UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20182019
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. 001-15903
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) |
575 North Dairy Ashford,
Suite 300
Houston, TX 77079
(Address of principal executive offices)
(281) 921-6400
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 par value | CRR | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☐ |
| Accelerated filer | ☒ |
Non-accelerated filer | ☐ |
| Smaller reporting company | ☒ |
|
|
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of OctoberJuly 19, 2018, 27,723,9202019, 29,377,102 shares of the registrant's Common Stock, par value $.01$0.01 per share, were outstanding.
Index to Quarterly Report on Form 10-Q
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Item 1. |
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| Consolidated Balance Sheets - | 3 | |
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Item 2. |
| Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
CARBO CERAMICS INC.
($ in thousands, except per share data)
|
| September 30, |
|
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| (Unaudited) |
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| (Note 1) |
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| (Unaudited) |
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| (Note 1) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 48,872 |
|
| $ | 68,169 |
|
| $ | 40,813 |
|
| $ | 72,752 |
|
Restricted cash |
|
| 5,932 |
|
|
| 6,935 |
|
|
| 1,200 |
|
|
| 1,725 |
|
Trade accounts and other receivables, net |
|
| 37,669 |
|
|
| 37,705 |
|
|
| 23,834 |
|
|
| 35,693 |
|
Inventories: |
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Finished goods |
|
| 48,199 |
|
|
| 59,519 |
|
|
| 39,747 |
|
|
| 41,422 |
|
Raw materials and supplies |
|
| 25,684 |
|
|
| 19,480 |
|
|
| 18,680 |
|
|
| 22,592 |
|
Total inventories |
|
| 73,883 |
|
|
| 78,999 |
|
|
| 58,427 |
|
|
| 64,014 |
|
Assets held for sale |
|
| 17,842 |
|
|
| — |
| ||||||||
Prepaid expenses and other current assets |
|
| 5,366 |
|
|
| 3,989 |
|
|
| 4,910 |
|
|
| 4,754 |
|
Income tax receivable |
|
| 2,328 |
|
|
| 2,319 |
| ||||||||
Total current assets |
|
| 189,564 |
|
|
| 195,797 |
|
|
| 131,512 |
|
|
| 181,257 |
|
Restricted cash |
|
| 3,780 |
|
|
| 3,281 |
|
|
| 8,853 |
|
|
| 8,840 |
|
Income tax receivable |
|
| 2,296 |
|
|
| 2,389 |
| ||||||||
Property, plant and equipment: |
|
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|
|
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|
|
Land and land improvements |
|
| 39,584 |
|
|
| 41,590 |
|
|
| 39,584 |
|
|
| 39,584 |
|
Land-use and mineral rights |
|
| 19,696 |
|
|
| 19,696 |
|
|
| 20,264 |
|
|
| 19,696 |
|
Buildings |
|
| 75,814 |
|
|
| 72,427 |
|
|
| 75,978 |
|
|
| 75,815 |
|
Machinery and equipment |
|
| 432,841 |
|
|
| 455,863 |
|
|
| 425,378 |
|
|
| 432,906 |
|
Construction in progress |
|
| 29,571 |
|
|
| 36,138 |
|
|
| 28,762 |
|
|
| 29,129 |
|
Total property, plant and equipment |
|
| 597,506 |
|
|
| 625,714 |
|
|
| 589,966 |
|
|
| 597,130 |
|
Less accumulated depreciation and amortization |
|
| 316,183 |
|
|
| 301,528 |
|
|
| 333,243 |
|
|
| 323,511 |
|
Net property, plant and equipment |
|
| 281,323 |
|
|
| 324,186 |
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|
| 256,723 |
|
|
| 273,619 |
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Goodwill |
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| 3,500 |
|
|
| 3,500 |
|
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| 3,500 |
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|
| 3,500 |
|
Operating lease right-of-use assets |
|
| 52,266 |
|
|
| — |
| ||||||||
Intangible and other assets, net |
|
| 6,280 |
|
|
| 11,445 |
|
|
| 11,391 |
|
|
| 7,150 |
|
Total assets |
| $ | 486,743 |
|
| $ | 540,598 |
|
| $ | 464,245 |
|
| $ | 474,366 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 15,372 |
|
| $ | 19,417 |
|
| $ | 13,910 |
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| $ | 12,174 |
|
Accrued payroll and benefits |
|
| 6,380 |
|
|
| 6,056 |
|
|
| 4,048 |
|
|
| 6,950 |
|
Accrued freight |
|
| 1,381 |
|
|
| 2,292 |
|
|
| 2,377 |
|
|
| 2,434 |
|
Accrued utilities |
|
| 903 |
|
|
| 1,552 |
|
|
| 589 |
|
|
| 1,012 |
|
Derivative instruments |
|
| 563 |
|
|
| 2,537 |
| ||||||||
Other accrued expenses |
|
| 7,810 |
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|
| 14,020 |
| ||||||||
Notes payable, related parties |
|
| 27,040 |
|
|
| — |
|
|
| — |
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|
| 27,040 |
|
Long-term debt, current portion |
|
| — |
|
|
| 15,733 |
| ||||||||
Operating lease liabilities |
|
| 11,531 |
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|
| — |
| ||||||||
Other current liabilities |
|
| 10,145 |
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|
| 10,577 |
|
|
| 712 |
|
|
| 1,192 |
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Total current liabilities |
|
| 61,784 |
|
|
| 42,431 |
|
|
| 40,977 |
|
|
| 80,555 |
|
Deferred income taxes |
|
| 63 |
|
|
| 230 |
|
|
| 1,114 |
|
|
| 1,114 |
|
Long-term debt, net |
|
| 61,211 |
|
|
| 60,698 |
|
|
| 62,048 |
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|
| 45,650 |
|
Notes payable, related parties |
|
| — |
|
|
| 27,040 |
| ||||||||
Noncurrent operating lease liabilities |
|
| 49,866 |
|
|
| — |
| ||||||||
Other long-term liabilities |
|
| 6,492 |
|
|
| 4,434 |
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|
| 4,209 |
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|
| 10,764 |
|
Shareholders' equity: |
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Preferred stock, par value $0.01 per share, 5,000 shares authorized, none outstanding |
|
| — |
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|
| — |
|
|
| — |
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|
| — |
|
Common stock, par value $0.01 per share, 80,000,000 shares authorized; 27,730,631 and 27,133,614 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively |
|
| 277 |
|
|
| 271 |
| ||||||||
Common stock, par value $0.01 per share, 80,000,000 shares authorized; 29,377,538 and 27,710,861 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively |
|
| 294 |
|
|
| 277 |
| ||||||||
Additional paid-in capital |
|
| 131,378 |
|
|
| 125,715 |
|
|
| 138,288 |
|
|
| 132,080 |
|
Retained earnings |
|
| 225,538 |
|
|
| 279,779 |
|
|
| 167,449 |
|
|
| 203,926 |
|
Total shareholders' equity |
|
| 357,193 |
|
|
| 405,765 |
|
|
| 306,031 |
|
|
| 336,283 |
|
Total liabilities and shareholders' equity |
| $ | 486,743 |
|
| $ | 540,598 |
|
| $ | 464,245 |
|
| $ | 474,366 |
|
The accompanying notes are an integral part of these statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
(Unaudited)
|
| Three months ended |
|
| Nine months ended |
|
| Three months ended |
|
| Six months ended |
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|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
|
| 2018 |
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| 2017 |
|
| 2018 |
|
| 2017 |
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| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Revenues |
| $ | 53,819 |
|
| $ | 50,173 |
|
| $ | 161,175 |
|
| $ | 128,415 |
|
| $ | 43,099 |
|
| $ | 57,989 |
|
| $ | 90,557 |
|
| $ | 107,356 |
|
Cost of sales (exclusive of depreciation and amortization shown below) |
|
| 50,514 |
|
|
| 53,805 |
|
|
| 152,303 |
|
|
| 142,830 |
|
|
| 39,568 |
|
|
| 50,818 |
|
| $ | 87,474 |
|
| $ | 101,788 |
|
Depreciation and amortization |
|
| 8,058 |
|
|
| 10,891 |
|
|
| 24,793 |
|
|
| 32,999 |
|
|
| 7,311 |
|
|
| 8,323 |
|
|
| 14,714 |
|
|
| 16,735 |
|
Gross loss |
|
| (4,753 | ) |
|
| (14,523 | ) |
|
| (15,921 | ) |
|
| (47,414 | ) |
|
| (3,780 | ) |
|
| (1,152 | ) |
|
| (11,631 | ) |
|
| (11,167 | ) |
Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) |
|
| 10,121 |
|
|
| 9,494 |
|
|
| 30,412 |
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|
| 29,272 |
|
|
| 9,784 |
|
|
| 10,685 |
|
|
| 19,816 |
|
|
| 20,292 |
|
Depreciation and amortization |
|
| 625 |
|
|
| 641 |
|
|
| 1,859 |
|
|
| 1,924 |
|
|
| 398 |
|
|
| 620 |
|
|
| 796 |
|
|
| 1,234 |
|
Loss on sale of Russian proppant business |
|
| — |
|
|
| 26,728 |
|
|
| 350 |
|
|
| 26,728 |
| ||||||||||||||||
Other operating (income) expense |
|
| (718 | ) |
|
| 125,738 |
|
|
| (777 | ) |
|
| 125,738 |
| ||||||||||||||||
Loss on sale of Russia proppant business |
|
| — |
|
|
| 350 |
|
|
| — |
|
|
| 350 |
| ||||||||||||||||
Other operating expenses (income) |
|
| 89 |
|
|
| (55 | ) |
|
| 18 |
|
|
| (59 | ) | ||||||||||||||||
Operating loss |
|
| (14,781 | ) |
|
| (177,124 | ) |
|
| (47,765 | ) |
|
| (231,076 | ) |
|
| (14,051 | ) |
|
| (12,752 | ) |
|
| (32,261 | ) |
|
| (32,984 | ) |
Other expense: |
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|
|
|
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|
|
|
|
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|
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Interest expense, net |
|
| (2,292 | ) |
|
| (1,915 | ) |
|
| (6,393 | ) |
|
| (5,630 | ) |
|
| (2,286 | ) |
|
| (2,084 | ) |
|
| (4,363 | ) |
|
| (4,101 | ) |
Other, net |
|
| 166 |
|
|
| 258 |
|
|
| 173 |
|
|
| 448 |
| ||||||||||||||||
Other income, net |
|
| 132 |
|
|
| 31 |
|
|
| 425 |
|
|
| 8 |
| ||||||||||||||||
|
|
| (2,126 | ) |
|
| (1,657 | ) |
|
| (6,220 | ) |
|
| (5,182 | ) |
|
| (2,154 | ) |
