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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 June 30, 2005
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 0-28178
CARBO CERAMICS INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 72-1100013 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
6565 MacArthur Boulevard
Suite 1050
Irving, Texas 75039
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. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo
As of August 1, 2005, 16,052,197 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.
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CARBO CERAMICS INC.
Index to Quarterly Report on Form 10-Q
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
June 30, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | (Note 1) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 16,722 | $ | 33,990 | ||||
Short-term investments | 56,950 | 46,125 | ||||||
Trade accounts receivable, net | 48,471 | 41,191 | ||||||
Inventories: | ||||||||
Finished goods | 14,194 | 12,878 | ||||||
Raw materials and supplies | 7,575 | 8,314 | ||||||
Total inventories | 21,769 | 21,192 | ||||||
Prepaid expenses and other current assets | 2,288 | 1,232 | ||||||
Deferred income taxes | 2,772 | 2,552 | ||||||
Total current assets | 148,972 | 146,282 | ||||||
Property, plant and equipment: | ||||||||
Land and land improvements | 1,988 | 1,958 | ||||||
Land-use and mineral rights | 5,248 | 5,248 | ||||||
Buildings | 14,851 | 14,604 | ||||||
Machinery and equipment | 148,259 | 145,043 | ||||||
Construction in progress | 33,440 | 16,278 | ||||||
Total | 203,786 | 183,131 | ||||||
Less accumulated depreciation | 63,881 | 57,746 | ||||||
Net property, plant and equipment | 139,905 | 125,385 | ||||||
Goodwill | 21,840 | 21,840 | ||||||
Intangible and other assets, net | 4,712 | 4,010 | ||||||
Total assets | $ | 315,429 | $ | 297,517 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 10,493 | $ | 10,454 | ||||
Accrued payroll and benefits | 5,424 | 6,182 | ||||||
Accrued freight | 1,951 | 1,378 | ||||||
Accrued utilities | 1,795 | 2,065 | ||||||
Accrued income taxes | 1,128 | 5,595 | ||||||
Retainage related to construction in progress | 340 | 456 | ||||||
Other accrued expenses | 3,513 | 3,062 | ||||||
Total current liabilities | 24,644 | 29,192 | ||||||
Deferred income taxes | 25,439 | 23,958 | ||||||
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; 16,018,597 and 15,983,662 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively | 160 | 160 | ||||||
Additional paid-in capital | 92,773 | 90,766 | ||||||
Unearned stock compensation | (1,874 | ) | (943 | ) | ||||
Retained earnings | 174,344 | 154,415 | ||||||
Accumulated other comprehensive income (loss) | (57 | ) | (31 | ) | ||||
Total shareholders’ equity | 265,346 | 244,367 | ||||||
Total liabilities and shareholders’ equity | $ | 315,429 | $ | 297,517 | ||||
The accompanying notes are an integral part of these statements.
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CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited)
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Revenues | $ | 63,834 | $ | 52,350 | $ | 125,002 | $ | 102,361 | ||||||||
Cost of sales | 38,202 | 30,889 | 74,549 | 60,556 | ||||||||||||
Gross profit | 25,632 | 21,461 | 50,453 | 41,805 | ||||||||||||
Selling, general and administrative expenses | 6,777 | 5,737 | 13,826 | 10,987 | ||||||||||||
Start-up costs | 239 | — | 254 | — | ||||||||||||
Loss on disposal of equipment | 95 | 49 | 95 | 49 | ||||||||||||
Operating profit | 18,521 | 15,675 | 36,278 | 30,769 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 526 | 74 | 910 | 134 | ||||||||||||
Interest expense | — | (2 | ) | — | (2 | ) | ||||||||||
Earnings in equity-method investee | 95 | — | 95 | — | ||||||||||||
Other, net | (11 | ) | 27 | (8 | ) | 89 | ||||||||||
610 | 99 | 997 | 221 | |||||||||||||
Income before income taxes | 19,131 | 15,774 | 37,275 | 30,990 | ||||||||||||
Income taxes | 6,954 | 5,917 | 13,504 | 11,565 | ||||||||||||
Net income | $ | 12,177 | $ | 9,857 | $ | 23,771 | $ | 19,425 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.76 | $ | 0.62 | $ | 1.49 | $ | 1.22 | ||||||||
Diluted | $ | 0.76 | $ | 0.61 | $ | 1.48 | $ | 1.21 | ||||||||
Other information: | ||||||||||||||||
Dividends declared per common share | $ | 0.12 | $ | 0.10 | $ | 0.24 | $ | 0.20 | ||||||||
The accompanying notes are an integral part of these statements.
