SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
Commission File No. 0-28178
CARBO CERAMICS INC.
| DELAWARE (State or other jurisdiction of incorporation or organization) |
72-1100013 (I.R.S. Employer 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 x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
As of October 26, 2004, 15,975,762 shares of the registrant’s Common Stock, par value $.01 per share were outstanding.
1
CARBO CERAMICS
INC.
Index to Quarterly Report on Form 10-Q
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| Rule 13a-14(a)/15d-14(a) Certification by C. Mark Pearson | ||||||||
| Rule 13a-14(a)/15d-14(a) Certification by Paul G. Vitek | ||||||||
| Certification Pursuant to 18 U.S.C. Section 1350 | ||||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
| September 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | (Note 1) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 63,678 | $ | 38,714 | ||||
Trade accounts receivable, net |
43,859 | 30,395 | ||||||
Inventories: |
||||||||
Finished goods |
13,496 | 14,004 | ||||||
Raw materials and supplies |
5,556 | 6,433 | ||||||
Total inventories |
19,052 | 20,437 | ||||||
Prepaid expenses and other current assets |
1,812 | 1,086 | ||||||
Deferred income taxes |
2,596 | 2,077 | ||||||
Total current assets |
130,997 | 92,709 | ||||||
Property, plant and equipment: |
||||||||
Land and land improvements |
1,958 | 1,958 | ||||||
Land-use and mineral rights |
5,248 | 5,052 | ||||||
Buildings |
14,692 | 12,826 | ||||||
Machinery and equipment |
142,051 | 132,973 | ||||||
Construction in progress |
12,657 | 11,011 | ||||||
Total |
176,606 | 163,820 | ||||||
Less accumulated depreciation |
55,060 | 47,156 | ||||||
Net property, plant and equipment |
121,546 | 116,664 | ||||||
Goodwill |
21,840 | 21,840 | ||||||
Intangible assets, net |
4,101 | 3,911 | ||||||
Total assets |
$ | 278,484 | $ | 235,124 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,170 | $ | 5,599 | ||||
Accrued payroll and benefits |
5,824 | 4,680 | ||||||
Accrued freight |
1,492 | 1,076 | ||||||
Accrued utilities |
1,768 | 1,645 | ||||||
Accrued income taxes |
1,627 | 38 | ||||||
Retainage related to construction in progress |
629 | 265 | ||||||
Provision for legal judgment |
— | 975 | ||||||
Other accrued expenses |
2,458 | 2,154 | ||||||
Total current liabilities |
19,968 | 16,432 | ||||||
Deferred income taxes |
23,724 | 18,553 | ||||||
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;
15,951,957 and 15,733,432 shares issued and outstanding at September 30,
2004 and December 31, 2003, respectively |
159 | 157 | ||||||
Additional paid-in capital |
90,142 | 80,534 | ||||||
Unearned stock compensation |
(1,066 | ) | (253 | ) | ||||
Retained earnings |
145,581 | 119,743 | ||||||
Accumulated other comprehensive income (loss) |
(24 | ) | (42 | ) | ||||
Total shareholders’ equity |
234,792 | 200,139 | ||||||
Total liabilities and shareholders’ equity |
$ | 278,484 | $ | 235,124 | ||||
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, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Revenues |
$ | 58,482 | $ | 43,260 | $ | 160,843 | $ | 121,221 | ||||||||
Cost of sales |
33,126 | 25,487 | 92,827 | 73,963 | ||||||||||||
Gross profit |
25,356 | 17,773 | 68,016 | 47,258 | ||||||||||||
Selling, general and administrative expenses |
7,312 | 4,890 | 19,154 | 14,157 | ||||||||||||
Start-up costs |
— | — | — | 80 | ||||||||||||
Loss on disposal of equipment |
— | — | 49 | 717 | ||||||||||||
Operating profit |
18,044 | 12,883 | 48,813 | 32,304 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
181 | 54 | 315 | 144 | ||||||||||||
Interest expense |
— | (1 | ) | (2 | ) | (12 | ) | |||||||||
Other, net |
(41 | ) | (19 | ) | 48 | (133 | ) | |||||||||