|
| (2,053 | ) |
|
| (3,938 | ) |
|
| (4,093 | ) |
Loss before income taxes |
|
| (16,907 | ) |
|
| (178,781 | ) |
|
| (53,985 | ) |
|
| (236,258 | ) |
|
| (16,205 | ) |
|
| (14,805 | ) |
|
| (36,199 | ) |
|
| (37,077 | ) |
Income tax benefit |
|
| (171 | ) |
|
| (316 | ) |
|
| (164 | ) |
|
| (527 | ) | ||||||||||||||||
Income tax expense |
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| 7 |
| ||||||||||||||||
Net loss |
| $ | (16,736 | ) |
| $ | (178,465 | ) |
| $ | (53,821 | ) |
| $ | (235,731 | ) |
| $ | (16,205 | ) |
| $ | (14,812 | ) |
| $ | (36,199 | ) |
| $ | (37,084 | ) |
Loss per share: |
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|
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Basic |
| $ | (0.62 | ) |
| $ | (6.69 | ) |
| $ | (2.00 | ) |
| $ | (8.84 | ) |
| $ | (0.57 | ) |
| $ | (0.55 | ) |
| $ | (1.29 | ) |
| $ | (1.38 | ) |
Diluted |
| $ | (0.62 | ) |
| $ | (6.69 | ) |
| $ | (2.00 | ) |
| $ | (8.84 | ) |
| $ | (0.57 | ) |
| $ | (0.55 | ) |
| $ | (1.29 | ) |
| $ | (1.38 | ) |
Other information: |
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Dividends declared per common share |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
The accompanying notes are an integral part of these statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSSHAREHOLDERS’ EQUITY
($ in thousands)
(Unaudited)
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Net loss |
| $ | (16,736 | ) |
| $ | (178,465 | ) |
| $ | (53,821 | ) |
| $ | (235,731 | ) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
| — |
|
|
| 302 |
|
|
| — |
|
|
| 979 |
|
Reclassification of Russia cumulative translation loss to Net Loss upon sale |
|
| — |
|
|
| 33,347 |
|
|
| — |
|
|
| 33,347 |
|
Comprehensive loss |
| $ | (16,736 | ) |
| $ | (144,816 | ) |
| $ | (53,821 | ) |
| $ | (201,405 | ) |
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Retained Earnings |
|
| Total |
| ||||
Balances at January 1, 2019 |
| $ | 277 |
|
| $ | 132,080 |
|
| $ | 203,926 |
|
| $ | 336,283 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| (19,994 | ) |
|
| (19,994 | ) |
Shares sold under ATM program |
|
| 9 |
|
|
| 3,366 |
|
|
| — |
|
|
| 3,375 |
|
Stock granted under restricted stock plan, net |
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
Stock based compensation |
|
| — |
|
|
| 710 |
|
|
| — |
|
|
| 710 |
|
Shares surrendered by employees to pay taxes |
|
| — |
|
|
| — |
|
|
| (278 | ) |
|
| (278 | ) |
Balances at March 31, 2019 |
| $ | 290 |
|
| $ | 136,152 |
|
| $ | 183,654 |
|
| $ | 320,096 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| (16,205 | ) |
|
| (16,205 | ) |
Shares sold under ATM program |
|
| 4 |
|
|
| 1,227 |
|
|
| — |
|
|
| 1,231 |
|
Modification of warrant |
|
| — |
|
|
| 178 |
|
|
| — |
|
|
| 178 |
|
Stock granted under restricted stock plan, net |
|
| — |
|
|
| 79 |
|
|
| — |
|
|
| 79 |
|
Stock based compensation |
|
| — |
|
|
| 652 |
|
|
| — |
|
|
| 652 |
|
Balances at June 30, 2019 |
| $ | 294 |
|
| $ | 138,288 |
|
| $ | 167,449 |
|
| $ | 306,031 |
|
|
|
|
|
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|
|
|
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Retained Earnings |
|
| Total |
| ||||
Balances at January 1, 2018 |
| $ | 271 |
|
| $ | 125,715 |
|
| $ | 279,779 |
|
| $ | 405,765 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| (22,272 | ) |
|
| (22,272 | ) |
Stock granted under restricted stock plan, net |
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
Stock based compensation |
|
| — |
|
|
| 903 |
|
|
| — |
|
|
| 903 |
|
Shares surrendered by employees to pay taxes |
|
| — |
|
|
| — |
|
|
| (421 | ) |
|
| (421 | ) |
Balances at March 31, 2018 |
| $ | 274 |
|
| $ | 126,615 |
|
| $ | 257,086 |
|
| $ | 383,975 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| (14,812 | ) |
|
| (14,812 | ) |
Shares sold under ATM program |
|
| 3 |
|
|
| 2,846 |
|
|
| — |
|
|
| 2,849 |
|
Stock granted under restricted stock plan, net |
|
| — |
|
|
| 320 |
|
|
| — |
|
|
| 320 |
|
Stock based compensation |
|
| — |
|
|
| 820 |
|
|
| — |
|
|
| 820 |
|
Other |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 1 |
|
Balances at June 30, 2018 |
| $ | 277 |
|
| $ | 130,601 |
|
| $ | 242,275 |
|
| $ | 373,153 |
|
The accompanying notes are an integral part of these statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
|
| Nine months ended |
|
| Six months ended |
| ||||||||||
|
| September 30, |
|
| June 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (53,821 | ) |
| $ | (235,731 | ) |
| $ | (36,199 | ) |
| $ | (37,084 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 26,652 |
|
|
| 34,923 |
|
|
| 15,510 |
|
|
| 17,969 |
|
Amortization of debt issuance costs and original issue discount |
|
| 513 |
|
|
| 882 |
|
|
| 1,061 |
|
|
| 340 |
|
Provision for doubtful accounts |
|
| 145 |
|
|
| 493 |
|
|
| 183 |
|
|
| 81 |
|
Deferred income taxes |
|
| (167 | ) |
|
| 76 |
|
|
| — |
|
|
| 4 |
|
(Gain) loss on disposal or impairment of assets |
|
| (1,097 | ) |
|
| 125,738 |
| ||||||||
Loss (gain) on disposal or impairment of assets |
|
| 18 |
|
|
| (59 | ) | ||||||||
Loss on sale of Russian proppant business |
|
| 350 |
|
|
| 25,101 |
|
|
| — |
|
|
| 350 |
|
Foreign currency transaction gain, net |
|
| — |
|
|
| (35 | ) | ||||||||
Noncash lease expense |
|
| 862 |
|
|
| — |
| ||||||||
Stock compensation expense |
|
| 3,027 |
|
|
| 3,831 |
|
|
| 1,586 |
|
|
| 2,254 |
|
PIK accrual on notes payable, related parties |
|
| — |
|
|
| 997 |
| ||||||||
PIK repayment on notes payable, related parties |
|
| (2,040 | ) |
|
| — |
| ||||||||
Change in fair value of derivative instruments |
|
| (1,974 | ) |
|
| (575 | ) |
|
| — |
|
|
| (1,348 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts and other receivables |
|
| (109 | ) |
|
| (14,538 | ) |
|
| 11,676 |
|
|
| (3,777 | ) |
Inventories |
|
| 5,132 |
|
|
| 5,567 |
|
|
| 5,830 |
|
|
| 836 |
|
Prepaid expenses and other current assets |
|
| 104 |
|
|
| (245 | ) |
|
| (194 | ) |
|
| (407 | ) |
Accounts payable |
|
| (4,044 | ) |
|
| 8,795 |
|
|
| 1,293 |
|
|
| (1,341 | ) |
Accrued expenses |
|
| (2,413 | ) |
|
| 3,561 |
|
|
| (7,938 | ) |
|
| (4,303 | ) |
Income tax receivable, net |
|
| 92 |
|
|
| (1,069 | ) |
|
| (9 | ) |
|
| 97 |
|
Other, net |
|
| 2,757 |
|
|
| 2,123 |
|
|
| (169 | ) |
|
| 2,126 |
|
Net cash used in operating activities |
|
| (24,853 | ) |
|
| (40,106 | ) |
|
| (8,530 | ) |
|
| (24,262 | ) |
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (1,668 | ) |
|
| (2,095 | ) |
|
| (1,085 | ) |
|
| (1,179 | ) |
Investment in PicOnyx |
|
| (684 | ) |
|
| — |
| ||||||||
Issuance of Note from PicOnyx |
|
| (500 | ) |
|
| — |
| ||||||||
Net proceeds from asset sales |
|
| 5,233 |
|
|
| 21,501 |
|
|
| 113 |
|
|
| 74 |
|
Net cash provided by investing activities |
|
| 3,565 |
|
|
| 19,406 |
| ||||||||
Net cash used in investing activities |
|
| (2,156 | ) |
|
| (1,105 | ) | ||||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on notes payable |
|
| (874 | ) |
|
| (500 | ) | ||||||||
Repayments on long-term debt |
|
| (14,533 | ) |
|
| — |
| ||||||||
Repayments on notes payable, related parties |
|
| (25,000 | ) |
|
| — |
| ||||||||
Proceeds from long-term debt |
|
| — |
|
|
| 12,349 |
|
|
| 14,533 |
|
|
| — |
|
Repayments on long-term debt |
|
| — |
|
|
| (3,250 | ) | ||||||||
Repayments on insurance financing agreement |
|
| (941 | ) |
|
| (923 | ) | ||||||||
Payments of debt issuance costs |
|
| — |
|
|
| (989 | ) | ||||||||
Proceeds from sale of common stock under ATM program |
|
| 2,849 |
|
|
| — |
| ||||||||
Proceeds from issuance of common stock under ATM program |
|
| 4,606 |
|
|
| 2,849 |
| ||||||||
Payment of debt issuance costs |
|
| (218 | ) |
|
| — |
| ||||||||
Purchase of common stock |
|
| (421 | ) |
|
| (534 | ) |
|
| (279 | ) |
|
| (421 | ) |
Net cash provided by financing activities |
|
| 1,487 |
|
|
| 6,653 |
| ||||||||
Effect of exchange rate changes on cash |
|
| — |
|
|
| 246 |
| ||||||||
Net cash (used in) provided by financing activities |
|
| (21,765 | ) |
|
| 1,928 |
| ||||||||
Net decrease in cash and cash equivalents and restricted cash |
|
| (19,801 | ) |
|
| (13,801 | ) |
|
| (32,451 | ) |
|
| (23,439 | ) |
Cash and cash equivalents and restricted cash at beginning of period |
|
| 78,385 |
|
|
| 91,680 |
|
|
| 83,317 |
|
|
| 78,385 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 58,584 |
|
| $ | 77,879 |
|
| $ | 50,866 |
|
| $ | 54,946 |
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 6,751 |
|
| $ | 2,319 |
|
| $ | 4,469 |
|
| $ | 3,850 |
|
Income taxes paid |
| $ | — |
|
| $ | 465 |
|
| $ | — |
|
| $ | — |
|
The accompanying notes are an integral part of these statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share and per square foot data)
(Unaudited)
1. | Basis of Presentation |
The accompanying unaudited consolidated financial statements of CARBO Ceramics Inc. have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required 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. The consolidated balance sheet as of December 31, 20172018 has been derived from the audited financial statements at that date. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 20172018 included in the annual report on Form 10-K of CARBO Ceramics Inc. for the year ended December 31, 2017.2018.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries (the “Company”). All significant intercompany transactions have been eliminated.