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CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
(Unaudited)
Six months ended | ||||||||
June 30, | ||||||||
2005 | 2004 | |||||||
Operating activities | ||||||||
Net income | $ | 23,771 | $ | 19,425 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 6,202 | 5,495 | ||||||
Amortization | 316 | 275 | ||||||
Provision for doubtful accounts | 348 | 260 | ||||||
Deferred income taxes | 1,261 | 1,261 | ||||||
Loss on disposal of assets | 95 | 49 | ||||||
Stock compensation expense | 452 | 178 | ||||||
Earnings in equity-method investee | (95 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | (7,628 | ) | (8,346 | ) | ||||
Inventories | (577 | ) | (28 | ) | ||||
Prepaid expenses and other current assets | (1,056 | ) | (893 | ) | ||||
Accounts payable | 39 | (1,317 | ) | |||||
Accrued payroll and benefits | (758 | ) | (587 | ) | ||||
Accrued freight | 573 | (46 | ) | |||||
Accrued utilities | (270 | ) | 194 | |||||
Accrued income taxes | (4,197 | ) | 2,958 | |||||
Payment of legal judgment | — | (975 | ) | |||||
Other accrued expenses | 451 | 921 | ||||||
Net cash provided by operating activities | 18,927 | 18,824 | ||||||
Investing activities | ||||||||
Capital expenditures | (21,245 | ) | (8,668 | ) | ||||
Investment in equity-method investee | (611 | ) | — | |||||
Purchases of short-term investments | (69,675 | ) | (10,000 | ) | ||||
Proceeds from maturities of short-term investments | 58,850 | — | ||||||
Net cash used in investing activities | (32,681 | ) | (18,668 | ) | ||||
Financing activities | ||||||||
Proceeds from exercise of stock options | 354 | 5,290 | ||||||
Dividends paid | (3,842 | ) | (3,168 | ) | ||||
Net cash provided by (used in) financing activities | (3,488 | ) | 2,122 | |||||
Net increase (decrease) in cash and cash equivalents | (17,242 | ) | 2,278 | |||||
Effect of exchange rate changes on cash | (26 | ) | 19 | |||||
Cash and cash equivalents at beginning of period | 33,990 | 38,714 | ||||||
Cash and cash equivalents at end of period | $ | 16,722 | $ | 41,011 | ||||
Supplemental cash flow information | ||||||||
Interest paid | $ | — | $ | 2 | ||||
Income taxes paid | $ | 16,440 | $ | 7,346 | ||||
The accompanying notes are an integral part of these statements.
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CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share data)
(Unaudited)
(Unaudited)
1. | Basis of Presentation |
The accompanying unaudited consolidated financial statements of CARBO Ceramics Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2004 included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its significant 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.
Revenue Recognition— Proppant segment revenue is recognized when title passes to the customer, generally upon delivery. In the Fracture and Reservoir Diagnostics segment, revenue from fracture mapping and reservoir diagnostic services and engineering services is recognized at the time service is performed and revenue from the sale of fracture simulation software is recognized when title passes to the customer at time of shipment.
2. | Reclassifications |
Beginning January 1, 2005, the Company has included in cost of sales the depreciation and amortization of certain equipment and intangibles used by Pinnacle Technologies, Inc. Depreciation and amortization relating to these assets were charged to selling, general and administrative expenses prior to January 1, 2005. Depreciation and amortization expense for these assets included in the 2004 financial statements have been reclassified as cost of sales to conform to the 2005 presentation. Depreciation and amortization for these assets totaled $1,249 and $855, respectively, for the six months ended June 30, 2005 and June 30, 2004. The reclassification had no effect on net income.
