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, 2007
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. 001-15903
CARBO CERAMICS INC.
(Exact name of registrant as specified in its charter)
| |
|
|
| DELAWARE
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|
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
As of October 23, 2007, 24,488,591 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, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Unaudited) |
|
|
(Note 1) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,449 |
|
|
$ |
24,973 |
|
Short-term investments |
|
|
— |
|
|
|
7,500 |
|
Trade accounts and other receivables, net |
|
|
70,049 |
|
|
|
63,461 |
|
Inventories: |
|
|
|
|
|
|
|
|
Finished goods |
|
|
34,106 |
|
|
|
26,181 |
|
Raw materials and supplies |
|
|
19,733 |
|
|
|
14,602 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
53,839 |
|
|
|
40,783 |
|
Prepaid expenses and other current assets |
|
|
3,272 |
|
|
|
2,558 |
|
Deferred income taxes |
|
|
6,249 |
|
|
|
4,650 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
140,858 |
|
|
|
143,925 |
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Land and land improvements |
|
|
9,515 |
|
|
|
8,659 |
|
Land-use and mineral rights |
|
|
6,140 |
|
|
|
6,101 |
|
Buildings |
|
|
40,991 |
|
|
|
26,209 |
|
Machinery and equipment |
|
|
253,138 |
|
|
|
207,341 |
|
Construction in progress |
|
|
66,470 |
|
|
|
71,744 |
|
|
|
|
|
|
|
|
Total |
|
|
376,254 |
|
|
|
320,054 |
|
Less accumulated depreciation |
|
|
105,024 |
|
|
|
88,306 |
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
271,230 |
|
|
|
231,748 |
|
Goodwill |
|
|
23,213 |
|
|
|
21,840 |
|
Intangible and other assets, net |
|
|
8,330 |
|
|
|
7,152 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
443,631 |
|
|
$ |
404,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
18,658 |
|
|
$ |
12,939 |
|
Accrued payroll and benefits |
|
|
7,822 |
|
|
|
8,115 |
|
Accrued freight |
|
|
2,263 |
|
|
|
2,061 |
|
Accrued utilities |
|
|
2,246 |
|
|
|
3,166 |
|
Accrued income taxes |
|
|
964 |
|
|
|
3,172 |
|
Retainage related to construction in progress |
|
|
106 |
|
|
|
117 |
|
Other accrued expenses |
|
|
4,287 |
|
|
|
4,676 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
36,346 |
|
|
|
34,246 |
|
Deferred income taxes |
|
|
30,077 |
|
|
|
27,560 |
|
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;
24,480,166 and 24,391,214 shares issued and outstanding at September 30, 2007 and December
31, 2006, respectively |
|
|
245 |
|
|
|
244 |
|
Additional paid-in capital |
|
|
107,330 |
|
|
|
104,784 |
|
Retained earnings |
|
|
266,682 |
|
|
|
235,732 |
|
Accumulated other comprehensive income |
|
|
2,951 |
|
|
|
2,099 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
377,208 |
|
|
|
342,859 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
443,631 |
|
|
$ |
404,665 |
|
|
|
|
|
|
|
|
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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues |
|
$ |
84,788 |
|
|
$ |
77,410 |
|
|
$ |
246,677 |
|
|
$ |
225,173 |
|
Cost of sales |
|
|
55,318 |
|
|
|
48,545 |
|
|
|
158,809 |
|
|
|
141,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
29,470 |
|
|
|
28,865 |
|
|
|
87,868 |
|
|
|
83,621 |
|
Selling, general and administrative expenses |
|
|
10,089 |
|
|
|
8,408 |
|
|
|
29,069 |
|
|
|
24,674 |
|
Start-up costs |
|
|
204 |
|
|
|
28 |
|
|
|
1,171 |
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
19,177 |
|
|
|
20,429 |
|
|
|
57,628 |
|
|
|
58,498 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
72 |
|
|
|
394 |
|
|
|
424 |
|
|
|
1,318 |
|
Foreign currency exchange gains, net |
|
|
1,579 |
|
|
|
186 |
|
|
|
2,376 |
|
|
|
826 |
|
Other, net |
|
|
104 |
|
|
|
67 |
|
|
|
119 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,755 |
|
|
|
647 |
|
|
|
2,919 |
|
|
|
2,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
20,932 |
|
|
|
21,076 |
|
|
|
60,547 |
|
|
|
60,756 |
|
Income taxes |
|
|
6,869 |
|
|
|
7,624 |
|
|
|
20,304 |
|
|
|
21,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,063 |
|
|
$ |
13,452 |
|
|
$ |
40,243 |
|
|
