e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| þ |
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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, 2007
or
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| o |
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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.
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
As
of April 26, 2007, 24,468,181 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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2007 |
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2006 |
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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 |
|
$ |
17,187 |
|
|
$ |
24,973 |
|
Short-term investments |
|
|
11,500 |
|
|
|
7,500 |
|
Trade accounts and other receivables, net |
|
|
67,815 |
|
|
|
63,461 |
|
Inventories: |
|
|
|
|
|
|
|
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Finished goods |
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|
27,633 |
|
|
|
26,181 |
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Raw materials and supplies |
|
|
16,268 |
|
|
|
14,602 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
43,901 |
|
|
|
40,783 |
|
Prepaid expenses and other current assets |
|
|
2,175 |
|
|
|
2,558 |
|
Deferred income taxes |
|
|
4,852 |
|
|
|
4,650 |
|
|
|
|
|
|
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Total current assets |
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|
147,430 |
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|
143,925 |
|
Property, plant and equipment: |
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|
|
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Land and land improvements |
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9,486 |
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|
8,659 |
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Land-use and mineral rights |
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6,111 |
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|
6,101 |
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Buildings |
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30,151 |
|
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26,209 |
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Machinery and equipment |
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211,344 |
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|
207,341 |
|
Construction in progress |
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84,019 |
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71,744 |
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|
|
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|
|
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Total |
|
|
341,111 |
|
|
|
320,054 |
|
Less accumulated depreciation |
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|
93,202 |
|
|
|
88,306 |
|
|
|
|
|
|
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Net property, plant and equipment |
|
|
247,909 |
|
|
|
231,748 |
|
Goodwill |
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|
21,840 |
|
|
|
21,840 |
|
Intangible and other assets, net |
|
|
7,253 |
|
|
|
7,152 |
|
|
|
|
|
|
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Total assets |
|
$ |
424,432 |
|
|
$ |
404,665 |
|
|
|
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|
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|
|
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|
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| LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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|
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Accounts payable |
|
$ |
19,018 |
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$ |
12,939 |
|
Accrued payroll and benefits |
|
|
5,087 |
|
|
|
8,115 |
|
Accrued freight |
|
|
1,708 |
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|
|
2,061 |
|
Accrued utilities |
|
|
3,121 |
|
|
|
3,166 |
|
Accrued income taxes |
|
|
8,803 |
|
|
|
3,172 |
|
Retainage related to construction in progress |
|
|
113 |
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|
|
117 |
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Other accrued expenses |
|
|
4,298 |
|
|
|
4,676 |
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|
|
|
|
|
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Total current liabilities |
|
|
42,148 |
|
|
|
34,246 |
|
Deferred income taxes |
|
|
28,358 |
|
|
|
27,560 |
|
Shareholders’ equity: |
|
|
|
|
|
|
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|
Preferred stock, par value $0.01 per share, 5,000 shares authorized,
none outstanding |
|
|
— |
|
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|
— |
|
Common stock, par value $0.01 per share, 40,000,000 shares authorized;
24,457,181 and 24,391,214 shares issued and outstanding at March 31,
2007 and December 31, 2006, respectively |
|
|
245 |
|
|
|
244 |
|
Additional paid-in capital |
|
|
105,961 |
|
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|
104,784 |
|
Retained earnings |
|
|
246,098 |
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|
235,732 |
|
Accumulated other comprehensive income |
|
|
1,622 |
|
|
|
2,099 |