| 140 | 34 | 361 | (1 | ) | ||||||||||||
Income before income taxes |
18,184 | 12,917 | 49,174 | 32,303 | ||||||||||||
Income taxes |
6,687 | 4,803 | 18,252 | 12,035 | ||||||||||||
Net income |
$ | 11,497 | $ | 8,114 | $ | 30,922 | $ | 20,268 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.72 | $ | 0.52 | $ | 1.95 | $ | 1.31 | ||||||||
Diluted |
$ | 0.72 | $ | 0.52 | $ | 1.93 | $ | 1.29 | ||||||||
Other information: |
||||||||||||||||
Dividends declared per common share |
$ | 0.12 | $ | 0.10 | $ | 0.32 | $ | 0.28 | ||||||||
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, |
||||||||
| 2004 |
2003 |
|||||||
Operating activities |
||||||||
Net income |
$ | 30,922 | $ | 20,268 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation |
8,562 | 7,286 | ||||||
Amortization |
401 | 370 | ||||||
Deferred income taxes |
4,652 | 1,448 | ||||||
Loss on disposal of equipment |
49 | 717 | ||||||
Non-cash stock compensation expense |
310 | 238 | ||||||
Changes in operating assets and liabilities: |
||||||||
Trade accounts receivable |
(13,464 | ) | (4,374 | ) | ||||
Inventories |
1,385 | (3,476 | ) | |||||
Prepaid expenses and other current assets |
(726 | ) | (881 | ) | ||||
Accounts payable |
571 | 1,453 | ||||||
Accrued payroll and benefits |
1,144 | 841 | ||||||
Accrued freight |
416 | 235 | ||||||
Accrued utilities |
123 | 388 | ||||||
Accrued income taxes |
4,345 | 558 | ||||||
Provision for legal judgment |
(975 | ) | (993 | ) | ||||
Other accrued expenses |
304 | 222 | ||||||
Net cash provided by operating activities |
38,019 | 24,300 | ||||||
Investing activities |
||||||||
Capital expenditures, net |
(13,720 | ) | (17,038 | ) | ||||
Purchase of Pinnacle Technologies, Inc. |
— | (909 | ) | |||||
Net cash used in investing activities |
(13,720 | ) | (17,947 | ) | ||||
Financing activities |
||||||||
Proceeds from exercise of stock options |
5,731 | 1,082 | ||||||
Dividends paid |
(5,084 | ) | (4,344 | ) | ||||
Net cash provided by (used in) financing activities |
647 | (3,262 | ) | |||||
Net increase in cash and cash equivalents |
24,946 | 3,091 | ||||||
Effect of exchange rate changes on cash |
18 | (25 | ) | |||||
Cash and cash equivalents at beginning of period |
38,714 | 24,447 | ||||||
Cash and cash equivalents at end of period |
$ | 63,678 | $ | 27,513 | ||||
Supplemental cash flow information |
||||||||
Interest paid |
$ | 2 | $ | 12 | ||||
Income taxes paid |
$ | 9,255 | $ | 10,029 | ||||
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. In addition, the consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its wholly owned subsidiaries (the “Company”): CARBO Ceramics (UK) Limited, CARBO Ceramics (Mauritius) Inc., CARBO Ceramics (China) Company Limited, CARBO Ceramics Cyprus Limited, CARBO Ceramics (Eurasia) LLC, CARBO Ceramics LLC and Pinnacle Technologies, Inc. All significant intercompany transactions have been eliminated.
2. Reclassification of Handling Costs
Beginning January 1, 2004, the Company has included handling costs in cost of sales. Handling costs, including labor and overhead to maintain finished goods inventory, costs of operating distribution facilities and depreciation of those facilities, were charged to selling, general and administrative expenses prior to January 1, 2004. Because handling costs tend to vary directly with sales activity and can impact shipping costs, the Company decided that handling costs would be better classified as cost of sales. Shipping costs, which consist of transportation costs associated with delivery of the Company’s products to customers, are classified as cost of sales. Handling costs included in the 2003 financial statements have been reclassified as cost of sales to conform to the 2004 presentation. The reclassification had no effect on net income.