$ |
39,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.58 |
|
|
$ |
0.55 |
|
|
$ |
1.65 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.57 |
|
|
$ |
0.55 |
|
|
$ |
1.64 |
|
|
$ |
1.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.14 |
|
|
$ |
0.12 |
|
|
$ |
0.38 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
| |
|
2007 |
|
|
2006 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
40,243 |
|
|
$ |
39,298 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
16,707 |
|
|
|
13,558 |
|
Amortization |
|
|
855 |
|
|
|
584 |
|
Provision for doubtful accounts |
|
|
59 |
|
|
|
490 |
|
Deferred income taxes |
|
|
(552 |
) |
|
|
966 |
|
Excess tax benefits from stock based compensation |
|
|
(150 |
) |
|
|
(400 |
) |
Foreign
currency transaction gain, net |
|
|
(2,376 |
) |
|
|
(826 |
) |
Non-cash stock compensation expense |
|
|
1,664 |
|
|
|
2,257 |
|
Earnings in equity-method investee |
|
|
(214 |
) |
|
|
(51 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts and other receivables |
|
|
(5,530 |
) |
|
|
(8,980 |
) |
Inventories |
|
|
(12,290 |
) |
|
|
(10,097 |
) |
Prepaid expenses and other current assets |
|
|
(609 |
) |
|
|
(650 |
) |
Long-term prepaid expenses |
|
|
103 |
|
|
|
108 |
|
Accounts payable |
|
|
5,460 |
|
|
|
(4,856 |
) |
Accrued payroll and benefits |
|
|
(347 |
) |
|
|
(441 |
) |
Accrued freight |
|
|
199 |
|
|
|
792 |
|
Accrued utilities |
|
|
(923 |
) |
|
|
(320 |
) |
Accrued income taxes |
|
|
(2,089 |
) |
|
|
(1,639 |
) |
Other accrued expenses |
|
|
(453 |
) |
|
|
2,442 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
39,757 |
|
|
|
32,235 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Capital expenditures, net |
|
|
(54,050 |
) |
|
|
(51,292 |
) |
Acquisition of business, net of cash acquired |
|
|
(2,545 |
) |
|
|
— |
|
Purchases of short-term investments |
|
|
(4,000 |
) |
|
|
(26,765 |
) |
Proceeds from maturities of short-term investments |
|
|
11,500 |
|
|
|
47,050 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(49,095 |
) |
|
|
(31,007 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from bank borrowings |
|
|
3,000 |
|
|
|
— |
|
Repayments on bank borrowings |
|
|
(3,000 |
) |
|
|
— |
|
Proceeds from exercise of stock options |
|
|
764 |
|
|
|
1,022 |
|
Dividends paid |
|
|
(9,293 |
) |
|
|
(7,790 |
) |
Excess tax benefits from stock based compensation |
|
|
150 |
|
|
|
400 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(8,379 |
) |
|
|
(6,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(17,717 |
) |
|
|
(5,140 |
) |
Effect of exchange rate changes on cash |
|
|
193 |
|
|
|
(44 |
) |
Cash and cash equivalents at beginning of period |
|
|
24,973 |
|
|
|
19,695 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
7,449 |
|
|
$ |
14,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
6 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
22,946 |
|
|
$ |
22,132 |
|
|
|
|
|
|
|
|
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 that is reported under the equity method of accounting. All significant
intercompany transactions have been eliminated.
2. Acquisition of Business
On April 12, 2007, the Company purchased 100 percent of the outstanding shares of Applied
Geomechanics, Inc. (“AGI”), a supplier of tiltmeters. Results of operations for AGI, included in
the consolidated financial statements since that date, are not material. AGI develops and markets
precision measurement instruments for oilfield, geotechnical and scientific applications. The
Company’s acquisition and the resulting goodwill were attributable to the Company’s strategy to
expand its ability to produce tiltmeters and related equipment and improve the Company’s revenue
generating potential in the geotechnical (non-oilfield) monitoring business. The acquisition was
accounted for using the purchase method of accounting provided for under Financial Accounting
Standards Board Statement No. 141, “Business Combinations.” The aggregate cost of the acquisition
was $2,553 in cash and direct costs of the transaction. Goodwill of $1,373 arising in the
transaction is not deductible for income tax purposes.