As of September 30, 2018, theThe Company wasis currently producing ceramic proppants and technology ceramic productsproppants from its Eufaula, Alabama manufacturing facility, base ceramic proppants from its Toomsboro, Georgia manufacturing facility, and processing sand at its Marshfield, Wisconsin facility. As needed,The Company also produces ceramic media at its McIntyre, Georgia and Eufaula, Alabama facilities. The Company is also using its Toomsboro, Georgia facility for contract manufacturing. In addition, the Company produces resin-coated ceramic proppant, ceramic media for the industrial markets, and contract manufacturingproppants at our Toomsboro, Georgia and McIntyre, Georgia facilities. Our Millen, Georgia facility is currently mothballed, and we do not expect to resume production or complete the second line of theits New Iberia, Louisiana facility. As of September 30, 2018 the Company was marketing for sale all of the assets associated with the entire Millen, Georgia facility and expects to complete a sale no later than August 1, 2019. These assets met the criteria for held for sale, and accordingly, their carrying value of $17,842 has been reclassified from net property, plant and equipment (including $6,753 from construction in progress) to assets held for sale within current assets on the consolidated balance sheets. Completion of the second phase of the retrofit of our Eufaula, Alabama plant with our new KRYPTOSPHERE® technology is suspended until such time that market conditions improve enough to warrant completion. As of September 30, 2018, the value of the second phase of the retrofit of our Eufaula, Alabama plant totaled approximately 81% of the Company’s total construction in progress and we estimate that the project is over 95% complete.
The Company continues to focus on diversifying its revenue streams to include a variety of oilfield technology products, industrial ceramic products, contract manufacturing,assess liquidity needs and frac sand.manage cash flows. As a result of the steps the Company has taken to enhance its liquidity, the Company currently believes that cash on hand and cash flows from operations will enable the Company to meet its working capital, capital expenditure, debt service and other funding requirements for at least one year from the date of this Form 10-Q. The Company’s view regarding sufficiency of cash and liquidity10-Q is primarily based on our financial forecast for the remainder of 2018 and 2019, which is impacted by various assumptions regarding demand and sales prices for our products. Although the Company has observed certain factors that could be indicative of improving industry conditions, itsissued. Our financial forecasts in recent periods have not always been accurate due to the inability to estimateproven less reliable given customer demand, which is highly volatile in the current operating environment. The Company hasenvironment and no committed sales backlog from itsexists with our customers. As a result, there is no guarantee that itsour financial forecast, which projects sufficient cash will be available to meet planned operating expenses and other cash needs, will be achieved.accurate. In the event that the Company experiences lower customer demand, lower prices for its products and services, or higher expenses than it forecasted, or if the Company underperforms relative to its forecast, the Company could experience negative cash flows from operations, as has been the case in prior years, which would reduce its cash balances and liquidity.
LateThe second phase of the retrofit of our Eufaula, Alabama plant with the new KRYPTOSPHERE® technology has been suspended until such time that market conditions improve enough to warrant completion. As of June 30, 2019, the value of the assets relating to this project totaled approximately 82% of the Company’s total construction in progress and the project is approximately 75% complete.
On May 28, 2019, the Company entered into an agreement with PicOnyx, Inc. (“PicOnyx”) pursuant to which the Company agreed to provide certain services and contribute certain manufacturing assets to PicOnyx in exchange for 9.7 million shares of convertible preferred stock in PicOnyx. At the Company’s election, the preferred stock can be converted into a pre-determined number of shares of common stock. Additionally, the preferred stock has voting rights that give the Company approximately 22% of voting rights based on the number of outstanding shares of PicOnyx stock. As part of its agreement with PicOnyx, the Company is also designated a seat on the PicOnyx Board of Directors. The Company also holds a warrant to purchase additional shares from PicOnyx with a nominal exercise price in the second quarterevent of 2018, we settled our disputecertain qualified financings. In addition, the Company entered into a Contract Manufacturing Services Agreement with PicOynx, pursuant to which the buyerCompany agreed to provide contract manufacturing services to PicOnyx for certain of our Russian proppant business regardingits products. Pursuant to the additional $4,000 owed to us. Termsterms of the settlement requiredSubscription and Asset Contribution Agreement, the buyerCompany has agreed to pay $3,650,lease certain property to PicOnyx. The Company recorded its investment in PicOnyx at the fair value of the assets given up and liabilities assumed, which approximated the book value and which the Company believes represents the standalone selling price. The fair value was estimated using equipment appraisals (Level 3 inputs as defined in ASC 820). No gain or loss was recorded at inception. Given that the Company’s investment in PicOnyx does not have a readily-determinable fair value, the Company measures the investment at cost, less any impairment, and will adjust the investment to fair value to the extent an observable price change for identical or similar investments of PicOnyx is identified. No adjustments to the cost basis were recorded during the quarter ended June 30, 2019. The net book value of the Company’s investment in PicOnyx is approximately $4,300 at June 30, 2019 and is recorded in Intangible and other assets, net on the consolidated balance sheet. The transaction resulted in a non-cash change in Property, plant and equipment and Intangible and other assets, net of approximately $3,500 as well as a result we recorded a loss of $350. In July 2018, we received the settlement proceedsnon-cash change in Accounts Payable and
7
Intangible and other assets, net of approximately $3,650.$400. PicOnyx represents a variable interest entity for which the Company holds a variable interest. The Company does not consolidate PicOnyx as the Company is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact PicOnyx’s economic performance. In addition, the Company provided PicOnyx $500 in exchange for a convertible promissory note. The note will automatically be converted to equity shares if certain qualified financings occur. The convertible promissory note bears interest at 7.5% per year. The note matures on the earlier of August 1, 2021 or the termination of the Contract Manufacturing Services Agreement. The note is collateralized by all of the manufacturing assets the Company contributed to PicOnyx.
Deferred Taxes – Valuation Allowance
Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, provides the carrying value of deferred tax assets should be reduced by the amount not expected to be realized. A company should reduce deferred tax assets by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. ASC 740 requires all available evidence, both positive and negative, be considered to determine whether a valuation allowance for deferred tax assets is needed in the financial statements. Additionally, there can be statutory limitations on the deferred tax assets should certain conditions arise. As a result of the significant decline in oil and gas activities and net losses incurred over the
past several years, we believe it is more likely than not that a portion of our deferred tax assets will not be realized in the future. Our valuation allowance against a portion of our deferred tax assets as of SeptemberJune 30, 20182019 was $67,309.$80,311. Our assessment of the realizability of our deferred tax assets is based on the weight of all available evidence, both positive and negative, including future reversals of deferred tax liabilities. As of September 30, 2018, there have been no changes to the provisional amounts recorded as of December 31, 2017 associated with tax reform under the Tax Cuts and Jobs Act.
Restricted Cash
A portion of the Company’s cash balance is restricted to its use in order to provide collateral primarily relating tofor letters of credit, corporate cards and corporate credit cards.funds held in escrow relating to the sale of its Millen plant. As of SeptemberJune 30, 20182019 and December 31, 2017,2018, total restricted cash was $9,712$10,053 and $10,216,$10,565, respectively.
Lower of Cost and Net Realizable Value Adjustments
As of SeptemberJune 30, 2018,2019, the Company reviewed the carrying values of all inventories and concluded that no adjustments were warranted for finished goods and raw materials intended for use in the Company’s manufacturing process.
Manufacturing Production Levels Below Normal Capacity
As a result of the Company substantially reducing manufacturing production levels, including by idling certain facilities, certain production costs have been expensed instead of being capitalized into inventory. The Company expenses fixed production overhead amounts in excess of amounts that would have been allocated to each unit of production at normal production levels. For the three months ended SeptemberJune 30, 20182019 and 2017,2018, the Company expensed $7,231$5,861 and $10,890,$6,834, respectively, in production costs. For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, the Company expensed $23,788$14,345 and $32,899,$16,557, respectively, in production costs.
Long-LivedLong-lived and Other Noncurrent Assets Impairment
The Company has temporarily idled production at various manufacturing facilities. The Company does not assess temporarily idled assets for impairment unless events or circumstances indicate that the carrying amounts of those assets may not be recoverable. Short-term stoppages of production for less than one year do not generally significantly impact the long-term expected cash flows of the idled facility. As of SeptemberJune 30, 2018,2019, the Company concluded that there were no events or circumstances that would indicate that carrying amounts of long-lived and other noncurrent assets might be impaired. In addition,However, the Company continues to monitor market conditions closely. Further deterioration of market conditions could result in impairment charges being taken on the Company’s long-lived and other noncurrent assets, including the Company’s manufacturing plants, goodwill and intangible assets. The Company will evaluate long-lived and other noncurrent assets for impairment at such time that events or circumstances indicate that carrying amounts might be impaired. During the three months ended September 30, 2017, the Company recognized a $125,759 impairment of long-lived assets, primarily relating to machinery and equipment and construction in progress at the Millen facility. These amounts are included in the line item Other operating (income) expense on the consolidated statement of operations. Also included within this line item is gains and losses relating to asset sales and other operating income and expenses.
