e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 0-28178
CARBO Ceramics Inc.
(Exact name of registrant as
specified in its charter)
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DELAWARE
(State or other
jurisdiction of
incorporation or organization)
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72-1100013
(I.R.S. Employer
Identification Number)
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6565 MacArthur Boulevard
Suite 1050
Irving, Texas 75039
(Address of principal executive
offices)
(972) 401-0090
(Registrants telephone
number)
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, par value $0.01 per share
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer (as defined in
Rule 12b-2
of the Act).
Large Accelerated
File 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
Act). Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the closing sale
price of the Common Stock on June 30, 2006 as reported on
the New York Stock Exchange, was approximately $834,494,000.
Shares of Common Stock held by each officer and director and by
each person who owns 10% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 16, 2007, Registrant had outstanding
24,436,380 shares of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrants Annual
Meeting of Shareholders to be held April 17, 2007, are
incorporated by reference in Parts II and III.
TABLE OF CONTENTS
PART I
General
CARBO Ceramics Inc. (the Company) is the
worlds largest producer and supplier of ceramic proppant
and the largest provider of fracture and reservoir diagnostic
services and fracture simulation software through its
subsidiary, Pinnacle Technologies, Inc. (Pinnacle).
The Company sells its products and services to operators of oil
and gas wells and to oilfield service companies to help increase
the production rates and the amount of oil and gas ultimately
recoverable from these wells. The Companys products and
services are primarily used in the hydraulic fracturing of
natural gas and oil wells.
Hydraulic fracturing is the most widely used method of
increasing production from oil and gas wells. The hydraulic
fracturing process consists of pumping fluids down a natural gas
or oil well at pressures sufficient to create fractures in the
hydrocarbon-bearing rock formation. A granular material, called
proppant, is suspended and transported in the fluid and fills
the fracture, propping it open once high-pressure
pumping stops. The proppant-filled fracture creates a permeable
channel through which the hydrocarbons can flow more freely from
the formation to the well and then to the surface.
There are three primary types of proppant that can be utilized
in the hydraulic fracturing process: sand, resin-coated sand and
ceramic. Sand is the least expensive proppant, resin-coated sand
is more expensive and ceramic proppant is typically the highest
cost. The higher initial cost of ceramic proppant is justified
by the fact that the use of these proppants in certain well
conditions results in an increase in the production rate of oil
and gas, an increase in the total oil or gas that can be
recovered from the well and, consequently, an increase in cash
flow for the operators of the well. The increased production
rates are primarily attributable to the higher strength and more
uniform size and shape of ceramic proppant versus alternative
materials.
Pinnacle provides fracture and reservoir diagnostic services,
sells fracture simulation software and provides fracture design
services to oil and gas companies worldwide. Using proprietary
technology and software, Pinnacle can map fractures as they are
created, providing well operators with key information regarding
the dimensions and orientation of the fracture. This information
is vital to optimizing the design of individual fracture
treatments in a reservoir and for well placement within a field.
The Company currently estimates that less than 3% of wells
fractured worldwide utilize fracture diagnostics.
Demand for ceramic proppant and fracture diagnostic services
depends primarily upon the demand for natural gas and oil and on
the number of natural gas and oil wells drilled, completed or
re-completed worldwide. More specifically, the demand for the
Companys products and services is dependent on the number
of oil and gas wells that are hydraulically fractured to
stimulate production.
The Company conducts its business within two operating segments:
1) Proppant and 2) Fracture and Reservoir Diagnostics.
Financial information about these operating segments is provided
in Note 10 to the Companys Consolidated Financial
Statements.
The Company manufactures primarily four distinct ceramic
proppants.
CARBOHSP®
and
CARBOPROP®
are premium priced, high strength proppants designed primarily
for use in deep gas wells.
CARBOHSP®
was the original ceramic proppant and was introduced in 1979.
The Company continues to manufacture and sell an improved
version of this original product.
CARBOHSP®
has the highest strength of any of the ceramic proppants
manufactured by the Company and is used primarily in the
fracturing of deep gas wells.
CARBOPROP®,
which was introduced by the Company in 1982, is slightly lower
in weight and strength than
CARBOHSP®
and was developed for use in deep gas wells that do not require
the strength of
CARBOHSP®.
CARBOLITE®
and
CARBOECONOPROP®
are lightweight proppants designed for use in gas wells of
moderate depth and shallower oil wells.
CARBOLITE®,
introduced in 1984, is used in medium depth oil and gas wells,
where the additional strength of ceramic proppant may not be
essential, but where higher production rates can be achieved due
to the products uniform size and spherical shape.
CARBOLITE®
is the Companys product most commonly used in oil wells.
CARBOECONOPROP®,
introduced in 1992 to compete directly with sand-based
1
proppant, is the Companys lowest priced product and sales
volume of this product has grown at a faster rate than the
Companys other ceramic proppants. The introduction of
CARBOECONOPROP®
has resulted in ceramic proppant being used by operators of oil
and gas wells that had not previously used ceramics.
Based on the Companys internally generated market
information the Company estimates that it supplies approximately
36% of the ceramic proppant and 6% of all proppant used
worldwide. During the year ended December 31, 2006, the
Company generated approximately 66% of its revenues in the U.S.
and 34% in international markets.
The services and products offered through the Companys
fracture and reservoir diagnostics operating segment consist
primarily of fracture mapping services that utilize proprietary
technology and software to determine the geometry of hydraulic
fractures. Operators of oil and gas wells use this information
to improve fracture design and to determine optimal well
placement within a reservoir. The optimization of fracture
design and well placement can be instrumental in increasing the
amount of oil or gas that is produced from a reservoir and can
reduce overall reservoir development costs. The Companys
fracture and reservoir diagnostics operating segment also
provides services to monitor the long-term flow of fluids
through a reservoir; fracture engineering and design services as
well as developing and selling the most widely used software
system to aid in the design of hydraulic fractures.
Competition
In the Proppant segment, the Companys largest worldwide
competitor is Saint-Gobain Proppants (Saint-Gobain),
formerly Norton Proppants. Saint-Gobain Proppants is a division
of Compagnie de Saint-Gobain, a large French glass and materials
company. Saint-Gobain manufactures a variety of high-strength
and intermediate strength ceramic proppants that it markets in
competition with each of the Companys products.
Saint-Gobains primary manufacturing facility is located in
Fort Smith, Arkansas. Saint-Gobain also manufactures
ceramic proppant in China and has announced plans to construct a
manufacturing facility in South America. Mineracao Curimbaba
(Curimbaba), based in Brazil, manufactures
bauxite-based products similar to the Companys
CARBOHSP®
and
CARBOPROP®
products, and markets those products primarily in the United
States. Curimbaba introduced its intermediate strength ceramic
proppant in the United States upon the expiration of the
intermediate strength proppant patent held by the Company in
November 2006.
There are two manufacturers of ceramic proppant in Russia.
Borovichi Refractory Plant (Borovichi) located in
Borovichi, Russia, and FORES Refractory Plant
(FORES) located in Ekaterinburg, Russia. While the
Company has limited information about Borovichi and FORES, the
Company believes that each of these companies currently
manufactures primarily intermediate strength ceramic proppants
and markets their products within Russia. The Company also
believes that these companies have added manufacturing capacity
in recent years and now provide a majority of the ceramic
proppant used in Russia. The Company is also aware of an
increasing number of manufacturers in China. The two largest of
these are Yixing Orient Petroleum Proppant Company, Ltd. and
GuiZhou LinHai New Material Company, Ltd. Each of these
companies produces intermediate strength ceramic proppants that
are marketed primarily in China.
Competition for
CARBOHSP®
and
CARBOPROP®
principally includes ceramic proppant manufactured by
Saint-Gobain, Curimbaba and Borovichi. The Companys
CARBOLITE®
and
CARBOECONOPROP®
products compete primarily with ceramic proppant produced by
Saint-Gobain and with sand-based proppant for use in the
hydraulic fracturing of medium depth natural gas and oil wells.
The leading suppliers of mined sand are Unimin Corp., Badger
Mining Corp., Fairmount Minerals Limited, Inc., and
Ogelbay-Norton Company. The leading suppliers of resin-coated
sand are Hexion Specialty Chemicals, Inc. (formerly Borden
Chemical, Inc. Oilfield Products Group) and Santrol, a
subsidiary of Fairmount Minerals.
The Company believes that the most significant factors that
influence a customers decision to purchase the
Companys ceramic proppant are (i) price/performance
ratio, (ii) on-time delivery performance,
(iii) technical support and (iv) proppant
availability. The Company believes that its products are
competitively priced and that its delivery performance is
excellent. The Company also believes that its superior technical
support has enabled it to
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persuade customers to use ceramic proppant in an increasingly
broad range of applications and thus increased the overall
market for the Companys products. Since 1993, the Company
has consistently expanded its manufacturing capacity and plans
to continue its strategy of adding capacity to meet anticipated
future increases in sales demand. By the end of 2007, the
Company will have expanded its proppant manufacturing capacity
by 80% in a two-year period.
The Company continually conducts testing and development
activities with respect to alternative raw materials to be used
in the Companys existing and alternative production
methods. The Company is actively involved in the development of
alternative products for use as proppant in the hydraulic
fracturing process and is aware of others engaged in similar
development activities. The Company believes that while there
are potential specialty applications for these products, they
will not significantly impact the use of ceramic proppants. The
Company believes that the main barriers to entry into the
ceramic proppant industry are the patent rights held by the
Company and certain of its current competitors along with the
know-how and trade secrets necessary to efficiently
manufacture a product of consistently high quality.
In 1993, Pinnacle was the first company to offer a successful
commercial fracture diagnostic service utilizing tiltmeters to
directly measure movements in the surface of the earth that
occur when a fracture is created. Pinnacle has continued to
improve the technology to map fractures and currently utilizes
these near surface tiltmeters as well as tiltmeters and
microseismic tools that are deployed downhole in either the well
that is being fractured or a nearby observation well. A number
of oilfield service companies are attempting to develop
competing fracture mapping services.
A customers decision to use fracture mapping services is
based on the customers understanding of the economic
benefits derived from knowing the dimensions and orientation of
the fracture. The Company believes that currently less than 3%
of all wells that are hydraulically fractured utilize fracture
mapping services and, as such, there is a significant
opportunity for growth in this business. The Company believes
that the primary factors that influence a customers
decision to utilize the Companys services are the
cost/benefit ratio of applying mapping technologies, the variety
of technologies that can be deployed in measuring the fracture
and the Companys expertise in interpreting the data
gathered.
Customers
and Marketing
The Companys largest customers for ceramic proppant are,
in alphabetical order, BJ Services Company, Halliburton Energy
Services, Inc. and Schlumberger Limited, the three largest
participants in the worldwide petroleum pressure pumping
industry. These companies collectively accounted for
approximately 70% and 65% of the Companys 2006 and 2005
revenues, respectively. However, the end users of the
Companys products are the operators of natural gas and oil
wells that hire the pressure pumping service companies to
hydraulically fracture wells. The Company works both with the
pressure pumping service companies and directly with the
operators of natural gas and oil wells to present the technical
and economic advantages of using ceramic proppant. The Company
generally supplies its customers with products on a
just-in-time
basis, with transactions governed by individual purchase orders.
Continuing sales of product depend on the Companys direct
customers and the well operators being satisfied with both
product quality and delivery performance. The Company sells its
fracture and reservoir diagnostic services directly to owners
and/or
operators of oil and gas wells.
The Company recognizes the importance of a technical marketing
program in demonstrating long-term economic advantages when
selling products and services that offer financial benefits over
time. The Company markets its products both to oilfield service
companies and to owners and operators of natural gas and oil
wells. The Company markets its fracture and reservoir diagnostic
services directly to owners
and/or
operators of oil and gas wells. While the Company has
historically marketed its products and services through separate
marketing channels, the Company believes that both of its
operating segments can benefit from a combined marketing
approach that offers its customers product and service solutions
for specific reservoirs. The Company has taken steps to
facilitate this combined marketing approach including appointing
a single corporate officer over the marketing activities of both
operating segments and constructing a new building to house the
sales personnel of both operating segments. The Company plans to
increase the size of its technical sales force to advise end
users on the benefits of using ceramic proppant and performing
fracture and reservoir diagnostic services.
3
While the Companys products have historically been used in
very deep wells that require high-strength proppant, the Company
believes that there is economic benefit to well operators of
using ceramic proppant in shallower wells that do not
necessarily require a high-strength proppant. The Company
believes that its education-based technical marketing efforts
have allowed it to capture a greater portion of the market for
sand-based proppant in recent years and will continue to do so
in the future.
The Company provides a variety of technical support services and
has developed computer software that models the return on
investment achievable by using the Companys ceramic
proppant versus other proppant in the hydraulic fracturing of a
natural gas or oil well. In addition to the increased technical
marketing effort, the Company has engaged in large-scale field
trials to demonstrate the economic benefits of its products and
validate the findings of its computer simulations. Occasionally,
the Company provides proppant to production companies for field
trials, on a discounted basis, in exchange for a production
companys agreement to provide production data for direct
comparison of the results of fracturing with ceramic proppant as
compared to alternative proppants.
The Companys international marketing efforts in 2006 were
conducted through its sales offices in Aberdeen, Scotland, and
Moscow, Russia, through commissioned sales agents located in
South America, China and Australia, and through a distributor in
Saudi Arabia.
The Companys products and services are used worldwide by
U.S. customers operating domestically and abroad, and by
foreign customers. Sales outside the United States accounted for
34%, 40% and 47% of the Companys sales for 2006, 2005 and
2004, respectively. The decreases in international sales in 2006
and 2005 were primarily attributable to decreased demand for the
Companys products in Russia. The primary reason for the
sales decline in Russia was an increase in the availability of
locally produced proppant, the pricing of which excludes the
customs duties, tariffs and transportation expenses associated
with imported products. The Company is addressing this situation
through the construction of a manufacturing facility in Kopeysk,
Russia. The distribution of the Companys international and
domestic revenues is shown below, based upon the region in which
the customer used the products and services:
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For the Years Ended December 31,
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2006
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2005
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2004
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($ in millions)
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Location
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United States
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$
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205.0
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$
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152.6
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$
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118.7
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International
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107.1
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100.1
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104.4
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Total
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$
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312.1
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$
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252.7
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$
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223.1
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Distribution
The Company maintains finished goods inventories at its plants
in New Iberia, Louisiana; Eufaula, Alabama; McIntyre, Georgia;
Toomsboro, Georgia; and Luoyang, China; and at 13 remote
stocking facilities located in Rock Springs, Wyoming; Oklahoma
City, Oklahoma; San Antonio, Texas; Shreveport, Louisiana;
Williston, North Dakota; Edmonton, Alberta, Canada; Grande
Prairie, Alberta, Canada; Rotterdam, The Netherlands; Jebel Ali,
United Arab Emirates; Adelaide, Australia; Tianjin, China;
Surgut, Russia; and Singapore. The North American remote
stocking facilities consist of bulk storage silos with truck
trailer loading facilities as well as rail yards for direct
transloading from rail car to tank trucks. The Company owns the
facilities in San Antonio, Rock Springs, Edmonton and
Grande Prairie and subcontracts the operation of the facilities
and transportation to a local trucking company in each location.
The remaining North American stocking facilities are owned and
operated by local companies under contract with the Company.
International remote stocking sites are duty-free warehouses
operated by independent owners. North American sites are
typically supplied by rail, and international sites are
typically supplied by container ship. In total, the Company
leases 590 rail cars for use in the distribution of its
products. The price of the Companys products sold for
delivery in the lower 48 United States and Canada includes
just-in-time
delivery of proppant to the operators well site, which
eliminates the need for customers to maintain an inventory of
ceramic proppant.
4
Raw
Materials
Ceramic proppant is made from alumina-bearing ores (commonly
referred to as clay, bauxite, bauxitic clay or kaolin, depending
on the alumina content) that are readily available on the world
market. Bauxite is largely used in the production of aluminum
metal, refractory material and abrasives. The main known
deposits of alumina-bearing ores in the United States are in
Arkansas, Alabama and Georgia; other economically mineable known
deposits are located in Australia, Brazil, China, Gabon, India,
Jamaica, Russia and Surinam.
For the production of
CARBOHSP®
and
CARBOPROP®
in the United States the Company uses imported bauxite, and
typically purchases its annual requirements at the sellers
current prices. The Company has historically purchased bauxite
from a single supplier in Australia. However, this supplier has
informed the Company that it intends to exit this business at
the end of 2007. The Company is actively evaluating alternative
suppliers and expects to have an agreement in place to purchase
future bauxite requirements by mid-year 2007.
The Companys Eufaula facility uses primarily locally mined
kaolin for the production of
CARBOLITE®
and
CARBOECONOPROP®.
The Company has entered into a contract that requires a supplier
to sell to the Company up to 200,000 net tons of kaolin per
year and the Company to purchase from the supplier 70% of the
Eufaula facilitys annual kaolin requirements through 2010.
The Companys two production facilities in Wilkinson
County, Georgia, use locally mined uncalcined kaolin for the
production of
CARBOECONOPROP®.
During 2002 and 2003, the Company acquired on both a fee simple
and leasehold basis, acreage in Wilkinson County, Georgia, which
contains approximately 12 million tons of raw material
suitable for production of
CARBOLITE®
and
CARBOECONOPROP®.
At 2007 planned production rates the acquired raw material would
supply the needs of the two Georgia facilities for a period of
approximately 30 years. The Company has entered into a
long-term agreement with a third party to mine and transport
this material at a fixed price subject to annual adjustment. The
agreement requires the Company to utilize the third party to
mine and transport at least 80% of the McIntyre facilitys
annual kaolin requirement.
The Companys production facility in Luoyang, China, uses
kaolin and bauxite for the production of
CARBOPROP®
and
CARBOLITE®.
Each of these materials is purchased under long-term contracts
that stipulate fixed prices subject to periodic adjustment.
