<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-28178
CARBO CERAMICS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-1100013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
600 E. LAS COLINAS BOULEVARD
SUITE 1520
IRVING, TEXAS 75039
(Address of principal executive offices)
(972) 401-0090
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 12, 1998, 14,602,000 shares of the registrant's Common
Stock, par value $.01 per share, were outstanding.
<PAGE> 2
CARBO CERAMICS INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - 3
September 30, 1998 (Unaudited) and December 31, 1997
Consolidated Statements of Income 4
(Unaudited) - Three and nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows 5
(Unaudited) - Nine months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements 6-7
(Unaudited) - September 30, 1998
Item 2. Management's Discussion and Analysis of Financial 8-10
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings 11
Item 2. Changes in securities 11
Item 3. Defaults upon senior securities 11
Item 4. Submission of matters to a vote of security-holders 11
Item 5. Other information 11
Item 6. Exhibits and reports on Form 8-K 11
Signatures 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------ ------------
($ in thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,553 $ 8,899
Investment securities - 13,905
Trade accounts receivable 15,274 14,243
Inventories:
Finished goods 3,867 4,347
Raw materials and supplies 4,701 4,034
------------ ------------
Total inventories 8,568 8,381
Prepaid expenses and other current assets 929 661
Deferred income taxes 922 772
------------ ------------
Total current assets 34,246 46,861
Property, plant and equipment:
Land and land improvements 459 214
Buildings 4,613 4,536
Machinery and equipment 30,707 27,773
Construction in progress 38,331 11,382
------------ ------------
Total 74,110 43,905
Less accumulated depreciation 11,341 9,812
------------ ------------
Net property, plant and equipment 62,769 34,093
------------ ------------
Total assets $ 97,015 $ 80,954
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,761 $ 2,131
Accrued payroll and benefits 2,425 2,448
Accrued freight 1,009 851
Accrued utilities 462 422
Accrued income taxes 916 1,018
Other accrued expenses 927 746
------------ ------------
Total current liabilities 8,500 7,616
Deferred income taxes 3,518 2,396
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:
14,602,000 shares issued and
outstanding 146 146
Additional paid-in capital 42,919 42,919
Retained earnings 41,932 27,877
------------ ------------
Total shareholders' equity 84,997 70,942
------------ ------------
Total liabilities and shareholders' equity $ 97,015 $ 80,954
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 22,013 $ 23,062 $ 68,394 $ 61,795
Cost of goods sold 10,775 11,593 33,760 30,986
----------- ----------- ----------- -----------
Gross profit 11,238 11,469 34,634 30,809
Selling, general and administrative expenses 2,706 2,255 7,563 6,356
----------- ----------- ----------- -----------
Operating profit 8,532 9,214 27,071 24,453
Other income (expense):
Interest income, net 164 230 741 672
Other, net (37) 22 180 31
----------- ----------- ----------- -----------
127 252 921 703
----------- ----------- ----------- -----------
Income before income taxes 8,659 9,466 27,992 25,156
Income taxes 3,293 3,527 10,652 9,182
----------- ----------- ----------- -----------
Net income $ 5,366 $ 5,939 $ 17,340 $ 15,974
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.37 $ 0.41 $ 1.19 $ 1.09
=========== =========== =========== ===========
Diluted $ 0.36 $ 0.40 $ 1.17 $ 1.09
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
---------- ----------
($ IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,340 $ 15,974
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,587 1,447
Deferred income taxes 972 276
Changes in operating assets and liabilities:
Trade accounts receivable (1,031) (2,753)
Inventories (187) (748)
Prepaid expenses and other current assets (268) (633)
Accounts payable 630 1,131
Accrued payroll and benefits (23) 32
Accrued freight 158 651
Accrued utilities 40 114
Accrued income taxes (102) 149
Other accrued expenses 181 208
---------- ----------
Net cash provided by operating activities 19,297 15,848
INVESTING ACTIVITIES
Maturities of investment securities 13,905 -
Purchases of property, plant and equipment (30,263) (4,966)
---------- ----------
Net cash used in investing activities (16,358) (4,966)
FINANCING ACTIVITIES
Dividends paid (3,285) (3,285)
---------- ----------
Net cash used in financing activities (3,285) (3,285)
---------- ----------
Net increase (decrease) in cash and cash equivalents (346) 7,597
Cash and cash equivalents at beginning of period 8,899 17,414
---------- ----------
Cash and cash equivalents at end of period $ 8,553 $ 25,011
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 9,782 $ 8,758
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CARBO
Ceramics Inc. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation have been included.