Reclassification of Prior Period Amounts
Certain prior period financial information has been reclassified to conform to current period presentation.
8
The following table sets forth the computation of basic and diluted loss per share under the two-class method:
|
| Three months ended |
|
| Nine months ended |
|
| Three months ended |
|
| Six months ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Numerator for basic and diluted loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (16,736 | ) |
| $ | (178,465 | ) |
| $ | (53,821 | ) |
| $ | (235,731 | ) |
| $ | (16,205 | ) |
| $ | (14,812 | ) |
| $ | (36,199 | ) |
| $ | (37,084 | ) |
Effect of reallocating undistributed earnings of participating securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net loss available under the two-class method |
| $ | (16,736 | ) |
| $ | (178,465 | ) |
| $ | (53,821 | ) |
| $ | (235,731 | ) |
| $ | (16,205 | ) |
| $ | (14,812 | ) |
| $ | (36,199 | ) |
| $ | (37,084 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share--weighted-average shares |
|
| 27,169,301 |
|
|
| 26,690,799 |
|
|
| 26,964,330 |
|
|
| 26,654,728 |
|
|
| 28,615,006 |
|
|
| 26,930,914 |
|
|
| 28,043,040 |
|
|
| 26,860,146 |
|
Effect of dilutive potential common shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Denominator for diluted loss per share--adjusted weighted-average shares |
|
| 27,169,301 |
|
|
| 26,690,799 |
|
|
| 26,964,330 |
|
|
| 26,654,728 |
|
|
| 28,615,006 |
|
|
| 26,930,914 |
|
|
| 28,043,040 |
|
|
| 26,860,146 |
|
Basic loss per share |
| $ | (0.62 | ) |
| $ | (6.69 | ) |
| $ | (2.00 | ) |
| $ | (8.84 | ) |
| $ | (0.57 | ) |
| $ | (0.55 | ) |
| $ | (1.29 | ) |
| $ | (1.38 | ) |
Diluted loss per share |
| $ | (0.62 | ) |
| $ | (6.69 | ) |
| $ | (2.00 | ) |
| $ | (8.84 | ) |
| $ | (0.57 | ) |
| $ | (0.55 | ) |
| $ | (1.29 | ) |
| $ | (1.38 | ) |
3. | Natural Gas Derivative Instruments |
Natural gas is used to fire the kilns at the Company’s domestic manufacturing plants. In an effort to mitigate potential volatility in the cost of natural gas purchases and reduce exposure to short-termshort term spikes in the price of this commodity, from timewe previously contracted in advance for portions of our future natural gas requirements. Due to time,the severe decline in industry activity beginning in early 2015, the Company enters into contracts to purchase a portion of the anticipated monthly natural gas requirements at specified prices. Contracts are geographic by plant location. As a result of the Company’s significantly reducingreduced production levels and consequently did not takingtake delivery of all of the contracted natural gas quantities,quantities. As a result, the Company accountshad accounted for the relevant contracts as derivative instruments.
Derivative accounting requires However, as of December 31, 2018, the last derivative contract expired and no future natural gas contracts to be recognized as either assets or liabilities at fair value with an offsetting entry in earnings. The Company uses the income approach in determining the fair value of these derivative instruments. The model used considers the difference, as of each balance sheet date, between the contracted prices and the New York Mercantile Exchange (“NYMEX”) forward strip price for each contracted period. The estimated cash flows from these contracts are discounted using a discount rate of 8.0%, which reflects the nature of the contracts as well as the timing and risk of estimated cash flows associated with the contracts. The discount rate had an immaterial impact on the fair value of the contracts for the nine months ended September 30, 2018. The last of these natural gas contracts will expire in December 2018. obligations existed.
During the three months ended SeptemberJune 30, 20182019 and 2017,2018, the Company recognized a $217 gain on derivative instruments of $0 and $285 gain,$412, respectively, in cost of sales on derivative instruments.sales. During the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, the Company recognized an $847,a gain on derivative instruments of $0 and $916 loss,$630, respectively, in cost of sales on derivative instruments. The cumulative present value of these natural gas derivative contracts as of September 30, 2018 are presented as current liabilities in the Consolidated Balance Sheet.
At September 30, 2018, the Company had contracted for delivery a total of 480,000 MMBtu of natural gas at an average price of $4.31 per MMBtu through December 31, 2018. Contracts covering 450,000 MMBtu are subject to accounting as derivative instruments. Future decreases in the NYMEX forward strip prices will result in additional derivative losses while future increases in the NYMEX forward strip prices will result in derivative gains. Future gains or losses will approximate the change in NYMEX natural gas prices relative to the total quantity of natural gas under contracts now subject to accounting as derivatives. The historical average NYMEX natural gas contract settlement prices for the three months ended September 30, 2018 and 2017 were $2.90 per MMBtu and $3.00 per MMBtu, respectively.sales.
The Company leases certain property, plant and equipment under operating leases, primarily consisting of railroad equipment leases, certain distribution center assets and real estate. Leases with an initial term of twelve months or less are not recorded on the balance sheet.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to ten years or more. The exercise of lease renewal options is typically at the Company’s derivative instrumentssole discretion. Certain leases also include options to purchase the leased property.
As a result of the underutilization of some of the Company’s assets, we rent or sublease certain assets to third parties, primarily consisting of a portion of our railroad equipment and distribution center assets.
We determine if an arrangement is a lease at inception. Operating leases are measured at fair valueincluded in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and noncurrent operating lease liabilities on a recurring basis. U.S. GAAP establishes a fair value hierarchy that has three levelsour consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the reliability of the inputs used to determine the fair value. These levels include: (1) Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; (2) Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and (3) Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s natural gas derivative instruments are included within Level 2 of the fair value hierarchy (see Note 3 herein for additional information on the derivative instruments). The following table sets forth by level within the fair value hierarchy the Company’s assets and liabilities that were accounted for at fair value:
|
| Fair value as of September 30, 2018 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
| — |
|
|
| (563 | ) |
|
| — |
|
|
| (563 | ) |
Total fair value |
| $ | — |
|
| $ | (563 | ) |
| $ | — |
|
| $ | (563 | ) |
|
| Fair value as of December 31, 2017 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
| — |
|
|
| (2,537 | ) |
|
| — |
|
|
| (2,537 | ) |
Total fair value |
| $ | — |
|
| $ | (2,537 | ) |
| $ | — |
|
| $ | (2,537 | ) |
At September 30, 2018, the fairpresent value of the Company’sfuture minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. As of June 30, 2019, it is not reasonably certain that we will exercise any of these options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are accounted for as a single lease component, primarily related to railroad equipment leases.
9
The components of lease cost were as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||
|
| June 30, 2019 |
| June 30, 2019 |
| ||
Operating lease cost |
| $ | 3,811 |
| $ | 7,969 |
|
Short-term lease cost |
|
| 536 |
|
| 1,255 |
|
Sublease income (a) |
|
| (1,009 | ) |
| (2,109 | ) |
Net lease cost |
| $ | 3,338 |
| $ | 7,115 |
|
(a) As a result of the adoption of ASC 842, sublease income is classified within revenues for the three and six months ended June 30, 2019. Prior to the adoption, sublease income was recorded as a reduction to cost of sales. Sublease income for the three and six months ended June 30, 2019 excludes rental income from owned assets of $393 and $799, respectively, which is recorded within revenues.
Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows:
2019 |
| $ | 8,708 |
|
2020 |
|
| 16,881 |
|
2021 |
|
| 16,471 |
|
2022 |
|
| 12,554 |
|
2023 |
|
| 9,209 |
|
Thereafter |
|
| 16,455 |
|
Total lease payments |
| $ | 80,278 |
|
Less: imputed interest |
|
| (18,881 | ) |
Present value of lease liabilities |
| $ | 61,397 |
|
The adoption of ASC 842 resulted in the Company recording a right of use asset of $56,591 and a total lease liability of $64,877 on January 1, 2019. The Company also reduced its other long-term debt approximatedliabilities by approximately $6,500 and accrued expenses by approximately $1,800 as of January 1, 2019 given that deferred rent is now included within the carrying value.total lease liability. These adjustments represented non-cash changes during the period ended March 31, 2019.
Other information related to leases was as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||
|
| June 30, 2019 |
| June 30, 2019 |
| ||
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 3,379 |
| $ | 6,358 |
|
Leased assets obtained in exchange for new operating lease liabilities |
|
| — |
|
| — |
|
For the six months ended June 30, 2019, the weighted average remaining lease term was 5.9 years and the weighted average discount rate was 10.3%.
5. | Stock Based Compensation |
TheOn May 21, 2019, the shareholders approved the 2019 CARBO Ceramics Inc. Omnibus Incentive Plan (the “2019 Omnibus Incentive Plan”). The 2019 Omnibus Incentive Plan replaces the Amended and Restated 2014 CARBO Ceramics Inc. Omnibus Incentive Plan (the “Amended and Restated(“A&R 2014 Plan”). Under the 2019 Omnibus Incentive Plan”) provides for granting ofPlan, the Company may grant cash-based awards, stock options (both non-qualified and incentive) and other equity-based awards (including stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units or share-denominated performance units) to employees and non-employee directors. The amount paid under the 2019 Omnibus Incentive Plan to any single participant in any calendar year with respect to any cash-based award shall not exceed $5,000. Awards may be granted with respect to a number of shares of the Company’s Common Stock that in the aggregate does not exceed 2,500,000 shares prior to the fifth anniversary of the effective date of the 2019 Omnibus Incentive Plan, plus (i) the number of shares that are forfeited, cancelled or returned and (ii) the number of shares subject to awards that are withheld by the Company or tendered by the participant to the Company to satisfy exercise price or tax withholding obligations in connection with awards other than options or stock appreciation rights. No more than 100,000 shares may be granted to any single participant in any calendar year. Equity-based awards may be subject to performance-based and/or service-based conditions. With respect to stock options and stock appreciation rights granted, the exercise price shall not be less than the market value of the underlying Common Stock on the date of grant. The maximum term of an option is ten years. Restricted stock awards granted generally vest (i.e., transfer and forfeiture restrictions on these shares are lifted) proportionately on each of the first three anniversaries of the grant date, but subject to certain limitations, awards may specify other vesting periods. As of SeptemberJune 30, 2018, 462,113
10
2019, 2,455,000 shares were available for issuance under the Amended and Restated 20142019 Omnibus Incentive Plan. Although the Company’s A&R 2014 Plan has been cancelled, unvested shares granted under that plan remain outstanding in accordance with its terms.
