overseas
sales volume declined 15% compared to last year’s third quarter due principally to decreased sales
volume in Russia. Excluding results in Russia, sales volume in overseas markets increased 10% from
the previous year with the strongest activity in China and North Africa. The average selling price
of the Company’s ceramic proppant in the third quarter of 2006 was $0.314 per pound, an increase of
4% compared to the third quarter of 2005 average selling price of $0.301 per pound. The higher
average selling price was the result of an increase in list prices implemented in November 2005.
Fracture and Reservoir Diagnostics segment revenues of $8.1 million for the quarter ended September
30, 2006 exceeded revenues of $6.7 million for the same period in 2005 by 20% and established a new
quarterly record. The increase was primarily due to continued growth in the fracture mapping and
reservoir diagnostics businesses, attributable to increased hydraulic fracturing activity in North
America, increased use of fracture mapping technology and a price increase instituted in January
2006.
Gross Profit. Consolidated gross profit for the third quarter of 2006 was $28.9 million, or 37% of
revenues, compared to $24.9 million, or 39% of revenues, for the third quarter of 2005. Gross
profit increased by 16% compared to last year’s third quarter as a result of increased revenues in
both of the Company’s business segments, but declined as a percentage of revenues primarily due to
a decrease in the margin on proppant sales.
11
Proppant segment gross profit was $25.3 million for the third quarter of 2006 compared to $22.2
million for the third quarter of 2005. The 14% increase in gross profit resulted from increased
sales volume and an increase in the average selling price compared to the previous year’s third
quarter. Gross profit as a percentage of revenues was 37% in the third quarter of 2006, down from
39% in last year’s third quarter because sales price increases did not fully offset increases in
manufacturing costs, primarily due to higher prices paid for natural gas and raw materials used to
manufacture proppant. The Company’s spending for natural gas delivered to its U.S. manufacturing
facilities during the quarter increased 26% compared to the third quarter of 2005. Third quarter
2006 gross profit margin was also impacted by the effect of reduced production output as throughput
at the Company’s manufacturing facilities was adjusted to balance the supply of finished goods with
the current demand for those products. Manufacturing facilities operated at approximately 89% of capacity in the third quarter of 2006 compared to operating at 100% of capacity
during last year’s third quarter.
Fracture and Reservoir Diagnostics segment gross profit for the third quarter of 2006 was $3.6
million, or 44% of revenues, compared to $2.7 million, or 40% of revenues, for the third quarter of
2005. The increase in gross profit margin was primarily due to a price increase instituted in
January 2006 and increased utilization of staff and equipment.
Selling, General and Administrative (SG&A) and Other Operating Expenses. Consolidated SG&A
expenses were $8.4 million for the third quarter of 2006 compared to $6.5 million for the
corresponding period in 2005. As a percentage of revenues, SG&A expenses increased to 10.9% for
the quarter ended September 30, 2006 compared to 10.1% for the quarter ended September 30, 2005
mostly due to increased research and development spending in both business segments.
Proppant segment SG&A expenses totaled $6.0 million for the third quarter of 2006 compared to $4.7
million for the corresponding period in 2005. SG&A expenses increased mostly due to increases in
research and development activity, marketing activity in international markets and administrative
expenses necessary to support higher sales activity. Other operating expenses of $0.2 million in
2005 were primarily related to start-up activities for the Company’s new manufacturing facility in
Toomsboro, Georgia.
Fracture and Reservoir Diagnostics segment SG&A expenses totaled $2.4 million for the third quarter
of 2006 and $1.8 million for the corresponding period in 2005. The increase was primarily due to
increased research and development spending and greater marketing and administrative expenses
necessary to support higher sales activity.
Income Tax Expense. Consolidated income tax expense was $7.6 million for the quarter ended
September 30, 2006 and $6.1 million for quarter ended September 30, 2005. Of the $1.5 million
increase in income tax expense, $0.9 million was due to increased taxable income in the third
quarter of 2006 and $0.6 million was due to a reduction of estimated state income tax in the third
quarter of 2005 resulting from preparation of the 2004 income tax returns.
Nine Months Ended September 30, 2006
Revenues. Consolidated revenues of $225.2 million for the nine months ended September 30, 2006
exceeded revenues of $189.1 million for the same period in 2005 by 19%. The improvement in
revenues was due to 19% increases in both of the Company’s business segments.