Under the terms of the agreement covering the purchase of
bauxite, the Company has an obligation to purchase, in total, a
minimum of 10,000 metric tons of bauxite per year or 100% of its
annual requirements for bauxite if it purchases less than 10,000
metric tons per year. Under the terms of the agreement covering
the purchase of kaolin, the Company has an obligation to
purchase a minimum of 80% of its annual requirement for kaolin
from a single supplier.
Production
Process
Ceramic proppants are made by grinding or dispersing ore to a
fine powder, combining the powder into small pellets and firing
the pellets in a rotary kiln. The Company uses two different
methods to produce ceramic proppant. The Companys plants
in New Iberia, Louisiana, McIntyre, Georgia, and Luoyang, China,
use a dry process (the Dry Process) which utilizes
clay, bauxite, bauxitic clay or kaolin. The raw material is
ground, pelletized and screened. The manufacturing process is
completed by firing the product in a rotary kiln. The Company
believes its competitors also use some form of the Dry Process
to produce their ceramic proppant.
The Companys plants in Eufaula, Alabama, and Toomsboro,
Georgia, use a wet process (the Wet Process), which
starts with kaolin from local mines which is formed into a
slurry. The slurry is then pelletized in a dryer and the pellets
are then fired in a rotary kiln. The Company believes it is the
only company in the ceramic proppant industry that utilizes the
Wet Process.
Patent
Protection and Intellectual Property
The Company makes ceramic proppant and ceramic media used in
foundry and scouring processes (the later two items comprising a
minimal volume of overall sales) by processes and techniques
that involve a high degree of proprietary technology, some of
which are protected by patents.
5
The Company owns four U.S. patents, two Russian patents,
and one Argentinean patent. One of the Companys
U.S. patents relates to the
CARBOLITE®
and
CARBOECONOPROP®
products and will expire in 2009. Another of the Companys
U.S. patents relates to the
ULTRALITE®
product, a low-apparent specific gravity ceramic proppant, and
will expire in 2022. Another of the Companys
U.S. patents relates to
TiO2
scouring media, a titanium-based media used in scouring
processes, and will expire in 2023. The Companys Russian
patents relate to lightweight and intermediate strength
proppants that it intends to produce in its Russian
manufacturing facility. The Companys Argentinean patent
relates to the
CARBOPROP®
product and will expire in 2008.
The Company owns seven U.S. patent applications (together
with a number of counterpart applications pending in foreign
jurisdictions), as well as one Russian patent application
(together with a counterpart application pending in a foreign
jurisdiction) that cover ceramic proppant and processes for
making ceramic proppant. The Company also owns two
U.S. patent applications (together with a number of
counterpart applications pending in foreign jurisdictions) that
cover scouring and grinding media, and processes for their
preparation. The Company also owns two U.S. patent
applications (together with a number of counterpart applications
pending in foreign jurisdictions) that cover ceramic foundry
media, and processes for making ceramic foundry media. The
applications are in various stages of the patent prosecution
process, and patents may not issue on such applications in any
jurisdiction for some time, if they issue at all.
The Company believes that its patents have been and will
continue to be important in enabling the Company to compete in
the market to supply proppant to the natural gas and oil
industry. The Company intends to enforce, and has in the past
vigorously enforced, its patents. The Company is currently, as
described below under Item 3. Legal
Proceedings, and may from time to time in the future be,
involved in litigation to determine the enforceability, scope
and validity of its patent rights. Past disputes with the
Companys main competitors have been resolved in
settlements that permit the Company to continue to benefit fully
from its patent rights. The Company and one of these competitors
have cross-licensed certain of their respective patents relating
to intermediate and low density proppant on both a royalty-free
and royalty-bearing basis. Royalties under these licenses are
not material to the Companys financial results. As a
result of these cross licensing arrangements, the Company is
able to produce a broad range of ceramic proppant while third
parties are unlikely, during the term of such patents, to be
able to produce certain of these ceramic proppants without
infringing on the patent
and/or
licensing rights held by the Company, the above-referenced
competitor or both. In addition to patent rights, the Company
uses a significant amount of trade secrets, or
Know-how, and other proprietary information and
technology in the conduct of its business. None of this
Know-how and technology is licensed to or from third
parties.
Pinnacle provides engineering services to the energy industry,
using processes and techniques that involve a high degree of
proprietary technology, some of which are protected by patents.
Pinnacle owns seven U.S. patents, one of which is co-owned
with Halliburton Energy Services, Inc. Some of these
U.S. patents are licensed to third parties; however such
licenses are not material to Pinnacles financial results.
Two of these U.S. patents relate to systems and methods for
determining the orientation of natural fractures using sensors
in observation wells to receive and evaluate signals indicative
of microseismic events and movement along the surface of the
fractures. One of these patents expires in 2018 and the other
expires in 2023. The U.S. patent that is co-owned with
Halliburton Energy Services, Inc. relates to methods of
fracturing a formation using tiltmeters to detect dimensions of
the fracture, and comparing the measured magnitude of the
fracture dimension with a predetermined modeled magnitude of the
same fracture dimension. This patent expires in 2023. Another of
Pinnacles U.S. patents, which will expire in 2018,
relates to systems for facilitating information retrieval while
drilling a well that include fiber optic cables adapted for
insertion into a drill string. Another of Pinnacles
U.S. patents will expire in 2017 and relates to systems for
monitoring fracturing that include vertical tilt array
and/or
linear sensing arrays. Another of Pinnacles
U.S. patents relates to microseismic event detectors that
analyze microseismic waves sensed at receiver stations. This
patent expires in 2016. Another of Pinnacles
U.S. patents will expire in 2021 and relates to a treatment
well tiltmeter system that includes one or more tiltmeter
assemblies located within an active treatment well.
Pinnacle also owns four U.S. patent applications (together
with a number of counterparts pending in foreign jurisdictions)
that relate to certain of its proprietary systems and methods
for monitoring and analyzing microseismic events and fractures.
The patent applications are in various stages of the patent
prosecution process, and patents may not issue on such
applications in any jurisdiction for some time, if they issue at
all. Pinnacle also licenses
6
several patents from third parties for use in its business. In
addition to patent rights, Pinnacle uses a significant amount of
Know-how and other proprietary technology in the
conduct of its business, and a substantial portion of this
Know-how and technology is licensed by Pinnacle from
third parties.
Production
Capacity
The Company believes that constructing adequate capacity ahead
of demand while incorporating new technology to reduce
manufacturing costs are important competitive strategies to
increase its overall share of the market for proppant. Prior to
1993, the Companys production capacity was in excess of
its sales requirements. Since that time, the Company has been
expanding its capacity in order to meet the generally increasing
demand for its products. Between 1993 and 1996, through facility
construction and modification, as well as permit revisions, the
Company increased the capacity of its Eufaula and New Iberia
facilities to a total of 380 million pounds per year
collectively. Between mid-1999 and early 2003, the Company
constructed and subsequently expanded its manufacturing facility
in McIntyre, Georgia, which currently has the capacity to
manufacture 275 million pounds per year. The Companys
manufacturing facility in Luoyang, China, was completed in 2002
and expanded in 2004, to its current annual capacity of
100 million pounds.
In early 2006, the Company completed construction of a
250 million pounds per year manufacturing facility in
Toomsboro, Georgia at a cost of $61.3 million. This plant
efficiently produces high volumes of the Companys
low-cost, lightweight
CARBOECONOPROP®,
and is designed to accommodate future expansion to a capacity of
up to one billion pounds per year through the construction of up
to three additional production lines. Construction of the second
production line commenced in 2006 and is expected to be complete
in the third quarter of 2007. The addition of subsequent lines
will be dependent on the expected future demand for the
Companys products.
The Company initiated construction of a manufacturing facility
in Kopeysk, Russia, in June 2005. This facility is expected to
be completed in the first quarter of 2007 and is designed to
have an annual capacity of 100 million pounds when fully
operational.
The following table sets forth the current capacity of each of
the Companys existing manufacturing facilities:
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Annual
|
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|
Location
|
|
Capacity
|
|
|
Products
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|
(Millions of pounds)
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|
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|
|
New Iberia, Louisiana
|
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120
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|
|
CARBOHSP®
and
CARBOPROP®
|
Eufaula, Alabama
|
|
|
260
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|
|
CARBOLITE®
and CARBOECONOPROP®
|
McIntyre, Georgia
|
|
|
275
|
|
|
CARBOLITE®,
CARBOECONOPROP®
|
|
|
|
|
|
|
CARBOHSP®
and
CARBOPROP®
|
Toomsboro, Georgia
|
|
|
250
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|
CARBOECONOPROP®
|
Luoyang, China
|
|
|
100
|
|
|
CARBOPROP®
and
CARBOLITE®
|
|
|
|
|
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Total current capacity
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|
1,005
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|
|
|
The Company generally supplies its domestic pumping service
customers with products on a
just-in-time
basis and operates without any material backlog.
Long-Lived
Assets By Geographic Area
Long-lived assets, consisting of net property, plant and
equipment, goodwill and intangibles, as of December 31 in
the United States and other countries are as follows:
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|
|
|
|
|
|
|
|
|
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|
2006
|
|
|
2005
|
|
|
2004
|
|
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($ in millions)
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Long-lived assets:
|
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|
|
|
|
|
|
|
|
|
|
|
United States
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$
|
200.0
|
|
|
$
|
173.9
|
|
|
$
|
134.2
|
|
International (primarily China and
Russia)
|
|
|
58.8
|
|
|
|
31.6
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
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$
|
258.8
|
|
|
$
|
205.5
|
|
|
$
|
151.2
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|
|
|
|
|
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7
Risks associated with the Companys international
operations are described under Item 1A. Risk
Factors Our international operations subject us to
risks inherent in doing business on an international level that
could adversely impact our results of operations.
Environmental
and Other Governmental Regulations
The Company believes that its operations are in substantial
compliance with applicable domestic and foreign federal, state
and local environmental and safety laws and regulations.
However, on January 26, 2007, following self-disclosure of
certain air pollution emissions, the Company received a Notice
of Violation (NOV) from the State of Georgia
Department of Environmental Protection regarding appropriate
permitting for emissions of two specific substances from its
Toomsboro facility. The NOV calls for performance testing of
these emissions and further dialogue with the relevant
government agencies. The Company is assessing what impact,
financial or otherwise, that might result from the NOV, and does
not at this time have an estimate of costs associated with
compliance. Other than as potentially related to the NOV, the
Company does not anticipate any significant expenditure in order
to continue to comply with such laws and regulations.
Employees
At December 31, 2006, the Company had 630 employees
worldwide. In addition to the services of its employees, the
Company employs the services of consultants as required. The
Companys employees are not represented by labor unions.
There have been no work stoppages or strikes during the last
three years that have resulted in the loss of production or
production delays. The Company believes its relations with its
employees are satisfactory.
Forward-Looking
Information
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. This
Form 10-K,
the Companys Annual Report to Shareholders, any
Form 10-Q
or any
Form 8-K
of the Company or any other written or oral statements made by
or on behalf of the Company may include forward-looking
statements which reflect the Companys current views with
respect to future events and financial performance. The words
believe, expect, anticipate,
project and similar expressions identify
forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, each of
which speaks only as of the date the statement was made. The
Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. The Companys
forward-looking statements are based on assumptions that we
believe to be reasonable but that may not prove to be accurate.
All of the Companys forward-looking information is subject
to risks and uncertainties that could cause actual results to
differ materially from the results expected. Although it is not
possible to identify all factors, these risks and uncertainties
include the risk factors discussed below.
The Companys results of operations could be adversely
affected if its business assumptions do not prove to be accurate
or if adverse changes occur in the Companys business
environment, including but not limited to:
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a potential decline in the demand for oil and natural gas;
|
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potential declines or increased volatility in oil and natural
gas prices that would adversely affect our customers, the energy
industry or our production costs;
|
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potential reductions in spending on exploration and development
drilling in the oil and natural gas industry that would reduce
demand for our products and services;
|
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an increase in competition in the proppant market;
|
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|
the development of alternative stimulation techniques, such as
extraction of oil or gas without fracturing;
|
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|
the development of alternative proppants for use in hydraulic
fracturing;
|
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general global economic and business conditions;
|
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|
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fluctuations in foreign currency exchange rates; and
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8
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|
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the potential expropriation of assets by foreign governments.
|
The Companys results of operations could also be adversely
affected as a result of worldwide economic, political and
military events, including war, terrorist activity or
initiatives by the Organization of the Petroleum Exporting
Countries. For further information, see Item 1A. Risk
Factors.
Available
Information
The Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are made
available free of charge on the Companys internet website
at http://www.carboceramics.com as soon as reasonably
practicable after such material is filed with, or furnished to,
the Securities and Exchange Commission (SEC).
The public may read and copy any materials the Company files
with the SEC at the SECs Public Reference Room at 100 F
Street, Room 1580, N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC, at
http://www.sec.gov.
You should consider carefully the trends, risks and
uncertainties described below and other information in this
Form 10-K
and subsequent reports filed with the SEC before making any
investment decision with respect to our securities. If any of
the following trends, risks or uncertainties actually occurs or
continues, our business, financial condition or operating
results could be materially adversely affected, the trading
prices of our securities could decline, and you could lose all
or part of your investment.
Our
business and financial performance depend on the level of
activity in the natural gas and oil industries.
Our operations are materially dependent upon the levels of
activity in natural gas and oil exploration, development and
production. These activity levels are affected by both
short-term and long-term trends in natural gas and oil prices.
In recent years, natural gas and oil prices and, therefore, the
level of exploration, development and production activity, have
experienced significant fluctuations. Worldwide economic,
political and military events, including war, terrorist
activity, events in the Middle East and initiatives by the
Organization of Petroleum Exporting Countries, have contributed,
and are likely to continue to contribute, to price volatility. A
prolonged reduction in natural gas and oil prices would depress
the level of natural gas and oil exploration, development,
production and well completions activity and result in a
corresponding decline in the demand for our products. Such a
decline could have a material adverse effect on our results of
operations and financial condition.
Our
business and financial performance could suffer if new processes
are developed to replace hydraulic fracturing.
Substantially all of our products are proppants used in the
completion and re-completion of natural gas and oil wells
through the process of hydraulic fracturing. The development of
new processes for the completion of natural gas and oil wells
leading to a reduction in or discontinuation of the use of the
hydraulic fracturing process could cause a decline in demand for
our products and could have a material adverse effect on our
results of operations and financial condition.
We may
be adversely affected by decreased demand for ceramic proppant
or the development by our competitors of effective alternative
proppants.
Ceramic proppant is a premium product capable of withstanding
higher pressure and providing more highly conductive fractures
than mined sand, which is the most commonly used proppant type.
Although we believe that the use of ceramic proppant generates
higher production rates and more favorable production economics
than mined sand, a significant shift in demand from ceramic
proppant to mined sand could have a material adverse effect on
our
9
results of operations and financial condition. The development
and use of effective alternative proppant could also cause a
decline in demand for our products, and could have a material
adverse effect on our results of operations and financial
condition.
We
rely upon, and receive a significant percentage of our revenues
from, a limited number of key customers.
During 2006, our largest customers were, in alphabetical order,
BJ Services Company, Halliburton Energy Services, Inc. and
Schlumberger Limited, the three largest participants in the
worldwide petroleum pressure pumping industry. Although the end
users of our products are numerous operators of natural gas and
oil wells that hire the pressure pumping service companies to
hydraulically fracture wells, these three customers accounted
collectively for approximately 70% of our 2006 revenues. We
generally supply our domestic pumping service customers with
products on a
just-in-time
basis, with transactions governed by individual purchase orders.
Continuing sales of product depend on our direct customers and
the end user well operators being satisfied with both product
quality and delivery performance. Although we believe our
relations with our customers and the major well operators are
satisfactory, a material decline in the level of sales to any
one of our major customers due to unsatisfactory product
performance, delivery delays or any other reason could have a
material adverse effect on our results of operations and
financial condition.
We
rely on certain patents.
We own four United States patents and one Argentinean patent
relating to ceramic proppant. These patents generally cover the
manufacture and use of our products. The U.S. patents
expire at various times in the years 2006 through 2019, with two
key product patents expiring in 2006 and one key patent expiring
in 2009. We believe that these patents have been and will
continue to be important in enabling us to compete in the market
to supply proppant to the natural gas and oil industry. There
can be no assurance that our patents will not be challenged or
circumvented by competitors in the future or will provide us
with any competitive advantage, or that other companies will not
be able to market functionally similar products without
violating our patent rights. In addition, if our patents are
challenged, there can be no assurance that they will be upheld.
The entry of additional competitors into the market to supply
ceramic proppant following expiration of our U.S. patent
rights could have a material adverse effect on our results of
operations and financial condition. In November of 2006, the
U.S. patent related to the Companys
CARBOPROP®
product expired. Given that only a limited period of time has
passed since the patents expiry, the Company has not yet
gathered sufficient data to provide projections on whether the
expiry will have a material impact on overall sales. We intend
to enforce and have in the past vigorously enforced our patents.
We are involved from time to time in litigation to determine the
enforceability, scope and validity of our patent rights.
We
operate in an increasingly competitive market.
We compete with at least two other principal suppliers of
ceramic proppant, as well as with suppliers of sand and
resin-coated sand for use as proppant, in the hydraulic
fracturing of natural gas and oil wells. The proppant market is
highly competitive and no one supplier is dominant. The
expiration of key patents owned by the Company may result in
additional competition in the market for ceramic proppant.
Significant
increases in fuel prices for any extended periods of time will
increase our operating expenses.
The price and supply of natural gas is unpredictable, and can
fluctuate significantly based on international political and
economic circumstances, as well as other events outside our
control, such as changes in supply and demand due to weather
conditions, actions by OPEC and other oil and gas producers,
regional production patterns and environmental concerns. Natural
gas is a significant component of our direct manufacturing costs
and price escalations will likely increase our operating
expenses and can have a negative impact on income from
operations and cash flows. We operate in a competitive
marketplace and may not be able to pass through all of the
increased costs that could result from an increase in the cost
of natural gas.