A summary of restricted stock activity and related information for the ninesix months ended SeptemberJune 30, 20182019 is presented below:
|
| Shares |
|
| Weighted-Average Grant-Date Fair Value Per Share |
|
| Shares |
|
| Weighted-Average Grant-Date Fair Value Per Share |
| ||||
Nonvested at January 1, 2018 |
|
| 441,119 |
|
| $ | 14.87 |
| ||||||||
Nonvested at January 1, 2019 |
|
| 541,560 |
|
| $ | 12.14 |
| ||||||||
Granted |
|
| 334,638 |
|
| $ | 12.16 |
|
|
| 468,984 |
|
| $ | 4.55 |
|
Vested |
|
| (200,394 | ) |
| $ | 18.20 |
|
|
| (246,675 | ) |
| $ | 12.74 |
|
Forfeited |
|
| (14,033 | ) |
| $ | 12.00 |
|
|
| (29,170 | ) |
| $ | 9.96 |
|
Nonvested at September 30, 2018 |
|
| 561,330 |
|
| $ | 12.14 |
| ||||||||
Nonvested at June 30, 2019 |
|
| 734,699 |
|
| $ | 7.18 |
|
As of SeptemberJune 30, 2018,2019, there was $4,583$4,127 of total unrecognized compensation cost related to restricted shares granted under the Amended and Restatednow-cancelled A&R 2014 Omnibus Incentive Plan. That cost is expected to be recognized over a weighted-average period of 1.82.1 years. The total fair value of shares vested during the ninesix months ended SeptemberJune 30, 20182019 was $1,567.$1,011. For restricted stock awards granted to certain executives of the Company, there is a holding period requirement of two years after the vesting date. For the portion of such awards that are not expected to be withheld to satisfy tax withholdings, the grant date fair value for the January 2019 awards was discounted for the restriction of liquidity by 20.6%, which was calculated using the Finnerty model.
The Company made market-based cash awards to certain executives of the Company pursuant to the Amended and Restatednow-cancelled A&R 2014 Omnibus Incentive Plan. As of SeptemberJune 30, 2018,2019, the total target award outstanding was $3,210.$3,019. The payout of awards can range from 0% to 200% based on the Company’s Relative Total Shareholder Return calculated over a three year period beginning January 1 of the year each grant was made. During the ninesix months ended SeptemberJune 30, 2019, a total of $708 was paid relating to the 2016 grant, which was approximately 61% of the total target award. During the six months ended June 30, 2018, a total of $526 was paid relating to the 2015 grant, which was approximately 76% of the total target award.
The Company also granted phantom stock and cash-settled restricted stock units (collectively discussed as “phantom stock”) to certain key employees pursuant to the Amended and Restatednow-cancelled A&R 2014 Omnibus Incentive Plan. The units subject to a phantom stock
award vest and cease to be forfeitable in equal annual installments over a three-year period. Participants awarded units of phantom stock are entitled to a lump sum cash payment equal to the fair market value of a share of Common Stock on the vesting date. In no event will Common Stock of the Company be issued with regard to outstanding phantom stock awards. As of SeptemberJune 30, 2018,2019, there were 214,616319,892 units of phantom stock granted, under the Amended and Restated 2014 Omnibus Incentive Plan, of which 54,020115,020 have vested and 23,51127,862 have been forfeited. As of SeptemberJune 30, 2018,2019, nonvested units of phantom stock under the Amended and Restated 2014 Omnibus Incentive Plan had a total value of $994,$239, a portion of which is accrued as a liability within Accrued Payroll and Benefits. Compensation expense for these units of phantom stock will be recognized over the three-year vesting period. The amount of compensation expense recognized each period will be based on the fair value of the Company’s common stock at the end of each period.
6. | Long-Term Debt and Notes Payable |
On March 2, 2017, the Company entered into an Amended and Restated Credit Agreement (the “New Credit“Credit Agreement”), as last amended on June 7, 2018,20, 2019, with Wilks Brothers, LLC (“Wilks”(the “Wilks”) to replace its term loan with Wells Fargo Bank, National Association (“Wells Fargo”) and provide the Company with additional liquidity for a longer term.. The New Credit Agreement is a $65,000 facility maturing on December 31, 2022. The Company’s obligations bear interest at 9.00% and are guaranteed by its two domestic operating subsidiaries. No principal repayments are required until maturity (except in unusualcertain circumstances), and there are no financial covenants. In lieu of making cash interest payments,May 2019, the Company hasrepaid $14,533 to the option during the first two yearsWilks as a result of the loan to make interest payments as payment-in-kind, or PIK, by applying an 11.00% raterequired prepayment relating to the interest payment due (insteadnet cash proceeds from the sale of its Millen, Georgia facility. On June 20, 2019, the Company entered into the Second Amendment to Amended and Restated Credit Agreement and Joinder (the “Amended Credit Agreement”) with the Wilks and a promissory note (“Equify Note”) with Equify Financial LLC, an affiliate of the 9.00% cash interest rate) and capitalizingWilks, (“Equify”). By amending the resultingprevious credit agreement, the Company was able to refinance the amount tothat was repaid in May 2019, such that the total outstanding principal balanceremains at $65,000, but the Company’s repayment obligations are now split between the Wilks and Equify, at $33,000 and $32,000, respectively. The interest rate of 9%, maturity on December 31, 2022, and the terms and conditions for both loans remain the same.
The loan cannot be prepaid before March 31, 2021 without making the lenders whole for interest that would have been payable over the entire remaining term of the loan. The Company is requiredCompany’s obligations under the Amended Credit Agreement are secured by: (i) a pledge of all accounts receivable and inventory, (ii) cash in certain accounts, (iii) domestic distribution assets residing on owned real property, (iv) the Company’s Marshfield, Wisconsin and Toomsboro, Georgia plant facilities and equipment, and (v) certain real property interests in mines and minerals.
As of June 30, 2019, the Company’s combined outstanding debt to provide Wilks and Equify under the Amended Credit Agreement and Equify Note was $65,000. As of June 30, day notice2019, the fair value of its intent to exercise this option for an interest payment. The Company does not anticipate utilizing this option and has therefore accrued interest expense using the 9.00% cash interest rate.Company’s long-term debt approximated the carrying value.
As of SeptemberJune 30, 2018, the Company’s outstanding debt under its New Credit Agreement was $65,000. As of September 30, 2018,2019, the Company had $725$677 of unamortized debt issuance costs relating to the NewCredit Agreement and Amended Credit Agreement that are presented as a direct reduction from the carrying amount of the long-term debt obligation. As a result of the May 2019 repayment, the Company wrote off approximately $137 of unamortized debt issuance costs relating to the Credit Agreement. As a result of the June 2019 refinancing, the Company added approximately $218 to debt issuance costs resulting from an amendment fee paid directly to Wilks. The Company had $7,775$7,475 and $9,230$2,625 in standby letters of credit issued through its banks as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, primarily as collateral relating to our natural gas commitmentsrailcar leases and railcar leases. other obligations.
On March 2, 2017, in connection with entry into the New Credit Agreement, the Company issued a Warrant (the “Warrant”) to Wilks. Subject to the terms of the Warrant, the Warrant entitlesentitled the holder thereof to purchase up to 523,022 shares of the Common Stock, at an exercise price of $14.91 per share, payable in cash. The Warrant expires onwas amended in connection with the Amended Credit Agreement and June 2019 refinancing to revise the exercise price to $4.00 and to extend the expiration date to December 31, 2022.2024. Based on a Form 413D filing with the SEC on December 29, 2017,July 9, 2019 as of September 30, 2018,June 20, 2019, the Wilks owned approximately 11.1%10.5% of the Company’s outstanding common stock as of June 30, 2019, and should the Wilks fully exercise the Warrant to purchase an additional 523,022 shares, itthe Wilks would hold approximately 12.8%12.1% of the Company’s outstanding common stock. Upon issuance of the Warrant, the Company recorded an increase to additional paid-in capital of $3,871. Upon modification of the Warrant, the Company recorded an increase to additional paid-in capital of $178. As a result of the May 2019 repayment, the Company wrote off approximately $609 of unamortized original issue discount. As of SeptemberJune 30, 2018,2019, the unamortized original issue discount was $3,064.$2,276.
In May 2016, the Company received proceeds of $25,000 from the issuance of separate unsecured Promissory Notes (the “Notes”) to two of the Company’s Directors. Each Note maturesmatured on April 1, 2019 and bearsbore interest at 7.00%. On March 2, 2017, in connection with the New Credit Agreement, the Notes were amended to provide for payment-in-kind, or PIK, interest payments at 8.00% until the lenders under the New Credit Agreement receive two consecutive semi-annual cash interest payments. DuringOn April 1, 2017, the Company made $2,040a $997 interest paymentspayment as PIK, and capitalized the resulting amount to the outstanding principal balance. As ofOn October 25, 2018,1, 2017, the Company made a $1,043 interest payment as PIK, and capitalized the resulting amount to the outstanding principal balance. On April 1, 2019, the Company made a $27,040 payment repaying the outstanding principal balance of the Notes was $27,040.Notes.
Interest expensecost for the ninesix months ended SeptemberJune 30, 2019 and 2018 was $4,401 and 2017 was $6,482 and $5,966,$4,137, respectively. Interest cost primarily includes interest expense primarily relatesrelating to interest on ourthe Company’s debts as well as amortization and the write-off of debt issuance costs and amortization of the original issue discount associated with the NewAmended Credit Agreement and Warrant.
|
|
On July 28, 2016, the Company filed a prospectus supplement and associated sales agreement related to an at-the-market (“ATM”) equity offering program pursuant to which the Company may sell, from time to time, common stock having an aggregate offering price of up to $75,000 through Cowen and Company LLC, as sales agent, for general corporate purposes. No sales occurred during the third quarter 2018. During the nine months ended September 30, 2018, the Company sold a total of 300,227 shares of its common stock under the ATM program for $2,914, or an average of $9.71 per share, and received proceeds of $2,849, net of commissions of $65. As of September 30, 2018, the Company had sold a total of 3,705,936 shares of its common stock under the ATM program for $49,527, or an average of $13.36 per share, and received proceeds of $48,412, net of commissions of $1,114.