During the second quarter of 2004, the Company began investing in auction rate securities, which are debt instruments with long-term maturities and periodic interest rate reset dates. Through December 31, 2004, the Company included these investments in cash and cash equivalents. As a result of recent Securities and Exchange Commission (“SEC”) guidance on these type of securities, the Company determined that these investments were more appropriately classified as short-term investments. Accordingly, auction rate securities included in cash and cash equivalents in the 2004 financial statements have been reclassified as short-term investments to conform to the 2005 presentation. Gross purchases and sales of these investments are reflected in the investing activities section of the Consolidated Statement of Cash Flows. The reclassification had no effect on total current assets or net income.
3. | Short-Term Investments |
Management determines the appropriate classification of investments in debt securities at the time of purchase and reevaluates such designation at the end of each fiscal quarter. Short-term investments owned by the Company consist of auction rate securities with auction reset periods of twelve months or less, which are classified as available-for-sale securities and carried at cost, which approximates fair value.
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4. | Earnings Per Share |
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Numerator for basic and diluted earnings per share: | ||||||||||||||||
Net income | $ | 12,177 | $ | 9,857 | $ | 23,771 | $ | 19,425 | ||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per share— | ||||||||||||||||
Weighted-average shares | 15,980,830 | 15,925,647 | 15,974,602 | 15,871,049 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Employee stock options | 119,908 | 129,629 | 120,620 | 125,467 | ||||||||||||
Nonvested stock awards | 5,444 | 9,763 | 6,591 | 4,881 | ||||||||||||
Dilutive potential common shares | 125,352 | 139,392 | 127,211 | 130,348 | ||||||||||||
Denominator for diluted earnings per share— | ||||||||||||||||
Adjusted weighted-average shares | 16,106,182 | 16,065,039 | 16,101,813 | 16,001,397 | ||||||||||||
Basic earnings per share | $ | 0.76 | $ | 0.62 | $ | 1.49 | $ | 1.22 | ||||||||
Diluted earnings per share | $ | 0.76 | $ | 0.61 | $ | 1.48 | $ | 1.21 | ||||||||
During the six months ended June 30, 2005, employees exercised stock options to acquire 14,800 common shares at a weighted-average exercise price of $23.92 per share. The Company recognized a related income tax benefit, of which $270 was credited directly to shareholders’ equity.
During the six months ended June 30, 2004, employees exercised stock options to acquire 204,375 common shares at a weighted-average exercise price of $25.88 per share. The Company recognized a related income tax benefit, of which $2,551 was credited directly to shareholders’ equity.
5. | Stock-Based Compensation |
On April 13, 2004, the shareholders approved the 2004 CARBO Ceramics Inc. Long-Term Incentive Plan (the “2004 Plan”). Under the 2004 Plan, shares of common stock may be granted in the form of restricted stock awards to employees of the Company. The Company may issue up to 250,000 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 50,000 shares may be granted to any single employee. Transfer and forfeiture restrictions on one-third of the shares subject to award lapse on each of the first three anniversaries of the grant date. No awards can be granted under the 2004 Plan after the fifth anniversary date. During the six months ended June 30, 2005, the Company granted awards for 20,135 restricted shares under the plan, at a fair value of $68.70 per share, resulting in $1,383 in unearned stock compensation cost. During the six months ended June 30, 2004, the Company granted awards for 18,080 restricted shares under the plan, at a fair value of $62.09 per share, resulting in $1,123 in unearned stock compensation cost, net of 350 shares that were forfeited. Unearned stock compensation cost of restricted stock is amortized to expense over the vesting period of three years.
The Company accounts for its employee stock plans using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Under the intrinsic value method, compensation expense is recognized to the extent the exercise price of the award is less than the market value of the underlying common stock. In general, restricted stock awards under the 2004 Plan have no exercise price while stock options granted under the option plans have an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense charged to operations for the six months ended June 30, 2005 and June 30, 2004 was $452 and $178, respectively.