10
We are
exposed to increased costs associated with complying with
increasing and new regulation of corporate governance and
disclosure standards
We have expended significant resources to comply with changing
laws, regulations and standards relating to corporate governance
and public disclosure, including under the Sarbanes-Oxley Act of
2002, new SEC regulations and New York Stock Exchange rules. Our
compliance effort has resulted in increased expenses and these
expenses are expected to continue.
Environmental
compliance costs and liabilities could reduce our earnings and
cash available for operations.
We are subject to increasingly stringent laws and regulations
relating to environmental protection, including laws and
regulations governing air emissions, water discharges and waste
management. We incur, and expect to continue to incur, capital
and operating costs to comply with environmental laws and
regulations. The technical requirements of environmental laws
and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for strict
liability for damages to natural resources or threats to
public health and safety. Strict liability can render a party
liable for environmental damage without regard to negligence or
fault on the part of the party. Some environmental laws provide
for joint and several strict liability for remediation of spills
and releases of hazardous substances.
We use some hazardous substances and generate certain industrial
wastes in our operations. In addition, many of our current and
former properties are or have been used for industrial purposes.
Accordingly, we could become subject to potentially material
liabilities relating to the investigation and cleanup of
contaminated properties, and to claims alleging personal injury
or property damage as the result of exposures to, or releases
of, hazardous substances. In addition, stricter enforcement of
existing laws and regulations, new laws and regulations, the
discovery of previously unknown contamination or the imposition
of new or increased requirements could require us to incur costs
or become the basis of new or increased liabilities that could
reduce our earnings and our cash available for operations.
Our
international operations subject us to risks inherent in doing
business on an international level that could adversely impact
our results of operations.
International revenues accounted for approximately 34%, 40% and
47% of our total revenues in 2006, 2005 and 2004. We cannot
assure you that we will be successful in overcoming the risks
that relate to or arise from operating in international markets.
Risks inherent in doing business on an international level
include, among others, the following:
|
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|
|
|
economic and political instability (including as a result of the
threat or occurrence of armed international conflict or
terrorist attacks);
|
|
|
|
changes in regulatory requirements, tariffs, customs, duties and
other trade barriers;
|
|
|
|
transportation delays;
|
|
|
|
power supply shortages and shutdowns;
|
|
|
|
difficulties in staffing and managing foreign operations and
other labor problems;
|
|
|
|
currency rate fluctuations, convertibility and repatriation;
|
|
|
|
taxation of our earnings and the earnings of our personnel;
|
|
|
|
potential expropriation of assets by foreign
governments; and
|
|
|
|
other risks relating to the administration of or changes in, or
new interpretations of, the laws, regulations and policies of
the jurisdictions in which we conduct our business.
|
In particular, we are subject to risks associated with our
production facilities in Luoyang, China, and Kopeysk, Russia.
The legal systems in both China and Russia are still developing
and are subject to change. Accordingly, our operations and
orders for products in both countries could be adversely
impacted by changes to or interpretation of
11
each countrys law. Further, if manufacturing in either
region is disrupted, our overall capacity could be significantly
reduced and sales
and/or
profitability could be negatively impacted.
The
market price of our common stock will fluctuate, and could
fluctuate significantly.
The market price of the common stock will fluctuate, and could
fluctuate significantly, in response to various factors and
events, including the following:
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|
|
the liquidity of the market for our common stock;
|
|
|
|
differences between our actual financial or operating results
and those expected by investors and analysts;
|
|
|
|
changes in analysts recommendations or projections;
|
|
|
|
new statutes or regulations or changes in interpretations of
existing statutes and regulations affecting our business;
|
|
|
|
changes in general economic or market conditions; and
|
|
|
|
broad market fluctuations.
|
Our
actual results could differ materially from results anticipated
in forward-looking statements we make.
Some of the statements included or incorporated by reference in
this
Form 10-K
are forward-looking statements. These forward-looking statements
include statements relating to trends in the natural gas and oil
industries, the demand for ceramic proppant and our performance
in the Managements Discussion and Analysis of
Financial Condition and Results of Operations and
Business sections of this
Form 10-K.
In addition, we have made and may continue to make
forward-looking statements in other filings with the SEC, and in
written material, press releases and oral statements issued by
us or on our behalf. Forward-looking statements include
statements regarding the intent, belief or current expectations
of the Company or its officers. Our actual results could differ
materially from those anticipated in these forward-looking
statements. (See Business Forward-Looking
Information.)
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
The Company maintains its corporate headquarters (approximately
8,000 square feet of leased office space) in Irving, Texas,
owns its manufacturing facilities, land and substantially all of
the related production equipment in New Iberia, Louisiana, and
Eufaula, Alabama, and leases its McIntyre and Toomsboro,
Georgia, facilities through 2016, at which time title will be
conveyed to the Company. The Company owns the buildings and
production equipment at its facility in Luoyang, China, and has
been granted use of the land on which the facility is located
through 2051 under the terms of a land use agreement with the
Peoples Republic of China. In early 2007, the Company
completed construction of an office building in Houston, Texas
which houses the combined sales teams of the proppant and
Pinnacle units as well as certain of Pinnacles operations
(approximately 32,000 square feet located on
6.1 acres). The Company owns the buildings and production
equipment at its facility under construction in Kopeysk, Russia,
and leases the land on which the facility is located under the
terms of a lease agreement with the local government that
extends through 2055. The Company leases space for sales offices
in Aberdeen, Scotland and Moscow, Russia.
The New Iberia, Louisiana, facilities are located on
26.7 acres of land owned by the Company, and consist of two
production units, a laboratory, two office buildings and a
warehouse, totaling approximately 197,000 square feet
collectively. The Eufaula, Alabama, facilities are located on
14 acres of land owned by the Company, and consist of one
production unit, a laboratory and an office, collectively
totaling approximately 113,700 square feet.
12
The facilities in McIntyre and Toomsboro, Georgia, include real
property, plant and equipment that are leased by the Company
from the Development Authority of Wilkinson County. The term of
the lease, which covers both locations, commenced on
September 1, 1997, and terminates on December 1, 2016.
Under the terms of the lease, as amended in 2003, the Company is
responsible for all costs incurred in connection with the
premises, including costs of construction of the plant and
equipment. As an inducement to locate the facility in Wilkinson
County, Georgia, the Company received certain ad-valorem
property tax incentives. The lease and a related memorandum of
understanding define a negotiated value of the Companys
leasehold interest during the term of the lease. The lease also
calls for annual payments of additional rent to the Development
Authority of Wilkinson County. The total additional rent
payments are immaterial in relation to the cost of the facility
borne by the Company. At the termination of the lease, title to
all of the real property, plant and equipment will be conveyed
to the Company in exchange for nominal consideration. The
Company has the right to purchase the property, plant and
equipment at any time during the term of the lease for a nominal
price plus payment of any additional rent due to the Development
Authority of Wilkinson County through the remaining lease term.
The facilities in McIntyre, Georgia, are located on
approximately 36 acres of land and consist of various
production and support buildings, a laboratory building, a
warehouse building and an administrative building, collectively
totaling approximately 196,100 square feet. The facility in
Toomsboro, Georgia, is located on approximately 13 acres of
an approximately
786-acre
tract of property leased by the Company. The facility consists
of various production and support buildings, two laboratory
buildings, and an administrative building, collectively totaling
approximately 113,900 square feet.
The facility in Luoyang, China, is located on approximately
11 acres and consists of various production and support
buildings, a laboratory, and two administrative buildings,
collectively totaling approximately 118,000 square feet.
The facility under construction in Kopeysk, Russia, is located
on approximately 60 acres and will consist of various
production and support buildings and an administrative building
totaling together approximately 103,000 square feet.
The Companys customer service and distribution operations
are located at the New Iberia facility, while its quality
control, testing and development functions operate at the New
Iberia, Eufaula and McIntyre facilities. The Company owns
distribution facilities in San Antonio, Texas; Rock
Springs, Wyoming; and Edmonton and Grande Prairie, Alberta,
Canada and leases its other distribution facilities.
Between 2002 and 2006, the Company completed the acquisition of
approximately 2,100 acres of land and leasehold interests
in Wilkinson County, Georgia, near its plants in McIntyre and
Toomsboro, Georgia. The land contains approximately
12 million tons of raw material for use in the production
of the Companys lightweight ceramic proppants. The Company
has contracted with a third party to mine and haul the reserves
and bear the responsibility for subsequent reclamation of the
mined areas.
Pinnacle maintains leased office space in San Francisco,
California (approximately 7,000 square feet); Centennial
and Denver, Colorado; Delft, The Netherlands; and Calgary,
Alberta, Canada. Pinnacle also owns its field office
(approximately 2,800 square feet) in Bakersfield,
California.
|
|
Item 3.
|
Legal
Proceedings
|
The Company and China Ceramic Proppants Ltd (China
Ceramic) are currently involved in litigation in Canadian
federal district court to determine if China Ceramics
distribution of intermediate strength product infringed a patent
owned by the Company during the term of that patent. The Company
has been awarded a judgment in the validity and infringement
phase of the litigation. The Court ruled that the Companys
Canadian patent was valid at the time of infringement and that
the defendant infringed said patent. The Company does not
believe that this proceeding, or any action for damages that may
follow, will have a material effect on its business or its
results of operations.
From time to time, the Company is the subject of legal
proceedings arising in the ordinary course of business. The
Company does not believe that any of these proceedings will have
a material effect on its business or its results of operations.
13
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 2006.
Executive
Officers of the Registrant
Gary A. Kolstad (age 48) was elected on June 1,
2006, by the Companys Board of Directors to serve as
President and Chief Executive Officer and a Director of the
Company. Mr. Kolstad previously served in a variety of
positions over 21 years with Schlumberger, Ltd. Immediately
prior to joining the Company, Mr. Kolstad served as Vice
President, Oilfield Services U.S. Onshore and
Vice President, Global Accounts.
Paul G. Vitek (age 48) has been the Senior Vice
President of Finance and Administration and Chief Financial
Officer since January 2000. Prior to serving in his current
capacity, Mr. Vitek served as Vice President of Finance
from February 1996 and has served as Treasurer of the Company
since 1988. Mr. Vitek served as Secretary to the Company
from 1998 to January of 2006.
Mark L. Edmunds (age 51) has been the Vice President,
Operations since April 2002. From 2000 until joining the
Company, Mr. Edmunds served as Business Unit Manager and
Plant Manager for FMC Corporation. Prior to 2000,
Mr. Edmunds served Union Carbide Corporation and The Dow
Chemical Company in a variety of management positions including
Director of Operations, Director of Internal Consulting and
Manufacturing Operations Manager.
Christopher A. Wright (age 42) was named Vice
President, Business Development in June 2006 and has been a Vice
President of the Company since May 2002. Prior to June 2006,
Mr. Wright served as President of Pinnacle Technologies,
Inc., a provider of fracture diagnostic products and services,
and subsidiary of the Company, since its founding in 1992.
M. Kevin Fisher (age 50) was named President of
Pinnacle Technologies, Inc. as well as Vice President of the
Company, effective June 2006. Mr. Fisher has been employed
with Pinnacle since September 2000, most recently as Vice
President of Business Development. Prior to joining Pinnacle,
Mr. Fisher served Halliburton Energy Services and
ProTechnics Division of Core Laboratories in a variety of
engineering, technical and management positions.
All officers are elected at the Annual Meeting of the Board of
Directors for one-year terms or until their successors are duly
elected. There are no arrangements between any officer and any
other person pursuant to which he was selected as an officer.
There is no family relationship between any of the named
executive officers or between any of them and the Companys
directors.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Common
Stock Market Prices, Dividends and Stock Repurchases
The Companys Common Stock is traded on the New York Stock
Exchange (ticker symbol CRR). The approximate number of holders,
including both record holders and individual participants in
security position listings, of the Companys Common Stock
at February 15, 2007, was 15,009.
14
High and low stock prices and dividends for the last two fiscal
years (giving effect to the Companys
three-for-two
stock split effective August 19, 2005) were:
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|
|
2006
|
|
|
2005
|
|
|
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|
|
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|
Cash
|
|
|
|
|
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|
|
|
Cash
|
|
|
|
Sales Price
|
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|
Dividends
|
|
|
Sales Price
|
|
|
Dividends
|
|
Quarter Ended
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High
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Low
|
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Declared
|
|
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High
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Low
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Declared
|
|
|
March 31
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$
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67.67
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|
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$
|
50.71
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|
|
$
|
0.10
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|
|
$
|
50.20
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|
|
$
|
40.74
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|
|
$
|
0.08
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June 30
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|
|
65.83
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|
|
44.37
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|
|
0.10
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|
|
52.40
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|
42.40
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0.08
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September 30
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|
|
50.20
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|
34.21
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|
0.12
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|
|
67.99
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|
|
|
51.91
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|
|
0.10
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December 31
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|
39.81
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|
32.16
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0.12
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|
|
66.43
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|
|
|
51.45
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|
|
|
0.10
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|
The Company currently expects to continue its policy of paying
quarterly cash dividends, although there can be no assurance as
to future dividends because they depend on future earnings,
capital requirements and financial condition.
The Company made no purchases of any of its equity securities
during the fourth quarter of 2006.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The remainder of the information required by this Item is
incorporated by reference to the Companys Proxy Statement.
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Item 6.
|
Selected
Financial Data
|
The following selected financial data are derived from the
audited Consolidated Financial Statements of the Company. The
data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and notes
thereto included elsewhere in this
Form 10-K.
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Years Ended December 31,
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2006
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2005
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2004
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|
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2003
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2002
|
|
|
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($ in thousands, except per share data)
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|
Statement of Income
Data:
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Revenues
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$
|
312,126
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|
|
$
|
252,673
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|
|
$
|
223,054
|
|
|
$
|
169,936
|
|
|
$
|
126,308
|
|
Cost of sales
|
|
|
196,133
|
|
|
|
153,941
|
|
|
|
131,648
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|
|
|
103,769
|
|
|
|
79,425
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Gross profit
|
|
|
115,993
|
|
|
|
98,732
|
|
|
|
91,406
|
|
|
|
66,167
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|
|
|
46,883
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|
Selling, general and
administrative expenses(1)
|
|
|
35,206
|
|
|
|
28,432
|
|
|
|
26,008
|
|
|
|
19,153
|
|
|
|
16,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating profit
|
|
|
80,787
|
|
|
|
70,300
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|
|
|
65,398
|
|
|
|
47,014
|
|
|
|
30,680
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|
Other, net
|
|
|
3,027
|
|
|
|
1,783
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|
|
|
824
|
|
|
|
73
|
|
|
|
563
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Income before income taxes
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|
|
83,814
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|
|
|
72,083
|
|
|
|
66,222
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|
|
|
47,087
|
|
|
|
31,243
|
|
Income taxes
|
|
|
29,561
|
|
|
|
25,463
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|
|
|
24,549
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|
|
|
17,518
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|
|
|
11,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
|
$
|
41,673
|
|
|
$
|
29,569
|
|
|
$
|
19,714
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Basic
|
|
$
|
2.23
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|
|
$
|
1.94
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|
|
$
|
1.75
|
|
|
$
|
1.27
|
|
|
$
|
0.86
|
|
|
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|
|
|
|
|
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|
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|
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|
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Diluted
|
|
$
|
2.22
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|
|
$
|
1.93
|
|
|
$
|
1.73
|
|
|
$
|
1.26
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
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|
15
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|
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|
|
|
|
|
|
December 31,
|
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|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
($ in thousands, except per share data)
|
|
|
Balance Sheet Data:
|
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|
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|
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|
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|
|
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|
Current assets
|
|
$
|
143,925
|
|
|
$
|
148,287
|
|
|
$
|
146,282
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|
|
$
|
92,709
|
|
|
$
|
64,867
|
|
Current liabilities excluding bank
borrowings
|
|
|
34,246
|
|
|
|
36,309
|
|
|
|
29,192
|
|
|
|
16,432
|
|
|
|
17,940
|
|
Bank borrowings-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
231,748
|
|
|
|
179,500
|
|
|
|
125,385
|
|
|
|
116,664
|
|
|
|
111,797
|
|
Total assets
|
|
|
404,665
|
|
|
|
355,796
|
|
|
|
297,517
|
|
|
|
235,124
|
|
|
|
199,610
|
|
Total shareholders equity
|
|
|
342,859
|
|
|
|
293,366
|
|
|
|
244,367
|
|
|
|
200,139
|
|
|
|
168,585
|
|
Cash dividends per share
|
|
$
|
0.44
|
|
|
$
|
0.36
|
|
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
$
|
0.24
|
|
|
|
|
(1) |
|
Selling, general and administrative (SG&A) expenses for
2006, 2005, 2004, 2003 and 2002 include costs of
start-up
activities of $474,000, $1,092,000, none, $80,000, and
$1,099,000, respectively.
Start-up
costs for 2006 and 2005 are related primarily to the new
production facility in Toomsboro, Georgia.
Start-up
costs for 2003 are related to expansion of the McIntyre and New
Iberia facilities and initial operation of the Luoyang, China
facility.
Start-up
costs for 2002 are related to the Luoyang, China facility,
including organizational and administrative costs associated
with plant construction plus labor, materials and utilities
expended to bring installed equipment to operating condition.
SG&A expenses in 2002 also include the accrual of a $993,000
reserve related to a legal judgment against the Company.
SG&A expenses in 2005, 2004 and 2003 also include losses of
$95,000, $1,144,000 and $717,000, respectively, associated with
the disposal of certain equipment and impairment of certain
Pinnacle software. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Executive
Level Overview
CARBO Ceramics Inc. generates revenue primarily through the sale
of products and services to the oil and gas industry. The
Company conducts its business within two operating segments:
1) Proppant and 2) Fracture and Reservoir Diagnostics.