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|
|
|
|
|
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Total shareholders’ equity |
|
|
353,926 |
|
|
|
342,859 |
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|
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|
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Total liabilities and shareholders’ equity |
|
$ |
424,432 |
|
|
$ |
404,665 |
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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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2007 |
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2006 |
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Revenues |
|
$ |
83,971 |
|
|
$ |
74,278 |
|
Cost of sales |
|
|
55,254 |
|
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|
46,912 |
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|
|
|
|
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|
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|
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Gross profit |
|
|
28,717 |
|
|
|
27,366 |
|
Selling, general and administrative expenses |
|
|
9,472 |
|
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|
7,473 |
|
Start-up costs |
|
|
424 |
|
|
|
351 |
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|
|
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|
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|
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Operating profit |
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|
18,821 |
|
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|
19,542 |
|
Other income: |
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|
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Interest income, net |
|
|
219 |
|
|
|
437 |
|
Other, net |
|
|
574 |
|
|
|
338 |
|
|
|
|
|
|
|
|
|
|
|
793 |
|
|
|
775 |
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|
|
|
|
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|
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Income before income taxes |
|
|
19,614 |
|
|
|
20,317 |
|
Income taxes |
|
|
6,315 |
|
|
|
7,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,299 |
|
|
$ |
12,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.55 |
|
|
$ |
0.54 |
|
|
|
|
|
|
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Diluted |
|
$ |
0.54 |
|
|
$ |
0.53 |
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Other information: |
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Dividends declared per common share |
|
$ |
0.12 |
|
|
$ |
0.10 |
|
|
|
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|
|
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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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| |
|
2007 |
|
|
2006 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,299 |
|
|
$ |
12,984 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
4,929 |
|
|
|
4,431 |
|
Amortization |
|
|
254 |
|
|
|
181 |
|
Provision for doubtful accounts |
|
|
16 |
|
|
|
204 |
|
Deferred income taxes |
|
|
(297 |
) |
|
|
464 |
|
Excess tax benefits from stock based compensation |
|
|
(76 |
) |
|
|
(199 |
) |
Foreign currency transaction gain |
|
|
(474 |
) |
|
|
(355 |
) |
Non-cash stock compensation expense |
|
|
661 |
|
|
|
447 |
|
(Earnings) losses in equity-method investee |
|
|
(99 |
) |
|
|
17 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts and other receivables |
|
|
(4,248 |
) |
|
|
(4,295 |
) |
Inventories |
|
|
(3,031 |
) |
|
|
(2,521 |
) |
Prepaid expenses and other current assets |
|
|
391 |
|
|
|
(70 |
) |
Long-term prepaid expenses |
|
|
(1 |
) |
|
|
108 |
|
Accounts payable |
|
|
3,426 |
|
|
|
(4,076 |
) |
Accrued payroll and benefits |
|
|
(3,031 |
) |
|
|
(2,322 |
) |
Accrued freight |
|
|
(354 |
) |
|
|
409 |
|
Accrued utilities |
|
|
(45 |
) |
|
|
512 |
|
Accrued income taxes |
|
|
5,647 |
|
|
|
6,489 |
|
Other accrued expenses |
|
|
(399 |
) |
|
|
472 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
16,568 |
|
|
|
12,880 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Capital expenditures, net |
|
|
(18,020 |
) |
|
|
(14,578 |
) |
Purchases of short-term investments |
|
|
(4,000 |
) |
|
|
(18,845 |
) |
Proceeds from maturities of short term investments |
|
|
— |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(22,020 |
) |
|
|
(13,423 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
501 |
|
|
|
313 |
|
Dividends paid |
|
|
(2,933 |
) |
|
|
(2,432 |
) |
Excess tax benefits from stock based compensation |
|
|
76 |
|
|
|
199 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(2,356 |
) |
|
|
(1,920 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(7,808 |
) |
|
|
(2,463 |
) |
Effect of exchange rate changes on cash |
|
|
22 |
|
|
|
28 |
|
Cash and cash equivalents at beginning of period |
|
|
24,973 |
|
|
|
19,695 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
17,187 |
|
|
$ |
17,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
6 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
965 |
|
|
$ |
380 |
|
|
|
|
|
|
|
|
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, 2006 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, 2006 included in the Company’s annual report on Form 10-K for the year ended December 31, 2006.
