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, 2007
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or
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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. 001-15903
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:
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Title of Each Class
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Name of Each Exchange on which Registered
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Common Stock, par value $0.01 per share
Preferred Stock Purchase Rights
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New York Stock Exchange
New York Stock Exchange
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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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
Company o
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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 29, 2007, as reported on
the New York Stock Exchange, was approximately $637,639,000.
Shares of Common Stock held by each executive 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 22, 2008, the Registrant had
24,588,761 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrants Annual
Meeting of Shareholders to be held April 15, 2008, are
incorporated by reference in Part III.
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 natural gas wells and to oilfield service companies to help
increase the production rates and the amount of oil and natural
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 natural 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 most
expensive. 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 natural gas, an increase in the total oil or natural 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 natural 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 natural 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 11 to the Companys Consolidated Financial
Statements.
The Company primarily manufactures five distinct ceramic
proppants. The Company has historically pursued a strategy of
introducing new products that expand the market for ceramic
proppants relative to sand-based proppants.
CARBOHSP®
and
CARBOPROP®
are premium priced, high strength proppants designed primarily
for use in deep gas wells.
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®
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 ceramic proppants designed for use in natural
gas wells of moderate depth and oil wells.
CARBOLITE®
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 most commonly used in oil wells.
1
CARBOECONOPROP®,
introduced in 1992 to compete directly with sand-based proppant
and
CARBOHYDROPROPtm,
introduced in late 2007 to improve performance in
slickwater fracture treatments, are the
Companys lowest priced products. Sales volume of
CARBOECONOPROP®
has generally grown at a faster rate than the Companys
other ceramic proppants. While it is too early to fully predict
the effects of introducing
CARBOHYDROPROPtm,
the Company expects operators will also use this product in
place of sand-based alternatives.
Based on information provided by a third-party survey, 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, 2007, 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 natural 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 natural 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. Pinnacle also provides fracture
engineering and design services as well as develops and sells
the most widely used hydraulic fracture software modeling 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 that it expects to
complete a manufacturing facility in Venezuela in 2008.
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 primarily
manufactures 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®,
CARBOECONOPROP®
and
CARBOHYDROPROPtm
products compete primarily with ceramic proppant produced by
Saint-Gobain and Curimbaba 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 readily available, and that its
delivery performance is excellent. The Company also believes
that its superior technical
2
support has enabled it to 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, as needed, to meet anticipated future increases
in sales demand. Between 2005 and 2007, the Company expanded its
proppant manufacturing capacity by approximately 80% in a
three-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 1992, 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 major oilfield service companies are actively attempting to
develop competing fracture mapping services. Pinnacle has
expanded the use of the technologies initially developed for
fracture mapping to perform monitoring of long-term reservoir
processes. Pinnacle performs reservoir diagnostic services
through the use of tiltmeters, microseismic mapping, fiber optic
sensing, GPS, as well as pressure and temperature monitoring. A
number of major oilfield service companies are actively
attempting to develop and market competing reservoir monitoring
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, three of the largest
participants in the worldwide petroleum pressure pumping
industry. These companies collectively accounted for
approximately 62% and 70% of the Companys 2007 and 2006
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 product
quality, availability 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
3
this combined marketing approach including appointing a single
corporate officer to oversee the marketing activities of both
operating segments and co-locating the marketing and sales teams
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.
While the Companys products have historically been used in
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 new product introductions and 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 alternatives in the hydraulic fracturing of a
natural gas or oil well. In addition to the increased technical
marketing effort, the Company from time to time engages in
large-scale field trials to demonstrate the economic benefits of
its products and validate the findings of its computer
simulations. Periodically, 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.
In 2007 the Companys international marketing efforts were
conducted primarily through its sales offices in Aberdeen,
Scotland, Beijing, China and Moscow, Russia, and through
commissioned sales agents located in South America and China.
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%, 34% and 40% of the Companys sales for 2007, 2006 and
2005, respectively. The decrease in the proportion of
international sales in 2006 was 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
completed construction of a manufacturing facility in Kopeysk,
Russia in the second quarter of 2007 and expects that having
local manufacturing capacity will help it regain market share in
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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2007
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2006
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2005
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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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223.1
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$
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205.0
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$
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152.6
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International
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117.2
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107.1
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100.1
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Total
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$
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340.3
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$
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312.1
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$
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252.7
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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. The
Company has been expanding manufacturing capacity consistently
since 1999. 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 manufacturing
capacity of 100 million pounds per year.
In early 2006, the Company completed construction of a
manufacturing facility in Toomsboro, Georgia at a cost of
$61.3 million and with production capacity of
250 million pounds per year. A second production line at
this facility, also with production capacity of 250 million
pounds per year, was completed in the fourth quarter of 2007 and
commenced operations in January 2008. This plant efficiently
produces high volumes of the Companys low-
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cost, lightweight
CARBOECONOPROP®,
and is being utilized to produce the Companys
newly-introduced
CARBOHYDROPROPTM
product. The plant is designed to accommodate future expansion
to a capacity of up to one billion pounds per year through the
construction of two additional production lines. 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 was completed in
the second quarter of 2007 and has an annual capacity of
100 million pounds.
In the fourth quarter of 2007, the Company announced its plan to
idle production at its New Iberia facility originally
constructed in 1978. A transition plan for this event is being
implemented, and the Company does not expect it to have a
material impact on its ability to meet demand for the
Companys products. The Companys decision to idle
production at this facility was based on the rising cost of
imported raw material and the small scale of the New Iberia
facility. The production of products currently manufactured in
the New Iberia facility is expected to be moved to the
Companys facility in McIntyre, Georgia.
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
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Capacity
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Products
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(millions of pounds)
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New Iberia, Louisiana
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120
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CARBOHSP®
and
CARBOPROP®
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Eufaula, Alabama
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260
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CARBOLITE®
and
CARBOECONOPROP®
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McIntyre, Georgia
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275
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CARBOLITE®,
CARBOECONOPROP®
CARBOHSP®
and
CARBOPROP®
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Toomsboro, Georgia
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500
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CARBOECONOPROP®
and
CARBOHYDROPROPtm
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Luoyang, China
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100
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CARBOPROP®
and
CARBOLITE®
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Kopeysk, Russia
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100
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CARBOPROP®
and
CARBOLITE®
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Total current capacity
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1,355
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*
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* |
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Production activities at the New Iberia facility are expected to
be idled in 2008. Excluding capacity at the New Iberia
facility, total annual capacity is approximately
1.2 billion pounds. |
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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2007
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2006
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2005
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($ in millions)
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Long-lived assets:
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United States
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$
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239.1
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$
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200.0
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$
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173.9
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International (primarily China and Russia)
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65.9
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58.8
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31.6
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Total
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$
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305.0
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$
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258.8
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$
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205.5
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Distribution
The Company maintains finished goods inventories at each of its
manufacturing facilities and at 13 remote stocking facilities
located in Rock Springs, Wyoming; Oklahoma City, Oklahoma;
San Antonio, Texas; Alice, Texas; Shreveport, Louisiana;
Williston, North Dakota; Edmonton, Alberta, Canada; Grande
Prairie, Alberta, Canada; Rotterdam, The Netherlands;
Alexandria, Egypt; 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, Alice,
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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 660 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.
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, Guyana,
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
exited this business in 2007. The Company recently signed in
2008 a three-year supply agreement for a portion of its annual
bauxite requirement from a supplier that will mine bauxite in
Guyana, and is actively evaluating alternative suppliers for
future bauxite requirements.
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®
and
CARBOHYDROPROPtm.
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 2008 planned production rates the acquired raw material would
supply the needs of the two Georgia facilities for a period of
approximately 22 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.
The Companys production facility Kopeysk, Russia currently
uses uncalcined bauxite for the production of
CARBOPROP®.
Bauxite is purchased under annual agreements that stipulate
fixed prices for up to a specified quantity of material. For
2008, the supply agreement provides for up to 89,800 metric tons
of bauxite at fixed prices.
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.
6
The Companys plants in New Iberia, Louisiana; McIntyre,
Georgia; Kopeysk, Russia and Luoyang, China use a 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, 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.
The Company owns five U.S. patents, three Russian patents,
one Argentinean patent and one Singapore 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 a low-apparent specific gravity
ceramic proppant, and will expire in 2022. Two of the
Companys U.S. patents and the Companys
Singapore patent relate to
TiO2
scouring media, a titanium-based media used in scouring
processes, and will expire in 2023 through 2025. The
Companys Russian patents relate to lightweight and
intermediate strength proppants that it produces in its Russian
manufacturing facility and will expire in 2025 through 2026. The
Companys Argentinean patent relates to the
CARBOPROP®
product and will expire in 2008.
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.
The Company owns eleven U.S. patent applications (together
with a number of counterpart applications pending in foreign
jurisdictions). Two of the U.S. patent applications
(together with a number of counterpart applications pending in
foreign jurisdictions) cover scouring and grinding media, and
processes for their preparation. Two of the U.S. patent
applications (together with a number of counterpart applications
pending in foreign jurisdictions) 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 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
7
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 expires 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 five 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 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.
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 Company received an additional NOV with
respect to emissions from its McIntyre facility in May 2007. The
NOVs call 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 NOVs, and does not at this time have an estimate of
costs associated with compliance. See Item 3. Legal
Proceedings.
Employees
At December 31, 2007, the Company had 759 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, estimate, forecast,
plan or intend 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.
8
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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fluctuations in foreign currency exchange rates; and
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the potential expropriation of assets by foreign governments.