The Companys principal business, the Proppant segment,
consists of manufacturing and selling ceramic proppant for use
primarily in the hydraulic fracturing of oil and natural gas
wells. Through its Fracture and Reservoir Diagnostics segment,
the Company 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 Companys
wholly-owned subsidiary Pinnacle Technologies, Inc.
The Companys products and services help oil and gas
producers increase production and recovery rates from their
wells, thereby lowering overall reservoir development costs. As
a result, the Companys business is dependent to a large
extent on the level of drilling activity in the oil and gas
industry worldwide. However, the Company has increased its
revenues and income over an extended period and across various
industry business cycles by increasing its share of the
worldwide market for all types of proppant. While the
Companys ceramic proppants are more expensive than
alternative non-ceramic proppants, the Company has been able to
demonstrate the cost-effectiveness of its products to numerous
operators of oil and gas wells through increased technical
marketing activity. The Company believes its future prospects
will benefit from both an expected increase in drilling activity
worldwide and the desire of industry participants to improve
production results and lower their overall development costs.
In recent years, the Company has expanded its operations outside
the United States. In 2002 the Company constructed its first
manufacturing facility located outside the United States in the
city of Luoyang, China and completed a second production line in
2004 that doubled the capacity of that facility. In 2004, the
Company also opened a sales office in Moscow, Russia, and
established distribution operations in the country. In 2005, the
Company broke ground on a new manufacturing facility in the city
of Kopeysk, Russia and expects that facility to
16
reach completion in the first quarter of 2007. The Company
believes international operations will continue to represent an
important role in its future growth.
Revenue growth in recent years has been driven largely by
increases in ceramic proppant sales volume, but fracture and
reservoir diagnostic services are becoming an increasingly
important part of revenue growth. Because ceramic proppant are
used on less than 20 percent of fractures worldwide, the
Company believes there is significant potential for growth in
the future. As a result, in recent years, the Company has been
adding significant new manufacturing capacity to meet
anticipated future demand. The Company began producing product
from a new manufacturing facility in Toomsboro, Georgia in
January 2006 and during the year that plant demonstrated the
ability to operate at design capacity of 250 million pounds
per year. Construction of a second production line at the
Toomsboro facility is underway and is expected to be completed
in the third quarter of 2007. The second line will add an
additional 250 million pounds of annual capacity. The
manufacturing facility in Russia that is expected to be
completed during the first quarter of 2007 is designed to have
initial production capacity of 100 million pounds per year.
By the end of 2007, the Company expects to have expanded its
proppant manufacturing capacity by approximately 80% over a
two-year period. Because the Companys ceramic proppants
compete in part against lower-cost alternatives, the Company
expects its future revenue growth to be derived from increasing
sales volume more so than from an increase in the selling price
of ceramic proppant.
Operating profit margin for the Companys proppant business
is principally impacted by manufacturing costs and the
Companys production levels as a percentage of its
capacity. While most direct production expenses have been
relatively stable or predictable over time, natural gas, which
is used in production by the Companys domestic
manufacturing facilities, has varied from approximately 22% to
40% of total monthly direct production expense over the last
three years due to price volatility of this fuel source. During
2005, market prices of natural gas increased sharply, peaking
during the fourth quarter of that year. While the Company had
contracted in advance for most of its domestic natural gas
requirements through October 2005, beginning in November, the
Company began paying current market rates for all of its
domestic requirements. As a result, the average price of natural
gas delivered to the Companys U.S. manufacturing
facilities increased 65% during the fourth quarter of 2005
compared to the average price during the first three quarters of
that year. In an effort to mitigate volatility in the cost of
natural gas purchases and reduce exposure to short term spikes
in the price of this commodity, in late 2005 the Company resumed
contracting in advance for portions of its future natural gas
requirements and continued this practice throughout 2006.
Despite the efforts to reduce exposure to changes in natural gas
prices, it is possible that, given the significant portion of
manufacturing costs represented by this fuel, operating margins
may decline and changes in net income may not fully reflect
changes in revenue.
Management believes the addition of new manufacturing capacity
is critical to the Companys ability to continue its
long-term growth in sales volume and revenue for ceramic
proppant. With the addition of the Toomsboro manufacturing
facility in 2006, the Company has almost tripled its production
capacity since 1997. While the Company has operated near or at
full capacity for much of the previous ten years, addition of
significant new capacity in the future could adversely impact
operating profit margins if the timing of this new capacity does
not match increases in demand for the Companys products.
As the Companys sales volume has increased, and as the
Company has expanded in international markets, there has been an
increase in activities and expenses related to marketing,
distribution, research and development, and finance and
administration. As a result, selling, general and administrative
expenses have increased in recent years. In the future, the
Company expects to continue to actively pursue new business
opportunities by:
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|
increasing marketing activities globally,
|
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|
improving and expanding its distribution capabilities, and
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|
|
|
focusing on new product development
|
The Company expects that these activities will generate
increased revenue; however selling, general and administrative
expenses as a percentage of revenue may increase in 2007 from
2006 levels as the company continues to expand outside of North
America.
17
General
Business Conditions
The Companys proppant business is significantly impacted
by the number of natural gas wells drilled in North America,
where the majority of wells are hydraulically fractured. In
markets outside North America, sales of the Companys
products are less dependent on natural gas markets but are
influenced by the overall level of drilling and hydraulic
fracturing activity. Furthermore, because the decision to use
ceramic proppant or fracture and reservoir diagnostic services
is based on comparing the higher initial costs to the future
value derived from increased production and recovery rates, the
Companys business is influenced by the current and
expected prices of natural gas and oil.
Worldwide oil and natural gas prices and related drilling
activity levels remained very strong from 2004 through 2006. As
a result, the Company experienced record demand for its products
and services worldwide. However, the Companys ability to
sell additional ceramic proppant was limited by its production
capacity in 2004 and 2005. In 2006, the Company benefited from
the additional production capacity from its Toomsboro, Georgia
manufacturing and established new records for sales volume,
revenue and net income. From 2004 through 2006, the number of
rigs actively drilling for oil and gas in the United States
increased 38 percent. Overseas drilling activity remained strong
in 2005 and 2006, and the Company saw an increase in sales
volume in many regions outside of North America. However, sales
declined in the Russian market in both years compared to 2004
due to an increase in the availability of locally-produced
ceramic proppant and an increase in tariffs and freight
surcharges on imported products. The Company is addressing this
situation through construction of a manufacturing facility in
Russia which is expected to be complete in the first quarter of
2007. International revenues represented 34%, 40% and 47% of
total revenues from both operating segments in 2006, 2005 and
2004, respectively.
The Companys fracture and reservoir diagnostics business
is also impacted by the level of global drilling and hydraulic
fracturing activity. In 2006 this business benefited from both
an increase in the level of global activity and increased
acceptance and utilization of the fracture mapping services in
the Barnett Shale formation in North Central Texas and in other
unconventional natural gas formations. The Company believes that
the demand for the services provided by its fracture and
reservoir diagnostic business will increase as oil and gas
production companies develop increasingly complex,
unconventional reservoirs in North America and globally.
Critical
Accounting Policies
The Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the U.S., which
require the Company to make estimates and assumptions (see
Note 1 to the Consolidated Financial Statements). The
Company believes that, of its significant accounting policies,
the following may involve a higher degree of judgment and
complexity.
Revenue is recognized when title passes to the customer
(generally upon delivery of products) or at the time services
are performed. The Company generates a significant portion of
its revenues and corresponding accounts receivable from sales to
the petroleum pressure pumping industry. In addition, the
Company generates a significant portion of its revenues and
corresponding accounts receivable from sales to three major
customers, all of which are in the petroleum pressure pumping
industry. As of December 31, 2006, approximately 57% of the
balance in trade accounts receivable was attributable to those
three customers. The Company records an allowance for doubtful
accounts based on a percentage of sales and periodically
evaluates the allowance based on a review of trade accounts
receivable. Trade accounts receivable are periodically reviewed
for collectibility based on customers past credit history
and current financial condition, and the allowance is adjusted,
if necessary. If a prolonged economic downturn in the petroleum
pressure pumping industry were to occur or, for some other
reason, any of the Companys primary customers were to
experience significant adverse conditions, the Companys
estimates of the recoverability of accounts receivable could be
reduced by a material amount and the allowance for doubtful
accounts could be increased by material amounts. At
December 31, 2006, the allowance for doubtful accounts
totaled $1.8 million.
Inventory is stated at the lower of cost or market. Obsolete or
unmarketable inventory historically has been insignificant and
generally written off when identified. Assessing the ultimate
realization of inventories requires judgments about future
demand and market conditions, and management believes that
current inventories are properly valued at cost. Accordingly, no
reserve to write-down inventories has been recorded. If actual
market conditions are less favorable than those projected by
management, inventory write-downs may be required.
18
Income taxes are provided for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. This standard takes
into account the differences between financial statement
treatment and tax treatment of certain transactions. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
of a change in tax rates is recognized as income or expense in
the period that includes the enactment date. This calculation
requires the Company to make certain estimates about its future
operations. Changes in state, federal and foreign tax laws, as
well as changes in the Companys financial condition, could
affect these estimates.
Long-lived assets, which include net property, plant and
equipment, goodwill and intangibles, comprise a significant
amount of the Companys total assets. The Company makes
judgments and estimates in conjunction with the carrying values
of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives.
Additionally, the carrying values of these assets are
periodically reviewed for impairment or whenever events or
changes in circumstances indicate that the carrying amounts may
not be recoverable. An impairment loss is recorded in the period
in which it is determined that the carrying amount is not
recoverable. This requires the Company to make long-term
forecasts of its future revenues and costs related to the assets
subject to review. These forecasts require assumptions about
demand for the Companys products and services, future
market conditions and technological developments. Significant
and unanticipated changes to these assumptions could require a
provision for impairment in a future period.
Results
of Operations
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Net Income
|
|
$
|
54,253
|
|
|
|
16
|
%
|
|
$
|
46,620
|
|
|
|
12
|
%
|
|
$
|
41,673
|
|
For the year ended December 31, 2006, the Company reported
record net income of $54.3 million, 16% greater than the
$46.6 million for the year ended December 31, 2005 and
the fourth consecutive year in which the Company established a
new record for net income. Net income increased mainly due to
record revenues from both operating segments. 2006 also
represented the fourth consecutive year the Company achieved a
new revenue record. The increase in revenues was partially
offset by a decline in gross profit margin versus the previous
year primarily due to higher manufacturing costs in the Proppant
segment. Net income in 2006 also benefited somewhat from lower
start-up
costs than experienced last year, as the bulk of
start-up
activities for the Companys Toomsboro manufacturing
facility occurred in late 2005.
For the year ended December 31, 2005, net income of
$46.6 million represented a 12% increase compared to
$41.7 million for the year ended December 31, 2004.
The increase in net income was driven primarily by the higher
level of revenues generated in 2005. The increase in revenues
was due to increases in both sales volume and the average
selling price of ceramic proppant and an increase in revenues
from fracture and reservoir diagnostics. The revenue gain was
partially offset by the impact of higher costs for natural gas
and freight and an increase in selling, general and
administrative expenses. The Companys ability to increase
sales volume of proppant in 2005 was limited by manufacturing
capacity and inventory levels.
19
Individual components of financial results by operating segment
are discussed below.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Consolidated revenues
|
|
$
|
312,126
|
|
|
|
24
|
%
|
|
$
|
252,673
|
|
|
|
13
|
%
|
|
$
|
223,054
|
|
Revenues by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant
|
|
$
|
278,020
|
|
|
|
23
|
%
|
|
$
|
225,751
|
|
|
|
12
|
%
|
|
$
|
201,039
|
|
Fracture and Reservoir Diagnostics
|
|
$
|
34,106
|
|
|
|
27
|
%
|
|
$
|
26,922
|
|
|
|
22
|
%
|
|
$
|
22,015
|
|
Proppant segment revenues of $278.0 million for the year
ended December 31, 2006 surpassed last years record
of $225.8 million by 23% as a result of a 13% increase in
sales volume and a 9% increase in the average selling price.
Worldwide proppant sales volume increased for the fourth
consecutive year to 869.3 million pounds and exceeded the
2005 sales record of 771.8 million pounds by 13%. The
volume of ceramic proppant sold in North America increased 18%
compared to 2005 as sales grew at a higher rate than North
American drilling activity. The North American increase was
partially offset by a 10% decline in overseas sales volume due
to decreased sales in Russia. Excluding Russia, sales volume in
overseas markets increased 16% over the previous year.
International sales, which include overseas markets and the
North American markets of Canada and Mexico, accounted for 35%
of sales volume in 2006 compared to 40% in 2005. The average
selling price of proppant in 2006 was $0.320 per pound
compared to $0.293 per pound in 2005. The higher average
selling price was due to increases in list prices that went into
effect in June 2005 and November 2005 and, therefore, impacted
only part of the year in 2005 but impacted the full year in 2006.
Fracture and Reservoir Diagnostics segment revenues of
$34.1 million for 2006 increased 27% compared to
$26.9 million for 2005. The increase in revenues from the
prior year was primarily due to a 27% increase in mapping
services related to gas well completions in North America.
Fracture and Reservoir Diagnostics revenue benefited from an
increase in global drilling and fracturing activity in 2006,
increased acceptance and utilization of the Companys
fracture mapping services in unconventional natural gas
formations as well as increased revenue from the developing
long-term reservoir monitoring market.
Proppant segment revenues of $225.8 million for 2005
exceeded 2004 revenues of $201.0 million by 12% due to 6%
increases in both sales volume and the average selling price of
proppant. Worldwide proppant sales volume totaled
771.8 million pounds for 2005 compared to
725.7 million pounds for 2004. Demand for proppant was
strong throughout the year, but sales volume was consistently
limited by the Companys production capacity and inventory
levels. Increased natural gas drilling activity in North America
spurred demand for proppant that led to a 24% increase in North
American sales volume compared to 2004. Sales increases in North
America were partially offset by a 34% decline in overseas sales
volume compared to the record level of overseas sales set in
2004. The primary reason for the overseas sales decline was a
slowdown in Russian sales due to an increase in the availability
of locally produced proppant in that region, the pricing of
which excludes the customs duties, tariffs and transportation
expenses associated with imported products. The Company is
addressing this situation through the construction of a
manufacturing facility in Kopeysk, Russia. Excluding sales to
Russia, overseas sales volume increased 2% compared to 2004;
still, Russian sales led all overseas markets in 2005.
International sales, which include overseas markets and the
North American markets of Canada and Mexico, accounted for 40%
of sales volume in 2005 compared to 46% in 2004. The average
selling price of proppant was $0.293 per pound in 2005
compared to $0.277 in 2004. The higher average selling price was
due to increases in list prices that went into effect in June
2005 and November 2005.
Fracture and Reservoir Diagnostics segment revenues of
$26.9 million for 2005 increased 22% compared to
$22.0 million for 2004. The increase in revenues from the
prior year was primarily due to a 25% increase in mapping
services related to gas well completions in North America.
Fracture and Reservoir Diagnostics revenue benefited from an
increase in global drilling and fracturing activity in 2005 as
well as increased acceptance and utilization of the
Companys fracture mapping services in the Barnett Shale
formation in North Central Texas and other unconventional
natural gas formations.
20
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Consolidated gross profit
|
|
$
|
115,993
|
|
|
|
17
|
%
|
|
$
|
98,732
|
|
|
|
8
|
%
|
|
$
|
91,406
|
|
Consolidated gross profit %
|
|
|
37
|
%
|
|
|
|
|
|
|
39
|
%
|
|
|
|
|
|
|
41
|
%
|
Gross profit by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant
|
|
$
|
100,739
|
|
|
|
14
|
%
|
|
$
|
88,488
|
|
|
|
9
|
%
|
|
$
|
81,548
|
|
Proppant %
|
|
|
36
|
%
|
|
|
|
|
|
|
39
|
%
|
|
|
|
|
|
|
41
|
%
|
Fracture and Reservoir Diagnostics
|
|
$
|
15,254
|
|
|
|
49
|
%
|
|
$
|
10,244
|
|
|
|
4
|
%
|
|
$
|
9,858
|
|
Fracture and Reservoir Diagnostics
%
|
|
|
45
|
%
|
|
|
|
|
|
|
38
|
%
|
|
|
|
|
|
|
45
|
%
|
The Companys Proppant segment cost of sales consists of
manufacturing costs, packaging and transportation expenses
associated with the delivery of the Companys products to
its customers and handling costs related to maintaining finished
goods inventory and operating the Companys remote stocking
facilities. Variable manufacturing costs include raw materials,
labor, utilities and repair and maintenance supplies. Fixed
manufacturing costs include depreciation, property taxes on
production facilities, insurance and factory overhead. Cost of
sales for the Companys Fracture and Reservoir Diagnostics
segment consists of both variable and fixed components. Variable
costs include labor costs, subcontracting, travel and other
variable expenses associated with the delivery of the mapping
and reservoir monitoring services. Fixed costs include the
depreciation and amortization expenses relating to revenue
producing capital equipment.
Proppant segment gross profit for 2006 was $100.7 million,
or 36% of revenues, compared to $88.5 million, or 39% of
revenues, for 2005. While gross profit in 2006 exceeded 2005 by
14% due to higher sales volume, it decreased as a percentage of
revenues due to increases in the costs of manufacturing and
distributing finished goods. The primary factors contributing to
higher manufacturing costs were increases in the cost of natural
gas consumed by the Companys U.S. plants and the cost
of raw materials used to manufacture high-strength ceramic
proppant. Compared to 2005, the Company experienced a 24%
increase in the average price paid in 2006 for natural gas
delivered to its U.S. manufacturing facilities. The cost of
natural gas increased in the fourth quarter of 2005 when forward
purchase contracts covering the Companys gas requirements
for its U.S. plants expired, subjecting the Company to
market prices that had increased significantly during the year.