3. 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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,063 |
|
|
$ |
13,452 |
|
|
$ |
40,243 |
|
|
$ |
39,298 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share—
Weighted - average shares |
|
|
24,376,869 |
|
|
|
24,294,421 |
|
|
|
24,356,648 |
|
|
|
24,270,965 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
84,799 |
|
|
|
88,742 |
|
|
|
84,203 |
|
|
|
106,609 |
|
Nonvested and deferred stock awards |
|
|
42,512 |
|
|
|
19,827 |
|
|
|
33,490 |
|
|
|
18,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
127,311 |
|
|
|
108,569 |
|
|
|
117,693 |
|
|
|
125,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share—
Adjusted weighted - average shares |
|
|
24,504,180 |
|
|
|
24,402,990 |
|
|
|
24,474,341 |
|
|
|
24,396,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.58 |
|
|
$ |
0.55 |
|
|
$ |
1.65 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.57 |
|
|
$ |
0.55 |
|
|
$ |
1.64 |
|
|
$ |
1.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
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 $23,213 arising from the Company’s acquisitions of Pinnacle and AGI 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
$21,999 at September 30, 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fracture |
|
|
| |
|
|
|
|
|
and |
|
|
| |
|
|
|
|
|
Reservoir |
|
|
| |
|
Proppant |
|
Diagnostics |
|
Total |
Three Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
71,921 |
|
|
$ |
12,867 |
|
|
$ |
84,788 |
|
Income before income taxes |
|
|
18,578 |
|
|
|
2,354 |
|
|
|
20,932 |
|
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 |
|
Nine Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
212,793 |
|
|
$ |
33,884 |
|
|
$ |
246,677 |
|
Income before income taxes |
|
|
55,583 |
|
|
|
4,964 |
|
|
|
60,547 |
|
Segment assets as of September 30, 2007 |
|
|
395,101 |
|
|
|
47,316 |
|
|
|
442,417 |
|
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 |
|
5. Dividends Paid
On July 17, 2007, the Board of Directors declared a cash dividend of $0.14 per common
share payable to shareholders of record on July 31, 2007. The dividend was paid on August 15,
2007. On October 16, 2007 the Board of Directors declared a cash dividend of $0.14 per common
share payable to shareholders of record on October 31, 2007. The dividend is payable on November
15, 2007.
6. Comprehensive Income
Comprehensive income, which includes net income and all other changes in equity during
a period except those resulting from investments and distributions to owners, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
14,063 |
|
|
$ |
13,452 |
|
|
$ |
40,243 |
|
|
$ |
39,298 |
|
Foreign currency translation adjustment |
|
|
814 |
|
|
|
397 |
|
|
|
852 |
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
14,877 |
|
|
$ |
13,849 |
|
|
$ |
41,095 |
|
|
$ |
40,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign currency translation adjustment for the three and nine month periods ended
September 30, 2007 is net of deferred income taxes of $438 and $1,589, respectively.
7. 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
7
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. Under the
terms of the stock option plans the Company’s ability to issue grants of options has expired.
However, 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 the first four anniversaries of the grant date. The
Company’s policy is to issue new shares upon exercise. As of September 30, 2007, 197,050 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 Director Deferred Fee plan (the “Plan”) that permits non-employee
directors of the Company to elect once in December of each year to defer in the following calendar
year the receipt of cash compensation for service as a director, which would otherwise be payable
in that year, and to receive those fees in the form of the Company’s Common Stock on a specified
later date, on or after the Director’s retirement from the Board of Directors. 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 September 30, 2007, 4,043 shares were reserved for future issuance in payment of
$184 of fees deferred under the Plan by electing directors.
A summary of stock option activity and related information for the nine months ended September
30, 2007 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Aggregate |
|
| |
|
|
|
|
|
Average |
|
|
Intrinsic |
|
| |
|
Options |
|
|
Exercise Price |
|
|
Value |
|
Outstanding at January 1, 2007 |
|
|
241,400 |
|
|
$ |
22.49 |
|
|
|
|
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(33,645 |
) |
|
$ |
22.71 |
|
|
|
|
|
Forfeited |
|
|
(5,530 |
) |
|
$ |
34.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
202,225 |
|
|
$ |
22.11 |
|
|
$ |
5,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007 |
|
|
197,300 |
|
|
$ |
21.75 |
|
|
$ |
5,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, there was $38 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 September 30, 2007 is 4.2 years. The total
intrinsic value of options exercised during the nine months ended September 30, 2007 was $697.