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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|
|
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Three months ended |
|
| |
|
March 31, |
|
| |
|
2007 |
|
|
2006 |
|
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,299 |
|
|
$ |
12,984 |
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings per share— |
|
|
|
|
|
|
|
|
Weighted-average shares |
|
|
24,328,772 |
|
|
|
24,243,415 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
83,514 |
|
|
|
120,013 |
|
Nonvested and deferred stock awards |
|
|
28,383 |
|
|
|
20,507 |
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
111,897 |
|
|
|
140,520 |
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share— |
|
|
|
|
|
|
|
|
adjusted weighted-average shares |
|
|
24,440,669 |
|
|
|
24,383,935 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.55 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.54 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
6
3. 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 $18,157 at March
31, 2007 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:
| |
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|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fracture |
|
|
| |
|
|
|
|
|
and |
|
|
| |
|
|
|
|
|
Reservoir |
|
|
| |
|
Proppant |
|
Diagnostics |
|
Total |
Three Months Ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
73,607 |
|
|
$ |
10,364 |
|
|
$ |
83,971 |
|
Income before income taxes |
|
|
18,590 |
|
|
|
1,024 |
|
|
|
19,614 |
|
Segment assets as of March 31, 2007 |
|
|
381,059 |
|
|
|
39,690 |
|
|
|
420,749 |
|
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 |
|
4. Dividends Paid
On January 16, 2007, the Board of Directors declared a cash dividend of $0.12 per common share
payable to shareholders of record on January 31, 2007. The dividend was paid on February 15, 2007.
5. 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, |
|
| |
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
13,299 |
|
|
$ |
12,984 |
|
Foreign currency translation adjustment |
|
|
(477 |
) |
|
|
395 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
12,822 |
|
|
$ |
13,379 |
|
|
|
|
|
|
|
|
The foreign currency translation adjustment for the three months ended March 31, 2007 is net
of deferred income taxes of $893.
6. 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 upon retirement at or after the age of 62. The stock
option plans provided for granting options to purchase shares of the Company’s Common Stock to
employees and non-employee directors. Although pursuant to the terms of the stock option plans we
are no longer able to make additional grants under those plans, there are outstanding stock options
that were previously granted under the stock option plans. Under the stock option plans, the
Company was permitted to grant options for up to 2,175,000 shares.
The exercise price of each option generally was 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
7
the first four anniversaries of the grant date. The Company’s policy is to issue new shares upon
exercise. As of March 31, 2007, 208,040 shares were available for issuance under the restricted
stock plan and no options were available for issuance under the stock option plans.
The Company also has a deferred director fee plan (the “Plan”) that permits non-employee
directors of the Company to elect each year to defer receipt of cash compensation for service as a
director, otherwise payable in that year, and to receive those fees in the form of the Company’s
Common Stock on a specified later date. The number of shares reserved for an electing director is
based on the fair market value of the Company’s Common Stock on the date immediately preceding the
date those fees would have been paid absent the deferral. As of March 31, 2007, 3,341 shares were
reserved for future issuance in payment of $151 fees deferred under the Plan by electing
directors.
A summary of stock option activity and related information for the three months ended March
31, 2007 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Aggregate |
|
| |
|
|
|
|
|
Average |
|
|
Intrinsic |
|
| |
|
Options |
|
|
Exercise Price |
|
|
Value |
|
Outstanding at January 1, 2007 |
|
|
241,400 |
|
|
$ |
22.49 |
|
|
|
|
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(21,650 |
) |
|
$ |
23.13 |
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
219,750 |
|
|
$ |
22.43 |
|
|
$ |
5,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
196,596 |
|
|
$ |
21.39 |
|
|
$ |
4,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007, there was $125 of total unrecognized compensation cost, net of estimated
forfeitures, related to stock options granted under the plans. The weighted-average remaining
contractual term of options outstanding at March 31, 2007 is 4.7 years. The total intrinsic value
of options exercised during the three months ended March 31, 2007 was $423.