Fracture and Reservoir Diagnostics segment gross profit of
$15.3 million for 2006 increased by 49% compared to gross
profit of $10.2 million for 2005 primarily due to the
increase in revenue for this segment. Gross profit margin for
this segment increased from 38% in 2005 to 45% in 2006 due to
higher asset and people utilization driven by strong revenue
growth across all North American regions.
Proppant segment gross profit of $88.5 million for 2005
increased by 9% compared to gross profit of $81.5 million
for 2004 primarily due to increased sales volume. Gross profit
margin declined from 41% in 2004 to 39% in 2005. The decline in
gross profit margin resulted mainly from higher energy costs,
including the cost of natural gas consumed in manufacturing
proppant and fuel surcharges for raw material and finished
product delivery. In the fourth quarter of 2005, forward
contracts covering the purchase of natural gas requirements for
the Companys U.S. manufacturing facilities expired
and the Company began paying current market rates for all of its
domestic gas. This resulted in a 65% increase in the delivered
price paid by the Company for its gas requirements in the fourth
quarter of 2005 compared to the previous three quarters. The
delivered cost of natural gas used in the Companys
domestic manufacturing facilities for the full year 2005
increased 27% compared to the full year 2004. For most of 2005,
the Company experienced an increase in the cost of shipping its
product due to rising fuel prices and an increase in the volume
of expedited shipments to meet U.S. customer demand. The
Companys conventional distribution method in North America
is to rail ship product from its manufacturing facilities to
stocking locations and then truck ship to customers. Following a
draw down of inventory levels during then record sales volume
quarters in the fourth quarter of 2004 and the first quarter of
2005, strong demand for the remainder of 2005 regularly required
the Company to bypass its conventional distribution method and
expedite shipments by more expensive truck hauls directly from
manufacturing facilities to customers.
21
Fracture and Reservoir Diagnostics segment gross profit of
$10.2 million for 2005 increased by 4% compared to gross
profit of $9.9 million for 2004 primarily due to the
increase in revenue for this segment. Gross profit margin for
this segment declined from 45% in 2004 to 38% in 2005 due to
increased labor and equipment costs in preparation for
anticipated geographic and service offering growth and increased
subcontractor costs due to a change in the mix of service
offerings.
Selling,
General & Administrative (SG&A) and Other Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Consolidated SG&A and other
|
|
$
|
35,206
|
|
|
|
24
|
%
|
|
$
|
28,432
|
|
|
|
9
|
%
|
|
$
|
26,008
|
|
As a % of revenues
|
|
|
11
|
%
|
|
|
|
|
|
|
11
|
%
|
|
|
|
|
|
|
12
|
%
|
SG&A and other by operating
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant
|
|
$
|
24,959
|
|
|
|
19
|
%
|
|
$
|
20,922
|
|
|
|
7
|
%
|
|
$
|
19,480
|
|
Proppant %
|
|
|
9
|
%
|
|
|
|
|
|
|
9
|
%
|
|
|
|
|
|
|
10
|
%
|
Fracture and Reservoir Diagnostics
|
|
$
|
10,247
|
|
|
|
36
|
%
|
|
$
|
7,510
|
|
|
|
15
|
%
|
|
$
|
6,528
|
|
Fracture and Reservoir
Diagnostics %
|
|
|
30
|
%
|
|
|
|
|
|
|
28
|
%
|
|
|
|
|
|
|
30
|
%
|
Proppant segment expenses consisted of $24.5 million
SG&A and $0.5 million other non-recurring operating
expenses in 2006 compared to $19.8 million and
$1.1 million, respectively, in 2005. SG&A expenses
increased by $4.7 million due to increases in research and
development activity, marketing activity in international
markets, and administrative expenses necessary to support higher
sales activity in an expanding global market. Other operating
expenses in both 2006 and 2005 were primarily related to startup
of the Companys new manufacturing facility in Toomsboro,
Georgia that began operating in January of 2006. As a percentage
of revenue, SG&A and other operating expenses remained
constant at 9%.
Fracture and Reservoir Diagnostics segment SG&A and other
operating expenses of $10.2 million for 2006 increased by
36% compared to $7.5 million for 2004. The
$2.7 million increase in expenses was due to increased
sales and marketing activity to support revenue growth,
increased technical development spending and increases in
administration costs to support revenue growth.
Proppant segment expenses consisted of $19.8 million
SG&A and $1.1 million other non-recurring operating
expenses in 2005 compared to of $18.6 million and
$0.9 million, respectively, in 2004. SG&A expenses
increased by $1.2 million primarily due to increases in
expenses associated with the Companys growth, including
international expansion, and professional fees incurred to
comply with accounting, internal control and other corporate
governance requirements of the Sarbanes-Oxley Act of 2002,
partially offset by reduced legal expense. Other operating
expenses in 2005 were primarily related to
start-up of
the new manufacturing facility in Toomsboro, Georgia, while in
2004 they resulted primarily from a write-off of equipment
replaced at the Companys McIntyre, Georgia facility. As a
percentage of revenue, SG&A and other operating expenses
declined to 9% in 2005 compared to 10% in 2004.
Fracture and Reservoir Diagnostics segment SG&A and other
operating expenses of $7.5 million for 2005 increased by
15% compared to $6.5 million for 2004. The
$1.0 million increase in expenses was due to increased
sales and marketing activity and increased technical development
spending.
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Income Tax Expense
|
|
$
|
29,561
|
|
|
|
16
|
%
|
|
$
|
25,463
|
|
|
|
4
|
%
|
|
$
|
24,549
|
|
Effective Income Tax Rate
|
|
|
35.3
|
%
|
|
|
|
|
|
|
35.3
|
%
|
|
|
|
|
|
|
37.1
|
%
|
Income tax expense is not allocated between the two operating
segments. Consolidated income tax expense of $29.6 million
for the year ended December 31, 2006 increased
proportionately with the 16% increase in taxable
22
income compared to 2005. The effective income tax rate of 35.3%
of pretax income in 2006 was unchanged from 2005.
Consolidated income tax expense of $25.5 million for the
year ended December 31, 2005 increased 4% compared to 2004
primarily due to the increase in taxable income resulting from
the Companys improved performance. The 2005 effective
income tax rate of 35.3% of pretax income decreased from 37.1%
in 2004 due to a new permanent deduction for domestic
manufacturing activities enacted as part of the American Jobs
Creation Act of 2004, an increase in the Companys tax
exempt interest income and a reduction in estimated state income
taxes in the U.S. resulting from a decrease in the amount
of income apportioned to the states in which the Company does
business.
Liquidity
and Capital Resources
At December 31, 2006, the Company had cash and cash
equivalents of $25.0 million and short-term investments of
$7.5 million compared to cash and cash equivalents of
$19.7 million and short-term investments of
$42.0 million at December 31, 2005. During 2006, the
Company generated $50.7 million cash from operations,
received $1.0 million proceeds from employee exercises of
stock options, received $34.4 million from net purchases
and sales of short-term investments and retained
$0.4 million cash from excess tax benefits relating to
stock-based compensation to employees. Uses of cash included
$70.5 million of capital spending and $10.7 million of
cash dividends. Major capital spending included
$23.6 million on a new proppant manufacturing facility in
Kopeysk, Russia, which is expected to be completed in the first
quarter of 2007 at an estimated cost of $42.0 million,
$7.0 million on a new proppant manufacturing facility in
Toomsboro, Georgia, which was completed slightly below planned
expenditure of $62.0 million and began operating in the
first quarter of 2006, $22.3 on a second production line at the
Toomsboro facility, which is expected to be completed in the
third quarter of 2007 and add 250 million pounds of annual
capacity at an estimated cost of $54.0 million,
$3.3 million on microseismic equipment for use in providing
fracture mapping and reservoir diagnostic services and
$2.8 million to construct an office building in Houston,
Texas to serve as a combined operations facility for Pinnacle
Technologies and sales headquarters for the Companys
proppant business.
The Company believes its 2007 results will be influenced by the
level of natural gas drilling in North America but expects its
ability to demonstrate the value of ceramic proppant relative to
alternatives will allow it to grow sales volume and revenue at a
more rapid pace than the growth rate associated with drilling or
fracturing activity. Given the levels of natural gas inventories
in North America, there is the possibility of a short-term
contraction in drilling activity. The Company believes any
slow-down in activity is more likely to occur in the first half
of the year and expects self-correcting mechanisms of the
marketplace to adjust supply quickly, resulting in a relatively
short period of depressed activity. The Company believes its
twelve production lines at five production facilities worldwide
give it a great deal flexibility to adjust supply to meet demand
for its ceramic proppant.
Subject to its financial condition, the amount of funds
generated from operations and the level of capital expenditures,
the Companys current intention is to continue to pay
quarterly dividends to holders of its Common Stock. On
January 16, 2007, the Companys Board of Directors
approved the payment of a quarterly cash dividend of
$0.12 per share to shareholders of the Companys
Common Stock on January 31, 2007. The Company estimates its
total capital expenditures in 2007 will be between
$70.0 million and $75.0 million, including completion
of its manufacturing facility in Kopeysk, Russia and expansion
of its facility in Toomsboro, Georgia, expansion of its
distribution facilities and acquisition or construction of
additional fracture mapping tools.
The Company maintains an unsecured line of credit of
$10.0 million. As of December 31, 2006, there was no
outstanding debt under the credit agreement. The Company
anticipates that cash on hand, cash provided by operating
activities and funds available under its line of credit will be
sufficient to meet planned operating expenses, tax obligations
and capital expenditures for the next 12 months. The
Company also believes that it could acquire additional debt
financing, if needed. Based on these assumptions, the Company
believes that its fixed costs could be met even with a moderate
decrease in demand for the Companys products.
Off-Balance
Sheet Arrangements
The Company had no off-balance sheet arrangements as of
December 31, 2006.
23
Contractual
Obligations
The following table summarizes the Companys contractual
obligations as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in Period
|
|
|
|
|
|
|
Less Than
|
|
|
1 - 3
|
|
|
4 - 5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
($ in thousands)
|
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primarily railroad
equipment
|
|
|
19,187
|
|
|
|
3,501
|
|
|
|
5,511
|
|
|
|
3,732
|
|
|
|
6,443
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas contracts
|
|
|
21,927
|
|
|
|
21,118
|
|
|
|
809
|
|
|
|
|
|
|
|
|
|
Raw materials contracts
|
|
|
8,100
|
|
|
|
8,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchases
|
|
|
7,290
|
|
|
|
7,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
56,504
|
|
|
$
|
40,009
|
|
|
$
|
6,320
|
|
|
$
|
3,732
|
|
|
$
|
6,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations relate primarily to railroad
equipment leases and include leases of other property, plant and
equipment. See Note 4 and Note 12 to the Notes to the
Consolidated Financial Statements.
The Company uses natural gas to power its domestic manufacturing
plants. From time to time the Company enters into contracts to
purchase a portion of the anticipated natural gas requirements.
The contracts are at specified prices and are typically
short-term in duration. As of December 31, 2006, the last
contract was due to expire in February 2008.
The Company has entered into contracts to supply raw materials,
primarily kaolin and bauxite, to each of its manufacturing
plants. Each of the contracts is described in Note 12 to
the Notes to the Consolidated Financial Statements. Four of the
contracts do not require the Company to purchase minimum annual
quantities, but do require the purchase of minimum annual
percentages, ranging from 70% to 100% of the respective
plants requirements for the specified raw materials. One
contract requires the Company to purchase a minimum annual
quantity of material, which is included in the above table.
The Company has commitments totaling $7.5 million for
equipment and subcontractor agreements related to constructing a
second production line at its manufacturing facility in
Toomsboro, Georgia. In the event of cancellation, some of the
commitments have cancellation clauses that would require the
Company to pay expenses incurred by manufacturers to date
and/or a
penalty fee.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
The Companys major market risk exposure is to foreign
currency fluctuations that could impact its investments in China
and Russia. When necessary, the Company may enter into forward
foreign exchange contracts to hedge the impact of foreign
currency fluctuations. There were no such foreign exchange
contracts outstanding at December 31, 2006.
The Company has a $10.0 million line of credit with its
primary commercial bank. Under the terms of the revolving credit
agreement, the Company may elect to pay interest at either a
fluctuating base rate established by the bank from time to time
or at a rate based on the rate established in the London
inter-bank market. There were no borrowings outstanding under
this agreement at December 31, 2006. The Company does not
believe that it has any material exposure to market risk
associated with interest rates.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The information required by this Item is contained in pages F-3
through F-22 of this Report.
24
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
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 SECs
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 December 31, 2006, management carried out an
evaluation, under the supervision and with the participation of
the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based upon and as of the
date of that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Companys 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) Managements Report on Internal Controls
For Managements Report on Internal Control over Financial
Reporting, see
page F-1
of this Report.
(c) Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
For the Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting, see
page F-2
of this Report.
(d) Changes in Internal Controls
There were no changes in the Companys internal control
over financial reporting during the quarter ended
December 31, 2006, that materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item
9B.
|
Other
Information
|
Not applicable.
PART III
Certain information required by Part III is omitted from
this Report. The Company will file a definitive proxy statement
pursuant to Regulation 14A (the Proxy
Statement) not later than 120 days after the end of
the fiscal year covered by this Report and certain information
included therein is incorporated herein by reference. Only those
sections of the Proxy Statement that specifically address the
items set forth herein are incorporated by reference. Such
incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Information concerning executive officers under Item 401 of
Regulation S-K
is set forth in Part I of this
Form 10-K.
The other information required by this Item is incorporated by
reference to the Companys Proxy Statement.
25
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference to the Companys Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
The information required by this Item is incorporated by
reference to the Companys Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this Item is incorporated by
reference to the Companys Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item is incorporated by
reference to the Companys Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Exhibits, Financial Statements and Financial Statement
Schedules:
1. Consolidated Financial Statements
The Consolidated Financial Statements of CARBO Ceramics Inc.
listed below are contained in pages F-3 through F-22 of this
Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2006, and 2005
Consolidated Statements of Income for each of the three years
ended December 31, 2006, 2005 and 2004
Consolidated Statements of Shareholders Equity for each of
the three years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2006, 2005 and 2004
2. Consolidated Financial Statement Schedules
Schedule II Consolidated Valuation and
Qualifying Accounts is contained on
page S-1
of this Report. All other schedules have been omitted since they
are either not required or not applicable.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are
filed as part of, or incorporated by reference into, this Report.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Gary A. Kolstad
President and Chief Executive Officer
Paul G. Vitek
Sr. Vice President, Finance and Chief Financial Officer
Dated: March 1, 2007
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Gary A. Kolstad
and Paul G. Vitek, jointly and severally, his
attorneys-in-fact,
each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said
attorneys-in-fact,
or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ WILLIAM
C. MORRIS
William
C. Morris
|
|
Chairman of the Board
|
|
March 1, 2007
|
|
|
|
|
|
/s/ GARY
A. KOLSTAD
Gary
A. Kolstad
|
|
President, Chief Executive Officer
and Director (Principal Executive Officer)
|
|
March 1, 2007
|
|
|
|
|
|
/s/ PAUL
G. VITEK
Paul
G. Vitek
|
|
Sr. Vice President, Finance and
Chief Financial Officer (Principal Financial
and Accounting Officer)
|
|
March 1, 2007
|
|
|
|
|
|
/s/ CLAUDE
E. COOKE, JR.
Claude
E. Cooke, Jr.
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ CHAD
C. DEATON
Chad
C. Deaton
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ H.E.
LENTZ, JR.
H.E.
Lentz, Jr.
|
|
Director
|
|
March 1, 2007
|
27
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ JOHN
J. MURPHY
John
J. Murphy
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ JESSE
P. ORSINI
Jesse
P. Orsini
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ ROBERT
S. RUBIN
Robert
S. Rubin
|
|
Director
|
|
March 1, 2007
|
28
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external reporting purposes in accordance with generally
accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and our Chief
Financial Officer, assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2006. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on its
assessment and those criteria, management believes that the
Company maintained effective internal control over financial
reporting as of December 31, 2006.
The Companys independent registered public accounting
firm, Ernst & Young LLP, has issued an attestation
report on managements assessment of the Companys
internal control over financial reporting. That report is
included herein.
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL
CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders
CARBO Ceramics Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that CARBO Ceramics Inc. maintained
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). CARBO Ceramics Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that CARBO Ceramics
Inc. maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, CARBO Ceramics Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of CARBO Ceramics Inc. as of
December 31, 2006, and 2005, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2006, and our report dated February 27,
2007, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
New Orleans, Louisiana
February 27, 2007
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
CARBO Ceramics Inc.