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, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Numerator for basic and diluted earnings per share: |
||||||||||||||||
Net income |
$ | 11,497 | $ | 8,114 | $ | 30,922 | $ | 20,268 | ||||||||
Denominator: |
||||||||||||||||
Denominator for basic earnings per share—weighted-average shares |
15,944,648 | 15,561,929 | 15,895,761 | 15,521,623 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Employee stock options |
125,352 | 112,929 | 125,429 | 108,089 | ||||||||||||
Nonvested stock awards |
3,575 | — | 4,446 | — | ||||||||||||
Contingent stock – acquisition |
— | — | — | 24,127 | ||||||||||||
Dilutive potential common shares |
128,927 | 112,929 | 129,875 | 132,216 | ||||||||||||
Denominator for diluted earnings per share—adjusted weighted-average shares |
16,073,575 | 15,674,858 | 16,025,636 | 15,653,839 | ||||||||||||
Basic earnings per share |
$ | 0.72 | $ | 0.52 | $ | 1.95 | $ | 1.31 | ||||||||
Diluted earnings per share |
$ | 0.72 | $ | 0.52 | $ | 1.93 | $ | 1.29 | ||||||||
6
During the nine months ended September 30, 2004, employees exercised stock options to acquire 218,525 common shares at a weighted-average exercise price of $26.23 per share. The Company recognized a related income tax benefit of $2,756, which was credited directly to shareholders’ equity.
During the nine months ended September 30, 2003, employees exercised stock options to acquire 53,725 common shares at a weighted-average exercise price of $20.15 per share. The Company recognized a related income tax benefit of $354, of which $243 was credited directly to shareholders’ equity, $23 was recorded as a reduction of goodwill for exercises of vested stock options assumed in the May 31, 2002 acquisition of Pinnacle Technologies and $88 was used to offset a previously recognized deferred income tax benefit.
4. 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 participant 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 awards 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. Since inception of the plan in 2004, the Company granted awards for 18,430 shares under the plan and recorded $1,123 in unearned stock compensation cost, net of 350 shares that were forfeited.
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. 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 | Nine months ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income, as reported |
$ | 11,497 | $ | 8,114 | $ | 30,922 | $ | 20,268 | ||||||||
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects |
83 | 46 | 195 | 150 | ||||||||||||
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects |
(338 | ) | (241 | ) | (925 | ) | (830 | ) | ||||||||
Pro forma net income |
$ | 11,242 | $ | 7,919 | $ | 30,192 | $ | 19,588 | ||||||||
Earnings per share: |
||||||||||||||||
Basic - as reported |
$ | 0.72 | $ | 0.52 | $ | 1.95 | $ | 1.31 | ||||||||
Basic - pro forma |
$ | 0.71 | $ | 0.51 | $ | 1.90 | $ | 1.26 | ||||||||
Diluted - as reported |
$ | 0.72 | $ | 0.52 | $ | 1.93 | $ | 1.29 | ||||||||
Diluted - pro forma |
$ | 0.70 | $ | 0.51 | $ | 1.88 | $ | 1.25 | ||||||||
5. Dividends Paid
On July 13, 2004, the Board of Directors declared a cash dividend of $0.12 per common share payable to shareholders of record on July 30, 2004. The dividend was paid on August 16, 2004.
7
6. Comprehensive Income
Comprehensive income was as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income |
$ | 11,497 | $ | 8,114 | $ | 30,922 | $ | 20,268 | ||||||||
Foreign currency translation adjustment |
(1 | ) | (15 | ) | 18 | (25 | ) | |||||||||
Comprehensive income |
$ | 11,496 | $ | 8,099 | $ | 30,940 | $ | 20,243 | ||||||||
7. Legal Proceedings
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate cost to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2003). 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, 2003 and there have been no changes in the Company’s evaluation of its critical accounting policies since the preparation of that report.
Results of Operations
Three Months Ended September 30, 2004
Revenues. Revenues of $58.5 million for the quarter ended September 30, 2004 increased 35% over the same period a year earlier and represent a new quarterly revenue record as well as the seventh consecutive increase in quarterly revenues. The increase was primarily due to a 21% improvement in ceramic proppant sales volume, a 6% increase in the average selling price of ceramic proppant and record performance by Pinnacle Technologies, Inc.