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The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income, as reported | $ | 12,177 | $ | 9,857 | $ | 23,771 | $ | 19,425 | ||||||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 148 | 77 | 284 | 112 | ||||||||||||
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects | (316 | ) | (322 | ) | (705 | ) | (587 | ) | ||||||||
Pro forma net income | $ | 12,009 | $ | 9,612 | $ | 23,350 | $ | 18,950 | ||||||||
Earnings per share: | ||||||||||||||||
Basic — as reported | $ | 0.76 | $ | 0.62 | $ | 1.49 | $ | 1.22 | ||||||||
Basic — pro forma | $ | 0.75 | $ | 0.60 | $ | 1.46 | $ | 1.19 | ||||||||
Diluted — as reported | $ | 0.76 | $ | 0.61 | $ | 1.48 | $ | 1.21 | ||||||||
Diluted — pro forma | $ | 0.75 | $ | 0.60 | $ | 1.45 | $ | 1.18 | ||||||||
6. | Segment Information |
The Company has two operating segments: 1) Proppant and 2) Fracture and Reservoir Diagnostics. Discrete financial information is available for each operating segment. Management of each operating segment reports to the chief operating decision maker, who regularly evaluates financial results to determine how to allocate resources and assess performance. The accounting policies of each segment are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2004. During the quarter ended June 30, 2005, the Fracture and Reservoir Diagnostics operating segment exceeded the quantitative thresholds defined by FASB Statement No. 131,Disclosures about Segments of an Enterprise and Related Information,and also became a reportable segment.
The Company’s Proppant segment manufactures and sells ceramic proppants worldwide for use primarily in the hydraulic fracturing of natural gas and oil wells. All of the Company’s ceramic proppant products have similar production processes and economic characteristics and are marketed predominantly to pumping service companies that perform hydraulic fracturing for major oil and gas companies.
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. (“Pinnacle”).
Goodwill totaling $21,840 arising from the Company’s acquisition of Pinnacle is not assigned to an operating segment because that information is not used by the Company’s chief operating decision maker in allocating resources. An intersegment note receivable totaling $10,473 and $8,829 at June 30, 2005 and 2004, respectively, and the costs of the Company’s corporate offices are reported in the Proppant segment. Intersegment sales are not material.
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Summarized financial information for the Company’s reportable segments is shown in the following table:
Fracture | ||||||||||||
and | ||||||||||||
Reservoir | ||||||||||||
Proppant | Diagnostics | Total | ||||||||||
Three Months Ended June 30, 2005 | ||||||||||||
Revenues from external customers | $ | 57,132 | $ | 6,702 | $ | 63,834 | ||||||
Income before income taxes | 18,575 | 556 | 19,131 | |||||||||
Three Months Ended June 30, 2004 | ||||||||||||
Revenues from external customers | $ | 47,917 | $ | 4,433 | $ | 52,350 | ||||||
Income before income taxes | 15,273 | 501 | 15,774 | |||||||||
Six Months Ended June 30, 2005 | ||||||||||||
Revenues from external customers | $ | 112,293 | $ | 12,709 | $ | 125,002 | ||||||
Income before income taxes | 36,422 | 853 | 37,275 | |||||||||
Segment assets as of June 30, 2005 | 281,692 | 22,370 | 304,062 | |||||||||
Six Months Ended June 30, 2004 | ||||||||||||
Revenues from external customers | $ | 94,287 | $ | 8,074 | $ | 102,361 | ||||||
Income before income taxes | 30,265 | 725 | 30,990 | |||||||||
Segment assets as of June 30, 2004 | 228,919 | 17,620 | 246,539 |
7. | Dividends Paid |
On April 19, 2005, the Board of Directors declared a cash dividend of $0.12 per common share payable to shareholders of record on April 29, 2005. The dividend was paid on May 13, 2005.
8. | Comprehensive Income |
Comprehensive income was as follows:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income | $ | 12,177 | $ | 9,857 | $ | 23,771 | $ | 19,425 | ||||||||
Foreign currency translation adjustment | (25 | ) | 18 | (26 | ) | 19 | ||||||||||
Comprehensive income | $ | 12,152 | $ | 9,875 | $ | 23,745 | $ | 19,444 | ||||||||
9. | New Accounting Pronouncement |
In December 2004, the FASB issued SFAS No. 123-Revised 2004 (“SFAS 123(R)”),Share-Based Payment. This is a revision of SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB No. 25,Accounting for Stock Issued to Employees(“APB 25”). As noted in the above description of our stock-based compensation accounting policy, the Company generally does not record compensation expense for employee stock options. Under SFAS 123(R), the Company will be required to measure the cost of employee services received in exchange for stock compensation, based on the grant date fair value (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value for stock options will be estimated using an option pricing model. Excess tax benefits, as defined in SFAS 123(R), will be recognized as an addition to paid-in capital. Under SFAS 123(R), measurement and recognition of compensation expense related to the Company’s restricted stock will be the same as APB 25. The provisions of SFAS 123(R) originally were effective as of the beginning of the first reporting period beginning after June 15, 2005. However, in April 2005, the effective date was revised to require adoption no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company is currently in the process of evaluating the impact of SFAS 123(R) on its financial statements, including its impact under different option pricing models.