The following table disaggregates our revenue by product line for the three and nine months ended September 30, 2018 and 2017:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Technology products and services |
| $ | 12,922 |
|
| $ | 10,813 |
|
| $ | 35,578 |
|
| $ | 28,543 |
|
Industrial products and services |
|
| 4,153 |
|
|
| 2,955 |
|
|
| 10,714 |
|
|
| 7,372 |
|
Base ceramic and sand proppants |
|
| 27,520 |
|
|
| 31,079 |
|
|
| 90,558 |
|
|
| 75,754 |
|
Oilfield and Industrial technologies and services segment |
|
| 44,595 |
|
|
| 44,847 |
|
|
| 136,850 |
|
|
| 111,669 |
|
Environmental technologies and services segment |
|
| 9,224 |
|
|
| 5,326 |
|
|
| 24,325 |
|
|
| 16,746 |
|
|
| $ | 53,819 |
|
| $ | 50,173 |
|
| $ | 161,175 |
|
| $ | 128,415 |
|
| New Accounting Pronouncements |
In February 2016, the FASB issued ASU No. 2016-02, “Leases“Leases (Topic 842),” which amends current lease guidance. This guidance requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU No. 2018-11, “Leases“Leases (Topic 842): Targeted Improvements”,Improvements,” which simplifies the implementation by allowing entities the option to instead apply the provisions of the new guidance at the effective date, without adjusting the comparative periods presented. The new leaseCompany adopted this guidance will be effective forJanuary 1, 2019 without adjusting the interim and annual periods beginning after December 15, 2018 with early adoption permitted. Upon initial evaluation,comparative periods. In addition, the Company expects an impactelected the package of practical expedients permitted under the guidance, which among other things, allowed the Company to our consolidated balance sheetscarry forward the historical lease classification. As of June 30, 2019, the Company’s operating lease ROU asset was $52,266 and related disclosures,its total lease liability was $61,397. In addition, upon implementation, the Company’s deferred rent balances, recorded primarily within other long-term liabilities and accrued expenses as our operating leases will require adjustmentsof December 31, 2018, of approximately $8,300 were removed and recorded to record a right to use asset and relatedthe lease liability. The balance of the right of use asset and lease liabilityCompany has not yet been quantified. We have selectedimplemented a lease accounting system and our implementation of it is substantially complete. The Company is infor accounting for leases under the process of evaluating the potential impactnew standard. There were no significant impacts to the consolidated statement of operations and consolidated statement of cash flows. We are finalizing our internal controls over financial reporting related to the adoption of this new accounting pronouncement.See Note 4 for additional information.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting”. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU will be effective for the interim and annual periods beginning after December 15, 2018, with early adopting permitted. The Company does not expect a material impact to our consolidated financial statements or related disclosures.
| Equity Offering |
On July 28, 2016, the Company filed a prospectus supplement and associated sales agreement related to an at-the-market (“ATM”) equity offering program pursuant to which the Company may sell, from time to time, common stock with an aggregate offering price of up to $75,000 through Cowen and Company LLC, as sales agent, for general corporate purposes. The Company’s Form S-3 Registration Statement filed on May 20, 2016 has since expired, and as a result, we cannot sell additional common stock
12
under the ATM program until a new Form S-3 Registration Statement is effective. During the three months ended June 30, 2019, the Company sold a total of 356,350 shares of its common stock under the ATM program for $1,259, or an average of $3.53 per share, and received proceeds of $1,231, net of commissions of $28. During the six months ended June 30, 2019, the Company sold a total of 1,250,000 shares of its common stock under the ATM program for $4,713, or an average of $3.77 per share, and received proceeds of $4,607, net of commissions of $106. As of June 30, 2019, the Company had sold a total of 4,955,936 shares of its common stock under the ATM program for $54,240, or an average of $10.94 per share, and received proceeds of $53,019, net of commissions of $1,220. The most recent sales under the ATM program occurred on April 4, 2019.
9. | Segment Information |
The Company has two operating segments: 1) oilfieldOilfield and industrial technologiesIndustrial Technologies and servicesServices and 2) environmental technologiesEnvironmental Technologies and services.Services. Discrete financial information is available for each operating segment. Management of each operating segment reports to our Chief Executive Officer, the Company’s 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 of the consolidated financial statements included in the annual report on Form 10-K for the year ended December 31, 2017.2018.
The Company’s oilfieldOilfield and industrial technologiesIndustrial Technologies and servicesServices segment manufactures and sells ceramic technology ceramic products and services, base ceramic proppant and frac sand for both the oilfield and industrial sectors. These products have different technology features and product characteristics, which vary based on the application for which they are intended to be used. The various ceramic products’ manufacturing processes are similar.
Oilfield ceramic technology products, base ceramic proppant and frac sand proppant are manufactured and sold to pressure pumping companies and oil and gas operators for use in the hydraulic fracturing of natural gas and oil wells. ThisThe Oilfield and Industrial Technologies and Services segment also promotes increased production and Estimated Ultimate Recovery (“EUR”) of oil and natural gas by providing industry-leading technology to Design, Build, and Optimize the FracTM®. Through our wholly-owned subsidiary StrataGen, Inc., we sell one of the most widely used fracture stimulation software under the brand FracPro® and provide fracture design and consulting services to oil and natural gas E&P companies under the brand StrataGen.
OurThe Company’s industrial ceramic technology products are manufactured at the same facilities and using the same machinery and equipment as the oilfield products, however they are sold to industrial companies. These products are designed for use in various industrial technology applications, including, but not limited to, casting and milling. The Company’s chief operating decision maker reviews discreet financial information as a whole for all of the Company’s manufacturing, consulting and software businesses. Manufacturing includes the manufacture of technology products, base ceramics, industrial ceramics, sand and contract manufacturing, regardless of the industry the products are ultimately sold to. See Note 10 for disaggregated revenue information.
Our environmental technologiesThe Company’s Environmental Technologies and servicesServices segment designs, manufactures and sells products and services intended to protect operators’clients’ assets, minimize environmental risks, and lower lease operating expense (“LOE”). AGPI,Asset Guard Products Inc. (“AGPI”), a wholly-owned subsidiary of ours,the Company, provides spill prevention, containment and countermeasure systems for the oil and gas industry.and other industries. AGPI uses proprietary technology designed to enable its clients to extend the life of their storage assets, reduce the potential for hydrocarbon spills and provide containment of stored materials.
13
Summarized financial information for the Company’s operating segments for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 is shown in the following tables. Intersegment sales are not material.
|
| Oilfield and Industrial Technologies and Services |
|
| Environmental Technologies and Services |
|
| Total |
|
| Oilfield and Industrial Technologies and Services |
|
| Environmental Technologies and Services |
|
| Total |
| ||||||
Three Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| ($ in thousands) |
| |||||||||||||||||||||
Three Months Ended June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Revenue from external customers |
| $ | 44,595 |
|
| $ | 9,224 |
|
| $ | 53,819 |
|
| $ | 35,913 |
|
| $ | 7,186 |
|
| $ | 43,099 |
|
(Loss) income before income taxes |
|
| (17,904 | ) |
|
| 997 |
|
|
| (16,907 | ) |
|
| (16,502 | ) |
|
| 297 |
|
|
| (16,205 | ) |
Depreciation and amortization |
|
| 8,372 |
|
|
| 311 |
|
|
| 8,683 |
|
|
| 7,432 |
|
|
| 277 |
|
|
| 7,709 |
|
Three Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Revenue from external customers |
| $ | 44,847 |
|
| $ | 5,326 |
|
| $ | 50,173 |
| ||||||||||||
Loss before income taxes |
|
| (178,603 | ) |
|
| (178 | ) |
|
| (178,781 | ) | ||||||||||||
Depreciation and amortization |
|
| 11,223 |
|
|
| 309 |
|
|
| 11,532 |
| ||||||||||||
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Three Months Ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Revenue from external customers |
| $ | 136,850 |
|
| $ | 24,325 |
|
| $ | 161,175 |
|
| $ | 49,788 |
|
| $ | 8,201 |
|
| $ | 57,989 |
|
(Loss) income before income taxes |
|
| (56,217 | ) |
|
| 2,232 |
|
|
| (53,985 | ) |
|
| (15,545 | ) |
|
| 740 |
|
|
| (14,805 | ) |
Depreciation and amortization |
|
| 25,755 |
|
|
| 897 |
|
|
| 26,652 |
|
|
| 8,647 |
|
|
| 297 |
|
|
| 8,944 |
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Six Months Ended June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Revenue from external customers |
| $ | 111,669 |
|
| $ | 16,746 |
|
| $ | 128,415 |
|
| $ | 76,000 |
|
| $ | 14,557 |
|
| $ | 90,557 |
|
Loss before income taxes |
|
| (235,803 | ) |
|
| (455 | ) |
|
| (236,258 | ) | ||||||||||||
(Loss) income before income taxes |
|
| (36,768 | ) |
|
| 569 |
|
|
| (36,199 | ) | ||||||||||||
Depreciation and amortization |
|
| 33,947 |
|
|
| 976 |
|
|
| 34,923 |
|
|
| 14,965 |
|
|
| 545 |
|
|
| 15,510 |
|
Six Months Ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Revenue from external customers |
| $ | 92,256 |
|
| $ | 15,100 |
|
| $ | 107,356 |
| ||||||||||||
(Loss) income before income taxes |
|
| (38,312 | ) |
|
| 1,235 |
|
|
| (37,077 | ) | ||||||||||||
Depreciation and amortization |
|
| 17,383 |
|
|
| 586 |
|
|
| 17,969 |
|
10. | Disaggregated Revenue |
The following table disaggregates revenue by product line: |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30 |
|
| June 30 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Oilfield and Industrial Technologies and Services segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products and services |
| $ | 8,426 |
|
| $ | 12,786 |
|
| $ | 15,615 |
|
| $ | 22,656 |
|
Industrial products and services |
|
| 3,141 |
|
|
| 3,269 |
|
|
| 7,868 |
|
|
| 6,562 |
|
Base ceramic and sand proppants |
|
| 22,944 |
|
|
| 33,733 |
|
|
| 49,609 |
|
|
| 63,038 |
|
Sublease and rental income |
|
| 1,402 |
|
|
| — |
|
|
| 2,908 |
|
|
| — |
|
|
|
| 35,913 |
|
|
| 49,788 |
|
|
| 76,000 |
|
|
| 92,256 |
|
Environmental Technologies and Services segment |
|
| 7,186 |
|
|
| 8,201 |
|
|
| 14,557 |
|
|
| 15,100 |
|
|
| $ | 43,099 |
|
| $ | 57,989 |
|
| $ | 90,557 |
|
| $ | 107,356 |
|
Sales of oilfield technology products and services, consulting services, and FracPro software are included within Technology products and services. Sales of industrial ceramic products, industrial technology products and contract manufacturing are included within Industrial products and services. Sales of oilfield base ceramic and sand proppants, as well as railcar usage fees are included within Base ceramic and sand proppants. Sublease and rental income primarily consist of the sublease of certain railroad equipment and rental income related to leases on some of our underutilized distribution center assets. As a result of the adoption of ASC 842 as of January 1, 2019, these amounts were classified within revenues during the three and six months ended June 30, 2019. These amounts were classified as a reduction of costs for the same periods in 2018. See Note 4.