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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 (OPEC). 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 Securities Exchange Act of
1934 (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 that 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. More specifically, the demand for our products is
closely related to the number of natural gas and oil wells
completed in geologic formations where ceramic proppants are
used in fracture treatments. 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
OPEC, have contributed, and are likely to continue to
contribute, to price volatility. Additionally, warmer than
normal winters in North America and other weather
9
patterns may adversely impact the short-term demand for natural
gas and, therefore, demand for our products and services. 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 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 2007, our largest customers were, in alphabetical order,
BJ Services Company, Halliburton Energy Services, Inc. and
Schlumberger Limited, three of the 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 pressure pumping service companies to
hydraulically fracture wells, these three customers accounted
collectively for approximately 62% of our 2007 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 product
quality, availability 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 five United States patents, three Russian patents, one
Singapore patent and one Argentinean patent relating to ceramic
proppant. These patents generally cover the manufacture and use
of some of our products. The U.S. patents expire at various
times in the years 2009 through 2023, with 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.
10
Third
parties may claim that we are infringing their intellectual
property rights.
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. Although the Company does not believe that it is
infringing upon the intellectual property rights of others by
using such proprietary information and technology, it is
possible that such a claim will be asserted against the Company
in the future. In the event any third party makes a claim
against us for infringement of patents or other intellectual
property rights of a third party, such claims, with or without
merit, could be time-consuming and result in costly litigation.
In addition, the Company could experience loss or cancellation
of customer orders, experience product shipment delays, or be
subject to significant liabilities to third parties. If our
products were found to infringe on a third partys
proprietary rights, the Company could be required to enter into
royalty or licensing agreements to continue selling its
products. Royalty or licensing agreements, if required, may not
be available on acceptable terms, if at all, which could
seriously harm our business. Involvement in any patent dispute
or other intellectual property dispute or action to protect
trade secrets and expertise could have a materially adverse
effect on the Companys business.
We
operate in an increasingly competitive market.
We compete with 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.
Major
oilfield service companies offer or are developing competing
fracture mapping and reservoir monitoring
services.
A number of major oilfield service companies are actively
attempting to develop or presently market fracture mapping and
reservoir monitoring services that compete with those offered by
Pinnacle. A number of these companies are larger and have more
resources than the Company. If one or more of these companies
develops and markets fracture mapping or reservoir monitoring
services that effectively compete with those offered by
Pinnacle, the revenues and net income of the Company could be
adversely affected.
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.
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. Moreover, as discussed in
Item 3 Legal Proceedings of this
Form 10-K,
we received two NOVs from the State of Georgia Environmental
Protection Division (EPD) during 2007. 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
11
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%, 34% and
40% of our total revenues in 2007, 2006 and 2005, respectively.
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);
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changes in regulatory requirements, tariffs, customs, duties and
other trade barriers;
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transportation delays;
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power supply shortages and shutdowns;
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difficulties in staffing and managing foreign operations and
other labor problems;
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currency rate fluctuations, convertibility and repatriation;
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taxation of our earnings and the earnings of our personnel;
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potential expropriation of assets by foreign
governments; and
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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.
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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 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.
Undetected
defects in Pinnacles fracture simulation software could
adversely affect its business.
Despite extensive testing, Pinnacles software could
contain defects, bugs or performance problems. If any of these
problems are not detected, the Company could be required to
incur extensive development costs or costs related to product
recalls or replacements. The existence of any defects, errors or
failures in Pinnacles software products may subject
Pinnacle to liability for damages, delay the development or
release of new products and adversely affect market acceptance
or perception of Pinnacles software products or related
services, any one of which could materially and adversely affect
the Companys business, results of operations and financial
condition.
A
significant failure of our computer systems or networks in
connection with the implementation of new enterprise software
could adversely affect our business.
We plan to implement new enterprise resources planning software
during 2008. We plan to use internal resources, as well as the
software supplier and other outside software consultants, to
implement the software. To mitigate the risks associated with
the implementation, we have installed a full hardware and
software test environment, separate from our operating
environment, to thoroughly test and validate the new software.
The test environment may not completely match the operating
environment, thereby reducing the accuracy of our tests. While
we have a detailed implementation plan, all software
implementations of this complexity have inherent risks,
12
including, without limitation, potential interruptions in
service that could adversely affect our relationships with our
suppliers and customers.
The
market price of our common stock will fluctuate, and could
fluctuate significantly.
The market price of the Companys 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;
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differences between our actual financial or operating results
and those expected by investors and analysts;
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changes in analysts recommendations or projections;
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new statutes or regulations or changes in interpretations of
existing statutes and regulations affecting our business;
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changes in general economic or market conditions; and
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broad market fluctuations.
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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.)
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Item 1B.
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Unresolved
Staff Comments
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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 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.
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
13
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 in Kopeysk, Russia is located on approximately
60 acres and consists 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; Alice,
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; Oklahoma City, Oklahoma; 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
|
On January 26, 2007, following self-disclosure of certain
air pollution emissions, the Company received a NOV from the
State of Georgia EPD regarding appropriate permitting for
emissions of two specific substances from its Toomsboro
facility. Pursuant to the NOV, the Company conducted performance
testing of these emissions and provided updated results in the
course of additional dialogue with the relevant government
agencies, including discussions of emissions at the
Companys nearby McIntyre, Georgia manufacturing facility.
Following these discussions, a second NOV was issued on
May 22, 2007 for the McIntyre plant for alleged violations
similar to those in the January NOV, related to the Toomsboro
facility. The Company submitted to the EPD a schedule of
responsive activities in mid June and is in process of
submitting additional information. The EPD has not yet issued a
response regarding required remedial actions or fines, if any,
resulting from the NOVs and as such the Company does not at this
time have an estimate of costs associated with compliance.
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.
14
|
|
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 2007.
|
|
Item 4A.
|
Executive
Officers of the Registrant
|
Gary A. Kolstad (age 49) 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.
Mr. Kolstad became a Vice President of Schlumberger, Ltd.
in 2001, where he last held the positions of Vice President,
Oilfield Services U.S. Onshore and Vice
President, Global Accounts.
Paul G. Vitek (age 49) 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 52) 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.
David G. Gallagher (age 49) was appointed as Vice
President, Marketing and Sales on April 16, 2007.
Mr. Gallagher previously held a variety of positions over a
26 year period with Schlumberger, Ltd., where from 2002
until 2007, he served as Director of Marketing for Venezuela,
Trinidad and the Caribbean.
M. Kevin Fisher (age 51) was appointed 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
technical and management positions.
R. Sean Elliott (age 33) joined the Company in
November 2007 as General Counsel, and was appointed as Corporate
Secretary and Chief Compliance Officer on January 15, 2008.
Previously, Mr. Elliott served as legal counsel to Aviall,
Inc. (an international aviation company) from 2004 to 2007,
where he last held the positions of Assistant General Counsel
and Assistant Secretary. From 1999 until 2004, Mr. Elliott
practiced law with Haynes and Boone, LLP, a Dallas, Texas-based
law firm.
All officers are elected 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, 2008, was 14,492.
15
The following table sets forth the high and low sales prices of
the Companys common stock on the New York Stock Exchange
and dividends for the last two fiscal years were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
Sales Price
|
|
|
Dividends
|
|
|
Sales Price
|
|
|
Dividends
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
March 31
|
|
$
|
46.93
|
|
|
$
|
34.34
|
|
|
$
|
0.12
|
|
|
$
|
67.67
|
|
|
$
|
50.71
|
|
|
$
|
0.10
|
|
June 30
|
|
|
48.33
|
|
|
|
41.37
|
|
|
|
0.12
|
|
|
|
65.83
|
|
|
|
44.37
|
|
|
|
0.10
|
|
September 30
|
|
|
51.00
|
|
|
|
41.35
|
|
|
|
0.14
|
|
|
|
50.20
|
|
|
|
34.21
|
|
|
|
0.12
|
|
December 31
|
|
|
51.94
|
|
|
|
36.69
|
|
|
|
0.14
|
|
|
|
39.81
|
|
|
|
32.16
|
|
|
|
0.12
|
|
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 2007.
Equity
Compensation Plans and Stock Performance Graph
Information regarding the Companys equity compensation
plans and the securities authorized for issuance thereunder is
incorporated by reference as described in Item 12 of
Part III. A stock performance graph comparing shareholder
return on the Companys common stock versus selected
indexes is set forth in Item 12 of Part III.
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
($ in thousands, except per share data)
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
340,351
|
|
|
$
|
312,126
|
|
|
$
|
252,673
|
|
|
$
|
223,054
|
|
|
$
|
169,936
|
|
Cost of sales
|
|
|
221,202
|
|
|
|
196,133
|
|
|
|
153,941
|
|
|
|
131,648
|
|
|
|
103,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
119,149
|
|
|
|
115,993
|
|
|
|
98,732
|
|
|
|
91,406
|
|
|
|
66,167
|
|
Selling, general and administrative expenses(1)
|
|
|
41,098
|
|
|
|
35,206
|
|
|
|
28,432
|
|
|
|
26,008
|
|
|
|
19,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
78,051
|
|
|
|
80,787
|
|
|
|
70,300
|
|
|
|
65,398
|
|
|
|
47,014
|
|
Other, net
|
|
|
3,349
|
|
|
|
3,027
|
|
|
|
1,783
|
|
|
|
824
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
81,400
|
|
|
|
83,814
|
|
|
|
72,083
|
|
|
|
66,222
|
|
|
|
47,087
|
|
Income taxes
|
|
|
27,530
|
|
|
|
29,561
|
|
|
|
25,463
|
|
|
|
24,549
|
|
|
|
17,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
53,870
|
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
|
$
|
41,673
|
|
|
$
|
29,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.21
|
|
|
$
|
2.23
|
|
|
$
|
1.94
|
|
|
$
|
1.75
|
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.20
|
|
|
$
|
2.22
|
|
|
$
|
1.93
|
|
|
$
|
1.73
|
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
($ in thousands, except per share data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
144,272
|
|
|
$
|
143,925
|
|
|
$
|
148,287
|
|
|
$
|
146,282
|
|
|
$
|
92,709
|
|
Current liabilities excluding bank borrowings
|
|
|
33,264
|
|
|
|
34,246
|
|
|
|
36,309
|
|
|
|
29,192
|
|
|
|
16,432
|
|
Bank borrowings-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
275,826
|
|
|
|
231,748
|
|
|
|
179,500
|
|
|
|
125,385
|
|
|
|
116,664
|
|
Total assets
|
|
|
453,123
|
|
|
|
404,665
|
|
|
|
355,796
|
|
|
|
297,517
|
|
|
|
235,124
|
|
Total shareholders equity
|
|
|
389,439
|
|
|
|
342,859
|
|
|
|
293,366
|
|
|
|
244,367
|
|
|
|
200,139
|
|
Cash dividends per share
|
|
$
|
0.52
|
|
|
$
|
0.44
|
|
|
$
|
0.36
|
|
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
|
|
(1) |
|
Selling, general and administrative (SG&A) expenses for
2007, 2006, 2005, 2004 and 2003 include costs of
start-up
activities of $1,215,000, $474,000, $1,092,000, none, and
$80,000, respectively.