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
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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.
11. | Subsequent Events |
On July 19, 2005, the Board of Directors approved a 3-for-2 split of the Company’s common stock to be effected in the form of a stock dividend. The record date of the stock dividend will be August 5, 2005, and the additional shares will be distributed on August 19, 2005.
On July 21, 2005, the government of the People’s Republic of China ended its policy of linking the value of its currency, the Yuan, to the U.S. dollar and adopted a policy of linking the Yuan’s value to a basket of foreign currencies. This change has not had a material affect on the translated value of the Company’s net assets that are denominated in Yuan, which were $19,449 as of June 30, 2005.
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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, 2004). 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, accounting for legal contingencies and accounting for business acquisitions. Critical accounting policies are discussed more fully in the annual report on Form 10-K for the year ended December 31, 2004 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 June 30, 2005
Revenues.Consolidated revenues of $63.8 million for the quarter ended June 30, 2005 were a new quarterly record and increased 22% compared to revenues of $52.3 million for the same period a year earlier. The previous record of $62.2 million was established in the fourth quarter of 2004. The increase in revenues was largely due to an increase in the sales volume and average selling price of proppant.
Worldwide proppant sales totaled 190.3 million pounds for the quarter, a 12% increase compared to the second quarter of 2004, with North American sales volume up 29% and overseas volume down 23%. The increase in North America was primarily due to record quarterly sales volume in the U.S. and Mexico. Strong U.S. sales were the result of continuing improvement in drilling activity as the second quarter U.S. natural gas rig count increased by 20% compared to the same period a year ago. Sales volume in Mexico exceeded the second quarter of 2004 by 106% and surpassed the previous quarterly record for that region. Sales in Canada began to rebound in June from the seasonal second quarter decline associated with the spring thaw, finishing the quarter 12% ahead of the second quarter of 2004. The decline in overseas sales volume compared to last year’s second quarter resulted mainly from decreases of 89% in Russia and 76% in the North Sea. Sales in Russia have slowed following a transfer of ownership of the Company’s largest customer in the Russian market, combined with an increase in the availability of locally produced proppant. North Sea sales declined due to customer project delays in that region.
The second quarter 2005 average selling price of $0.300 per pound of proppant increased approximately 7% compared to the second quarter 2004 average selling price of $0.281. The higher average selling price was due to price increases that went into effect in July 2004 and June 2005, increases in expenses passed on to customers for fuel surcharges and for freight premiums to expedite shipments to U.S. customers, and an increase in sales of higher priced resin-coated proppant.
Consolidated revenues also benefited from an increase in revenues in the Company’s Fracture and Reservoir Diagnostics segment. Revenues of $6.7 million for the quarter ended June 30, 2005 exceeded revenues of $4.4 million for the same period in 2004 by 52%. The increase was primarily due to the continued growth in the core fracture mapping business.
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Gross Profit.Consolidated gross profit for the second quarter of 2005 was $25.6 million, or 40% of sales, compared to $21.5 million, or 41% of sales, for the second quarter of 2004. The increase in consolidated gross profit was primarily due to the increase in Proppant segment revenues and the decrease in consolidated gross profit margin was primarily due to a decrease in the Fracture Diagnostic and Engineering Services segment’s gross profit margin.