The results of the interim periods presented herein are not necessarily
indicative of the results to be expected for any other interim period or the
full year. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1997 included in the Company's Form 10-K Annual Report for the year ended
December 31, 1997.
The consolidated financial statements include the accounts of CARBO
Ceramics Inc. and its wholly owned subsidiaries, CARBO Ceramics Sales
Corporation and CARBO Ceramics (UK) Limited. CARBO Ceramics Sales Corporation
was formed on July 31, 1996 under the laws of Barbados. CARBO Ceramics
(UK) Limited was formed on December 19, 1997 under the laws of Scotland. All
significant intercompany transactions have been eliminated.
2. DIVIDENDS PAID
On July 14, 1998, the Board of Directors declared a cash dividend of
$0.075 per common share payable to shareholders of record on July 31, 1998.
The dividend was paid on August 17, 1998.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share ($ in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net income ........................................ $ 5,366 $ 5,939 $ 17,340 $ 15,974
Denominator:
Denominator for basic earnings per share--
weighted-average shares ......................... 14,602,000 14,602,000 14,602,000 14,602,000
Effect of dilutive securities:
Employee stock options .......................... 156,818 179,058 186,413 112,598
----------- ----------- ----------- -----------
Dilutive potential common shares .................. 156,818 179,058 186,413 112,598
----------- ----------- ----------- -----------
Denominator for diluted earnings per share--
adjusted weighted-average shares ................ 14,758,818 14,781,058 14,788,413 14,714,598
=========== =========== =========== ===========
Basic earnings per share ............................. $ 0.37 $ 0.41 $ 1.19 $ 1.09
=========== =========== =========== ===========
Diluted earnings per share ........................... $ 0.36 $ 0.40 $ 1.17 $ 1.09
=========== =========== =========== ===========
</TABLE>
6
<PAGE> 7
4. INCOME TAXES
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 Company's deferred tax assets and liabilities as of September 30, 1998
and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
Deferred tax assets: ($ in thousands)
<S> <C> <C>
Employee benefits ............................ $ 401 $ 271
Inventories .................................. 362 377
Other ........................................ 159 124
------------ ------------
Total deferred tax assets .................... 922 772
Deferred tax liabilities:
Depreciation ................................. 3,439 2,356
Other ........................................ 79 40
------------ ------------
Total deferred tax liabilities ............... 3,518 2,396
------------ ------------
Net deferred liabilities ..................... $ 2,596 $ 1,624
============ ============
</TABLE>
5. COMMITMENTS
Construction in progress of $38.3 million at September 30, 1998 includes
$37 million related to construction of the Company's new manufacturing facility
in McIntyre, Georgia. The new facility is scheduled to be fully operational in
the first quarter of 1999 at a total estimated cost of $49 million.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998
Revenues. Revenues for the third quarter 1998 were $22 million, a decrease of
five percent from the third quarter 1997. The decrease was due to a three
percent decrease in sales volume and a switch in product mix toward the
lower-priced, lightweight products. The effect of the decrease in volume was
partially offset by an increase in the average selling price due to a price
increase that was effective in January 1998. Domestic sales volume was down by
six percent from the previous year, while export sales volume increased by four
percent - with continued strength in the Canadian and Mexican markets.