Start-up
costs for 2007 are related primarily to the new production
facility in Kopeysk, Russia.
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. SG&A expenses in 2007, 2006, 2005, 2004 and 2003
also include losses of $268,000, none, $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 completed construction of this new
facility during the first half of 2007. The Company believes
international operations will continue to represent an important
role in its future growth.
17
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 is
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 added
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
with the ability to operate at design capacity of
250 million pounds per year. Construction of a second
production line at the Toomsboro facility was completed during
the fourth quarter of 2007 and production started in January
2008. This second line added an additional 250 million
pounds of annual capacity. The manufacturing facility in Russia,
completed during the first half of 2007, is designed to have
initial production capacity of 100 million pounds per year.
As a result of these changes, the Company has expanded its
proppant manufacturing capacity by approximately 80% over a
three-year period. This expansion will be partially offset by
the Companys recently announced plans to idle production
at its oldest manufacturing facility, located in New Iberia,
Louisiana, during the first half of 2008. This facility has a
designed production capacity of 120 million pounds per
year. The idling of this plant will reduce production costs and
is based on the rising cost of imported raw material and the
small scale of that facility. 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.
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. As a result, the Company has more than tripled its
production capacity since 1997 although it is not currently
constructing any new manufacturing capacity. While the Company
has operated near or at full capacity at times during the
previous ten years, the addition of significant new capacity
could adversely impact operating profit margins if the timing of
this new capacity does not match increases in demand for the
Companys products.
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, the Company has
experienced recent increases in the cost of natural gas, which
is used in production by the Companys domestic
manufacturing facilities, and bauxite, which is the primary raw
material for production of the Companys high strength
ceramic proppant. The cost of natural gas 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. 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 and remained
high during much of 2006. 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, the Company
contracts in advance for portions of its future natural gas
requirements. During 2007 the Companys long-standing
contract with its supplier of high strength raw materials, which
are imported into the U.S., expired. The Company has experienced
an increase in the cost of high strength raw materials as it
seeks alternative suitable suppliers in other parts of the
world. These materials are used to manufacture high-strength
products,
CARBOPROP®
and
CARBOHSP®,
at the New Iberia, Louisiana and McIntyre, Georgia facilities.
The delivered cost of bauxite, which represents approximately
half of the cost of high strength products, increased 20% during
2007 and could increase as much as 15% to 25% in 2008. As these
costs are expected to continue to increase, management will
continue to pursue a long-term source of these materials to
complement its strong position in lightweight raw material
supplies. Despite the efforts to reduce exposure to changes in
natural gas prices and the cost of high strength raw materials,
it is possible that, given the significant portion of
manufacturing costs represented by these items, operating
margins may decline and changes in net income may not directly
correlate to changes in revenue.
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:
|
|
|
|
|
increasing marketing activities globally,
|
18
|
|
|
|
|
improving and expanding its distribution capabilities, and
|
|
|
|
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 continue to increase in
2008 from 2007 levels as the company continues to expand outside
of North America.
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 2007. 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 and 2007, the Company
benefited from the additional production capacity from its
Toomsboro, Georgia manufacturing facility and established new
records for sales volume, revenue and net income. From 2004
through 2007, the number of rigs actively drilling for oil and
gas in the United States increased 48 percent. Overseas
drilling activity remained strong in 2005 and through 2007, and
the Company saw an increase in sales volume in many regions
outside of North America. However, sales declined in the Russian
market in 2005 and 2006 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.
With the completion of the new manufacturing facility in
Kopeysk, Russia during the first half of 2007, sales volume in
the Russian market for 2007 increased from that of the previous
year. International revenues represented 34%, 34% and 40% of
total revenues from both operating segments in 2007, 2006 and
2005, respectively.
The Companys fracture and reservoir diagnostics business
is also impacted by the level of global drilling and hydraulic
fracturing activity. In 2007 and 2006 this business benefited
from increased acceptance and utilization of the Companys
fracture mapping services in unconventional natural gas
formations and from the developing reservoir monitoring market.
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. Fracture and reservoir diagnostic services accounted
for 15%, 11% and 11% of total revenues for 2007, 2006 and 2005,
respectively.
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, 2007, approximately 47% of the
balance in trade accounts receivable was attributable to those
three customers. The Company records an allowance for doubtful
accounts based on its assessment of collectability risk and
periodically evaluates the allowance based on a review of trade
accounts receivable. Trade accounts receivable are periodically
reviewed for collectability based on customers past credit
history and current financial condition, and the allowance is
adjusted, if necessary. If a
19
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, 2007, 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 the lower of cost or
market. 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.
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
|
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
|
($ in thousands)
|
|
Net Income
|
|
$
|
53,870
|
|
|
|
(1
|
)%
|
|
$
|
54,253
|
|
|
|
16
|
%
|
|
$
|
46,620
|
|
For the year ended December 31, 2007, the Company reported
net income of $53.9 million, a decline of 1% compared to
the previous year. For 2007 the Company experienced a 9%
increase in revenues, which represented the fifth consecutive
year the Company achieved a new revenue record. The increase in
revenues was offset by a decline in gross profit margin versus
the previous year due to a number of factors including:
increased costs for high strength raw materials imported into
the U.S., continued high manufacturing costs during the
start-up of
the Companys manufacturing facility in Russia, increased
field trial activity in which the Company sells its products at
a discounted price, and increased pricing pressure in certain
international markets. Selling, general and administrative
expenses also increased to support higher operating and sales
activity in an expanding global market. In addition,
start-up
costs in 2007, related primarily to the
start-up of
the Companys manufacturing facility in Russia, increased
$0.7 million from 2006, when the Company incurred costs
associated with the completion and
start-up of
the first production line in Toomsboro, Georgia. Interest
income, net of interest expense, in 2007 declined
$1.2 million due to lower cash balances as a result of
capital spending to add proppant manufacturing capacity.
Finally, net income in 2007 benefitted from incremental gains of
$1.5 million from the appreciation of Russian and
20
Chinese currencies relative to the U.S. dollar on the
capital structure of its investments in those countries and a
reduction in income taxes.
For the year ended December 31, 2006, the Company reported
record net income of $54.3 million, 16% greater than the
$46.6 million for the year ended December 31, 2005 and
2006 was the fourth consecutive year in which the Company
established a new record for net income. Net income increased
mainly due to record revenues from both operating segments. The
increase in revenues was partially offset by a decline in gross
profit margin versus the previous year primarily due to higher
manufacturing costs in the Proppant segment. Net income in 2006
also benefited somewhat from lower
start-up
costs than experienced in 2005, as the bulk of
start-up
activities for the Companys Toomsboro manufacturing
facility occurred in late 2005.
Individual components of financial results by operating segment
are discussed below.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Consolidated revenues
|
|
$
|
340,351
|
|
|
|
9
|
%
|
|
$
|
312,126
|
|
|
|
24
|
%
|
|
$
|
252,673
|
|
Revenues by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant
|
|
$
|
290,859
|
|
|
|
5
|
%
|
|
$
|
278,020
|
|
|
|
23
|
%
|
|
$
|
225,751
|
|
Fracture and Reservoir Diagnostics
|
|
$
|
49,492
|
|
|
|
45
|
%
|
|
$
|
34,106
|
|
|
|
27
|
%
|
|
$
|
26,922
|
|
Proppant segment revenues of $290.9 million for the year
ended December 31, 2007 surpassed last years record
of $278.0 million by 5%. Worldwide proppant sales volume
increased for the fifth consecutive year to 908 million
pounds and exceeded the 2006 sales record of 869 million
pounds by 4%. The volume of ceramic proppant sold in North
America remained unchanged from 2006 as a 5% increase in
U.S. sales volume and a 65% increase in sales to Mexico
were offset by a 26% decline in Canada. Overseas sales volume
increased 30% led by an increase in sales volume in Russia
following completion of the Companys manufacturing
facility there in the first half of 2007. In other overseas
markets, sales volume increased 7% in 2007 compared to 2006. The
average selling price of proppant remained relatively unchanged,
from $0.320 per pound in 2006 compared to $0.321 per pound for
2007.
Fracture and Reservoir Diagnostics segment revenues of
$49.5 million for 2007 increased 45% compared to
$34.1 million for 2006. The increase in revenues from the
prior year was primarily due to a 34% increase in fracture
mapping services primarily related to gas well completions in
North America. Fracture and Reservoir Diagnostics revenue
benefited from increased acceptance and utilization of the
Companys fracture mapping services in unconventional
natural gas formations as well as an 85% increase in revenue
from the developing reservoir monitoring market.
Proppant segment revenues of $278.0 million for the year
ended December 31, 2006 surpassed the prior year 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 million pounds and exceeded the
2005 sales record of 772 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
$26.9 million for 2005. The increase in revenues from the
prior year was primarily due to a 27% increase in mapping
services related to gas well completions in North America.
Fracture and Reservoir Diagnostics revenue benefited from an
increase in global drilling and fracturing activity in 2006,
increased acceptance and utilization of the
21
Companys fracture mapping services in unconventional
natural gas formations as well as increased revenue from the
developing long-term reservoir monitoring market.