Proppant segment gross profit for the second quarter of 2005 was $23.2 million, or 41% of sales, compared to $19.6 million, or 41% of sales, for the second quarter of 2004. Proppant segment gross profit margin remained the same year-over-year as an increase in the average sales price of proppant offset the negative impact of higher costs for raw materials, natural gas and freight. The delivered cost of natural gas used in the Company’s domestic proppant manufacturing facilities averaged $7.28/mmbtu for the second quarter of 2005 compared to $6.66/mmbtu for the second quarter of 2004. The Company’s proppant manufacturing facilities operated at 108% of design capacity in the second quarter of 2005 compared to 96% in the same period last year and total production volume increased 20% year-over-year. Record production volume was achieved during the quarter, boosted by record volume at the McIntyre, Georgia facility. Freight cost increased primarily due to increases in fuel surcharges and a larger than usual volume of product shipped by truck instead of rail in order to meet customer requirements.
Fracture and Reservoir Diagnostics segment gross profit for the second quarter of 2005 was $2.4 million, or 35% of sales, compared to $1.9 million, or 42% of sales, for the second quarter of 2004. The decrease in gross profit margin was primarily due to increased labor costs in preparation for anticipated growth and increased subcontractor costs due to a change in the mix of service offerings.
For information regarding the reclassification of depreciation and amortization of certain equipment and intangibles used by Pinnacle from selling, general and administrative expenses to cost of sales beginning January 1, 2005, see Note 2 to the Notes to Consolidated Financial Statements.
Selling, General and Administrative (SG&A) and Other Operating Expenses.Consolidated SG&A expenses totaled $6.8 million for the second quarter of 2005 compared to $5.7 million for the corresponding period in 2004. As a percentage of revenues, SG&A decreased to 10.6% for the quarter ended June 30, 2005 compared to 11.0% for the quarter ended June 30, 2004.
Proppant segment SG&A expenses totaled $4.9 million for the second quarter of 2005 compared to $4.4 million for the corresponding period in 2004. The increase was due to greater activity related to the Company’s global business development efforts and increased selling and administrative expenses associated with the Company’s growth and international expansion. Other operating expenses include $0.2 million in the second quarter of 2005 related to pre-operating activities associated with new proppant manufacturing facilities under construction in Wilkinson County, Georgia and the city of Kopeysk, Chelyabinsk Oblast of the Russian Federation.
Fracture and Reservoir Diagnostics segment SG&A expenses totaled $1.9 million for the second quarter of 2005 and $1.3 million for the corresponding period in 2004. The increase was primarily due to greater marketing and administrative expenses necessary to support higher sales activity and increased spending on technology development.
Income Tax Expense. Consolidated income tax expense of $7.0 million for the quarter ended June 30, 2005 increased 18% compared to the same period a year ago primarily due to the increase in taxable income resulting from the Company’s improved performance. The effective income tax rate of 36.3% of pretax income for the second quarter of 2005 decreased from 37.5% for last year’s second quarter primarily due to the benefit of a new deduction for domestic manufacturing activities enacted as part of the American Jobs Creation Act of 2004, combined with an increase in the Company’s tax exempt interest.
Six Months Ended June 30, 2005
Revenues. Consolidated revenues of $125.0 million for the six-month period ended June 30, 2005 exceeded revenues of $102.4 million for the same period in 2004 by 22%. The improvement in revenues was largely due to an increase in the sales volume and average selling price of proppant and an increase in revenues from the Fracture and Reservoir Diagnostics segment.
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Proppant segment revenues of $112.3 million for the six-month period ended June 30, 2005 exceeded revenues of $94.3 million for the same period in 2004 by 19%. The growth was driven primarily by a 15% increase in ceramic proppant sales volume, with worldwide sales totaling 391.6 million pounds, and a 4% increase in the average selling price of proppant. North American proppant sales volume increased 24% over 2004, including a 16% increase in the U.S., a 40% increase in Canada and a 125% increase in Mexico. Overseas sales volume declined by 10% compared to last year primarily due to decreases of 29% in Russia and 72% in the North Sea, partially offset by increases in other overseas areas. The average selling price per pound of ceramic proppant for the first half of 2005 was $0.287 versus $0.276 for the first half of 2004. The higher average selling price was due to the impact of price increases that went into effect in July 2004 and June 2005, increases in expenses passed on to customers for fuel surcharges and for freight premiums to expedite shipments to U.S. customers, and an increase in sales of higher priced resin-coated proppant.