We have audited the accompanying consolidated balance sheets of
CARBO Ceramics Inc. as of December 31, 2006 and 2005, and
the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of CARBO Ceramics Inc. at December 31,
2006 and 2005, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the financial statements, in 2006
the Company changed its method of accounting for stock-based
compensation.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of CARBO Ceramics Inc.s internal control
over financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 27,
2007, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
New Orleans, Louisiana
February 27, 2007
F-3
CARBO
CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,973
|
|
|
$
|
19,695
|
|
Short-term investments
|
|
|
7,500
|
|
|
|
41,975
|
|
Trade accounts and other
receivables, net
|
|
|
63,461
|
|
|
|
53,918
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
26,181
|
|
|
|
17,981
|
|
Raw materials and supplies
|
|
|
14,602
|
|
|
|
8,490
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
40,783
|
|
|
|
26,471
|
|
Prepaid expenses and other current
assets
|
|
|
2,558
|
|
|
|
2,433
|
|
Deferred income taxes
|
|
|
4,650
|
|
|
|
3,795
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
143,925
|
|
|
|
148,287
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
8,659
|
|
|
|
2,812
|
|
Land-use and mineral rights
|
|
|
6,101
|
|
|
|
5,271
|
|
Buildings
|
|
|
26,209
|
|
|
|
15,051
|
|
Machinery and equipment
|
|
|
207,341
|
|
|
|
154,785
|
|
Construction in progress
|
|
|
71,744
|
|
|
|
72,074
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
320,054
|
|
|
|
249,993
|
|
Less accumulated depreciation
|
|
|
88,306
|
|
|
|
70,493
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
231,748
|
|
|
|
179,500
|
|
Goodwill
|
|
|
21,840
|
|
|
|
21,840
|
|
Intangible and other assets, net
|
|
|
7,152
|
|
|
|
6,169
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
404,665
|
|
|
$
|
355,796
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,939
|
|
|
$
|
11,277
|
|
Accrued payroll and benefits
|
|
|
8,115
|
|
|
|
6,941
|
|
Accrued freight
|
|
|
2,061
|
|
|
|
1,356
|
|
Accrued utilities
|
|
|
3,166
|
|
|
|
3,389
|
|
Accrued income taxes
|
|
|
3,172
|
|
|
|
9,998
|
|
Retainage related to construction
in progress
|
|
|
117
|
|
|
|
337
|
|
Other accrued expenses
|
|
|
4,676
|
|
|
|
3,011
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,246
|
|
|
|
36,309
|
|
Deferred income taxes
|
|
|
27,560
|
|
|
|
26,121
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value
$0.01 per share, 5,000 shares authorized, none
outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.01 per share, 40,000,000 shares authorized;
24,391,214 and 24,286,388 shares issued and outstanding at
December 31, 2006 and 2005, respectively
|
|
|
244
|
|
|
|
243
|
|
Additional paid-in capital
|
|
|
104,784
|
|
|
|
102,536
|
|
Unearned stock compensation
|
|
|
|
|
|
|
(2,135
|
)
|
Retained earnings
|
|
|
235,732
|
|
|
|
192,196
|
|
Accumulated other comprehensive
income
|
|
|
2,099
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
342,859
|
|
|
|
293,366
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
404,665
|
|
|
$
|
355,796
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-4
CARBO
CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands, except per share data)
|
|
|
Revenues
|
|
$
|
312,126
|
|
|
$
|
252,673
|
|
|
$
|
223,054
|
|
Cost of sales
|
|
|
196,133
|
|
|
|
153,941
|
|
|
|
131,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
115,993
|
|
|
|
98,732
|
|
|
|
91,406
|
|
Selling, general and
administrative expenses
|
|
|
34,732
|
|
|
|
27,245
|
|
|
|
24,864
|
|
Start-up
costs
|
|
|
474
|
|
|
|
1,092
|
|
|
|
|
|
Loss on disposal or impairment of
assets
|
|
|
|
|
|
|
95
|
|
|
|
1,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
80,787
|
|
|
|
70,300
|
|
|
|
65,398
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
1,590
|
|
|
|
1,756
|
|
|
|
570
|
|
Other, net
|
|
|
1,437
|
|
|
|
27
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,027
|
|
|
|
1,783
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
83,814
|
|
|
|
72,083
|
|
|
|
66,222
|
|
Income taxes
|
|
|
29,561
|
|
|
|
25,463
|
|
|
|
24,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
|
$
|
41,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.23
|
|
|
$
|
1.94
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.22
|
|
|
$
|
1.93
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
CARBO
CERAMICS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Compen-
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
sation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
($ in thousands, except per share data)
|
|
|
Balances at January 1, 2004
|
|
$
|
236
|
|
|
$
|
80,534
|
|
|
$
|
(253
|
)
|
|
$
|
119,664
|
|
|
$
|
(42
|
)
|
|
$
|
200,139
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,673
|
|
|
|
|
|
|
|
41,673
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,684
|
|
Exercise of stock options
|
|
|
4
|
|
|
|
6,128
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
6,131
|
|
Tax benefit from exercise of
options
|
|
|
|
|
|
|
2,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,981
|
|
Stock granted under restricted
stock plan, net
|
|
|
|
|
|
|
1,123
|
|
|
|
(1,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
433
|
|
Cash dividends ($0.29 per
share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,001
|
)
|
|
|
|
|
|
|
(7,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
240
|
|
|
|
90,766
|
|
|
|
(943
|
)
|
|
|
154,335
|
|
|
|
(31
|
)
|
|
|
244,367
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,620
|
|
|
|
|
|
|
|
46,620
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
557
|
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,177
|
|
Exercise of stock options
|
|
|
3
|
|
|
|
6,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,053
|
|
Tax benefit from exercise of
options
|
|
|
|
|
|
|
3,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,712
|
|
Stock granted under restricted
stock plan, net
|
|
|
|
|
|
|
2,008
|
|
|
|
(2,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
816
|
|
Cash dividends ($0.36 per
share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,759
|
)
|
|
|
|
|
|
|
(8,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
243
|
|
|
|
102,536
|
|
|
|
(2,135
|
)
|
|
|
192,196
|
|
|
|
526
|
|
|
|
293,366
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,253
|
|
|
|
|
|
|
|
54,253
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,573
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,826
|
|
Exercise of stock options
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,024
|
|
Tax benefit from stock based
compensation
|
|
|
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554
|
|
Stock based compensation
|
|
|
1
|
|
|
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,806
|
|
Adoption of SFAS 123(R)
(Note 7)
|
|
|
|
|
|
|
(2,135
|
)
|
|
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.44 per
share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,717
|
)
|
|
|
|
|
|
|
(10,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
$
|
244
|
|
|
$
|
104,784
|
|
|
$
|
|
|
|
$
|
235,732
|
|
|
$
|
2,099
|
|
|
$
|
342,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-6
CARBO
CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
|
$
|
41,673
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
18,712
|
|
|
|
12,949
|
|
|
|
11,762
|
|
Amortization
|
|
|
805
|
|
|
|
675
|
|
|
|
415
|
|
Provision for doubtful accounts
|
|
|
507
|
|
|
|
682
|
|
|
|
666
|
|
Deferred income taxes
|
|
|
584
|
|
|
|
920
|
|
|
|
4,930
|
|
Excess tax benefits from stock
based compensation
|
|
|
(360
|
)
|
|
|
|
|
|
|
|
|
Loss on disposal or impairment of
assets
|
|
|
|
|
|
|
95
|
|
|
|
1,144
|
|
Foreign currency transaction
(gain) loss
|
|
|
(1,387
|
)
|
|
|
147
|
|
|
|
|
|
Non-cash stock compensation expense
|
|
|
2,806
|
|
|
|
816
|
|
|
|
433
|
|
Earnings in equity-method investee
|
|
|
(84
|
)
|
|
|
(208
|
)
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts and other
receivables
|
|
|
(9,726
|
)
|
|
|
(13,347
|
)
|
|
|
(11,462
|
)
|
Inventories
|
|
|
(14,104
|
)
|
|
|
(5,203
|
)
|
|
|
(755
|
)
|
Prepaid expenses and other current
assets
|
|
|
(76
|
)
|
|
|
(1,199
|
)
|
|
|
(146
|
)
|
Long-term prepaid expenses
|
|
|
92
|
|
|
|
(1,107
|
)
|
|
|
|
|
Accounts payable
|
|
|
1,634
|
|
|
|
794
|
|
|
|
4,855
|
|
Accrued payroll and benefits
|
|
|
1,169
|
|
|
|
753
|
|
|
|
1,502
|
|
Accrued freight
|
|
|
702
|
|
|
|
(23
|
)
|
|
|
302
|
|
Accrued utilities
|
|
|
(227
|
)
|
|
|
1,323
|
|
|
|
420
|
|
Accrued income taxes
|
|
|
(6,272
|
)
|
|
|
8,116
|
|
|
|
8,538
|
|
Payment of legal judgment
|
|
|
|
|
|
|
|
|
|
|
(975
|
)
|
Other accrued expenses
|
|
|
1,636
|
|
|
|
(55
|
)
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
50,664
|
|
|
|
52,748
|
|
|
|
64,210
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
(70,460
|
)
|
|
|
(67,811
|
)
|
|
|
(21,950
|
)
|
Investment in equity-method
investee
|
|
|
|
|
|
|
(611
|
)
|
|
|
|
|
Purchases of short-term investments
|
|
|
(26,765
|
)
|
|
|
(72,175
|
)
|
|
|
(70,125
|
)
|
Proceeds from maturities of
short-term investments
|
|
|
61,240
|
|
|
|
76,325
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(35,985
|
)
|
|
|
(64,272
|
)
|
|
|
(68,075
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
1,024
|
|
|
|
6,053
|
|
|
|
6,131
|
|
Dividends paid
|
|
|
(10,717
|
)
|
|
|
(8,759
|
)
|
|
|
(7,001
|
)
|
Excess tax benefits from stock
based compensation
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(9,333
|
)
|
|
|
(2,706
|
)
|
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
5,346
|
|
|
|
(14,230
|
)
|
|
|
(4,735
|
)
|
Effect of exchange rate changes on
cash
|
|
|
(68
|
)
|
|
|
(65
|
)
|
|
|
11
|
|
Cash and cash equivalents at
beginning of year
|
|
|
19,695
|
|
|
|
33,990
|
|
|
|
38,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
24,973
|
|
|
$
|
19,695
|
|
|
$
|
33,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
35,249
|
|
|
$
|
16,427
|
|
|
$
|
11,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-7
CARBO
CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Significant
Accounting Policies
|
Description
of Business
CARBO Ceramics Inc. (the Company) was formed in 1987
and is a manufacturer of ceramic proppants. The Company has five
production plants operating in New Iberia, Louisiana; Eufaula,
Alabama; McIntyre, Georgia; Toomsboro, Georgia; and Luoyang,
China. The Company is currently constructing a new proppant
manufacturing facility in the city of Kopeysk, Chelyabinsk
Oblast of the Russian Federation. The Company predominantly
markets its proppant products through pumping service companies
that perform hydraulic fracturing for major oil and gas
companies. Finished goods inventories are stored at the plant
sites and thirteen remote distribution facilities located in:
Rock Springs, Wyoming; Oklahoma City, Oklahoma;
San Antonio, Texas; Shreveport, Louisiana; Williston, North
Dakota; Edmonton, Alberta, Canada; Grande Prairie, Alberta,
Canada; Rotterdam, The Netherlands; Tianjin, China; Surgut,
Russia; Adelaide, Australia; Singapore; and Jebel Ali, United
Arab Emirates. The Company also provides fracture diagnostic and
mapping services, sells fracture simulation software and
provides fracture design services to oil and gas companies
worldwide through its wholly-owned subsidiary, Pinnacle
Technologies, Inc., which is headquartered in Houston, Texas.
Principles
of Consolidation
The Consolidated Financial Statements include the accounts of
CARBO Ceramics Inc. and its operating subsidiaries. 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 was acquired April 2005 and is
reported under the equity method of accounting. All significant
intercompany transactions have been eliminated.
Concentration
of Credit Risk and Accounts Receivable
The Company performs periodic credit evaluations of its
customers financial condition and generally does not
require collateral. Receivables are generally due within
30 days. The majority of the Companys receivables are
from customers in the petroleum pressure pumping industry. The
Company establishes an allowance for doubtful accounts based on
a percentage of sales and periodically evaluates the balance in
the allowance based on a review of trade accounts receivable.
Trade accounts receivable are periodically reviewed for
collectibility based on customers past credit history and
current financial condition, and the allowance is adjusted if
necessary. Credit losses historically have been insignificant.
The allowance for doubtful accounts at December 31, 2006
and 2005 was $1,753,000 and $1,335,000, respectively. Other
receivables, primarily value added tax receivables in Russia,
were $5,615,000 and $2,948,000 as of December 31, 2006 and
2005, respectively.
Cash
Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. The carrying amounts reported in the balance sheet
for cash equivalents approximate fair value.
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.
F-8
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
Inventories are stated at the lower of cost
(first-in,
first-out method) or market. Finished goods inventories include
costs of materials, plant labor and overhead incurred in the
production of the Companys products.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost. Repair and
maintenance costs are expensed as incurred. Depreciation is
computed on the straight-line method for financial reporting
purposes using the following estimated useful lives:
|
|
|
|
|
Buildings and improvements
|
|
|
15 to 30 years
|
|
Machinery and equipment
|
|
|
3 to 30 years
|
|
Land-use rights
|
|
|
30 years
|
|
The Company holds approximately 2,100 acres of land and
leasehold interests in Wilkinson County, Georgia, near its
plants in McIntyre and Toomsboro, Georgia. The Company estimates
the land has 12 million tons of kaolin reserves for use as
raw material in production of its products. The capitalized
costs of land and mineral rights as well as costs incurred to
develop such property are amortized using the
units-of-production
method based on estimated total tons of kaolin reserves.
Impairment
of Long-Lived Assets and Intangible Assets
Long-lived assets to be held and used or intangible assets that
are subject to amortization are reviewed for impairment whenever
events or circumstances indicate their carrying amounts might
not be recoverable. Recoverability is assessed by comparing the
undiscounted expected future cash flows from the assets with
their carrying amount. If the carrying amount exceeds the sum of
the undiscounted future cash flows an impairment loss is
recorded. The impairment loss is measured by comparing the fair
value of the assets with their carrying amounts. Intangible
assets that are not subject to amortization are tested for
impairment at least annually by comparing their fair value with
the carrying amount and recording an impairment loss for any
excess of carrying amount over fair value. Fair values are
determined based on discounted expected future cash flows or
appraised values, as appropriate. Long-lived assets that are
held for disposal are reported at the lower of the assets
carrying amount or fair value less costs related to the
assets disposition. During 2005, the Company recognized a
$95,000 loss on disposal of kiln turning parts at the New Iberia
proppant plant. During 2004, the Company recognized a $1,144,000
loss on disposal or impairment of assets, of which $960,000 is
attributed primarily to a prematurely failing calciner at the
McIntyre proppant plant and $184,000 resulted from impairment of
certain Fracture and Reservoir Diagnostics segment software. The
losses related to equipment removed from service and software
impairment are included in the income statement line item
Loss on disposal or impairment of assets.
Capitalized
Software Costs
The Company capitalizes certain software costs, after
technological feasibility has been established, which are
amortized utilizing the straight-line method over the economic
lives of the related products, not to exceed five years.
Goodwill
Goodwill represents the excess of the cost of companies acquired
over the fair value of their net assets at the date of
acquisition. Realization of goodwill is assessed at least
annually by management based on the fair value of the respective
reporting unit. The latest impairment review indicated goodwill
was not impaired.
F-9
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Split
On July 19, 2005, the Board of Directors declared a
three-for-two
stock split of the Companys Common Stock, which was
effected via a stock dividend on August 19, 2005, to the
stockholders of record at the close of business on
August 5, 2005. As a result of the split, the Company
issued 8,025,134 additional shares, for which retained earnings
decreased by $80,251 and Common Stock increased by $80,251.
Accordingly, all share and per share data for all periods
presented have been adjusted to reflect the effects of the stock
split.
Revenue
Recognition
Revenue from proppant sales is recognized when title passes to
the customer, generally upon delivery. Revenue from fracture
diagnostic and mapping services and fracture design services is
recognized at the time service is performed. Revenue from the
sale of fracture simulation software is recognized when title
passes to the customer at time of shipment.
Shipping
and Handling Costs
Shipping and handling costs are classified as cost of sales.
Shipping costs consist of transportation costs to deliver
products to customers. Handling costs include labor and overhead
to maintain finished goods inventory and operate distribution
facilities.
Cost
of Start-Up
Activities
Start-up
activities, including organization costs, are expensed as
incurred.
Start-up
costs for 2006 and 2005 are related primarily to the new
proppant manufacturing facility in Toomsboro, Georgia, which
began proppant production in mid-January 2006.
Start-up
costs include organizational and administrative costs associated
with the facility as well as labor, materials, and utilities to
bring installed equipment to operating condition.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Research
and Development Costs
Research and development costs are charged to operations when
incurred and are included in selling, general and administrative
expenses. The amounts incurred in 2006, 2005 and 2004 were
$5,685,000, $3,750,000 and $3,418,000, respectively.
Stock-Based
Compensation
Prior to January 1, 2006 the Company accounted for its
stock-based compensation plans using the intrinsic value method
under the recognition and measurement provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations as
permitted by FASB Statement No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Under
the intrinsic value method, compensation expense was recognized
in the income statement to the extent the exercise price of the
award was less than the market value of the underlying common
stock. Since the Company historically has granted stock options
with an exercise price equal to the market price on the date of
grant, stock option awards had no intrinsic value and,
therefore, no compensation expense was recognized. Because
restricted stock awards had no exercise price, the resulting
intrinsic value was equal to the market price on the date of
grant and recognized as compensation expense on a straight-line
basis over the vesting period of each award. Pro forma
disclosures were provided to illustrate the effects on net
income and
F-10
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings per share as if the Company had applied the fair value
recognition provisions of SFAS 123 and recognized expense
for both restricted stock awards and stock option awards.
Effective January 1, 2006 the Company adopted the fair
value recognition provisions of FASB Statement No. 123(R),
Share-Based Payment (SFAS 123(R)), which
is a revision of SFAS 123 and supersedes APB 25.
SFAS 123(R) requires the Company to recognize compensation
expense in the income statement for all share-based payments to
employees. Pro forma disclosure is no longer an alternative. The
Company elected to adopt SFAS 123(R) using the modified
prospective transition method, under which compensation expense
includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of,
December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS 123 used in the Companys pro forma disclosures
adjusted for estimated forfeitures, and (b) compensation
cost for all share-based payments granted on or after
January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R).
Results for prior periods have not been restated as permitted
under the modified prospective approach; therefore pro forma
disclosures will continue to be provided for periods prior to
January 1, 2006.
Under SFAS 123(R), the cost of employee services received
in exchange for stock is measured based on the grant-date fair
value. The Company recognizes that cost on a straight-line basis
over the period during which an employee is required to provide
service in exchange for the award (usually the vesting period).