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Consolidated gross profit
|
|
$
|
119,149
|
|
|
|
3
|
%
|
|
$
|
115,993
|
|
|
|
17
|
%
|
|
$
|
98,732
|
|
Consolidated gross profit %
|
|
|
35
|
%
|
|
|
|
|
|
|
37
|
%
|
|
|
|
|
|
|
39
|
%
|
Gross profit by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant
|
|
$
|
97,337
|
|
|
|
(3
|
)%
|
|
$
|
100,739
|
|
|
|
14
|
%
|
|
$
|
88,488
|
|
Proppant %
|
|
|
33
|
%
|
|
|
|
|
|
|
36
|
%
|
|
|
|
|
|
|
39
|
%
|
Fracture and Reservoir Diagnostics
|
|
$
|
21,812
|
|
|
|
43
|
%
|
|
$
|
15,254
|
|
|
|
49
|
%
|
|
$
|
10,244
|
|
Fracture and Reservoir Diagnostics %
|
|
|
44
|
%
|
|
|
|
|
|
|
45
|
%
|
|
|
|
|
|
|
38
|
%
|
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 2007 was $97.3 million,
or 33% of revenues, compared to $100.7 million, or 36% of
revenues, for 2006. Gross profit decreased $3.4 million
despite an increase of $12.8 million in revenue. The
factors contributing to the decrease in the proppant gross
profit from 2006 to 2007 are increased manufacturing and freight
costs associated with the production and sale of high-strength
proppants, continued high production costs during the
start-up of
the Companys manufacturing facility in Russia, increased
field trial activity in which the Company sells its products at
a discounted price, and increased pricing pressure in certain
international markets. These increased costs were partially
offset by a reduction in natural gas costs in the Companys
U.S. manufacturing facilities. Although Proppant segment
gross profit margins as a percent of revenues declined three
consecutive years, the Company expects that the percentage in
2008 will be similar to that of 2007.
Fracture and Reservoir Diagnostics segment gross profit of
$21.8 million for 2007 increased by 43% compared to gross
profit of $15.3 million for 2006 primarily due to the
increase in revenue for this segment. Gross profit margin for
this segment decreased slightly from 45% in 2006 to 44% in 2007
due to higher direct cost of sales related to long-term
reservoir monitoring projects and equipment sales.
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 $10.2 million for 2005 primarily due to the
increase in revenue for this segment. Gross profit margin for
this segment increased from 38% in 2005 to 45% in 2006 due to
higher asset and people utilization driven by strong revenue
growth across all North American regions.
22
Selling,
General & Administrative (SG&A) and Other
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Consolidated SG&A and other
|
|
$
|
41,098
|
|
|
|
17
|
%
|
|
$
|
35,206
|
|
|
|
24
|
%
|
|
$
|
28,432
|
|
As a % of revenues
|
|
|
12
|
%
|
|
|
|
|
|
|
11
|
%
|
|
|
|
|
|
|
11
|
%
|
SG&A and other by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant
|
|
$
|
27,665
|
|
|
|
11
|
%
|
|
$
|
24,959
|
|
|
|
19
|
%
|
|
$
|
20,922
|
|
Proppant %
|
|
|
10
|
%
|
|
|
|
|
|
|
9
|
%
|
|
|
|
|
|
|
9
|
%
|
Fracture and Reservoir Diagnostics
|
|
$
|
13,433
|
|
|
|
31
|
%
|
|
$
|
10,247
|
|
|
|
36
|
%
|
|
$
|
7,510
|
|
Fracture and Reservoir Diagnostics %
|
|
|
27
|
%
|
|
|
|
|
|
|
30
|
%
|
|
|
|
|
|
|
28
|
%
|
Proppant segment expenses consisted of $26.2 million of
SG&A and $1.5 million of other operating expenses in
2007 compared to $24.5 million and $0.5 million,
respectively, in 2006. SG&A expenses increased by
$1.7 million due to increases in research and development
activity, marketing activity in both domestic and international
markets, and administrative expenses necessary to support higher
sales activity in an expanding global market. Other operating
expenses for 2007 consisted of $1.2 million of
start-up
costs primarily related to the
start-up of
the Companys manufacturing facility in Russia and
$0.3 million of loss on disposal of assets mainly
attributed to the disposal of equipment at the McIntyre and
Eufaula proppant plants. Other operating expenses in 2006 were
primarily related to the 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 increased to 10% in 2007
compared to 9% in 2006.
Fracture and Reservoir Diagnostics segment SG&A of
$13.4 million for 2007 increased by 31% compared to
$10.2 million for 2006. The $3.2 million increase in
expenses was due to increased sales and marketing activity,
technological development spending and administrative costs to
support revenue growth. There were no other operating expenses
for this segment in 2007 or 2006.
Proppant segment expenses consisted of $24.5 million of
SG&A and $0.5 million of other 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 2005. The
$2.7 million increase in expenses was due to increased
sales and marketing activity to support revenue growth,
increased technical development spending and increases in
administration costs to support revenue growth.
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
|
($ in thousands)
|
|
Income Tax Expense
|
|
$
|
27,530
|
|
|
|
(7
|
)%
|
|
$
|
29,561
|
|
|
|
16
|
%
|
|
$
|
25,463
|
|
Effective Income Tax Rate
|
|
|
33.8
|
%
|
|
|
|
|
|
|
35.3
|
%
|
|
|
|
|
|
|
35.3
|
%
|
Income tax expense is not allocated between the two operating
segments. Consolidated income tax expense of $27.5 million
for the year ended December 31, 2007 decreased 7% compared
to 2006 due to a 3% decrease in pretax income, lower state
income tax obligations compared to prior year, an adjustment of
deferred income tax liabilities resulting from changes in
certain state income tax regulations, and a $0.9 million
reduction of estimated income tax resulting from preparation and
filing of prior years tax returns. The effective income
tax rate for 2007 was 33.8% compared to 35.3% for 2006.
23
Consolidated income tax expense of $29.6 million for the
year ended December 31, 2006 increased proportionately with
the 16% increase in taxable income compared to 2005. The
effective income tax rate of 35.3% of pretax income in 2006 was
unchanged from 2005.
Liquidity
and Capital Resources
At December 31, 2007, the Company had cash and cash
equivalents of $12.3 million and no short-term investments
compared to cash and cash equivalents of $25.0 million and
short-term investments of $7.5 million at December 31,
2006. During 2007, the Company generated $59.7 million cash
from operations, received $1.4 million from employee
exercises of stock options, received $7.5 million from net
purchases and sales of short-term investments, retained
$0.2 million cash from excess tax benefits relating to
stock-based compensation to employees, and accumulated
$0.2 million cash from effect of exchange rate changes.
Uses of cash included $65.0 million of capital spending,
$2.5 million on a business acquisition, $1.5 million
for part ownership in another company, and $12.7 million of
cash dividends. In addition, during 2007 the Company borrowed
and fully-repaid a total of $12.0 million on its credit
facility. Major capital spending in 2007 included
$30.5 million on a second production line at the Toomsboro
facility, which was completed during the fourth quarter of 2007
and added 250 million pounds of annual capacity at a total
cost of $53.8 million, $5.7 million on a new proppant
manufacturing facility in Kopeysk, Russia, which was completed
in the first half of 2007 and added 100 million pounds of
annual capacity at a total cost of $47.5 million,
$6.8 million on the expansion of distribution facilities
and $6.7 million on microseismic equipment for use in
providing fracture mapping and reservoir diagnostic services.
The Company believes its 2008 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. The Company believes its introduction of a
new product
CARBOHYDROPROPtm
should help penetrate the market for sand-based proppant in
slickwater fracturing treatments. Given the levels of natural
gas inventories in North America, the Company believes
there is the possibility of a short-term contraction in drilling
activity. From an overseas perspective, the Company believes the
outlook for drilling and fracturing activity is more optimistic
and expects the recent investments made in fixed assets and
human resources necessary to expand its international presence
to begin to show results. With capital spending requirements
expected to decrease substantially in 2008, the Company expects
to generate significant free cash flow.
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 15, 2008, the Companys Board of Directors
approved the payment of a quarterly cash dividend of $0.14 per
share to shareholders of the Companys common stock on
January 31, 2008. The Company estimates its total capital
expenditures in 2008 will be between $27.0 million and
$32.0 million.
The Company maintains an unsecured line of credit of
$10.0 million. As of December 31, 2007, there was no
outstanding debt under the credit agreement. The Company
anticipates that cash on hand, cash provided by operating
activities and funds available under its line of credit will be
sufficient to meet planned operating expenses, tax obligations
and capital expenditures for the next 12 months. The
Company also believes that it could acquire additional debt
financing, if needed. Based on these assumptions, the Company
believes that its fixed costs could be met even with a moderate
decrease in demand for the Companys products.
Off-Balance
Sheet Arrangements
The Company had no off-balance sheet arrangements as of
December 31, 2007.
24
Contractual
Obligations
The following table summarizes the Companys contractual
obligations as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in Period
|
|
|
|
|
|
|
Less than
|
|
|
1 - 3
|
|
|
4 - 5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
|
($ in thousands)
|
|
|
Long-term debt obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Primarily railroad equipment
|
|
|
23,008
|
|
|
|
4,556
|
|
|
|
7,623
|
|
|
|
5,554
|
|
|
|
5,275
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Natural gas contracts
|
|
|
13,882
|
|
|
|
13,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Raw materials contracts
|
|
|
2,711
|
|
|
|
2,416
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
39,601
|
|
|
$
|
20,854
|
|
|
$
|
7,918
|
|
|
$
|
5,554
|
|
|
$
|
5,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 5 and Note 13 to the Notes to the
Consolidated Financial Statements.
Operating lease obligations relate primarily to railroad
equipment leases and include leases of other property, plant and
equipment.