Worldwide proppant sales totaled a record 182 million pounds for the quarter, with overseas volume up 80% and North American sales volume remaining relatively flat at a 1% increase compared to the third quarter of 2003. North American activity was sustained by increased Canadian sales while U.S. sales experienced a slight decline. U.S. sales volume fell 2% versus last year’s third quarter as decreases in South Texas, the Rocky Mountains and Gulf of Mexico overshadowed increases in the Mid-Continent and East Texas regions. Product shortages contributed to the drop off in the Rocky Mountains while Gulf of Mexico activity was adversely impacted by an active hurricane season. Canadian sales volume improved 13% versus last year’s third quarter, despite curtailed activity caused by heavy rains during the period. Overseas sales surpassed the record volume set in the second quarter of 2004. The increase in overseas volume compared to the third quarter of 2003 was led by shipments into Russia. For the quarter, overseas shipments accounted for 37% of total sales volume compared to 25% for the third quarter of 2003 and sales outside the U.S. accounted for 50% of total sales volume compared to 38% for the third quarter of 2003.
Third quarter 2004 average selling price of $0.279 per pound for ceramic proppant increased 6% over the third quarter 2003 average selling price of $0.264. The increase was mostly due to an upsurge in sales of higher-priced, high strength products in overseas markets combined with the impact of a price increase that went into effect in July 2004 and an increase in pass-through charges for resin-coating of proppant shipped to the North Sea and Russia. Revenues for the third quarter of 2004 include a record $7.8 million from Pinnacle Technologies, Inc. compared to $3.6 million for the third quarter of 2003. The increase in Pinnacle revenue is due largely to increased fracture mapping activity in the Rocky Mountain and North Texas markets.
Gross Profit. Gross profit for the third quarter of 2004 was $25.4 million, or 43% of sales, compared to $17.8 million, or 41% of sales, for the third quarter of 2003. The increase in gross profit margin was primarily due to increased sales of higher-margin ceramic proppant products, the effect of a price increase implemented during the quarter and record quarterly results of Pinnacle Technologies, Inc. Plant utilization improved slightly, as manufacturing facilities operated at 103% of manufacturing capacity versus 97% during last year’s third quarter. However, this improvement in utilization had minimal impact on improving gross profit margins due to the effect of a higher cost of natural gas consumed in production. The delivered cost of natural gas used in manufacturing averaged $6.91/mmbtu for the quarter compared to $5.91/mmbtu for the third quarter of 2003.
Selling, General and Administrative (SG&A) and Other Operating Expenses. Selling, general and administrative expenses totaled $7.3 million for the third quarter of 2004 and $4.9 million for the corresponding period in 2003. The increase was primarily due to greater marketing and administrative expenses necessary to support higher sales activity and increased business development activities in Russia.
9
Income Tax Expense. Income tax expense of $6.7 million for the quarter ended September 30, 2004 increased 39% over the third quarter of 2003 primarily due to the increase in taxable income resulting from the Company’s improved performance. The effective income tax rate of 36.8% of pretax income decreased slightly from 37.2% in the third quarter of 2003 due to an increase in tax exempt interest income.
Nine Months Ended September 30, 2004
Revenues. Revenues of $160.8 million for the nine-month period ended September 30, 2004 exceeded revenues of $121.2 million for the same period in 2003 by 33%. The growth was driven primarily by a 27% increase in ceramic proppant sales volume, with worldwide sales totaling 524 million pounds. North American sales volume increased 13% compared to the first nine months of 2003, including an 8% increase in the U.S. and a 38% increase in Canada. Overseas sales grew 74% over the nine-month period ended September 30, 2003 and accounted for 30% of sales volume in the first nine months of 2004 versus 22% for the same period in 2003. Most of the growth occurred in the Russian market, with noteworthy growth also occurring in the North Sea. The average selling price per pound of ceramic proppant for the first nine months of 2004 was $0.277 versus $0.269 for the comparable period in 2003. The increase is mainly due to the increase in sales of higher-priced, high strength products in overseas markets. Revenues for the first nine months of 2004 also included $15.9 million from Pinnacle Technologies, Inc. compared to $9.9 million for the same period in 2003.
Gross Profit. Gross profit for the nine months ended September 30, 2004 was $68.0 million, or 42% of revenues, compared to $47.3 million, or 39% of revenues, for the same period in 2003. Improved utilization of manufacturing plants, increased sales of higher-margin ceramic proppants and improved performance by Pinnacle Technologies, Inc. contributed to the increased margin compared to the first nine months of 2003. The Company operated at approximately 98% of manufacturing capacity year-to-date in 2004 compared to 87% during the same period in 2003.