Fracture and Reservoir Diagnostics segment revenues of $12.7 million for the six-month period ended June 30, 2005 exceeded revenues of $8.1 million for the same period in 2004 by 57%. The growth was driven primarily by a rapid increase in demand for fracture mapping services in the U.S. and an increase in international engineering services.
Gross Profit.Consolidated gross profit for the six months ended June 30, 2005 was $50.5 million, or 40% of revenues, compared to $41.8 million, or 41% of revenues, for the same period in 2004. The increase in consolidated gross profit was primarily due to the increase in proppant sales and the decrease in consolidated gross profit margin was primarily due to the Company’s Fracture and Reservoir Diagnostics segment.
Proppant segment gross profit for the six months ended June 30, 2005 was $46.0 million, or 41% of revenues, compared to $38.5 million, or 41% of revenues, for the same period in 2004. Gross profit margin remained the same year-over-year as an increase in the average sales price of proppant offset the negative impact of higher costs for raw materials, natural gas and freight. The delivered cost of natural gas used in the Company’s domestic proppant manufacturing facilities averaged $7.24/mmbtu for the first half of 2005 compared to $6.53/mmbtu for the first half of 2004. The Company’s proppant manufacturing facilities operated at 106% of design capacity in the first half of 2005 compared to 95% in the same period last year and total production volume increased 21% year-over-year. Freight cost increased primarily due to increases in fuel surcharges and a larger than usual volume of product shipped by truck instead of rail in order to expedite delivery to U.S. customers.
Fracture and Reservoir Diagnostics segment gross profit for the six months ended June 30, 2005 was $4.5 million, or 36% of revenues, compared to $3.3 million, or 41% of revenues, for the same period in 2004. The decrease in gross profit margin was primarily due to increased labor costs in preparation for anticipated growth and for the development of expanded service offerings. Increased third party cost of data acquisition for fracture mapping services also contributed to the decrease in margins.
Selling, General and Administrative (SG&A) and Other Operating Expenses.Consolidated SG&A expenses totaled $13.8 million for the six months ended June 30, 2005 compared to $11.0 million for the six months ended June 30, 2004. As a percentage of revenues, SG&A expenses increased slightly to 11.0% for the first half of 2005 compared to 10.7% for same period in 2004.
Proppant segment SG&A expenses totaled $10.2 million for the six months ended June 30, 2005 compared to $8.6 million for the six months ended June 30, 2004. The increase was due to greater activity related to the Company’s global business development efforts; legal expenses related to patent activity, including litigation in defense of existing patents; additional professional fees incurred to comply with accounting, internal control and other corporate governance requirements of the Sarbanes-Oxley Act of 2002; and increased selling and administrative expenses associated with the Company’s growth and international expansion. Other operating expenses in 2005 include $0.2 million related to start-up activities associated with two new manufacturing facilities under construction in Wilkinson County, Georgia and the city of Kopeysk, Chelyabinsk Oblast of the Russian Federation.
Fracture and Reservoir Diagnostics segment SG&A expenses totaled $3.6 million for the six months ended June 30, 2005 compared to $2.4 million for the six months ended June 30, 2004. The increase was primarily due to greater marketing and administrative expenses necessary to support higher revenues and increased spending on technology development.
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Income Tax Expense. Consolidated income tax expense of $13.5 million for the six months ended June 30, 2005 increased 17% compared to the same period a year ago primarily due to the increase in taxable income resulting from the Company’s improved performance. The effective income tax rate of 36.2% of pretax income for the first half of 2005 decreased from 37.3% for first half of 2004 primarily due to the benefit of a new deduction for domestic manufacturing activities enacted as part of the American Jobs Creation Act of 2004, combined with an increase in the Company’s tax exempt interest income.
Liquidity and Capital Resources
At June 30, 2005, the Company had cash and cash equivalents of $16.7 million and short-term investments of $57.0 million compared to cash and cash equivalents of $34.0 million and short-term investments of $46.1 million at December 31, 2004. The Company generated $18.9 million cash from operations and received $0.3 million proceeds from employee exercises of stock options. Uses of cash included $21.3 million of capital spending, $10.8 million for net purchases and sales of short-term investments, $3.8 million of cash dividends and $0.6 million investment in a joint venture. Major capital spending included $14.4 million toward the new manufacturing facility in Wilkinson County, Georgia and $2.5 million toward the new manufacturing facility in the Russian Federation. For a discussion regarding the reclassification from cash and cash equivalents to short-term investments at December 31, 2004, see Note 2 to the Notes to Consolidated Financial Statements.