The fair value of stock options is estimated using a
Black-Scholes option-pricing model and the fair value of
restricted stock is determined based on the market price of the
Companys Common Stock on the date of grant. Compensation
expense is recognized only for share based payments expected to
vest; therefore the Company estimates forfeitures at the time of
grant based on historical forfeiture rates and future
expectations and reduces compensation expense accordingly.
Forfeiture rates are revised, if necessary, in subsequent
periods, with the Company ultimately recognizing expense only on
awards that actually vest. Excess tax benefits, as defined in
SFAS 123(R), are recognized as additions to paid-in capital
and classified as financing cash flows.
Foreign
Subsidiaries
Financial statements of the Companys foreign subsidiaries
are translated using current exchange rates for assets and
liabilities; average exchange rates for the period for revenues,
expenses, gains and losses; and historical exchange rates for
equity accounts. Resulting translation adjustments are included
in, and the only component of, accumulated other comprehensive
income as a separate component of shareholders equity.
New
Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 31, 2006. The Company does
not expect adoption of FIN 48 to have a material impact on
its financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value and requires enhanced disclosures about
fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods
within those fiscal years. The Company does not expect adoption
of SFAS 157 to have a material impact on its financial
position, results of operations or cash flows.
F-11
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Intangible
and Other Assets
|
Following is a summary of intangible assets as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
($ in thousands)
|
|
|
Intangibles subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses
|
|
$
|
3,113
|
|
|
$
|
1,248
|
|
|
$
|
2,676
|
|
|
$
|
934
|
|
Hardware designs
|
|
|
1,148
|
|
|
|
595
|
|
|
|
818
|
|
|
|
488
|
|
Software
|
|
|
3,496
|
|
|
|
748
|
|
|
|
2,494
|
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,757
|
|
|
$
|
2,591
|
|
|
$
|
5,988
|
|
|
$
|
1,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2004, the Company determined that certain internally
developed software previously considered to have an indefinite
life is now considered to have a finite life due to development
of new versions of the software. The Company performed an
impairment test and determined that the carrying amount of the
original software exceeded its fair value by $184,000.
Accordingly, an impairment loss of that amount was recognized
and the software is now being amortized over its remaining
estimated useful life.
The weighted-average amortization periods for patents and
licenses, hardware designs, and software are 11 years,
5 years and 5 years, respectively, and 7 years in
total. Amortization expense for 2006, 2005 and 2004 was
$805,000, $675,000 and $415,000, respectively. Estimated
amortization expense for each of the ensuing years through
December 31, 2011 is, respectively, $988,000, $949,000,
$777,000, $517,000, and $305,000.
Other assets totaling $1,986,000 and $1,967,000 at
December 31, 2006 and 2005, respectively consisted of a 49%
equity interest in a fracture-related services company in Canada
and the long-term portion of a prepayment for the purchase of
ceramic proppant from a manufacturer. The Company has not
received any distributions from its equity-method investee.
Under the terms of an unsecured revolving credit agreement with
a bank, dated December 31, 2000, and amended
December 23, 2003, December 10, 2004 and
December 31, 2006, the Company may borrow up to
$10.0 million through December 31, 2009, with the
option of choosing either the banks fluctuating Base Rate
or LIBOR Fixed Rate (as defined in the credit agreement). At
December 31, 2006 the unused portion of the credit facility
was $10.0 million. The terms of the credit agreement
provide for certain affirmative and negative covenants and
require the Company to maintain certain financial ratios.
Commitment fees are payable quarterly at the annual rate of
0.375% of the unused line of credit. Commitment fees were
$38,000 in each of the years 2006, 2005, and 2004.
F-12
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases certain property, plant and equipment under
operating leases, primarily consisting of railroad equipment
leases. Minimum future rental payments due under non-cancelable
operating leases with remaining terms in excess of one year as
of December 31, 2006 are as follows ($ in thousands):
|
|
|
|
|
2007
|
|
$
|
3,501
|
|
2008
|
|
|
3,005
|
|
2009
|
|
|
2,506
|
|
2010
|
|
|
2,034
|
|
2011
|
|
|
1,698
|
|
Thereafter
|
|
|
6,443
|
|
|
|
|
|
|
Total
|
|
$
|
19,187
|
|
|
|
|
|
|
Leases of railroad equipment generally provide for renewal
options for periods from one to five years at their fair rental
value at the time of renewal. In the normal course of business,
operating leases for railroad equipment are generally renewed or
replaced by other leases. Rent expense for all operating leases
was $4,801,000 in 2006, $3,496,000 in 2005, and $3,393,000 in
2004.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities as of
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
2,021
|
|
|
$
|
1,375
|
|
Inventories
|
|
|
708
|
|
|
|
718
|
|
Foreign tax credits
|
|
|
912
|
|
|
|
868
|
|
Other
|
|
|
1,009
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,650
|
|
|
|
3,795
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
21,624
|
|
|
|
22,181
|
|
Goodwill
|
|
|
2,052
|
|
|
|
1,583
|
|
Foreign earnings and other
|
|
|
3,884
|
|
|
|
2,357
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
27,560
|
|
|
|
26,121
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
22,910
|
|
|
$
|
22,326
|
|
|
|
|
|
|
|
|
|
|
F-13
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the provision for income taxes for the
years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
25,464
|
|
|
$
|
21,815
|
|
|
$
|
16,803
|
|
State
|
|
|
3,513
|
|
|
|
2,728
|
|
|
|
2,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
28,977
|
|
|
|
24,543
|
|
|
|
19,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,068
|
|
|
|
702
|
|
|
|
4,237
|
|
State
|
|
|
(484
|
)
|
|
|
218
|
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
584
|
|
|
|
920
|
|
|
|
4,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,561
|
|
|
$
|
25,463
|
|
|
$
|
24,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income taxes computed at the
U.S. statutory tax rate to the Companys income tax
expense for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
($ in thousands)
|
|
|
U.S. statutory rate
|
|
$
|
29,335
|
|
|
|
35.0
|
%
|
|
$
|
25,229
|
|
|
|
35.0
|
%
|
|
$
|
23,178
|
|
|
|
35.0
|
%
|
State income taxes, net of federal
tax benefit
|
|
|
1,969
|
|
|
|
2.3
|
|
|
|
1,950
|
|
|
|
2.7
|
|
|
|
2,281
|
|
|
|
3.4
|
|
ETI Exclusion, Section 199
Manufacturing Benefit and other
|
|
|
(1,743
|
)
|
|
|
(2.0
|
)
|
|
|
(1,716
|
)
|
|
|
(2.4
|
)
|
|
|
(910
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,561
|
|
|
|
35.3
|
%
|
|
$
|
25,463
|
|
|
|
35.3
|
%
|
|
$
|
24,549
|
|
|
|
37.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Holders of Common Stock are entitled to one vote per share on
all matters to be voted on by shareholders and do not have
cumulative voting rights. Subject to preferences of any
Preferred Stock, the holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally
available for that purpose. In the event of liquidation,
dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution
rights of any Preferred Stock then outstanding. The Common Stock
has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and non-assessable.
On July 19, 2005, the Board of Directors declared a
three-for-two
stock split of the Companys Common Stock, which was
effected via a stock dividend on August 19, 2005, to the
stockholders of record at the close of business on
August 5, 2005. As a result of the split, the Company
issued 8,025,134 additional shares, for which retained earnings
decreased by $80,251 and Common Stock increased by $80,251.
Accordingly, all share and per share data for all periods
presented have been adjusted to reflect the effects of the stock
split.
On January 16, 2007, the Board of Directors declared a cash
dividend of $0.12 per share. The dividend is payable on
February 15, 2007 to shareholders of record on
January 31, 2007.
F-14
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred
Stock
The Companys charter authorizes 5,000 shares of
Preferred Stock. The Board of Directors has the authority to
issue Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the
designation of such series, without further vote or action by
the Companys shareholders. In connection with adoption of
a shareholder rights plan on February 13, 2002, the Company
created the Series A Preferred Stock and authorized
2,000 shares of the Series A Preferred Stock.
Shareholder
Rights Plan
On February 13, 2002, the Company adopted a shareholder
rights plan and declared a dividend of one right for each
outstanding share of Common Stock to shareholders of record on
February 25, 2002. With certain exceptions, the rights
become exercisable if a tender offer for the Company is
announced or any person or group acquires beneficial ownership
of at least 15 percent of the Companys Common Stock.
If exercisable, each right entitles the holder to purchase one
fifteen-thousandth of a share of Series A Preferred Stock
at an exercise price of $133 and, if any person or group
acquires beneficial ownership of at least 15 percent of the
Companys Common Stock, to acquire a number of shares of
Common Stock having a market value of two times the $133
exercise price. The Company may redeem the rights for
$0.01 per right at any time before any person or group
acquires beneficial ownership of at least 15 percent of the
Common Stock. The rights expire on February 13, 2012.
|
|
7.
|
Stock-Based
Compensation
|
Effective January 1, 2006 the Company adopted the fair
value recognition provisions of FASB Statement No. 123(R),
Share-Based Payment, which requires the Company to
recognize compensation expense in the income statement for all
share-based payments to employees. Results for prior periods
have not been restated as permitted under the modified
prospective approach; therefore pro forma disclosures will
continue to be provided for periods prior to January 1,
2006.
The Company has three stock-based compensation plans: a
restricted stock plan and two stock option plans. The restricted
stock plan provides for granting shares of Common Stock in the
form of restricted stock awards to employees and non-employee
directors of the Company. Under the restricted stock plan, the
Company may issue up to 375,000 shares, plus (i) the
number of shares that are forfeited, and (ii) the number of
shares that are withheld from the participants to satisfy tax
withholding obligations. No more than 75,000 shares may be
granted to any single employee. One-third of the shares subject
to award vest (i.e., transfer and forfeiture restrictions on
these shares are lifted) on each of the first three
anniversaries of the grant date. All unvested shares granted to
an individual vest upon retirement at or after the age of 62.
The stock option plans provide for granting options to purchase
shares of the Companys Common Stock to employees and
non-employee directors. Under the stock option plans, the
Company may grant options for up to 2,175,000 shares. The
exercise price of each option generally is equal to the market
price on the date of grant. The maximum term of an option is ten
years and options generally become exercisable (i.e., vest)
proportionately on each of the first four anniversaries of the
grant date. The Companys policy is to issue new shares
upon exercise. As of December 31, 2006, 252,357 shares
were available for issuance under the restricted stock plan and
52,650 shares were available for issuance under the stock
option plans.
The Company also has a deferred director fee plan (the
Plan) that permits non-employee directors of the
Company to elect each year to defer receipt of cash compensation
for service as a director, otherwise payable in that year, and
to receive those fees in the form of the Companys Common
Stock on a specified later date. The number of shares reserved
for an electing director is based on the fair market value of
the Companys Common Stock on the date immediately
preceding the date those fees would have been paid absent the
deferral. As of December 31, 2006, 2,649 shares were
reserved for future issuance in payment of $119,000 fees
deferred under the Plan by electing directors.
F-15
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the pro forma effect on net
income and earnings per share as if the Company had applied the
fair value recognition provisions of SFAS 123 to the
Companys stock-based compensation for the years ended
December 31 ($ in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
46,620
|
|
|
$
|
41,673
|
|
Add: Stock-based employee
compensation expense included in reported net income, net of
related tax effects
|
|
|
514
|
|
|
|
273
|
|
Deduct: Total stock-based
compensation expense determined under fair value based method
for all awards, net of related tax effects
|
|
|
(1,157
|
)
|
|
|
(1,255
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
45,977
|
|
|
$
|
40,691
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
1.94
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
1.92
|
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
1.93
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
1.90
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
As a result of adopting SFAS 123(R), the Companys
income before income taxes for the year ended December 31,
2006 was lower by $251,000 ($158,000 net of tax) than it
would have been if the Company had continued to account for
stock-based compensation under APB 25. Basic and diluted
earnings per share were each lower by $0.01 per share for
the year ended December 31, 2006 due to the adoption of
SFAS 123(R). Prior to adoption of SFAS 123(R), the
Company presented all tax benefits of deductions resulting from
stock compensation as operating cash flows in the statement of
cash flows. SFAS 123(R) requires the cash flows from tax
benefits resulting from tax deductions in excess of compensation
cost recognized in the income statement (excess tax benefits) to
be classified as financing cash flows. The $360,000 excess tax
benefit classified as a financing cash inflow for the year ended
December 31, 2006 would have been classified as an
operating cash inflow if the Company had not adopted
SFAS 123(R). Under SFAS 123(R), the Companys
unearned stock compensation balance of $2,135,000 included in
shareholders equity at December 31, 2005 was
reclassified to additional paid-in capital during the quarter
ended March 31, 2006.
A summary of stock option activity and related information for
the year ended December 31, 2006 is presented below ($ in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Outstanding at January 1, 2006
|
|
|
291,248
|
|
|
$
|
22.16
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(49,848
|
)
|
|
$
|
20.55
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
241,400
|
|
|
$
|
22.49
|
|
|
$
|
3,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
213,146
|
|
|
$
|
21.28
|
|
|
$
|
3,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, there was $184,000 of total
unrecognized compensation cost related to stock options granted
under the plans. The weighted-average remaining contractual term
of options outstanding at December 31, 2006 is
5.0 years. The weighted-average grant date fair value of
options granted during the year ended December 31, 2004 was
$15.74, which was estimated using a Black-Scholes option pricing
model with the following weighted-
F-16
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
average assumptions: risk-free interest rate of 3.55%, dividend
yield of 0.6%, volatility factor of the expected market price of
the Companys Common Stock of .455 and a weighted-average
expected life of the option of 5 years. There have been no
stock options granted since 2004. The total intrinsic value of
options exercised during the years ended December 31, 2006,
2005 and 2004 was $1,513,000, $9,998,000, and $8,057,000,
respectively.
A summary of restricted stock activity and related information
for the year ended December 31, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2006
|
|
|
58,634
|
|
|
$
|
47.03
|
|
Granted
|
|
|
57,510
|
|
|
$
|
57.52
|
|
Vested
|
|
|
(33,539
|
)
|
|
$
|
50.62
|
|
Forfeited
|
|
|
(2,522
|
)
|
|
$
|
50.26
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
80,083
|
|
|
$
|
52.96
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, there was $2,648,000 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
1.7 years. The weighted-average grant date fair value of
restricted stock granted during the years ended
December 31, 2005 and 2004 was $48.61 and $41.39,
respectively. The total fair value of shares vested during the
years ended December 31, 2006 and 2005 was $1,698,000 and
$373,000, respectively. No shares vested during the year ended
December 31, 2004, the first year of the plan.
The following table sets forth the computation of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands, except per share data)
|
|
|
Numerator for basic and diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
|
$
|
41,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted-average shares
|
|
|
24,280,778
|
|
|
|
24,004,563
|
|
|
|
23,868,138
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options (See
Note 7)
|
|
|
100,640
|
|
|
|
166,141
|
|
|
|
189,487
|
|
Nonvested stock awards (See
Note 7)
|
|
|
19,113
|
|
|
|
6,660
|
|
|
|
7,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
119,753
|
|
|
|
172,801
|
|
|
|
196,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share adjusted weighted-average shares
|
|
|
24,400,531
|
|
|
|
24,177,364
|
|
|
|
24,064,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.23
|
|
|
$
|
1.94
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
2.22
|
|
|
$
|
1.93
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Quarterly
Operating Results (Unaudited)
|
Quarterly results of operations for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
($ in thousands, except per share data)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
74,278
|
|
|
$
|
73,485
|
|
|
$
|
77,410
|
|
|
$
|
86,953
|
|
Gross profit
|
|
|
27,366
|
|
|
|
27,390
|
|
|
|
28,865
|
|
|
|
32,372
|
|
Net income
|
|
|
12,984
|
|
|
|
12,862
|
|
|
|
13,452
|
|
|
|
14,955
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
$
|
0.55
|
|
|
$
|
0.62
|
|
Diluted
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
0.55
|
|
|
$
|
0.61
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
61,168
|
|
|
$
|
63,834
|
|
|
$
|
64,104
|
|
|
$
|
63,567
|
|
Gross profit
|
|
|
24,821
|
|
|
|
25,632
|
|
|
|
24,949
|
|
|
|
23,330
|
|
Net income
|
|
|
11,594
|
|
|
|
12,177
|
|
|
|
12,452
|
|
|
|
10,397
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.51
|
|
|
$
|
0.52
|
|
|
$
|
0.43
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
0.50
|
|
|
$
|
0.51
|
|
|
$
|
0.43
|
|
Quarterly data may not sum to full year data reported in the
Consolidated Financial Statements due to rounding.
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. During the quarter ended June 30, 2005, the
Company concluded that the Fracture and Reservoir Diagnostics
operating segment met the disclosure requirements defined by
FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, and that operating
segment became a reportable segment.
The Companys Proppant segment manufactures and sells
ceramic proppants worldwide for use primarily in the hydraulic
fracturing of natural gas and oil wells. All of the
Companys 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 Companys 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 Companys wholly-owned
subsidiary Pinnacle Technologies, Inc. (Pinnacle).
Goodwill totaling $21,840,000 arising from the Companys
acquisition of Pinnacle is not assigned to an operating segment
because that information is not used by the Companys chief
operating decision maker in allocating resources. An
inter-segment note receivable totaling $17,504,000, $13,416,000,
and $10,025,000 at December 31, 2006, 2005, and 2004,
respectively, and the costs of the Companys corporate
offices are reported in the Proppant segment. Intersegment sales
are not material.