Selling, General and Administrative (SG&A) and Other Operating Expenses. Selling, general and administrative expenses totaled $19.2 million for the nine months ended September 30, 2004 compared to $14.2 million for the nine months ended September 30, 2003. The increase was primarily due to greater marketing and administrative expenses necessary to support higher sales activity, increased business development activities in Russia and increased research and product development activities. Other operating expenses in 2003 include a $0.7 million write-off for equipment disposed of during the expansion of the McIntyre manufacturing facility. In addition start-up costs of $0.1 million in 2003 related to expansion of the McIntyre and New Iberia facilities and initial operation of the China facility that was completed near the end of 2002.
Income Tax Expense. Income tax expense of $18.3 million for the nine months ended September 30, 2004 increased 52% over the nine months ended September 30, 2003 due to the increase in taxable income resulting from the Company’s improved performance. The effective income tax rate of 37.1% of pretax income decreased slightly from 37.3% in 2003.
Financial Condition
Liquidity and Capital Resources
Cash and cash equivalents totaled $63.7 million as of September 30, 2004, an increase of $25.0 million from December 31, 2003. The Company generated $38.0 million cash from operations and received $5.7 million from employee exercises of stock options. Uses of cash included capital spending of $13.7 million and cash dividends of $5.0 million. Capital spending on major projects includes $2.5 million for expansion of the China facility and $3.7 million toward a new manufacturing facility to be constructed in Wilkinson County, Georgia.
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. Effective July 2004, the Company increased the list price on each of its proppant products by $0.01 per pound but does not expect to realize the full benefit of the increase in 2004 due to existing long-term commitments to customers. While the outlook for Pinnacle Technologies, Inc. is favorable for the fourth quarter of 2004, it is unlikely that the record performance of the third quarter will be achieved due to the timing of projects scheduled for the fourth quarter.
10
During the fourth quarter of 2004, the Company will need to replace a portion of the calciner in its McIntyre, Georgia production facility. The calciner removes excess water from the locally-mined clay to prepare the clay for processing in the plant. This piece of equipment is failing prematurely and will need to have major components replaced. The repair should not impact production rates in the quarter but will result in higher operating costs and a non-cash write-off of approximately $0.7 million (on a pre-tax basis) for the remaining book value of the assets to be replaced.
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 October 20, 2004, 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 $11.0 million to $14.0 million for the remainder of 2004, including spending of approximately $11.0 million on a new manufacturing facility in Wilkinson County, Georgia, construction of which is expected to be complete by the end of 2005. The new Georgia plant is designed to have initial annual capacity of 250 million pounds at an expected total cost of $62.0 million. Permitting work on the new facility is progressing on schedule; and initial clearing and grading of the property has begun. The Company broke ground on the facility in October 2004.
The Company maintains an unsecured line of credit of $10.0 million. As of September 30, 2004, there was no outstanding debt under the credit agreement. The Company anticipates that cash on hand, cash provided by operating activities and funds available under its line of credit will be sufficient to meet planned operating expenses, tax obligations and capital expenditures for the next 12 months. The Company also believes that it could acquire additional debt financing, if needed. Based on these assumptions, we believe that the Company’s fixed costs could be met even with a moderate decrease in demand for the Company’s products.
Contractual Obligations
The following table summarizes the Company’s contractual obligations as of September 30, 2004:
| Payments due in period |
||||||||||||||||||||
| ($ in thousands) | Less than | 1 - 3 | 4 - 5 | More than | ||||||||||||||||
| Total |
1 year |
years |
years |
5 years |
||||||||||||||||
Operating lease obligations: |
||||||||||||||||||||
- Primarily railroad
equipment |
$ | 4,431 | $ | 1,428 | $ | 2,097 | $ | 628 | $ | 278 | ||||||||||
Purchase obligations: |
||||||||||||||||||||
- Natural gas contracts |
7,726 | 7,726 | — | — | — | |||||||||||||||
- Raw materials contracts |
8,100 | 6,480 | 1,620 | — | — | |||||||||||||||
Total contractual obligations |
$ | 20,257 | $ | 15,634 | $ | 3,717 | $ | 628 | $ | 278 | ||||||||||
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 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
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September 30, 2004. 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, 2004, 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 September 30, 2004, 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 that 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.
(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, 2004 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
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
a. Exhibits
The following exhibits are filed as part of the Quarterly Report on Form 10-Q:
| Exhibits |
||
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: October 29, 2004
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