11. | Legal Proceedings |
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
|
|
In October 2018, the Company signed a non-binding Letter of Intent to sell its Millen, Georgia plant for $26,000. The transaction is expected to close before year-end.
In October 2018, the Company signed a non-binding Letter of Intent to contribute certain idled assets for a minority ownership in PicOnyx, Inc., developer of M-ToneTM, a new family of functional pigments for the plastics, paints, ink, coatings and adhesives markets. The transaction is expected to close before year-end.
Also in October 2018, the CEO temporarily and voluntarily reduced his base pay to $750 effective November 1, 2018. Future adjustments to the CEO’s base pay may occur as revenues and financial metrics continue to improve. The CEO’s employment contract has not been amended in connection with this voluntary change.
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ITEM 2. | MANAGEMENT’S |
Overview
CARBO Ceramics Inc. (“we,” “us,” “our” or our “Company”) is a global technology company that provides products and services to the oil and gas, industrial, and environmental markets to enhance value for its clients. The Company conducts its business within two operating segments: 1) oilfieldOilfield and industrial technologiesIndustrial Technologies and servicesServices and 2) environmental technologiesEnvironmental Technologies and services. Services.
The Company’s oilfieldOur Oilfield and industrial technologiesIndustrial Technologies and servicesServices segment manufactures and sells ceramic technology ceramic products and services, base ceramic proppant and frac sand for both the oilfield and industrial sectors. The products have different technology features and product characteristics, which vary based on the application for which they are intended to be used. The various ceramic products’ manufacturing processes are similar.
Oilfield ceramic technology products, base ceramic proppant and frac sand proppant are manufactured and sold to pressure pumping companies and oil and gas operators for use 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 conductive 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. TheWe believe the higher initial cost of ceramic proppant is justified by the fact that its use in certain well conditions typically 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. We are one of the world’s largest suppliers of ceramic proppant.
Through our wholly-owned subsidiary StrataGen, Inc., we promote increased production and EUR of oil and natural gas by selling a widely used fracture stimulation software under the brand FracPro®,FracPro, and providing fracture design and consulting services to oil and natural gas E&P companies under the brand StrataGen.
FracPro®FracPro provides a suite of stimulation software solutions used for designing fracture treatments and for on-site real-time analysis.analysis and data acquisition. Use of FracPro has enabledenables our clients to recognizeoptimize reservoir stimulation to enhance oil and remedy potential stimulation problems.gas production. FracPro has been integrated with third-party reservoir simulation software, furthering its reach and utility.
The StrataGen consulting team works with operators around the world to help optimize well placement, fracture treatment design and production enhancement. The broad range of expertise of the StrataGen consultants includes: fracture treatment design; completion support; on-site treatment supervision; quality control; post-treatment evaluation and optimization; reservoir and fracture studies; rock mechanics and software application and training.
Our industrial ceramic technology products are manufactured and sold to industrial companies. These products are designed for use in various industrial technology applications, including but not limited to casting and milling.
We also produce industrial products at our manufacturing facilities for third parties under tolling arrangements. These products so far have been primarily used in industrial or agricultural applications. Contract manufacturing has led to increased revenue generation. We continue to develop additional opportunities within the industrial, agricultural and oil and gas industries to grow revenue, and reduce our plants’ slowing and idling costs.
Our environmental technologiesEnvironmental Technologies and servicesServices segment is intended to protect operators’ assets, minimize environmental risks, and lower lease operating expense (“LOE”). Asset Guard Products Inc. (“AGPI”),AGPI, the only subsidiary of ours to operate in this segment, provides spill prevention, containment and countermeasure systems for the oil and gas, industry.industrial, and retail applications. AGPI uses proprietary technology to make products designed to enable its clients to extend the life of their storage assets, reduce the potential for hydrocarbon spills and provide containment of stored materials. AGPI was formerly known as Falcon Technologies and Services, Inc.
Late in the second quarter of 2018, we settled our dispute with the buyer of our Russian proppant business regarding the additional $4.0 million owed to us. Terms of the settlement required the buyer to pay us $3.65 million, and as a result we recorded a loss of $0.35 million during the second quarter of 2018. In July 2018, we received the settlement proceeds of $3.65 million.
Industry Conditions
During the three months ended SeptemberJune 30, 2018,2019, the average price of West Texas Intermediate (“WTI”) crude oil increased 45%decreased 12% to $69.76$59.78 per barrel compared to $48.16$68.03 per barrel during the same period in 2017.2018. The average North American rig count increased 9% decreased 6%
15
during the three months ended SeptemberJune 30, 20182019 to 1,2591,073 rigs compared to 1,1551,143 rigs during the same period in 2017. Although
commodity2018. Commodity prices have increased in the last year, they remain at significantly lower levels than prior to the severe industry downturn that began in late 2014, which has not encouraged a broad move away from low-cost completions. E&P operators that are existing or target customers of ours continued to use more frac sand than ceramic or resin-coated proppants as a percentage of overall proppant consumption during the three months ended SeptemberJune 30, 2018. 2019. In addition, customers’ shift to less expensive sand from the recent expansion of competitor regional sand supply has negatively impacted our frac sand revenue. We expect this trend to continue in the current commodity price environment as our customers are under increasing pressure to consider lower up-front cost alternatives in the current commodity price environment, notwithstanding the superior performance results of our ceramic products.
Generally,Current demand for mostproppant is extremely dynamic. Most of our oilfield products and services dependsdepend primarily uponon the supply of and demand for oil and natural gas, and oil andas well as on the number of natural gas and oil wells drilled, completed or re-completed worldwide. More specifically, the demand for most of our products and services is dependent on the number of oil and natural gas wells that are hydraulically fractured to stimulate production. Because theThe demand for theseour products and services is also dependent on the commodity price of oil and natural gas, and lower commodity prices result in fewer purchases of our premium products being purchased.products. In addition, to rig counts and commodity prices, our results of operations are also significantly affected by a host of other factors, including but not limited to (a) rig counts, (b) well completions activity, which is not necessarily correlated with rig count, (b)(c) customer preferences, (c)(d) new product and technology adoption, (including of our KRYPTOSPHERE, CARBOAIR and SCALEGUARD technologies), (d)(e) imports and competition, (e)(f) changes in the product mix of what we sell, (f)(g) costs of developing our products and services and running our business, and (g)(h) changes in our strategy and execution. Current demand for proppant is extremely dynamic, but even if rig count and commodity prices remain constant, our business results are also highly dependent on these additional factors.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with U.S. GAAP, which require us to make estimates and assumptions (see Note 1 to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2017)2018). We believe that some of our accounting policies involve a higher degree of judgment and complexity than others. As of December 31, 2017,2018, our critical accounting policies included revenue recognition, estimating the recoverability of accounts receivable, inventory valuation, accounting for income taxes, accounting for long-lived assets, accounting for derivative instruments, and accounting for abnormally low production levels. These critical accounting policies are discussed more fully in our annual report on Form 10-K for the year ended December 31, 2017.2018.
There have been no changes in our evaluation of our critical accounting policies since December 31, 2017.2018, other than the addition of a new accounting policy for leases.
The Company accounts for its leases in accordance with the requirements of ASC 842, Leases. We determine if an arrangement is a lease at inception. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We have lease agreements with lease and non-lease components, which are accounted for as a single lease component, primarily related to railroad equipment leases. Operating leases are included in operating lease ROU assets, operating lease liabilities, and noncurrent operating lease liabilities on our consolidated balance sheets. Sublease and rental income are recognized as revenue on the consolidated statement of operations.
Results of Operations
Three Months Ended SeptemberJune 30, 20182019
Revenues. Oilfield and industrial technologiesIndustrial Technologies and servicesServices segment revenues of $44.6$35.9 million for the three months ended SeptemberJune 30, 20182019 decreased 1%28% compared to $44.8$49.8 million for the same period in 2017.2018. The decrease was mainly attributable to decreases in base ceramic and frac sand and technology products sales. These decreases were partially offset by sublease and rental income. As a result of the adoption of ASC 842 as of January 1, 2019, sublease and rental income was classified within revenues during the three months ended June 30, 2019. These amounts were classified as a reduction of costs for the same period in 2018. Despite the overall decrease in base ceramic revenue, our international base ceramic revenue increased to 58% of total base ceramic revenue for the three months ended June 30, 2019 compared to 41% for the same period in 2018.
Environmental Technologies and Services segment revenues of $7.2 million for the three months ended June 30, 2019 decreased 12% compared to $8.2 million in the same period in 2018. The decrease was mainly attributable to a 5% decrease in base ceramic revenue and an 18% decrease in frac sand related revenue, which in turn was attributable to customers’ shift from Northern White Sand to lower cost regional sand alternatives, partially offset by a 41% increase in industrial products and services revenue and a 20% increase in technology products and services revenue.
Environmental technologies and services segment revenues of $9.2 million for the three months ended September 30, 2018 increased 73% compared to $5.3 million in the same period in 2017. The increase was mainly attributable to improved product sales and new client growth combined with an increase in oil and natural gas industry activity.activity as well as increased competition.
16
Gross Loss. Oilfield and industrial technologiesIndustrial Technologies and servicesServices segment gross loss for the three months ended SeptemberJune 30, 20182019 was $6.6$4.8 million, or 15%13% of revenues, compared to gross loss of $15.1$2.7 million, or 34%5% of revenues, for the same period in 2017.2018. Gross loss improvedworsened primarily due to a shiftthe decreases in sales mix to more profitable technologybase ceramic and industrial productsfrac sand sales.