F-18
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information for the Companys
reportable segments for the three-year period ended
December 31, 2006 is shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fracture and
|
|
|
|
|
|
|
|
|
|
Reservoir
|
|
|
|
|
|
|
Proppant
|
|
|
Diagnostics
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
278,020
|
|
|
$
|
34,106
|
|
|
$
|
312,126
|
|
Income before income taxes
|
|
|
79,253
|
|
|
|
4,561
|
|
|
|
83,814
|
|
Total assets
|
|
|
362,697
|
|
|
|
37,632
|
|
|
|
400,329
|
|
Capital expenditures, net
|
|
|
60,612
|
|
|
|
9,848
|
|
|
|
70,460
|
|
Depreciation and amortization
|
|
|
15,376
|
|
|
|
4,141
|
|
|
|
19,517
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
225,751
|
|
|
$
|
26,922
|
|
|
$
|
252,673
|
|
Income before income taxes
|
|
|
69,415
|
|
|
|
2,668
|
|
|
|
72,083
|
|
Total assets
|
|
|
319,573
|
|
|
|
27,799
|
|
|
|
347,372
|
|
Capital expenditures, net
|
|
|
60,983
|
|
|
|
6,828
|
|
|
|
67,811
|
|
Depreciation and amortization
|
|
|
10,520
|
|
|
|
3,104
|
|
|
|
13,624
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
201,039
|
|
|
$
|
22,015
|
|
|
$
|
223,054
|
|
Income before income taxes
|
|
|
62,984
|
|
|
|
3,238
|
|
|
|
66,222
|
|
Total assets
|
|
|
264,342
|
|
|
|
21,360
|
|
|
|
285,702
|
|
Capital expenditures, net
|
|
|
17,386
|
|
|
|
4,564
|
|
|
|
21,950
|
|
Depreciation and amortization
|
|
|
9,986
|
|
|
|
2,191
|
|
|
|
12,177
|
|
Geographic
Information
Long-lived assets, consisting of net property, plant and
equipment, goodwill and intangibles, as of December 31 in
the United States and other countries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
199,967
|
|
|
$
|
173,917
|
|
|
$
|
134,250
|
|
International (primarily China and
Russia)
|
|
|
58,787
|
|
|
|
31,625
|
|
|
|
16,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
258,754
|
|
|
$
|
205,542
|
|
|
$
|
151,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues outside the United States accounted for 34%, 40% and
47% of the Companys revenues for 2006, 2005 and 2004,
respectively. Revenues for the years ended December 31 in
the United States, Canada, Russia and other countries are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
205,029
|
|
|
$
|
152,595
|
|
|
$
|
118,665
|
|
Canada
|
|
|
52,102
|
|
|
|
38,775
|
|
|
|
28,236
|
|
Russia
|
|
|
5,519
|
|
|
|
17,465
|
|
|
|
35,214
|
|
Other international
|
|
|
49,476
|
|
|
|
43,838
|
|
|
|
40,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
312,126
|
|
|
$
|
252,673
|
|
|
$
|
223,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Sales
to Customers
The following schedule presents the percentages of total
revenues related to the Companys three major customers,
primarily from the Proppant segment, for the three-year period
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Customers
|
|
|
|
|
|
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
Others
|
|
|
Total
|
|
|
2006
|
|
|
24.5
|
%
|
|
|
19.2
|
%
|
|
|
26.2
|
%
|
|
|
30.1
|
%
|
|
|
100
|
%
|
2005
|
|
|
30.5
|
%
|
|
|
17.3
|
%
|
|
|
16.9
|
%
|
|
|
35.3
|
%
|
|
|
100
|
%
|
2004
|
|
|
28.3
|
%
|
|
|
13.5
|
%
|
|
|
23.6
|
%
|
|
|
34.6
|
%
|
|
|
100
|
%
|
The Company has defined contribution savings and profit sharing
plans pursuant to Section 401(k) of the Internal Revenue
Code. Benefit costs recognized as expense under these plans
consisted of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Contributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit sharing
|
|
$
|
1,256
|
|
|
$
|
941
|
|
|
$
|
990
|
|
Savings
|
|
|
710
|
|
|
|
606
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,966
|
|
|
$
|
1,547
|
|
|
$
|
1,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All contributions to the plans are 100% participant directed.
Participants are allowed to invest up to 20% of contributions in
the Companys Common Stock.
In 1995, the Company entered into an agreement with a supplier
to purchase kaolin for its Eufaula, Alabama, plant at a
specified contract price. The term of the agreement was eight
years commencing January 1, 1996. Beginning January 1,
1997, the agreement required the Company to purchase from the
supplier at least 80 percent of the Companys
estimated annual requirements of kaolin for its Eufaula plant.
In June 2003, the Company entered into a new agreement with the
supplier. The new agreement supersedes and replaces the 1995
agreement. The term of the agreement is seven years commencing
January 1, 2004 and requires the Company to purchase from
the supplier at least 70 percent of its annual kaolin
requirements for its Eufaula, Alabama, plant at specified
contract prices. For the years ended December 31, 2006,
2005, and 2004, the Company purchased from the supplier $3.0,
$3.3 and $2.9 million, respectively, of kaolin under the
agreement.
In January 2003, the Company entered into a mining agreement
with a contractor to provide kaolin for the Companys
McIntyre plant at specified contract prices, from lands owned or
leased by either the Company or the contractor. The term of the
agreement is twenty years commencing on January 1, 2003,
and requires the Company to accept delivery from the contractor
of at least 80 percent of the McIntyre plants annual
kaolin requirements. Under the agreement, the contractor bears
responsibility for reclaiming property owned by the Company and
indemnifies the Company from all claims. For the years ended
December 31, 2006, 2005 and 2004, the Company purchased
$0.9 million, $1.1 million and $0.6 million,
respectively, of kaolin under the agreement.
In January 2003, the Company entered into an agreement with a
supplier to purchase bauxite for production at its plants in New
Iberia, Louisiana, and McIntyre, Georgia. The term of the
agreement was three years commencing January 1, 2003, and
required the Company to purchase 60,000 metric tons of material
annually at specified contract prices. The contract also had
provisions to allow the Company to commit to purchase up to an
additional 45,000 metric tons in any contract year. The Company
entered into a new agreement with the supplier that extended the
F-20
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreement through 2007 under substantially similar terms. For
the years ended December 31, 2006, 2005 and 2004, the
Company purchased $17.0 million, $9.5 million and
$9.0 million, respectively, of bauxite under the agreement.
In 2002, the Company entered into a five-year agreement and a
ten-year agreement with two different suppliers to purchase
bauxite and hard clays for its China plant at specified contract
prices. The five-year agreement requires the Company to purchase
a minimum of 10,000 metric tons of material annually, or
100 percent of its annual requirements for bauxite if less
than 10,000 metric tons. The ten-year agreement requires the
Company to accept delivery from the supplier at least
80 percent of the plants annual requirements. For the
years ended December 31, 2006, 2005 and 2004, the Company
purchased approximately $0.8 million, $1.4 million and
$0.9 million, respectively, of material under the
agreements.
The Company has entered into a lease agreement with the
Development Authority of Wilkinson County (the Development
Authority) in the State of Georgia. Pursuant to this
agreement, the Development Authority holds the title to the real
and personal property of the Companys McIntyre and
Toomsboro manufacturing facilities and leases the facilities to
the Company for an annual rental fee of $35,000 per year
through the year 2016. At any time prior to the scheduled
termination of the lease, the Company has the option to
terminate the lease and purchase the property for a nominal fee
plus the payment of any rent payable through the balance of the
lease term. Furthermore, the Company has a security interest in
the title held by the Development Authority. The Company has
also entered into a Memorandum of Understanding (the
MOU) with the Development Authority and other local
agencies, under which the Company receives tax incentives in
exchange for its commitment to invest in the county and increase
employment. The Company is required to achieve certain
employment levels in order to retain its tax incentive. In the
event the Company does not meet the
agreed-upon
employment targets or the MOU is otherwise terminated, the
Company would be subjected to additional property taxes
annually. The property subject to the lease agreement is
included in Property, Plant and Equipment (net book value of
$133.7 million at December 31, 2006) in the
accompanying financial statements.
The Company uses natural gas to power its domestic manufacturing
plants. From time to time the Company enters into contracts to
purchase a portion of the anticipated natural gas requirements.
The contracts are at specified prices and are typically
short-term in duration. As of December 31, 2006, the
Company had natural gas contracts totaling $21.9 million,
expiring at various times through February 2008.
The Company has commitments totaling $7.5 million for
equipment and subcontractor agreements related to constructing a
second production line at its manufacturing facility in
Toomsboro, Georgia. In the event of cancellation, some of the
commitments have cancellation clauses that would require the
Company to pay expenses incurred by manufacturers to date
and/or a
penalty fee.
The Company was in compliance with the terms of all the above
listed agreements at December 31, 2006.
|
|
13.
|
Employment
Agreements
|
The Company has an employment agreement through
December 31, 2007 with its President and Chief Executive
Officer. The agreement, effective June 1, 2006, provides
for an annual base salary and incentive bonus. If the President
is terminated early without cause, the Company will be obligated
to pay two years base salary and a prorated incentive bonus. The
agreement also contains a two-year non-competition covenant that
would become effective upon termination for any reason. The
employment agreement extends automatically for successive
one-year periods without prior written notice.
The Company has an employment agreement with the CARBO Ceramics
Inc. Vice President, Business Development (former President of
Pinnacle Technologies, Inc.) through May 31, 2007. The
agreement provides for an annual base salary and incentive
bonus. The term of the agreement may be terminated by the
Company or the Vice President, Business Development for any
reason. The agreement contains a non-competition covenant that
is effective for one year beyond the term of the agreement.
F-21
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Legal
Proceedings and Judgment
|
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 costs to resolve
these matters will have a material adverse effect on the
Companys consolidated financial position, results of
operations, or cash flows.
On January 15, 2007, the Company awarded 44,734 shares
of restricted stock to certain employees. The fair value of the
stock award on the date of grant totaled $1,601,000, which will
be expensed net of estimated forfeitures over the three year
vesting period.
On January 26, 2007, following self-disclosure of certain
air pollution emissions, the Company received a Notice of
Violation (NOV) from the State of Georgia Department
of Environmental Protection regarding appropriate permitting for
emissions of two specific substances from its Toomsboro
facility. The NOV calls for performance testing of these
emissions and further dialogue with the relevant government
agencies. The Company is assessing what impact, financial or
otherwise, that might result from the NOV, and does not at this
time have an estimate of costs associated with compliance.
F-22
CARBO
Ceramics Inc.
Schedule II Consolidated Valuation and
Qualifying Accounts
For the Years Ended December 31, 2006, 2005 and
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
End of
|
|
|
|
|
Year Ended
|
|
Year
|
|
|
Expenses
|
|
|
Write-Offs
|
|
|
Year
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
1,335
|
|
|
$
|
507
|
|
|
$
|
89
|
|
|
$
|
1,753
|
|
|
|
|
|
December 31, 2005
|
|
$
|
665
|
|
|
$
|
682
|
|
|
$
|
12
|
|
|
$
|
1,335
|
|
|
|
|
|
December 31, 2004
|
|
$
|
20
|
|
|
$
|
666
|
|
|
$
|
21
|
|
|
$
|
665
|
|
|
|
|
|
S-1
Exhibit Index
|
|
|
|
|
|
3
|
.1
|
|
Certificate of Incorporation of
CARBO Ceramics Inc. (incorporated by reference to
exhibit 3.1 to the registrants
Form S-1
Registration Statement
No. 333-1884)
|
|
3
|
.2
|
|
Bylaws of CARBO Ceramics Inc.
(incorporated by reference to exhibit 3.2 to the
registrants
Form S-1
Registration Statement
No. 333-1884
and exhibit 99.2 to the Companys
form 8-K
Current Report filed July 20, 2005)
|
|
4
|
.1
|
|
Form of Common Stock Certificate
of CARBO Ceramics Inc. (incorporated by reference to
exhibit 4.1 to the registrants
Form S-1
Registration Statement
No. 333-1884)
|
|
4
|
.2
|
|
Certificate of Designations of
Series A Preferred Stock (incorporated by reference to
exhibit 2 to registrants
Form 8-A
Registration Statement No. 001-15903)
|
|
10
|
.1
|
|
Second Amended and Restated Credit
Agreement dated as of December 31, 2000, as amended
December 23, 2003 and as further amended December 10,
2004, between Brown Brothers Harriman & Co. and CARBO
Ceramics Inc. (incorporated by reference to exhibit 10.1 to
the registrants
Form 10-K
Annual Report for the year ended December 31, 2000)
|
|
10
|
.2
|
|
Form of Tax Indemnification
Agreement between CARBO Ceramics Inc. and William C. Morris,
Robert S. Rubin, Lewis C. Glucksman, George A. Wiegers, William
A. Griffin, and Jesse P. Orsini (incorporated by reference to
exhibit 10.2 to the registrants
Form S-1
Registration Statement
No. 333-1884)
|
|
10
|
.3
|
|
Purchase and Sale Agreement dated
as of March 31, 1995, between CARBO Ceramics Inc. and GEO
Specialty Chemicals, Inc., as amended (incorporated by reference
to exhibit 10.5 to the registrants
Form S-1
Registration Statement
No. 333-1884)
|
|
10
|
.4
|
|
Raw Material Requirements
Agreement dated as of June 1, 2003, between CARBO Ceramics
Inc. and C-E Minerals Inc. (incorporated by reference to
exhibit 10.4 the registrants
Form 10-K
Annual Report for the year ended December 31, 2003)
|
|
*10
|
.5
|
|
CARBO Ceramics Inc. 1996 Stock
Option Plan for Key Employees (incorporated by reference to
exhibit 10.9 to the registrants
Form S-1
Registration Statement
No. 333-1884)
|
|
*10
|
.6
|
|
Amendment No. 1 to the CARBO
Ceramics Inc. 1996 Stock Option Plan for Key Employees
(incorporated by reference to exhibit 4.5 to the
registrants
Form S-8
Registration Statement
No. 333-88100)
|
|
*10
|
.7
|
|
Form of Stock Option Award
Agreement (incorporated by reference to exhibit 10.10 to
the registrants
Form S-1
Registration Statement
No. 333-1884)
|
|
10
|
.8
|
|
Mining Agreement dated as of
January 1, 2003 between CARBO Ceramics Inc. and Arcilla
Mining and Land Co. (incorporated by reference to
exhibit 10.8 to the registrants
Form 10-K
Annual Report for the year ended December 31, 2002)
|
|
*10
|
.9
|
|
Employment Agreement between CARBO
Ceramics Inc. and Christopher A. Wright (incorporated by
reference to the registrants
Form 10-K
Annual Report for the year ended December 31, 2002)
|
|
*10
|
.10
|
|
1996 Stock Option Plan of Pinnacle
Technologies, Inc., as amended and restated May 31, 2002
(incorporated by reference to exhibit 4.1 to
registrants
Form S-8
Registration Statement
No. 333-91252)
|
|
10
|
.11
|
|
Lease Agreement dated as of
November 1, 2003, between the Development Authority of
Wilkinson Count and CARBO Ceramics Inc. (incorporated by
reference to exhibit 10.12 the registrants
Form 10-K
Annual Report for the year ended December 31, 2003)
|
|
*10
|
.12
|
|
CARBO Ceramics Inc. Incentive
Compensation Plan (incorporated by reference to
exhibit 99.1 of the registrants
Form 8-K
Current Report filed January 24, 2005)
|
|
*10
|
.13(a)
|
|
2004 CARBO Ceramics Inc. Long-Term
Incentive Plan (incorporated by reference to exhibit 99.2
of the registrants
Form 8-K
Current Report filed January 24, 2005)
|
|
*10
|
.13(b)
|
|
Amendment No. 1 to the 2004
CARBO Ceramics Inc. Long-Term Incentive Plan (incorporated by
reference to exhibit 10.1 of the registrants
Form 8-K
Current Report filed April 24, 2006)
|
|
*10
|
.14
|
|
Form of Officer Restricted Stock
Award Agreement (incorporated by reference to exhibit 99.3
of the registrants
Form 8-K
Current Report filed January 24, 2005)
|
|
*10
|
.15
|
|
CARBO Ceramics Inc. Director
Deferred Fee Plan (incorporated by reference to
exhibit 99.1 of the registrants
Form 8-K
Current Report filed December 19, 2005)
|
|
|
|
|
|
|
*10
|
.16
|
|
Letter Agreement dated
December 2, 2005 between CARBO Ceramics Inc. and Jesse P.
Orsini (incorporated by reference to exhibit 10.18 to the
registrants
Form 10-K
Annual Report for the year ended December 31, 2006)
|
|
*10
|
.17
|
|
Form of Non-Employee Director
Restricted Stock Award Agreement (incorporated by reference to
exhibit 10.2 of the registrants
Form 8-K
Current Report filed April 24, 2006)
|
|
*10
|
.18
|
|
Form of Officer Restricted Stock
Award Agreement (incorporated by reference to exhibit 10.3
of the registrants
Form 8-K
Current Report filed April 24, 2006)
|
|
*10
|
.19
|
|
Employment Agreement dated as of
May 10, 2006 between CARBO Ceramics Inc. and Gary Kolstad
(incorporated by reference to exhibit 10.1 to the
registrants
Form 8-K
Current Report filed May 16, 2006)
|
|
*10
|
.20
|
|
Incentive Compensation Plan for
Key Employees (incorporated by reference to exhibit 10.1 to
the registrants
Form 8-K
Current Report filed January 22, 2007)
|
|
*10
|
.21
|
|
Incentive Compensation Plan for
Energy Professional Staff (incorporated by reference to
exhibit 10.2 to the registrants
Form 8-K
Current Report filed January 22, 2007)
|
|
14
|
|
|
Code of Ethics (incorporated by
reference to exhibit 14 to the registrants
Form 10-K
Annual Report for the year ended December 31, 2003)
|
|
21
|
|
|
Subsidiaries
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification by Gary A. Kolstad
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification by Paul G. Vitek
|
|
32
|
|
|
Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement filed as
an exhibit pursuant to Item 15(b) of the requirements for
an Annual Report on
Form 10-K. |