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, 2007, the last
contract was due to expire in October 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 13 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. Two
outstanding contracts require the Company to purchase a minimum
annual quantity of material, which are included in the above
table.
|
|
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. As of December 31, 2007, the Companys net
investment that is subject to foreign currency fluctuations
totals $85.4 million and the Company has recorded
cumulative foreign currency translation adjustments of
$3.6 million, net of deferred income tax. These currency
translation adjustments are included in other comprehensive
income. Also, the Companys subsidiary in Russia has
borrowed $35.6 million, as of December 31, 2007, from
another subsidiary of the Company to fund construction of the
manufacturing plant in Russia. This indebtedness, while
eliminated in consolidation of the financial statements, is
subject to exchange rate fluctuations between the local
reporting currency and the currency in which the debt is
denominated. Currency exchange rate fluctuations associated with
this indebtedness result in gains and losses that impact net
income. When necessary, the Company may enter into forward
foreign exchange contracts to hedge the impact of foreign
currency fluctuations. There were no such foreign exchange
contracts outstanding at December 31, 2007.
The Company has a $10.0 million line of credit with its
primary commercial bank. Under the terms of the revolving credit
agreement, the Company may elect to pay interest at either a
fluctuating base rate established by the bank from time to time
or at a rate based on the rate established in the London
inter-bank market. There were no borrowings outstanding under
this agreement at December 31, 2007. The Company does not
believe that it has any material exposure to market risk
associated with interest rates.
25
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The information required by this Item is contained in pages F-3
through F-23 of this Report.
|
|
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, 2007, 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. There are inherent
limitations to the effectiveness of any system of disclosure
controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurances
of achieving their control objectives. Based upon and as of the
date of that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Companys
disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods
specified in the SECs rules and forms, and to ensure that
information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is
accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure.
(b) Managements Report on Internal Control Over
Financial Reporting
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 Control Over Financial Reporting
There were no changes in the Companys internal control
over financial reporting during the quarter ended
December 31, 2007, that materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
26
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
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 portions of the Companys Proxy Statement
entitled Security Ownership of Certain Beneficial Owners
and Management, Election of Directors
Nominees, Election of Directors
Committees of the Board of Directors and Meeting
Attendance, Code of Business Conduct and
Ethics, Section 16(a) Beneficial Ownership
Compliance and Report of the Audit Committee.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference to the portions of the Companys Proxy Statement
entitled Security Ownership of Certain Beneficial Owners
and Management, Election of Directors
Nominees, Election of Directors
Committees of the Board of Directors and Meeting
Attendance, Code of Business Conduct and
Ethics, Section 16(a) Beneficial Ownership
Compliance and Report of the Audit Committee.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
The information required by this Item is incorporated by
reference from the Companys Proxy Statement under the
captions Securities Ownership of Certain Beneficial Owners
and Management and Equity Compensation Plan
Information.
27
Stock
Performance Graph
The following graph compares the cumulative shareholder return
on the Companys common stock versus the total cumulative
return on the S&P 500 Stock Index and the S&P Small
Cap 600, Oil & Gas Equipment & Services
Sub-Industry Group. The comparison assumes $100 was invested as
of December 31, 1997 and all dividends were reinvested.
COMPARISON
OF 10 YEAR CUMULATIVE TOTAL RETURN*
Among
CARBO Ceramics, Inc., The S & P 500 Index
And The S & P SmallCap 600 Oil &
Gas Equipment & Services Index
|
|
|
* |
|
$100 invested on 12/31/97 in stock or index-including
reinvestment of dividends.
Fiscal year ending December 31. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this Item is incorporated by
reference to the Companys Proxy Statement. portion of the
Companys Proxy Statement entitled Election of
Directors Nominees.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item is incorporated by
reference to the portion of the Companys Proxy Statement
entitled Ratification of Appointment of the Companys
Independent Registered Public Accounting Firm.
28
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-23 of this
Report:
|
Report of Independent Registered Public Accounting Firm
|
Consolidated Balance Sheets at December 31, 2007 and 2006
|
Consolidated Statements of Income for each of the three years
ended December 31, 2007, 2006 and 2005
|
Consolidated Statements of Shareholders Equity for each of
the three years ended December 31, 2007, 2006 and 2005
|
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2007, 2006 and 2005
|
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.
29
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: February 27, 2008
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
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Gary
A. Kolstad
Gary
A. Kolstad
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Paul
G. Vitek
Paul
G. Vitek
|
|
Sr. Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Claude
E. Cooke, Jr.
Claude
E. Cooke, Jr.
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Chad
C. Deaton
Chad
C. Deaton
|
|
Director
|
|
February 27, 2008
|
30
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ James
B. Jennings
James
B. Jennings
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ H.E.
Lentz, Jr.
H.E.
Lentz, Jr.
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Randy
L. Limbacher
Randy
L. Limbacher
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Jesse
P. Orsini
Jesse
P. Orsini
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Robert
S. Rubin
Robert
S. Rubin
|
|
Director
|
|
February 27, 2008
|
31
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, 2007. 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 has concluded that the
Company maintained effective internal control over financial
reporting as of December 31, 2007.
The Companys independent registered public accounting
firm, Ernst & Young LLP, has issued an attestation
report on 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 CARBO Ceramics Inc.s internal control over
financial reporting as of December 31, 2007, 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 included in the accompanying Managements Report
on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on 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, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, 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, CARBO Ceramics Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, 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, 2007, and 2006, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2007 and our report dated February 25,
2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
February 25, 2008
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, 2007 and 2006, and
the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. 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,
2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2007, 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 consolidated financial
statements, in 2007 the Company changed its method of accounting
for income taxes and 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), CARBO
Ceramics Inc.s internal control over financial reporting
as of December 31, 2007, 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 25, 2008 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
February 25, 2008
F-3
CARBO
CERAMICS INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,296
|
|
|
$
|
24,973
|
|
Short-term investments
|
|
|
|
|
|
|
7,500
|
|
Trade accounts and other receivables, net
|
|
|
68,950
|
|
|
|
63,461
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
35,070
|
|
|
|
26,181
|
|
Raw materials and supplies
|
|
|
18,917
|
|
|
|
14,602
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
53,987
|
|
|
|
40,783
|
|
Prepaid expenses and other current assets
|
|
|
2,588
|
|
|
|
2,558
|
|
Deferred income taxes
|
|
|
6,451
|
|
|
|
4,650
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
144,272
|
|
|
|
143,925
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
9,707
|
|
|
|
8,659
|
|
Land-use and mineral rights
|
|
|
6,168
|
|
|
|
6,101
|
|
Buildings
|
|
|
46,903
|
|
|
|
26,209
|
|
Machinery and equipment
|
|
|
310,593
|
|
|
|
207,341
|
|
Construction in progress
|
|
|
12,767
|
|
|
|
71,744
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
386,138
|
|
|
|
320,054
|
|
Less accumulated depreciation
|
|
|
110,312
|
|
|
|
88,306
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
275,826
|
|
|
|
231,748
|
|
Goodwill
|
|
|
23,213
|
|
|
|
21,840
|
|
Intangible and other assets, net
|
|
|
9,812
|
|
|
|
7,152
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
453,123
|
|
|
$
|
404,665
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,709
|
|
|
$
|
12,939
|
|
Accrued payroll and benefits
|
|
|
8,812
|
|
|
|
8,115
|
|
Accrued freight
|
|
|
2,979
|
|
|
|
2,061
|
|
Accrued utilities
|
|
|
3,132
|
|
|
|
3,166
|
|
Accrued income taxes
|
|
|
2,474
|
|
|
|
3,172
|
|
Retainage related to construction in progress
|
|
|
108
|
|
|
|
117
|
|
Other accrued expenses
|
|
|
4,050
|
|
|
|
4,676
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
33,264
|
|
|
|
34,246
|
|
Deferred income taxes
|
|
|
30,420
|
|
|
|
27,560
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share, 5,000 shares
authorized, none outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 40,000,000 shares
authorized; 24,516,370 and 24,391,214 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
|
|
245
|
|
|
|
244
|
|
Additional paid-in capital
|
|
|
108,686
|
|
|
|
104,784
|
|
Retained earnings
|
|
|
276,879
|
|
|
|
235,732
|
|
Accumulated other comprehensive income
|
|
|
3,629
|
|
|
|
2,099
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
389,439
|
|
|
|
342,859
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
453,123
|
|
|
$
|
404,665
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
CARBO
CERAMICS INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands, except per share data)
|
|
|
Revenues
|
|
$
|
340,351
|
|
|
$
|
312,126
|
|
|
$
|
252,673
|
|
Cost of sales
|
|
|
221,202
|
|
|
|
196,133
|
|
|
|
153,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
119,149
|
|
|
|
115,993
|
|
|
|
98,732
|
|
Selling, general and administrative expenses
|
|
|
39,615
|
|
|
|
34,732
|
|
|
|
27,245
|
|
Start-up
costs
|
|
|
1,215
|
|