A summary of restricted stock activity and related information for the nine months ended
September 30, 2007 is presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Grant-Date |
|
| |
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2007 |
|
|
80,083 |
|
|
$ |
52.96 |
|
Granted |
|
|
59,953 |
|
|
$ |
38.44 |
|
Vested |
|
|
(33,558 |
) |
|
$ |
50.19 |
|
Forfeited |
|
|
(4,646 |
) |
|
$ |
44.52 |
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2007 |
|
|
101,832 |
|
|
$ |
45.71 |
|
|
|
|
|
|
|
|
|
As of September 30, 2007, there was $2,895 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 1.8 years. The total fair value of shares
vested during the nine months ended September 30, 2007 was $1,367.
8
8. Foreign Currencies
As of September 30, 2007, the Company’s net investment that is subject to foreign currency
fluctuations totals $84.3 million and the Company has recorded cumulative foreign currency
translation adjustments of $3.0 million, net of deferred income tax. These currency translation
adjustments are included in other comprehensive income. Also, the Company’s subsidiary in Russia
has borrowed $39.6 million, as of September 30, 2007, from another subsidiary of the Company to
fund construction of the manufacturing plant in Russia. This indebtedness, while eliminated in
consolidation of the financial statements, is subject to exchange rate fluctuations between the
local reporting currency and the currency in which the debt is denominated. Currency exchange rate
fluctuations associated with this indebtedness result in gains and losses that impact net income.
The gains and losses are presented in Other Income.
9. 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
nine months ended September 30, 2007. If these uncertain tax positions are recognized,
substantially all of this amount would impact 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. In June 2006 the Company
concluded an audit by the U.S. Internal Revenue Service for its 2003 tax year. The outcome did not
have a material effect on the financial statements. 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.
In February 2007, the Financial Accounting Standards Board issued Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides 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.
10. 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 Environmental Protection Division
(“EPD”) regarding appropriate permitting for emissions of two specific substances from its
Toomsboro facility. Pursuant to the NOV, the Company conducted performance testing of these
emissions and provided updated results in the course of additional dialogue with the relevant
government agencies, including discussions of emissions at the Company’s nearby McIntyre, Georgia
manufacturing facility. Following these discussions, a second NOV was issued on May 22, 2007 for
the McIntyre plant for alleged violations similar to those in the January NOV, related to the
Toomsboro facility. The Company submitted to the EPD a schedule of responsive activities in mid June and is in process of submitting
additional information. The EPD has not yet issued a response regarding required remedial actions or fines, if any, resulting from the
NOVs and as such the Company does not at this time have an estimate of costs
associated with compliance.
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 has 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, 2007
Revenues. Consolidated revenues of $84.8 million for the quarter ended September 30, 2007
increased 10% compared to $77.4 million in revenues for the quarter ended September 30, 2006. The
improvement was due to a 4% increase in Proppant segment revenues and
a 58% increase in Fracture
and Reservoir Diagnostics segment revenues.
Proppant segment revenues of $71.9 million for the quarter ended September 30, 2007 exceeded
revenues of $69.3 million for the same period in 2006 by 4% as the result of a 3% increase in
proppant sales volume and a 1% increase in the average selling price of proppant, which was due to
a change in the mix of products sold during the period. Worldwide proppant sales totaled 226
million pounds for the quarter compared to 221 million pounds for the third quarter of 2006. The
increase in sales volume was primarily attributable to overseas sales which increased 92% compared
to last year’s third quarter mainly due to increases in Russia, as well as China, the Middle East
and South America. This increase was partially offset by a 9% decline in sales volume in North
America where sales volume in Canada declined 40% compared to last year’s third quarter. The
decline in Canadian sales is attributed to the continued decline in the drilling activity of
Canadian oil and gas operators brought about by high drilling and completion costs and lower
natural gas prices. While the number of rigs drilling for natural gas in the U.S. increased 5%
from the third quarter 2006, the increased activity occurred in shale formations in which ceramic
proppants currently do not have a significant market share. An increase in the number of rigs
drilling for natural gas in Mexico, combined with an increase in the company’s market share
following a successful field trial earlier this year, resulted in an increase in sales volume of
140% in the country compared to last year’s third quarter. The average selling price of proppant
in the third quarter of 2007 was $0.318 per pound, an increase of 1% compared to the third quarter
of 2006 average selling price of $0.314 per pound.