Proppant segment revenues of $202.0 million for the nine months ended September 30, 2006 exceeded
revenues of $169.6 million for the nine months ended September 30, 2005 by 19%. The growth was
driven primarily by a 9% increase in sales volume along with a 9% increase in the average selling
price of proppant. Worldwide proppant sales totaled a nine-month record 634 million pounds in the
first nine months of 2006 compared to 582 million pounds for the same period in 2005. The volume
of proppant sold in North America increased by 17% compared to the first nine months of 2005
primarily due to an increase in the U.S. natural gas rig count and related fracturing activity and
increased utilization of ceramic proppant in Canada. The North American increase was partially
offset by a 23% decrease in overseas shipments due to decreased sales volume in Russia. Excluding
results in Russia, sales volume in overseas markets increased 11% from the previous year. The
average selling price per pound of ceramic proppant for the first nine months of 2006 was $0.319
versus $0.291 for the same period in 2005. The higher average selling price was due to increases
in list prices that went into effect in June 2005 and November 2005.
12
Fracture and Reservoir Diagnostics segment revenues of $23.2 million for the nine months ended
September 30, 2006 exceeded revenues of $19.5 million for the same period in 2005 by 19%. The
growth was driven primarily by a 16% increase in fracture mapping revenue, which is attributable to
increased hydraulic fracturing activity in North America and a price increase instituted in January
2006. An increase in revenue from the nascent reservoir diagnostics business was also a
contributing factor.
Gross Profit. Consolidated gross profit for the nine months ended September 30, 2006 was $83.6
million, or 37% of revenues, compared to $75.4 million, or 40% of revenues, for the same period in
2005. The 11% increase in gross profit was the result of year over year improvements in both the
Proppant segment and Fracture and Reservoir Diagnostics segment, while the decline in gross profit
as a percentage of revenues was primarily due to a decrease in the margin on proppant sales.
Proppant segment gross profit for the nine months ended September 30, 2006 was $73.8 million, or
37% of revenues, compared to $68.2 million, or 40% of revenues, for the same period in 2005. Gross
profit increased 8% due to higher sales volume but decreased as a percentage of revenues because
sales price increases did not fully offset increases in manufacturing costs, primarily due to
higher prices paid for natural gas and raw materials used to manufacture proppant. 2006 gross profit margin was also
impacted by the effect of lower production output at the Company’s manufacturing facilities, which operated at approximately 92% of
capacity in the first nine months of 2006 compared to operating at 100% of capacity for the same period in 2005.
Fracture and Reservoir Diagnostics segment gross profit for the nine months ended September 30,
2006 was $9.8 million, or 42% of revenues, compared to $7.2 million, or 37% of revenues, for the
same period in 2005. The increase in gross profit margin was primarily due to a price increase
instituted in January 2006 and increased utilization of staff and equipment.
Selling, General and Administrative (SG&A) and Other Operating Expenses. Consolidated SG&A
expenses and other operating expenses were $24.7 million and $0.4 million, respectively, for the
nine months ended September 30, 2006 compared to $20.3 million and $0.6 million, respectively, for
the nine months ended September 30, 2005. As a percentage of revenues, SG&A expenses increased
slightly to 11.0% for the first nine months of 2006 compared to 10.7% the same period in 2005.
Proppant segment SG&A expenses totaled $17.5 million for the nine months ended September 30, 2006
compared to $14.9 million for the nine months ended September 30, 2005. SG&A expenses increased
mostly because of increased spending for research and development, marketing, and administrative
expenses necessary to support higher sales activity and increased stock compensation expense. As a
percentage of revenues, SG&A expenses remained relatively unchanged at 8.7% in 2006 compared to
8.8% in 2005. Other operating expenses of $0.4 million in 2006 and $0.6 million in 2005 consisted
mostly of start-up costs associated with the new manufacturing facility in Toomsboro, Georgia that
began production in January 2006.
Fracture and Reservoir Diagnostics segment SG&A expenses totaled $7.2 million for the nine months
ended September 30, 2006 compared to $5.4 million for the nine months ended September 30, 2005.
The majority of the increase is due to increased spending on technology development to expand the
possible markets and applications which can be monitored. The remainder of the increase was due to
greater marketing and administrative expenses necessary to support higher revenues
Income Tax Expense. Consolidated income tax expense was $21.5 million for the nine months ended
September 30, 2006 and $19.6 million for the nine months ended September 30, 2005. The $1.9
million net increase in income tax expense was primarily attributable to the increase in taxable
income. Income tax expense for the first nine months of 2006 was lowered by a $0.5 million
reduction of net deferred income tax liabilities resulting from changes in state taxes, primarily
related to a tax law change in Texas which will reduce the Company’s future tax liability in that
state. Income tax expense for the first nine months of 2005 was lowered by a $0.6 million
reduction of estimated state income tax resulting from preparation of the 2004 income tax returns.