A summary of restricted stock activity and related information for the three months ended
March 31, 2007 is presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Grant-Date |
|
| |
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2007 |
|
|
80,083 |
|
|
$ |
52.96 |
|
Granted |
|
|
44,734 |
|
|
$ |
35.78 |
|
Vested |
|
|
(17,533 |
) |
|
$ |
53.85 |
|
Forfeited |
|
|
(417 |
) |
|
$ |
51.45 |
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2007 |
|
|
106,867 |
|
|
$ |
45.62 |
|
|
|
|
|
|
|
|
|
As of March 31, 2007, there was $3,490 of total unrecognized compensation cost, net of
estimated forfeitures, related to restricted shares granted under the plan. That cost is expected
to be recognized over a weighted-average period of 1.5 years. The total fair value of shares vested
during the three months ended March 31, 2007 was $629.
7. New Accounting Pronouncements
Effective January 1, 2007, the Company adopted the Financial Accounting Standards Board’s
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in financial statements and requires the
impact of a tax position to be recognized in the financial statements if that position will more
likely than not be sustained by the taxing authority. The Company had a recorded reserve of
approximately $575 associated with uncertain tax positions as of January 1, 2007. There were no
significant changes to the recorded reserve as a result of the adoption of FIN 48 or during the
three months ended March 31, 2007. Substantially all of this amount, if recognized, would affect
the effective tax rate. Related accrued interest and penalties are recorded in income tax
expense and are not material.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it
operates, the most significant of which are U.S. federal and certain state jurisdictions. The
Company does not currently have material income tax exposure in foreign jurisdictions due to tax
holidays, recent commencement of operations or immaterial operations. The Company is currently
under audit by the Internal Revenue Service for its 2003 tax year with an anticipated closing date
in 2008. The 2004 through 2006 tax years are still subject to examination. Various U.S. state
jurisdiction tax years remain open to examination as well though the Company believes assessments,
if any, would be immaterial to its consolidated financial statements.
8
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS 159”). SFAS 159 provides the Company with an option to report selected
financial assets and liabilities at fair value and establishes presentation and disclosure
requirements. The fair value option established by SFAS 159 permits the Company to elect to measure
eligible items at fair value on an instrument-by-instrument basis and then report unrealized gains
and losses for those items in the Company’s earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating SFAS 159 and has not yet
determined the impact of adoption.
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.
On January 26, 2007, following self-disclosure of certain air pollution emissions, the Company
received a Notice of Violation (“NOV”) from the State of Georgia Department of Environmental
Protection regarding appropriate permitting for emissions of two specific substances from its
Toomsboro facility. The NOV calls for performance testing of these emissions and further dialogue
with the relevant government agencies. The Company continues to assess what impact, financial or
otherwise, that might result from the NOV, and does not at this time have an estimate of costs
associated with compliance.
9. Subsequent Event
On April 12, 2007, the Company acquired Applied Geomechanics Inc. (“AGI”), a leading global
supplier of tiltmeters. AGI develops and markets precision measurement instruments for oilfield and
geotechnical applications. The Company does not expect the AGI acquisition to have a material
impact on the 2007 financial statements.
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, 2006). 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, 2006 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, 2007
Revenues. Consolidated revenues of $84.0 million for the first quarter of 2007 increased 13%
compared to $74.3 million for the same period in 2006 and represented the second highest quarterly
revenues and highest first quarter revenues in the Company’s history. The increase was attributable
to a 10% increase in Proppant segment revenues and a 42% increase in revenues the from Fracture and
Reservoir Diagnostics segment.
Proppant segment revenues of $73.6 million for the first quarter of 2007 exceeded revenues of $67.0
million for the same period in 2006 by 10% due to a 9% increase in proppant sales volume. Worldwide
proppant sales totaled 228 million pounds for the quarter compared to 209 million pounds for the
first quarter of 2006. North American and overseas sales volume increased by 6% and 33%,
respectively. Sales in North America benefited primarily from a 13% increase in the U.S. natural
gas rig count and an increase in demand for the Company’s heavyweight proppant products, but those
gains were partially offset by a decline in lightweight proppant sales due to a 20% reduction in
the Canadian rig count compared to the first quarter of 2006 and a rail strike in Canada that
delayed shipments to that region. Overseas sales increased across various regions, with the
strongest activity in Western Africa, the Middle East and South America. The average selling price
of proppant in the first quarter of 2007 was $0.323 per pound compared to the first quarter 2006
average selling price of $0.321. The average selling price increased only slightly because the
effect of increased sales of higher-priced heavyweight proppant was offset by a reduction in
Canadian sales, which carry a higher delivery charge than sales to the U.S. lower 48 states.