|
|
474
|
|
|
|
1,092
|
|
Loss on disposal of assets
|
|
|
268
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
78,051
|
|
|
|
80,787
|
|
|
|
70,300
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
419
|
|
|
|
1,590
|
|
|
|
1,756
|
|
Foreign currency exchange gain (loss), net
|
|
|
2,882
|
|
|
|
1,387
|
|
|
|
(147
|
)
|
Other, net
|
|
|
48
|
|
|
|
50
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,349
|
|
|
|
3,027
|
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
81,400
|
|
|
|
83,814
|
|
|
|
72,083
|
|
Income taxes
|
|
|
27,530
|
|
|
|
29,561
|
|
|
|
25,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
53,870
|
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.21
|
|
|
$
|
2.23
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.20
|
|
|
$
|
2.22
|
|
|
$
|
1.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2005
|
|
$
|
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
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,870
|
|
|
|
|
|
|
|
53,870
|
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,530
|
|
|
|
1,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,400
|
|
Exercise of stock options
|
|
|
1
|
|
|
|
1,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,399
|
|
Tax benefit from stock based compensation
|
|
|
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328
|
|
Stock based compensation
|
|
|
|
|
|
|
2,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,176
|
|
Cash dividends ($0.52 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,723
|
)
|
|
|
|
|
|
|
(12,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
$
|
245
|
|
|
$
|
108,686
|
|
|
$
|
|
|
|
$
|
276,879
|
|
|
$
|
3,629
|
|
|
$
|
389,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
CARBO
CERAMICS INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
53,870
|
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
23,589
|
|
|
|
18,712
|
|
|
|
12,949
|
|
Amortization
|
|
|
1,173
|
|
|
|
805
|
|
|
|
675
|
|
Provision for doubtful accounts
|
|
|
82
|
|
|
|
507
|
|
|
|
682
|
|
Deferred income taxes
|
|
|
(776
|
)
|
|
|
584
|
|
|
|
920
|
|
Excess tax benefits from stock based compensation
|
|
|
(247
|
)
|
|
|
(360
|
)
|
|
|
|
|
Loss on disposal of assets
|
|
|
268
|
|
|
|
|
|
|
|
95
|
|
Foreign currency transaction (gain) loss, net
|
|
|
(2,882
|
)
|
|
|
(1,387
|
)
|
|
|
147
|
|
Non-cash stock compensation expense
|
|
|
2,176
|
|
|
|
2,806
|
|
|
|
816
|
|
Earnings in equity-method investee
|
|
|
(229
|
)
|
|
|
(84
|
)
|
|
|
(208
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts and other receivables
|
|
|
(4,191
|
)
|
|
|
(9,726
|
)
|
|
|
(13,347
|
)
|
Inventories
|
|
|
(12,143
|
)
|
|
|
(14,104
|
)
|
|
|
(5,203
|
)
|
Prepaid expenses and other current assets
|
|
|
102
|
|
|
|
(76
|
)
|
|
|
(1,199
|
)
|
Long-term prepaid expenses
|
|
|
173
|
|
|
|
92
|
|
|
|
(1,107
|
)
|
Accounts payable
|
|
|
(1,614
|
)
|
|
|
1,634
|
|
|
|
794
|
|
Accrued payroll and benefits
|
|
|
635
|
|
|
|
1,169
|
|
|
|
753
|
|
Accrued freight
|
|
|
913
|
|
|
|
702
|
|
|
|
(23
|
)
|
Accrued utilities
|
|
|
(40
|
)
|
|
|
(227
|
)
|
|
|
1,323
|
|
Accrued income taxes
|
|
|
(369
|
)
|
|
|
(6,272
|
)
|
|
|
8,116
|
|
Other accrued expenses
|
|
|
(753
|
)
|
|
|
1,636
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
59,737
|
|
|
|
50,664
|
|
|
|
52,748
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
(65,034
|
)
|
|
|
(70,460
|
)
|
|
|
(67,811
|
)
|
Acquisition of business, net of cash acquired
|
|
|
(2,545
|
)
|
|
|
|
|
|
|
|
|
Investment in equity-method investee
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
(611
|
)
|
Purchases of short-term investments
|
|
|
(4,000
|
)
|
|
|
(26,765
|
)
|
|
|
(72,175
|
)
|
Proceeds from maturities of short-term investments
|
|
|
11,500
|
|
|
|
61,240
|
|
|
|
76,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(61,579
|
)
|
|
|
(35,985
|
)
|
|
|
(64,272
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
Repayments on bank borrowings
|
|
|
(12,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,398
|
|
|
|
1,024
|
|
|
|
6,053
|
|
Dividends paid
|
|
|
(12,723
|
)
|
|
|
(10,717
|
)
|
|
|
(8,759
|
)
|
Excess tax benefits from stock based compensation
|
|
|
247
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(11,078
|
)
|
|
|
(9,333
|
)
|
|
|
(2,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(12,920
|
)
|
|
|
5,346
|
|
|
|
(14,230
|
)
|
Effect of exchange rate changes on cash
|
|
|
243
|
|
|
|
(68
|
)
|
|
|
(65
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
24,973
|
|
|
|
19,695
|
|
|
|
33,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
12,296
|
|
|
$
|
24,973
|
|
|
$
|
19,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
43
|
|
|
$
|
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
28,675
|
|
|
$
|
35,249
|
|
|
$
|
16,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
CARBO
CERAMICS INC.
|
|
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 six
production plants operating in New Iberia, Louisiana; Eufaula,
Alabama; McIntyre, Georgia; Toomsboro, Georgia; Luoyang, China;
and Kopeysk, Russia. Recently, the Company announced plans to
idle the production plant in New Iberia, Louisiana during 2008.
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; Alice, Texas; Shreveport,
Louisiana; Williston, North Dakota; Edmonton, Alberta,
Canada; Grande Prairie, Alberta, Canada; Rotterdam, The
Netherlands; Alexandria, Egypt; Tianjin, China; Surgut, Russia;
and Singapore. 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
Company). The significant operating subsidiaries
include: CARBO Ceramics (China) Company Limited, CARBO Ceramics
(Eurasia) LLC, and Pinnacle Technologies, Inc. The consolidated
financial statements also include a 49% interest in a
fracture-related services company in Canada that was acquired in
April 2005 and a 32% interest in a Texas-based equipment
manufacturing company that was acquired in October 2007, both of
which are reported under the equity method of accounting. All
significant intercompany transactions have been eliminated.
Concentration
of Credit Risk, Accounts Receivable and Other
Receivables
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
its assessment of collectability risk and periodically evaluates
the balance in the allowance based on a review of trade accounts
receivable. Trade accounts receivable are periodically reviewed
for collectability 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, 2007 and 2006 was $1,842,000 and $1,753,000,
respectively. Other receivables, primarily value added tax
receivables in Russia, were $3,462,000 and $5,615,000 as of
December 31, 2007 and 2006, 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 as of
December 31, 2006 consisted of auction rate securities with
auction reset periods of twelve months or less, which were
classified as available-for-sale securities and carried at cost,
which approximated 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 2007 and 2005, the Company
recognized losses of $268,000 and $95,000, respectively, on
disposal of various assets mainly related to its
U.S. manufacturing facilities. The losses related to
equipment removed from service are included in the income
statement line item Loss on disposal of assets.
In November 2007 the Company announced plans to idle production
at its New Iberia, Louisiana proppant plant during the first
half 2008. In connection with the idling of the facility, the
Company anticipates incurring termination costs totaling
approximately $900,000, of which $270,000 has been recorded as
of December 31, 2007. The Company is currently evaluating
long-term plans for the facility, including the possibilities of
resuming production as demand and other conditions warrant,
never reopening the facility and other alternatives. The Company
assessed the recoverability of the remaining net carrying amount
of the assets, totaling $7,691,000 at December 31, 2007,
and based on the evaluation concluded that the estimated
probability-weighted future undiscounted cash flows exceeded the
remaining carrying amount as of December 31, 2007. As a
result, the assets were not impaired and are being accounted for
as held for use and thus depreciated. Should the Company later
decide to never reopen the facility, the remaining carrying
value will be written down to salvage or net realizable value
when and if such a decision is made.
Capitalized
Costs of Software for Sale or Use in Revenue Generating
Activities
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.
F-9
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 2007 are related primarily to the new proppant
manufacturing facility in Kopeysk, Russia, which began proppant
production in the first half of 2007.
Start-up
costs for 2006 and 2005 are related primarily to the new
proppant manufacturing facility in Toomsboro, Georgia, which
began proppant production in 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 2007, 2006 and 2005 were
$6,082,000, $5,685,000 and $3,750,000, 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
F-10
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
services 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
Effective January 1, 2007, the Company adopted the
Financial Accounting Standards Boards Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in
financial statements and requires the impact of a tax position
to be recognized in the financial statements if that position
will more likely than not be sustained by the taxing authority.
The Company had a recorded reserve of approximately $575
associated with uncertain tax positions as of January 1,
2007. There were no significant changes to the recorded reserve
as a result of the adoption of FIN 48 or during the twelve
months ended December 31, 2007. If these uncertain tax
positions are recognized, substantially all of this amount would
F-11
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impact the effective tax rate. Related accrued interest and
penalties are recorded in income tax expense and are not
material.
The Company files its tax returns as prescribed by the tax laws
of the jurisdictions in which it operates, the most significant
of which are U.S. federal and certain state jurisdictions.
The Company does not currently have material income tax exposure
in foreign jurisdictions due to tax holidays, recent
commencement of operations or immaterial operations. In June
2006 the Company concluded an audit by the U.S. Internal
Revenue Service for its 2003 tax year. The outcome did not have
a material effect on the financial statements. The 2004 through
2006 tax years are still subject to examination. Various
U.S. state jurisdiction tax years remain open to
examination as well though the Company believes assessments, if
any, would be immaterial to its consolidated financial
statements.
In September 2006, the Financial Accounting Standards Board
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.
In February 2007, the Financial Accounting Standards Board
issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 provides an
option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure
requirements. The fair value option established by SFAS 159
permits the Company to elect to measure eligible items at fair
value on an
instrument-by-instrument
basis and then report unrealized gains and losses for those
items in the Companys earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The
Company is currently evaluating SFAS 159 and has not yet
determined the impact of adoption.
|
|
2.
|
Acquisition
of Business
|
On April 12, 2007, the Company purchased 100 percent
of the outstanding shares of Applied Geomechanics, Inc.