Fracture and Reservoir Diagnostics segment revenues for the third quarter of 2007 were $12.9
million, a 58% increase compared to revenues of $8.1 million for the same period in 2006. The
increase was due to increases in fracture mapping and reservoir monitoring services, software
products, and consulting services.
10
Gross Profit. Consolidated gross profit for the third quarter of 2007 was $29.5 million, or 35% of
revenues, compared to $28.9 million, or 37% of revenues, for the third quarter of 2006. Gross
profit increased by 2% 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.
Proppant segment gross profit of $23.9 million for the third quarter of 2007 decreased 5% compared
to gross profit of $25.3 million for the third quarter of 2006. Gross profit as a percentage of
revenues was 33% in the third quarter of 2007, down from 36% in last year’s third quarter. The
decrease in gross profit resulted from higher prices paid for raw materials used to manufacture
heavyweight products and lower plant utilization. These decreases were partially offset by lower
natural gas costs in the company’s U.S. manufacturing facilities. The gross profit margin as a
percentage of revenue was also negatively impacted by sales in Russia that had low profit margins
due to high production costs resulting from low throughput levels during early stages of the
manufacturing plant start-up in the Company’s manufacturing facility in Kopeysk, Russia.
Fracture and Reservoir Diagnostics segment gross profit for the third quarter of 2007 was $5.6
million, or 43% of revenues, compared to $3.6 million, or 44% of revenues, for the third quarter of
2006. The increase in gross profit is primarily attributable to the absorption of fixed costs over
the higher services revenue generated in the third quarter of 2007. The decrease in gross profit
as a percentage of revenues is due to the changing mix of services, with strong reservoir
diagnostics activity that has proportionately higher costs of sales.
Selling, General and Administrative (SG&A) and Other Operating Expenses. Consolidated expenses
consisted of $10.1 million of SG&A expenses and $0.2 million of other operating expenses for the
third quarter of 2007 compared to $8.4 million of SG&A expenses for the corresponding period in
2006. As a percentage of revenues, SG&A expenses were 11.9% for the quarter ended September 30,
2007 compared to 10.9% for the quarter ended September 30, 2006.
Proppant segment expenses consisted of $6.9 million of SG&A expenses and $0.2 million of other
operating expenses for the third quarter of 2007 compared to $6.0 million of SG&A expenses for the
third quarter of 2006. Increases in SG&A expenses related to global marketing activity and
administrative expenses supporting revenue growth and global expansion. Commencement of operations
in Russia in 2007 accounted for $0.5 million of the increase in SG&A expenses. As a percentage of
revenues, proppant segment SG&A expenses increased to 9.5% compared to 8.7% for the third quarter
2006. Other operating expenses of $0.2 million in the third quarter of 2007 mainly consisted of
final startup costs for the Company’s new manufacturing facility in Russia.
Fracture and Reservoir Diagnostics segment SG&A expenses totaled $3.2 million, or 25.2% of
revenues, for the third quarter of 2007 and $2.4 million, or 29.0% of revenues, for the
corresponding period in 2006. The increase in aggregate expense was primarily due to additional
personnel added to sales and marketing staff and increased technical development and administrative
costs to support increased sales activity.
Income Tax Expense. The Company’s effective income tax rate was 32.8% for the quarter ended
September 30, 2007 and 36.2% for the quarter ended September 30, 2006. The effective income tax
rate for the third quarter decreased primarily due to a $0.5 million reduction of state income tax
expense resulting from the final preparation and filing of the Company’s 2006 tax returns.
Nine Months Ended September 30, 2007
Revenues. Consolidated revenues of $246.7 million for the nine months ended September 30, 2007
exceeded revenues of $225.2 million for the same period in 2006 by 10%. The improvement was due to
a 5% increase in Proppant segment revenues and a 46% increase in Fracture and Reservoir Diagnostics
segment revenues.
Proppant segment revenues of $212.8 million for the nine months ended September 30, 2007 exceeded
revenues of $202.0 million for the nine months ended September 30, 2006 by 5%. The growth was
driven primarily by a 4% increase in sales volume. Worldwide proppant sales totaled 661 million
pounds in the first nine months of 2007 compared to 634 million pounds for the same period in 2006.