The Company's financial results were impacted by decreased drilling activity
for natural gas and oil. As of September 30, 1998, spot oil prices were down
30 percent from the previous year and the international rig count was 22
percent lower than a year earlier. In North America, natural gas prices
decreased approximately 17 percent from the third quarter and the number of
rigs drilling for natural gas declined by six percent from the comparable
period a year earlier.
Gross Profit. Gross profit for the quarter was $11.2 million or 51 percent of
revenues as compared to $11.5 million or 50 percent of revenues for the third
quarter 1997. The improvement in gross profit margins was the result of a
price increase in January 1998, combined with a reduction in manufacturing
costs at the Company's Eufaula, Alabama manufacturing facility (Eufaula). The
reduction in manufacturing costs was the result of a seven percent increase in
throughput. There was 100 percent utilization of the facility during the
third quarter 1998, in contrast to the third quarter 1997 when Eufaula
experienced 23 days of downtime for mechanical repairs. Also during the
third quarter 1998, the Company experienced some easing of the higher
transportation costs related to Union Pacific railroad traffic congestion for
movement of finished goods from Eufaula to remote storage in San Antonio,
Texas.
Selling, General and Administrative Expenses (SG&A). SG&A expenses were $2.7
million for the third quarter 1998 (12 percent of revenues) and $2.3 million
for the comparable period in 1997 (10 percent of revenues). The increase in
expenses was primarily attributable to expenses incurred in connection with
the start-up of our McIntyre production facility and increased legal fees.
Nine Months Ended September 30, 1998
Revenues. Revenues for the nine months ended September 30, 1998 were $68.4
million, an increase of 11 percent over the same period in 1997. The increase
was due to a six percent increase in sales volume, a shift in product mix
towards more of the higher-priced, high strength products during the first
half of the year, and the price increase effective January 1998. Sales volume
increased five percent for the Company's lightweight products and eight percent
for high strength products. Domestic sales volume remained essentially flat,
while export volume increased by 17 percent over the comparable period in 1997.
Gross Profit. Gross profit for the nine months ended September 30, 1998 was
$34.6 million or 51 percent of revenues compared to $30.8 million or 50 percent
of revenues for the same period in 1997. The effect of the January 1998 price
increase combined with lower manufacturing costs at the New Iberia facility
were offset somewhat by higher freight and packaging costs on export sales and
increased transportation costs due to Union Pacific railroad traffic
congestion.
Selling, General and Administrative Expenses (SG&A). SG&A expenses were $7.6
million for the nine months ended September 30, 1998 (11 percent of revenues)
and $6.4 million for the same period in 1997 (10 percent of revenues).
Expenses increased primarily as a result of start-up expenses for the McIntyre
production facility and an increase in marketing activity in anticipation of
the increased capacity that will be available for sale following completion
of the new plant. Legal fees also increased by $317,000 versus the previous
year due to costs associated with international expansion and the mediation of
a legal dispute with our primary competitor.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $8.6 million as of September 30, 1998, a
decrease of $0.3 million from December 31, 1997. $30.2 million of capital
spending and cash dividends of $3.3 million offset cash generated from
operations of $19.3 million and $13.9 million from maturities of U.S.
government securities.
Capital spending of $30.2 million during the first nine months of 1998 included
$29.1 million related to continuing construction of a new manufacturing
facility in McIntyre, Georgia. The Company plans to spend an additional $12
million for the completion of the new facility, with funding expected to be
provided by existing cash balances and cash generated from operations. The
Company believes that its existing credit agreement is sufficient to fund a
portion of its capital spending program if necessary.
THE YEAR 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems. The Year 2000
Issue is the result of computer programs being written using two digits rather
than four to define the applicable year. Any computer programs or hardware
that have date-sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to engage in normal business activities.
Based on recent assessments, the Company determined that it will be required
to replace some of its software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. The Company presently
believes that with modifications or replacements of existing software and
certain hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000. The completed assessment indicated
that some of the Company's significant information technology systems could be
affected, however, the general ledger, billing, and inventory systems have
already been replaced by a Year 2000 compliant system. The assessment also
indicated that software and hardware (embedded chips) used in production and
manufacturing systems (hereafter also referred to as operating equipment) also
are at risk. Affected systems include automated process control equipment
used in various aspects of the manufacturing process.