The Company believes that the relatively high prices for oil and natural gas in the current spot and futures markets will continue to spur drilling and fracturing activity worldwide. Consequently, the Company expects demand for its products to remain strong. The Company intends to continue operating all of its manufacturing facilities near full capacity for the remainder of the year.
Subject to its financial condition, the amount of funds generated from operations and the level of capital expenditures, the Company’s current intention is to continue to pay quarterly dividends to shareholders of its Common Stock. On April 19, 2005, the Company’s Board of Directors approved the payment of a quarterly dividend of $0.12 per share to shareholders of the Company’s common stock. The Company has total projected capital expenditures of $60.0 million to $65.0 million for the remainder of 2005, including spending of approximately $36.0 million on the new manufacturing facility in Wilkinson County, Georgia, construction of which is expected to be complete by the end of 2005, and approximately $18.0 million on a new manufacturing facility in the Russian Federation. The new Georgia plant is designed to have initial annual capacity of 250 million pounds at an expected total cost of $62.0 million while the Russian plant is designed to have annual capacity of 100 million pounds at an expected total cost of $32.0 million. Ground-breaking for the Russian plant took place in June 2005. The manufacturing facility will be located in the city of Kopeysk, approximately 1,000 miles east of Moscow.
The Company maintains an unsecured line of credit of $10.0 million. As of June 30, 2005, 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 June 30, 2005.
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 demand for our products, changes in the demand for, or price of, oil and natural gas, risks of increased competition, technological, manufacturing and product development risks, loss of key customers, changes in government regulations, foreign and domestic political and legislative risks, the risks of war and international and domestic terrorism, risks associated with foreign operations and foreign currency exchange rates and
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controls, weather-related risks and other risks and uncertainties. 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 investment in China. 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 June 30, 2005. On July 21, 2005, the government of the People’s Republic of China ended its policy of linking its currency, the Yuan, to the U.S. dollar and adopted a policy of linking the Yuan’s value to a basket of foreign currencies. This change has not had a material affect on the translated value of the Company’s net assets that are denominated in Yuan, which were $19.4 million as of June 30, 2005.
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 June 30, 2005, 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 Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the quarter ended June 30, 2005, management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the end of the quarter for which this report is made, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
(b) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2005 that materially affected, or are reasonably likely to materially affect, those controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
a. | The Annual Meeting of Shareholders of Carbo Ceramics Inc. was held on April 19, 2005. | ||
b. | The following matters were submitted to a vote at the meeting: |
(1) The election of the following nominees as directors of Carbo Ceramics Inc. Votes representing 14,524,620 share of common stock were cast. The vote with respect to each nominee was as follows:
Nominee | For | Withheld | ||||||
Claude E. Cooke, Jr. | 14,473,237 | 69,383 | ||||||
Chad C. Deaton | 14,472,937 | 69,683 | ||||||
H. E. Lentz, Jr. | 14,473,826 | 68,794 | ||||||
William C. Morris | 14,346,741 | 195,879 | ||||||
John J. Murphy | 14,475,164 | 67,456 | ||||||
C. Mark Pearson | 14,479,888 | 62,732 | ||||||
Robert S. Rubin | 14,473,156 | 69,464 |
(2) The ratification of the appointment of Ernst & Young LLP as independent accountants to audit the consolidated financial statements of Carbo Ceramics Inc. for the year 2005. Votes representing 14,524,620 share of common stock were cast. Results of the vote were as follows: 14,315,687 for, 226,283 against, and 650 abstained.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
The following exhibits are filed as part of the Quarterly Report on Form 10-Q:
31.1 | Rule 13a-14(a)/15d-14(a) Certification by C. Mark Pearson. | ||
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. |
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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.
CARBO CERAMICS INC. | ||
/s/ C. Mark Pearson | ||
C. Mark Pearson President and Chief Executive Officer | ||
/s/ Paul G. Vitek | ||
Paul G. Vitek Sr. Vice President, Finance and Chief Financial Officer |
Date: August 3, 2005
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