(AGI), a supplier of tiltmeters. Results of
operations for AGI, included in the consolidated financial
statements since that date, are not material. AGI develops and
markets precision measurement instruments for oilfield,
geotechnical and scientific applications. The Companys
acquisition and the resulting goodwill were attributable to the
Companys strategy to expand its ability to produce
tiltmeters and related equipment and improve the Companys
revenue generating potential in the geotechnical (non-oilfield)
monitoring business. The acquisition was accounted for using the
purchase method of accounting provided for under Financial
Accounting Standards Board Statement No. 141,
Business Combinations. The aggregate cost of the
acquisition was $2,553,000 in cash and direct costs of the
transaction. Goodwill of $1,373,000 arising in the transaction
is not deductible for income tax purposes.
|
|
3.
|
Intangible
and Other Assets
|
Following is a summary of intangible assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses
|
|
$
|
3,286
|
|
|
$
|
1,615
|
|
|
$
|
3,113
|
|
|
$
|
1,248
|
|
Hardware designs
|
|
|
1,501
|
|
|
|
369
|
|
|
|
1,148
|
|
|
|
595
|
|
Software
|
|
|
4,552
|
|
|
|
1,351
|
|
|
|
3,496
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,339
|
|
|
$
|
3,335
|
|
|
$
|
7,757
|
|
|
$
|
2,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
the aggregate. Amortization expense for 2007, 2006 and 2005 was
$1,173,000, $805,000 and $675,000, respectively. Estimated
amortization expense for each of the ensuing years through
December 31, 2012 is $1,280,000, $1,108,000, $837,000,
$610,000, and $225,000, respectively.
Other assets totaling $3,808,000 and $1,986,000 at
December 31, 2007 and 2006, respectively, consisted of a
49% equity interest in a fracture-related services company in
Canada acquired in April 2005, a 32% interest in a Texas-based
equipment manufacturing company acquired in October 2007 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 investees.
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, 2007 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
$35,000 in 2007 and $38,000 in each of the years 2006 and 2005.
The Company leases certain property, plant and equipment under
operating leases, primarily consisting of railroad equipment
leases. Minimum future rental payments due under non-cancelable
operating leases with remaining terms in excess of one year as
of December 31, 2007 are as follows ($ in thousands):
|
|
|
|
|
2008
|
|
$
|
4,556
|
|
2009
|
|
|
4,032
|
|
2010
|
|
|
3,591
|
|
2011
|
|
|
3,262
|
|
2012
|
|
|
2,292
|
|
Thereafter
|
|
|
5,275
|
|
|
|
|
|
|
Total
|
|
$
|
23,008
|
|
|
|
|
|
|
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 $6,205,000 in 2007, $4,801,000 in 2006, and $3,496,000 in
2005.
F-13
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities as of
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
1,390
|
|
|
$
|
2,021
|
|
Inventories
|
|
|
1,826
|
|
|
|
708
|
|
Foreign tax credits
|
|
|
1,600
|
|
|
|
912
|
|
Other
|
|
|
1,635
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
6,451
|
|
|
|
4,650
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
21,665
|
|
|
|
21,624
|
|
Goodwill
|
|
|
2,697
|
|
|
|
2,052
|
|
Foreign currency translation
|
|
|
1,954
|
|
|
|
|
|
Foreign earnings and other
|
|
|
4,104
|
|
|
|
3,884
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
30,420
|
|
|
|
27,560
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
23,969
|
|
|
$
|
22,910
|
|
|
|
|
|
|
|
|
|
|
Significant components of the provision for income taxes for the
years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
26,028
|
|
|
$
|
25,420
|
|
|
$
|
21,229
|
|
State
|
|
|
979
|
|
|
|
3,513
|
|
|
|
2,728
|
|
Foreign
|
|
|
1,299
|
|
|
|
44
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
28,306
|
|
|
|
28,977
|
|
|
|
24,543
|
|
Deferred
|
|
|
(776
|
)
|
|
|
584
|
|
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,530
|
|
|
$
|
29,561
|
|
|
$
|
25,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In China, the Company benefited from a full income tax holiday
from the inception of that business through 2004 and a partial
tax holiday from 2005 through 2007. However, provision has been
made for deferred U.S. income taxes on all foreign earnings
based on the Companys intent to repatriate foreign
earnings. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
U.S. statutory rate
|
|
$
|
28,490
|
|
|
|
35.0
|
%
|
|
$
|
29,335
|
|
|
|
35.0
|
%
|
|
$
|
25,229
|
|
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
538
|
|
|
|
0.6
|
|
|
|
1,969
|
|
|
|
2.3
|
|
|
|
1,950
|
|
|
|
2.7
|
|
ETI Exclusion, Section 199 Manufacturing Benefit and other
|
|
|
(1,498
|
)
|
|
|
(1.8
|
)
|
|
|
(1,743
|
)
|
|
|
(2.0
|
)
|
|
|
(1,716
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,530
|
|
|
|
33.8
|
%
|
|
$
|
29,561
|
|
|
|
35.3
|
%
|
|
$
|
25,463
|
|
|
|
35.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit, in 2007 are net
of adjustments totaling $913,000 resulting from the preparation
and filing of prior years tax returns and a reduction in
deferred income tax liabilities associated with changes in
certain state tax regulations.
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 15, 2008, the Board of Directors declared a cash
dividend of $0.14 per share. The dividend is payable on
February 15, 2008 to shareholders of record on
January 31, 2008.
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.
F-15
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
8.
|
Stock
Based Compensation
|
The Company has three stock based compensation plans: a
restricted stock plan and two stock option plans. The restricted
stock plan provides for granting shares of Common Stock in the
form of restricted stock awards to employees and non-employee
directors of the Company. Under the restricted stock plan, the
Company may issue up to 375,000 shares, plus (i) the
number of shares that are forfeited, and (ii) the number of
shares that are withheld from the participants to satisfy tax
withholding obligations. No more than 75,000 shares may be
granted to any single employee. One-third of the shares subject
to award vest (i.e., transfer and forfeiture restrictions on
these shares are lifted) on each of the first three
anniversaries of the grant date. All unvested shares granted to
an individual vest upon retirement at or after the age of 62.
The stock option plans provided for granting options to purchase
shares of the Companys Common Stock to employees and
non-employee directors. Under the terms of the stock option
plans the Companys ability to issue grants of options has
expired. However, there are outstanding stock options that were
previously granted under the stock option plans. Under the stock
option plans, the Company was permitted to grant options for up
to 2,175,000 shares. The exercise price of each option
generally was equal to the market price on the date of grant.
The maximum term of an option is ten years and options generally
become exercisable (i.e., vest) proportionately on each of the
first four anniversaries of the grant date. The Companys
policy is to issue new shares upon exercise. As of
December 31, 2007, 193,273 shares were available for
issuance under the restricted stock plan and no options were
available for issuance under the stock option plans.
The Company also has a Director Deferred Fee plan (the
Plan) that permits non-employee directors of the
Company to elect once in December of each year to defer in the
following calendar year the receipt of cash compensation for
service as a director, which would otherwise be payable in that
year, and to receive those fees in the form of the
Companys Common Stock on a specified later date, on or
after the Directors retirement from the Board of
Directors. 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, 2007, 3,250 shares were reserved for
future issuance in payment of $144,000 of fees and dividends
deferred under the Plan by electing directors.
F-16
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the pro forma effect on net
income and earnings per share as if the Company had applied the
fair value recognition provisions of SFAS 123 to the
Companys stock based compensation for the year ended
December 31, 2005 ($ in thousands, except per share data):
|
|
|
|
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
46,620
|
|
Add: Stock based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
514
|
|
Deduct: Total stock based compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
|
|
(1,157
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
45,977
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic as reported
|
|
$
|
1.94
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
1.92
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
1.93
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
1.90
|
|
|
|
|
|
|
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 $2,135,000 included in
shareholders equity at December 31, 2005 was
reclassified to additional paid-in capital during the quarter
ended March 31, 2006.
A summary of stock option activity and related information for
the year ended December 31, 2007 is presented below ($ in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Outstanding at January 1, 2007
|
|
|
241,400
|
|
|
$
|
22.49
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(64,795
|
)
|
|
$
|
21.58
|
|
|
|
|
|
Forfeited
|
|
|
(5,530
|
)
|
|
$
|
34.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
171,075
|
|
|
$
|
22.43
|
|
|
$
|
2,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
167,650
|
|
|
$
|
22.04
|
|
|
$
|
2,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $18,000 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, 2007 was
4.0 years. The total intrinsic value of options exercised
during the years ended December 31, 2007, 2006 and 2005 was
$1,401,000, $1,513,000, and $9,998,000, respectively.
F-17
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of restricted stock activity and related information
for the year ended December 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2007
|
|
|
80,083
|
|
|
$
|
52.96
|
|
Granted
|
|
|
64,953
|
|
|
$
|
38.75
|
|
Vested
|
|
|
(39,446
|
)
|
|
$
|
50.63
|
|
Forfeited
|
|
|
(5,869
|
)
|
|
$
|
44.77
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
99,721
|
|
|
$
|
45.10
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $2,565,000 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, 2006 and 2005 was $57.52 and $48.61,
respectively. The total fair value of shares vested during the
years ended December 31, 2007, 2006 and 2005 was
$1,997,000, $1,698,000 and $373,000, respectively.
The following table sets forth the computation of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands, except per share data)
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
53,870
|
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
|
|
|
24,367,479
|
|
|
|
24,280,778
|
|
|
|
24,004,563
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options (See Note 8)
|
|
|
80,203
|
|
|
|
100,640
|
|
|
|
166,141
|
|
Nonvested and deferred stock awards (See Note 8)
|
|
|
36,220
|
|
|
|
19,113
|
|
|
|
6,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
116,423
|
|
|
|
119,753
|
|
|
|
172,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted
weighted-average shares
|
|
|
24,483,902
|
|
|
|
24,400,531
|
|
|
|
24,177,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.21
|
|
|
$
|
2.23
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
2.20
|
|
|
$
|
2.22
|
|
|
$
|
1.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Quarterly
Operating Results (Unaudited)
|
Quarterly results of operations for the years ended
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
($ in thousands, except per share data)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
83,971
|
|
|
$
|
77,918
|
|
|
$
|
84,788
|
|
|
$
|
93,674
|
|
Gross profit
|
|
|
28,717
|
|
|
|
29,681
|
|
|
|
29,470
|
|
|
|
31,281
|
|
Net income
|
|
|
13,299
|
|
|
|
12,881
|
|
|
|
14,063
|
|
|
|
13,627
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
|
$
|
0.53
|
|
|
$
|
0.58
|
|
|
$
|
0.56
|
|
Diluted
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
$
|
0.57
|
|
|
$
|
0.56
|
|
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
|
|
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 income before income
taxes as the measure to evaluate segment performance and to
allocate resources. 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).