Overseas sales volume increased 40%, with the strongest activity occurring in Russia, West Africa,
the Middle East and South America. The average selling price per pound of ceramic proppant for the
first nine months of 2007 was $0.322 versus $0.319 for the
11
same period last year. The slightly higher average selling price is primarily due to increased
sales of higher-priced, heavyweight proppant.
Fracture and Reservoir Diagnostics segment revenues of $33.9 million for the nine months ended
September 30, 2007 exceeded revenues of $23.2 million for the same period in 2006 by 46%. The
growth was driven primarily by an increase in demand for fracture mapping services in North
America, reservoir diagnostics services, consulting services and software sales.
Gross Profit. Consolidated gross profit for the nine months ended September 30, 2007 was $87.9
million, or 36% of revenues, compared to $83.6 million, or 37% of revenues, for the same period in
2006. The 5% increase in gross profit is primarily the result of improved margins for the Fracture
and Reservoir Diagnostics segment, while the decline in gross profit as a percentage of revenues
was primarily due to higher Proppant segment manufacturing and freight costs in 2007.
Proppant segment gross profit for the nine months ended September 30, 2007 was $73.3 million, or
34% of revenues, compared to $73.8 million, or 37% of revenues, for the same period in 2006. Gross
profit decreased because of increases in Proppant segment manufacturing and freight costs
associated with the production and sale of high-strength proppant, and high production costs in
Russia associated with low throughput in early stages of plant start-up. These increased costs
were partially offset by a reduction in natural gas costs in the Company’s U.S. manufacturing
facilities.
Fracture and Reservoir Diagnostics segment gross profit for the nine months ended September 30,
2007 was $14.6 million, or 43% of revenues, compared to $9.8 million, or 42% of revenues, for the
same period in 2006. The increase in gross profit and gross profit margin was primarily due to
increased utilization of staff and equipment and strong software sales.
Selling, General and Administrative (SG&A) and Other Operating Expenses. Consolidated expenses
consisted of $29.1 million of SG&A expenses and $1.2 million of other operating expenses for the
nine months ended September 30, 2007 compared to $24.7 million and $0.4 million, respectively for
the nine months ended September 30, 2006. As a percentage of revenues, SG&A expenses increased to
11.8% for the first nine months of 2007 compared to 11.0% for the same period in 2006.
Proppant segment expenses consisted of $19.6 million of SG&A expenses and $1.2 million of other
operating expenses for the nine months ended September 30, 2007 compared to $17.5 million and $0.4
million, respectively, for the nine months ended September 30, 2006. SG&A expenses increased
primarily because of commencement of operations in Russia in 2007 and planned increases in
marketing activity, research and development activity, and administrative and legal expenses to
support revenue growth. As a percentage of revenues, SG&A expenses increased to 9.2% in 2007 from
8.7% in 2006. Other operating expenses of $1.2 million for the nine months ended September 30,
2007 consisted primarily of the final start-up costs associated with the Company’s new
manufacturing facility in Russia while other operating expenses of $0.4 million for the nine months
ended September 30, 2006 consisted mostly of final 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 $9.5 million, or 28% of revenues,
for the nine months ended September 30, 2007 compared to $7.2 million, or 31% of revenues, for the
nine months ended September 30, 2006. The increase in aggregate expense was primarily due to
greater technology development spending on the growing reservoir monitoring business as well as
increases in marketing and administrative expenses necessary to support revenue growth.
Income Tax Expense. The Company’s effective income tax rate was 33.5% for the nine months ended
September 30, 2007 and 35.3% for the nine months ended September 30, 2006. The effective tax rate
decreased primarily due to lower state income tax obligations compared to prior year estimates and
adjustment of deferred income tax liabilities resulting from changes in certain state income tax
regulations.
Liquidity and Capital Resources
At September 30, 2007, the Company had cash and cash equivalents of $7.4 million compared to cash
and cash equivalents of $25.0 million and short-term investments of $7.5 million at December 31,
2006. For the nine months ended September 30, 2007, the Company generated $39.8 million in cash
from operations, received
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$0.8 million in proceeds from employee exercises of stock options, retained $0.1 million in cash
from excess tax benefits relating to stock based compensation to employees and received $7.5
million for net purchases and maturities of short-term investments. Use of cash included $54.1
million of capital spending, $2.5 million for a business acquisition, and $9.3 million of cash
dividends. The Company also borrowed and repaid $3.0 million under its unsecured line of credit.