Fracture and Reservoir Diagnostics segment revenues for the first quarter of 2007 were $10.4
million, 42% higher than revenues of $7.3 million for the same period in 2006. The increase was
primarily due to increased use of fracture mapping services in North America by production
companies and continued strong growth in the emerging reservoir monitoring market.
Gross Profit. Consolidated gross profit for the first quarter of 2007 was $28.7 million, or 34% of
revenues, compared to $27.4 million, or 37% of revenues, for the first quarter of 2006. Gross
profit increased by 5% as a result of increased revenues in both the Proppant and Fracture and
Reservoir Diagnostics segments. Despite the revenue and gross profit growth, gross profit as a
percentage of revenues declined mostly due to higher manufacturing and freight costs in the
Proppant segment.
10
Proppant segment gross profit was $24.7 million for the first quarter of 2007 compared to $24.3
million for the first quarter of 2006. Additional gross profit from increased sales volume was
mostly offset by higher manufacturing and freight costs, resulting in a decline in gross profit as
a percentage of revenues to 34% compared to 36% in last year’s first quarter. During the first
quarter, the Company experienced unexpectedly strong demand for its high strength ceramic proppant.
In order to satisfy that demand, the Company shifted production of its high strength proppant to
facilities which do not typically produce this product, resulting in increased manufacturing costs.
In addition, freight cost increased due to the need to expedite shipments of high strength products
to customer locations.
Fracture and Reservoir Diagnostics segment gross profit for the first quarter of 2007 was $4.0
million, or 39% of revenues, compared to $3.1 million, or 42% of revenues, for the first quarter of
2006. The reduction in gross profit margin is attributable to an increase in third party
subcontractor expenses due to a change in service mix and $0.4 million of equipment repair costs
billed to clients at cost.
Selling, General and Administrative (SG&A) and Other Operating Expenses. Consolidated expenses
consisted of $9.5 million SG&A expenses and $0.4 million other operating expenses for the first
quarter of 2007 compared to $7.5 million and $0.3 million, respectively, for the first quarter of
2006. As a percentage of revenues, SG&A expenses increased to 11.3% compared to 10.1% for first
quarter of 2006.
Proppant segment expenses consisted of $6.5 million SG&A expenses and $0.4 million other operating
expenses for the first quarter of 2007 compared to $5.2 million and $0.3 million, respectively, for
the first quarter of 2006. As a percentage of revenues, SG&A expenses increased to 8.8% compared to
7.8% for first quarter of 2006. SG&A expenses were higher primarily due to planned increases in
global marketing activity, research and development activity and administrative and legal expenses
to support revenue growth and global expansion. Other operating expenses in the first quarter of
2007 were for startup of the Company’s new manufacturing facility in Russia and in the first
quarter of 2006 were for startup of the Toomsboro, Georgia manufacturing facility.
Fracture and Reservoir Diagnostics segment SG&A and other operating expenses totaled $3.0 million,
or 29% of revenues, for the first quarter of 2007 compared to $2.3 million, or 31% of revenues, for
the corresponding period in 2006. The increase was primarily due to increased headcount in sales
and marketing plus increased technical development and administrative costs to support increased
sales.
Income Tax Expense. Income tax expense is not allocated between the two operating segments.