Liquidity and Capital Resources
At September 30, 2006, the Company had cash and cash equivalents of $14.5 million and short-term
investments of $21.7 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 $32.2 million cash from
operations, net of $20.2 million paid in the third quarter of 2006 for income taxes that previously
had been deferred under extensions granted to taxpayers affected by Hurricane Katrina. The Company
also received $1.0 million proceeds from employee exercises of stock options, retained $0.4 million
cash from excess tax benefits
13
relating to stock-based compensation to employees and received $20.3
million for net purchases and maturities of short-term investments. Uses of cash included $51.3
million of capital spending and $7.8 million of cash dividends. Major capital spending included
$19.2 million on a new proppant manufacturing facility in Kopeysk, Russia, which is expected to be
completed in the fourth quarter of 2006 at an estimated total cost of $42 million, $7.0 million on
a new proppant manufacturing facility in Toomsboro, Georgia, which was completed slightly below
planned expenditure of $62 million and began operating in the first quarter of 2006, and $12.7
million for a second production line at the Toomsboro facility, which is expected to be completed
in the third quarter of 2007 and add 250 million pounds of capacity to that facility at an
estimated total cost of $54 million.
The Company believes that the relatively high prices for oil and natural gas in the futures market
and the need for increased utilization of technology in the production of oil and gas will continue
to spur long-term drilling and fracturing activity worldwide. Consequently, the Company expects
demand for its products to remain strong in future years. Recent weakness in near-term natural gas
prices in North America suggest that a decline in drilling and fracturing activity could occur in
the coming months. While the Company has not seen any decline in the demand for its products as a
result of falling natural gas prices, the Company has twelve production lines located at its five
manufacturing locations worldwide and will adjust production to meet demand as necessary in future
periods.
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 July 18, 2006, the Company’s Board of Directors approved the
payment of a quarterly cash dividend of $0.12 per share to shareholders of the Company’s Common
Stock on July 31, 2006. The Company has total projected capital expenditures of $15 million to $20
million for the remainder of 2006, including spending to complete its manufacturing facility in
Kopeysk, Russia, to expand its Toomsboro, Georgia manufacturing facility, to expand its
distribution facilities and to acquire or construct additional fracture mapping tools.
The Company maintains an unsecured line of credit of $10.0 million. As of September 30, 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 September 30, 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:
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changes in overall economic conditions, |
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changes in the cost of raw materials and natural gas used in manufacturing our products, |
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• |
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changes in demand for our products, |
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• |
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changes in the demand for, or price of, oil and natural gas, |
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• |
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risks of increased competition, |
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• |
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technological, manufacturing and product development risks, |
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• |
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loss of key customers, |
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• |
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changes in foreign and domestic government regulations, |
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• |
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changes in foreign and domestic political and legislative risks, |
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the risks of war and international and domestic terrorism, |
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risks associated with foreign operations and foreign currency exchange rates and controls, |
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weather-related risks and other risks and uncertainties. |
14
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 September 30, 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
September 30, 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.
ITEM 4. CONTROLS AND PROCEDURES
| (a) |
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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 Securities Exchange Act of 1934 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 September 30, 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 such
evaluation 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 Securities Exchange Act of 1934 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 September 30, 2006 that materially affected, or are reasonably likely to materially affect,
those controls.
15
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 September 30, 2006, the Company credited 721 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 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 this Quarterly Report on Form 10-Q:
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad. |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification by Paul G. Vitek. |
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32 |
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Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
16
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.
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CARBO CERAMICS INC.
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/s/ Gary A. Kolstad
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Gary A. Kolstad |
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President and Chief Executive Officer |
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/s/ Paul G. Vitek
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Paul G. Vitek |
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Sr. Vice President, Finance and
Chief Financial Officer |
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Date: October 27, 2006
17
EXHIBIT INDEX
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| EXHIBIT |
|
DESCRIPTION |
31.1
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Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad. |
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31.2
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Rule 13a-14(a)/15d-14(a) Certification by Paul G. Vitek. |
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32
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
18