Major capital spending for the Proppant segment during the period included construction of the
second production line at the manufacturing facility in Toomsboro, Georgia that is expected to be
completed in late 2007, construction of a new proppant manufacturing facility in Kopeysk, Russia
completed in the first half of 2007, and a distribution facility expansion at Rock Springs,
Wyoming. Capital spending for the Fracture and Reservoir Diagnostics segment totaled $9.0 million.
The Company believes its 2007 and 2008 results will continue to be heavily influenced by the level
of natural gas drilling in North America. Given the levels of natural gas inventories in the U.S.
and the current low levels of drilling activity in Canada, there is the possibility of a short-term
contraction in drilling activity in North America which could negatively impact sales of the
company’s ceramic proppants. To offset the decreasing industry activity levels in North America
the Company intends to increase the number of field trials it initiates to demonstrate the value of
ceramic proppant relative to alternative proppants, continue to add resources to increase its
revenues outside of North America, evaluate opportunities to reduce costs in the proppant
production and distribution operations, develop a proppant targeted at the growing market for
slick-water fracture treatments, and add technical resources necessary to meet the growing demand
for Pinnacle Technologies’ products and services. The Company believes that demand for the
technologies offered by Pinnacle in fracture mapping and reservoir monitoring will continue to grow
and will remain particularly strong in key North American unconventional resource plays such as
shale formations and heavy oil recovery. The Company believes any slow-down in activity is likely
to be of a relatively short duration due to the increasing depletion rates in North American gas
wells and the impact that lower levels of drilling activity will have on natural gas supply and
price. The Company further believes that, after having finished the major expansion of its
proppant manufacturing facilities in the fourth quarter of 2007, capital spending requirements will
decrease in subsequent quarters and the Company should begin to increase its cash available for
other business purposes.
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 October 16, 2007, the Company’s Board of Directors approved the
payment of a quarterly cash dividend of $0.14 per share to shareholders of the Company’s Common
Stock on October 31, 2007. The Company estimates its total capital expenditures for the remainder
of 2007 will be approximately $9.0 to $11.0 million, including expansion of its manufacturing
facility in Toomsboro, Georgia.
The Company maintains an unsecured line of credit of $10.0 million. As of September 30, 2007,
there was no outstanding debt under the credit agreement. The Company anticipates that cash on
hand, 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.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of September 30, 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:
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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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changes in demand for our products, |
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changes in the demand for, or price of, oil and natural gas, |
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risks of increased competition, |
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technological, manufacturing and product development risks, |
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loss of key customers, |
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changes in foreign and domestic government regulations, |
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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, and |
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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. As of September 30, 2007, the Company’s net investment that is
subject to foreign currency fluctuations totals $84.3 million and the Company has recorded net
cumulative foreign currency translation adjustments of $3.0 million. These currency translation
adjustments are included in other comprehensive income. Also, the Company’s subsidiary in Russia
has borrowed $39.6 million, as of September 30, 2007, from another subsidiary of the Company to
fund construction of the manufacturing plant in Russia. This indebtedness, while eliminated in
consolidation of the financial statements, is subject to exchange rate fluctuations between the
local reporting currency and the currency in which the debt is denominated. Currency exchange rate
fluctuations associated with this indebtedness result in gains and losses that impact net income.
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, 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 market. As of September 30, 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.
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 Securities Exchange Act of 1934 (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 Exchange Act is accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of the end of the quarter ended September 30, 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 Exchange Act is recorded, processed, summarized and
reported as and when required.
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| (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, 2007 that materially affected, or are reasonably likely to materially affect,
those controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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See Note 10 of the Notes to the Consolidated Financial Statements which is incorporated
herein by reference. |
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
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The following exhibits are filed as part of, or incorporated by reference into, this
Quarterly Report on Form 10-Q: |
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| 10.1*
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First Amendment to Employment Agreement of Gary A. Kolstad dated as of
October 16, 2007. |
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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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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 26, 2007
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EXHIBIT INDEX
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| EXHIBIT |
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DESCRIPTION |
| 10.1* |
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First Amendment to Employment Agreement of Gary A. Kolstad dated as of October 16, 2007. |
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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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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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