Consolidated income tax expense was $6.3 million for the first quarter of 2007 compared to $7.3
million for the same period a year ago. Of the $1.0 million decrease, $0.5 is attributable to a
reduction in the Company’s effective tax rate from 36.1% in 2006 to 35.3% in 2007 and adjustment of
the related deferred income tax liabilities. The lower tax rate is the result of changes in the tax
laws of certain states in which the Company operates. The remainder of the decrease is due to a
$0.3 million reduction of estimated income tax resulting from preparation and filing of the 2005
income tax returns and a $0.2 million reduction due to lower taxable income compared to the first
quarter of 2006.
Liquidity and Capital Resources
At March 31, 2007, the Company had cash and cash equivalents of $17.2 million and short-term
investments of $11.5 million compared to cash and cash equivalents of $25.0 million and short-term
investments of $7.5 million at December 31, 2006. During the first quarter of 2007, the Company
generated $16.5 million cash from operations, received $0.5 million proceeds from employee
exercises of stock options and retained $0.1 million cash from tax benefits relating to stock-based
compensation to employees. Uses of cash included $18.0 million of capital spending, $2.9 million of
cash dividends and $4.0 million for purchases of short-term investments. Major capital spending
included $10.2 million to construct a second production line at the manufacturing facility in
Toomsboro, Georgia that is expected to be completed in the second half of 2007 and $3.2 million on
construction of a new manufacturing facility in Kopeysk, Russia that was substantially completed in
the first quarter of 2007.
The Company believes its 2007 results will continue to be influenced primarily by the level of
natural gas drilling in North America but expects its ability to demonstrate the value of ceramic
proppant relative to alternative proppants will allow it to grow sales volume and revenue at a more
rapid pace than the growth rate
associated with drilling or fracturing activity. Given the levels of natural gas inventories in
North America, there is the possibility of a short-term contraction in drilling activity. The
Company believes any slow-down in
11
activity is more likely to occur in the first half of the year and expects self-correcting
mechanisms of the marketplace to adjust supply quickly, resulting in a relatively short period of
depressed activity. The Company believes its twelve production lines at five production facilities
worldwide give it a great deal flexibility to adjust supply to meet demand for its ceramic
proppant.
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
holders of its Common Stock. On April 17, 2007, 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 April 30, 2007. The Company estimates its total capital expenditures for the remainder of
2007 will be between $50.0 million and $55.0 million, including final spending on its manufacturing
facility in Kopeysk, Russia, expansion of its facility in Toomsboro, Georgia, expansion of its
distribution facilities and acquisition or construction of additional fracture mapping tools.
The Company maintains an unsecured line of credit of $10.0 million. As of March 31, 2007, 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, 2007.
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 foreign and domestic government regulations, |
| |
| |
• |
|
changes in 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, 2006 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, 2007. 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
12
market. As of March 31, 2007, 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.
There were no material changes in the Company’s exposure to market risks from those risks disclosed
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
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 Securities and Exchange Commission’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 March 31, 2007, 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 March 31, 2007 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
Not applicable
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:
| |
10.1 |
|
Summary Sheet: 2007 David G. Gallagher Annual Base Salary, incorporated by
reference from Exhibit 10.1 to Current Report on Form 8-K filed on April 20, 2007. |
| |
| |
10.2 |
|
Summary Sheet: 2007 Named Executive Officer Annual Base Salary |
| |
| |
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad. |
| |
| |
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/ Gary A. Kolstad |
|
|
|
|
|
|
|
|
|
Gary A. Kolstad |
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
/s/ Paul G. Vitek |
|
|
|
|
|
|
|
|
|
Paul G. Vitek |
|
|
|
|
Sr. Vice President, Finance and |
|
|
|
|
Chief Financial Officer |
|
|
Date:
May 1, 2007
15
EXHIBIT INDEX
| |
|
|
| EXHIBIT |
|
DESCRIPTION |
|
|
|
10.1
|
|
Summary Sheet: 2007 David G. Gallagher Annual Base Salary, incorporated by reference from
Exhibit 10.1 to Current Report on Form 8-K filed on April 20, 2007. |
|
|
|
10.2
|
|
Summary Sheet: 2007 Named Executive Officer Annual Base Salary |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad. |
|
|
|
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