Based on a review of its product line, the Company has determined that all of
the products it has sold and will continue to sell are inert and do not require
remediation to be Year 2000 compliant. Accordingly, the Company does not
believe that the Year 2000 presents a material exposure as it relates to the
Company's products. In addition, the Company is gathering information about
the Year 2000 compliance status of its significant suppliers and
subcontractors and will continue to monitor their compliance.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase. For its information technology exposures,
to date the Company is 78 percent complete on the remediation phase and
expects to complete software replacement during the first quarter of 1999.
Once software is replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems. To
date, the Company has completed 72 percent of its testing and has implemented
70 percent of its remediated systems. Completion of the testing phase for all
significant systems is expected by March 31, 1999, with all remediated systems
fully tested and implemented by June 30, 1999, with 100 percent completion
targeted for September 30, 1999.
The remediation of operating equipment is significantly less difficult than
the remediation of information technology systems because there are minimal
automated systems in the manufacturing process. The Company is 20 percent
complete in the remediation phase of its operating equipment and expects to
complete its testing and implementation efforts by March 31, 1999.
Nature and Level of Importance of Third Parties and their Exposure to the
Year 2000. Currently, the Company has no direct interfaces with third parties.
The Company is in the process of surveying its significant suppliers and
subcontractors (external agents). To date, the Company is not aware of any
external agent with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity, or capital resources.
9
<PAGE> 10
However, the Company has no means of ensuring that external agents will be Year
2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
Costs. The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating
equipment for the Year 2000 modifications. The total cost of the Year 2000
project is estimated at $106,000 and is being funded through operating cash
flows. Costs to replace the general ledger, billing, and inventory systems
were excluded from the estimate because the decision to replace those systems
was not accelerated by the Year 2000. To date, the Company has incurred
approximately $15,000, which was entirely capitalized for new systems. The
remaining project costs are attributable to the purchase of new software and
operating equipment that will be capitalized.
Risks. Management of the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of the Year 2000 program.
In the event that the Company does not complete any additional phases, the
Company could be unable to manufacture some products. In addition,
disruptions in the economy generally resulting from Year 2000 issues could
also materially adversely affect the Company. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Contingency Plans. The Company has contingency plans for certain critical
applications and is working on such plans for others. These contingency plans
involve, among other actions, manual workarounds, increasing inventories, and
adjusting staffing strategies.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. There were no reports filed on Form 8-K during the three months ended
September 30, 1998.
b. Exhibits
27.1 Financial Data Schedule for the interim year to date period
ended September 30, 1998.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARBO CERAMICS INC.
By: /s/Jesse P. Orsini
----------------------------------------
Jesse P. Orsini
President
& Chief Executive Officer
By: /s/Paul G. Vitek
----------------------------------------
Paul G. Vitek
Vice President, Finance
Date: November 13, 1998
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT METHOD OF FILING
- ------- -----------------------------
<C> <S> <C>
27.1 Financial Data Schedule..... Filed herewith electronically
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,553
<SECURITIES> 0
<RECEIVABLES> 15,274
<ALLOWANCES> 0
<INVENTORY> 8,568
<CURRENT-ASSETS> 34,246
<PP&E> 74,110
<DEPRECIATION> 11,341
<TOTAL-ASSETS> 97,015
<CURRENT-LIABILITIES> 8,500
<BONDS> 0
0
0
<COMMON> 146
<OTHER-SE> 84,851
<TOTAL-LIABILITY-AND-EQUITY> 97,015
<SALES> 68,394
<TOTAL-REVENUES> 68,394
<CGS> 33,760
<TOTAL-COSTS> 33,760
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,992
<INCOME-TAX> 10,652
<INCOME-CONTINUING> 17,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,340
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.17
</TABLE>