F-19
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, 2007 is shown in the following tables. The
Other column includes net assets not allocated to
the operating segments. Goodwill totaling $21,840,000 arising
from the Companys acquisitions of Pinnacle in 2002 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
$26,731,000, $17,504,000, and $13,416,000 at December 31,
2007, 2006, and 2005, respectively, and the costs of the
Companys corporate offices are reported in the Proppant
segment. Intersegment sales are not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fracture and
|
|
|
|
|
|
|
|
|
|
|
|
|
Reservoir
|
|
|
|
|
|
|
|
|
|
Proppant
|
|
|
Diagnostics
|
|
|
Other
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
290,859
|
|
|
$
|
49,492
|
|
|
$
|
|
|
|
$
|
340,351
|
|
Income before income taxes
|
|
|
73,267
|
|
|
|
8,133
|
|
|
|
|
|
|
|
81,400
|
|
Total assets
|
|
|
401,386
|
|
|
|
56,628
|
|
|
|
(4,891
|
)
|
|
|
453,123
|
|
Capital expenditures, net
|
|
|
52,341
|
|
|
|
12,693
|
|
|
|
|
|
|
|
65,034
|
|
Depreciation and amortization
|
|
|
19,394
|
|
|
|
5,368
|
|
|
|
|
|
|
|
24,762
|
|
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
|
|
|
|
4,336
|
|
|
|
404,665
|
|
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
|
|
|
|
8,424
|
|
|
|
355,796
|
|
Capital expenditures, net
|
|
|
60,983
|
|
|
|
6,828
|
|
|
|
|
|
|
|
67,811
|
|
Depreciation and amortization
|
|
|
10,520
|
|
|
|
3,104
|
|
|
|
|
|
|
|
13,624
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
239,096
|
|
|
$
|
199,967
|
|
|
$
|
173,917
|
|
International (primarily China and Russia)
|
|
|
65,947
|
|
|
|
58,787
|
|
|
|
31,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
305,043
|
|
|
$
|
258,754
|
|
|
$
|
205,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues outside the United States accounted for 34%, 34% and
40% of the Companys revenues for 2007, 2006 and 2005,
respectively. Revenues for the years ended December 31 in the
United States, Canada and other countries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
223,111
|
|
|
$
|
205,029
|
|
|
$
|
152,595
|
|
Canada
|
|
|
42,024
|
|
|
|
52,102
|
|
|
|
38,775
|
|
Other international
|
|
|
75,216
|
|
|
|
54,995
|
|
|
|
61,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
340,351
|
|
|
$
|
312,126
|
|
|
$
|
252,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Customers
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
Others
|
|
|
Total
|
|
|
2007
|
|
|
22.7
|
%
|
|
|
19.0
|
%
|
|
|
19.9
|
%
|
|
|
38.4
|
%
|
|
|
100
|
%
|
2006
|
|
|
24.5
|
%
|
|
|
19.2
|
%
|
|
|
26.2
|
%
|
|
|
30.1
|
%
|
|
|
100
|
%
|
2005
|
|
|
30.5
|
%
|
|
|
17.3
|
%
|
|
|
16.9
|
%
|
|
|
35.3
|
%
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Contributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit sharing
|
|
$
|
1,385
|
|
|
$
|
1,256
|
|
|
$
|
941
|
|
Savings
|
|
|
879
|
|
|
|
710
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,264
|
|
|
$
|
1,966
|
|
|
$
|
1,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007,
2006, and 2005, the Company purchased from the supplier $3.1,
$3.0 and $3.3 million, respectively, of kaolin under the
agreement. A pricing addendum was added to this agreement near
the end of 2007.
F-21
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007, 2006 and 2005, the Company purchased
$0.6 million, $0.9 million and $1.1 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
agreement through 2007 under substantially similar terms. The
contract expired in 2007. For the years ended December 31,
2007, 2006 and 2005, the Company purchased $14.7 million,
$17.0 million and $9.5 million, respectively, of
bauxite under the agreement.
In June 2007 the Company entered into an agreement with a
supplier to purchase calcined bauxite for its McIntyre, Georgia
facility at a specified contract price. The term of the
agreement was to purchase 10,000 metric tons in 2007. However,
during 2007 the supplier was unable to obtain a ship to
transport the material to the port of Savannah, Georgia;
therefore, no purchases were made during 2007.
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 was automatically renewed for an
additional three years and 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 for at least
80 percent of the plants annual requirements. In
addition, in December 2006 the Company entered into an agreement
with a supplier to purchase a minimum of 25,000 metric tons of
bauxite at a specified contract price on an annual basis. For
the years ended December 31, 2007, 2006 and 2005, the
Company purchased approximately $1.6 million,
$0.8 million and $1.4 million, respectively, of
material under the agreements.
In September 2006, the Company signed an exclusive option
contract with a land owner to purchase fee simple title, mineral
interest, or leasehold interest of a designated tract of land.
The minimum annual acquisition during each option year is
$400,000. The Company may elect to delay the annual payment for
a period of twelve months once during the five year period.
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
$154.8 million at December 31, 2007) in the
accompanying consolidated financial statements.
F-22
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007, the
Company had natural gas contracts totaling $13.9 million,
expiring at various times through October 2008.
The Company was in compliance with the terms of all the above
listed agreements at December 31, 2007.
|
|
14.
|
Employment
Agreements
|
The Company has an employment agreement through
December 31, 2008 with its President and Chief Executive
Officer. The agreement, as amended on October 16, 2007,
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.
As of December 31, 2007, the Companys net investment
that is subject to foreign currency fluctuations totaled
$85.4 million and the Company has recorded cumulative
foreign currency translation adjustments of $3.6 million,
net of deferred income taxes. These currency translation
adjustments are included in other comprehensive income. Also,
the Companys subsidiary in Russia has borrowed
$35.6 million, as of December 31, 2007, from another
subsidiary of the Company to fund construction of the
manufacturing plant in Russia. This indebtedness, while
eliminated in consolidation of the financial statements, is
subject to exchange rate fluctuations between the local
reporting currency and the currency in which the debt is
denominated. Currency exchange rate fluctuations associated with
this indebtedness result in gains and losses that impact net
income. The gains and losses are presented in Other Income
(Expense).
|
|
16.
|
Legal
Proceedings and Regulatory Matters
|
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 26, 2007, following self-disclosure of certain
air pollution emissions, the Company received a Notice of
Violation (NOV) from the State of Georgia
Environmental Protection Division (EPD) regarding
appropriate permitting for emissions of two specific substances
from its Toomsboro facility. Pursuant to the NOV, the Company
conducted performance testing of these emissions and provided
updated results in the course of additional dialogue with the
relevant government agencies, including discussions of emissions
at the Companys nearby McIntyre, Georgia manufacturing
facility. Following these discussions, a second NOV was issued
on May 22, 2007 for the McIntyre plant for alleged
violations similar to those in the January NOV related to the
Toomsboro facility. The Company submitted to the EPD a schedule
of responsive activities in mid June and is in process of
submitting additional information. The EPD has not yet issued a
response regarding required remedial actions or fines, if any,
resulting from the NOVs and as such the Company does not at this
time have an estimate of costs associated with compliance.
On January 15, 2008, the Company awarded 55,095 shares
of restricted stock to certain employees. The fair value of the
stock award on the date of grant totaled $1,979,000, which will
be expensed net of estimated forfeitures over the three year
vesting period.
F-23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
End of
|
|
Year Ended
|
|
Year
|
|
|
Expenses
|
|
|
Write-offs
|
|
|
Year
|
|
|
|
($ in thousands)
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
1,753
|
|
|
$
|
82
|
|
|
$
|
(7
|
)
|
|
$
|
1,842
|
|
December 31, 2006
|
|
$
|
1,335
|
|
|
$
|
507
|
|
|
$
|
89
|
|
|
$
|
1,753
|
|
December 31, 2005
|
|
$
|
665
|
|
|
$
|
682
|
|
|
$
|
12
|
|
|
$
|
1,335
|
|
S-1
Exhibit Index
|
|
|
|
3.1
|
|
Amended and Restated 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
filed July 19,1996)
|
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)
|
3.3
|
|
Amendment to Bylaws of CARBO Ceramics Inc. (incorporated by
reference to 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
filed July 19, 1996)
|
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
filed February 25, 2002)
|
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
filed July 19, 1996)
|
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
filed July 19, 1996)
|
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
filed July 19, 1996)
|
*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
filed May 13, 2002)
|
*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
filed July 19, 1996)
|
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 exhibit 10.10 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
filed June 26, 2002)
|
10.11
|
|
Lease Agreement dated as of November 1, 2003, between the
Development Authority of Wilkinson County and CARBO Ceramics
Inc. (incorporated by reference to exhibit 10.12 of 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, 2005)
|
*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
|
|
First Amendment to Employment Agreement of Gary A. Kolstad,
dated as of October 16, 2007 (incorporated by reference to
Exhibit 10.1 of the Registrants Form 10-Q Quarterly
Report for the quarter ended September 30, 2007).
|
*10.21
|
|
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)
|
*10.22
|
|
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)
|
*10.23
|
|
Corporate and Proppant Incentive Compensation Plan for Key
Employees (effective January 1, 2008) (incorporated by
reference to exhibit 10.1 to the registrants
Form 8-K
Current Report filed January 22, 2008)
|
*10.24
|
|
Pinnacle Technologies, Inc. Incentive Compensation Plan for Key
Employees (effective January 1, 2008) (incorporated by
reference to exhibit 10.2 to the registrants
Form 8-K
Current Report filed January 22, 2008)
|
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
|