Environmental Technologies and lower slowing and idling production costs.
Environmental technologies and servicesServices segment gross profit for the three months ended SeptemberJune 30, 20182019 was $1.8$1.0 million compared to gross profit of $0.6$1.5 million for the same period in 2017.2018. This increasedecrease in gross profit was primarily the result of the increasedecrease in sales.sales for the period.
Depreciation and amortization expense was $8.1$7.3 million for the three months ended SeptemberJune 30, 20182019 compared to $10.9$8.3 million for the same period in 2017.2018. This decrease was largelyprimarily due to the impairment recorded onsale of our Millen facility during the thirdfourth quarter of 2017. As of September 30, 2018, the Millen facility carrying value was reclassified toasset sales, and assets held for sale.becoming fully depreciated.
Selling, General and Administrative (SG&A) and Other Operating Expenses.Expense (Income). Oilfield and industrial technologiesIndustrial Technologies and servicesServices segment SG&A (exclusive of depreciation and amortization) totaled $9.4$9.2 million for the three months ended SeptemberJune 30, 2018
2019 compared to $8.9$10.0 million for the same period in 2017,2018, primarily due to increaseddecreased sales and marketing expenses resulting from growing industrial sales. Other operating income of $0.7and research and development costs. Consolidated depreciation and amortization was down $0.2 million to $0.4 million for the three months ended SeptemberJune 30, 2019 compared to $0.6 million for the same period in 2018, was primarily relateddue to certain assets becoming fully depreciated or fully amortized. The $0.35 million loss on the sale of one of the Company’s distribution centers, offset by $0.3 million in other operating expenses. Other operating expense of $125.8 millionour Russian proppant business for the three months ended SeptemberJune 30, 20172018 was primarily related to settling the impairmentreceivable owed to us from the buyer of our Russian proppant business. Consolidated other operating expense for the three months ended June 30, 2019 was $0.1 million compared to other operating income of $0.1 million for the same period in 2018, both primarily relating to losses and gains on our Millen, Georgia proppant manufacturing facility.asset sales.
Environmental technologiesTechnologies and servicesServices segment SG&A (exclusive of depreciation and amortization) was $0.7down $0.1 million for the three months ended September 30, 2018 compared to $0.6 million for the three months ended SeptemberJune 30, 2017. This increase was primarily due2019 compared to increase sales and marketing expenses associated with$0.7 million for the increased sales.same period in 2018.
Income Taxes. Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, provides that the carrying value of deferred tax assets should be reduced by the amount not expected to be realized. A company should reduce deferred tax assets by a valuation allowance if, based on the weight of all available evidence, it is not more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. ASC 740 requires all available evidence, both positive and negative, be considered to determine whether a valuation allowance for deferred tax assets is needed in the financial statements. Additionally, there can be statutory limitations and losses also assessed on the deferred tax assets should certain conditions arise. As a result of the significant decline in oil and gas activities and net losses incurred over the past several years, we believe it is more likely than not that a portion of our deferred tax assets will not be realized in the future. Our valuation allowance against a portion of our deferred tax assetstaxes as of SeptemberJune 30, 20182019 was $67.3$80.3 million. Our assessment of the realizability of our deferred tax assets is based on the weight of all available evidence, both positive and negative, including future reversals of deferred tax liabilities. As a result, income tax benefitexpense was $0.2 million, or 1.0% of pretax loss,$0 for the three months ended SeptemberJune 30, 2018 compared to $0.3 million, or 0.2% of pretax loss, for the same period in 2017.2019 and 2018.
NineSix Months Ended SeptemberJune 30, 20182019
Revenues. Oilfield and industrial technologiesIndustrial Technologies and servicesServices segment revenues of $136.9$76.0 million for the ninesix months ended SeptemberJune 30, 2018 increased 23%2019 decreased 18% compared to $111.7$92.3 million for the same period in 2017.2018. The increasedecrease was mainly attributable to a 63% increasedecreases in base ceramic and frac sand related revenue, a 25% increase inand technology products and services revenue, and a 45% increase in industrial products and services revenue.sales. These increasesdecreases were partially offset by increases in industrial products sales and sublease and rental income. As a 15%result of the adoption of ASC 842 as of January 1, 2019, sublease and rental income was classified within revenues during the six months ended June 30, 2019. These amounts were classified as a reduction of costs for the same period in 2018. Despite the overall decrease in base ceramic revenue.revenue, our international base ceramic revenue increased to 52% of total base ceramic revenue for the six months ended June 30, 2019 compared to 31% for the same period in 2018.
Environmental technologiesTechnologies and servicesServices segment revenues of $24.3$14.6 million for the ninesix months ended SeptemberJune 30, 2018 increased 45%2019 decreased 4% compared to $16.7$15.1 million in the same period in 2017.2018. The increasedecrease was mainly attributable to improved product sales and new client growth combined with an increasea decrease in oil and natural gas industry activity. activity as well as increased competition.
Gross Loss. Oilfield and industrial technologiesIndustrial Technologies and servicesServices segment gross loss for the ninesix months ended SeptemberJune 30, 20182019 was $20.5$13.6 million, or 15%18% of revenues, compared to gross loss of $49.4$14.0 million, or 44%15% of revenues, for the same period in 2017.2018. Gross loss improved primarily due to a shift in sales mix to more profitable technology and industrial products and lower slowing and idling production costs and derivative gains in the yearcosts. The improvement was partially offset with reductions due to changesthe decrease in the NYMEX forward strip prices.base ceramic and frac sand sales.
Environmental technologiesTechnologies and servicesServices segment gross profit for the ninesix months ended SeptemberJune 30, 20182019 was $4.6$2.0 million compared to gross profit of $2.0$2.8 million for the same period in 2017.2018. This increasedecrease in gross profit was primarily the result of the increasedecrease in sales.sales for the period.
17
Depreciation and amortization expense was $24.8$14.7 million for the ninesix months ended SeptemberJune 30, 20182019 compared to $33.0$16.7 million for the same period in 2017.2018. This decrease was largelyprimarily due to the impairment recorded onsale of our Millen facility during the thirdfourth quarter of 2017. As of September 30, 2018, the Millen facility carrying value was reclassified toasset sales, and assets held for sale.becoming fully depreciated.
Selling, General and Administrative (SG&A) and Other Operating Expenses.Expense. Oilfield and industrial technologiesIndustrial Technologies and servicesServices segment SG&A (exclusive of depreciation and amortization) totaled $28.4$18.5 million for the ninesix months ended SeptemberJune 30, 20182019 compared to $27.3$19.0 million for the same period in 2017,2018, primarily due to increaseddecreased sales and marketing expenses associated with growing industrial sales.and research and development costs. Consolidated depreciation and amortization was down $0.4 million to $0.8 million for the six months ended June 30, 2019 compared to $1.2 million for the same period in 2018, primarily due to certain assets becoming fully depreciated or fully amortized. The $0.35 million loss on the sale of our Russian proppant business for the six months ended June 30, 2018 was related to settling the receivable owed to us from the buyer of our Russian proppant business for $0.35 million less than was owed to us in order to limit additional legal expenses resulting from the disagreement. Other operating income of $0.8 million for the nine months ended September 30, 2018 was primarily related to the sale of one of the Company’s distribution centers, offset by $0.3 million in other operating expense. Other operating expense of $125.8 million for the nine months ended September 30, 2017 was primarily related to the impairment on our Millen, Georgia proppant manufacturing facility.business.
Environmental technologiesTechnologies and servicesServices segment SG&A (exclusive of depreciation and amortization) was flat at $2.0$1.3 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017.2018.
Income Taxes.Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, provides that the carrying value of deferred tax assets should be reduced by the amount not expected to be realized. A company should reduce deferred tax assets by a valuation allowance if, based on the weight of all available evidence, it is not more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. ASC 740 requires all available evidence, both positive and negative, be considered to determine whether a valuation allowance for deferred tax assets is needed in the financial statements. Additionally, there can be statutory limitations and losses also assessed on the deferred tax assets should certain conditions arise. As a result of the significant decline in oil and gas activities and net losses incurred over the past several years, we believe it is more likely than not that a portion of our deferred tax assets will not be realized in the future. Our valuation allowance against a portion of our deferred tax assetstaxes as of SeptemberJune 30, 20182019 was $67.3$80.3 million. Our assessment of the realizability of our deferred tax assets is based on the weight of all available evidence, both positive and negative, including future reversals of deferred tax liabilities. As a result, income tax expense was $0.2 million, or 0.3% of pretax loss,$0 for the ninesix months ended SeptemberJune 30, 2018 compared to $0.5 million, or 0.2% of pretax loss, for the same period in 2017.2019 and 2018.
Outlook
In North America,The CARBO of the combinationpast will not be the CARBO of lower completionthe future. Our recently signed agreements to expand our product portfolio in the industrial market and enhance our oil and gas software offering is just the beginning. Late stage discussions are underway to capitalize on additional opportunities, including potential contract manufacturing opportunities with other companies. We believe these will set CARBO on a new path by continuing to reduce reliance on oil and gas activity customers’ budget exhaustion, and additional regional sand capacity coming online, leads usprovide a platform for growth for many years to estimate our full year 2018 consolidatedcome.
Although the first half of 2019 revenues were weaker-than-expected, we expect the revenue will approximate $210 million. The main driver for the reduced revenue forecastsecond half of 2019 to be stronger as delayed oil and gas projects from the first half of 2019 are completed. As a result, we believe our results of operations should continue to improve as we work to produce consistent, positive cash flow. The recently signed agreements previously noted, and possible additional opportunities, should accelerate our path to achieve this consistent positive cash flow and profitability.
We expect a stronger second half of 2019 given the delays experienced for our oil and gas technology ceramic products during the fullsecond quarter of 2019. Both KRYPTOSPHERE HD and KRYPTOSPHERE LD sales should see continued growth and contribute meaningfully to revenue. In addition, we anticipate technology sales of SCALEGUARD and CARBONRT to also have good results as we close out the year.
We experienced a temporary lull in industrial sales due to a client’s equipment process change during the quarter. As this client resumes normal activity and we are able to capitalize on the positive results from a number of our industrial product trials that started earlier this year, 2018, is softening industry demand for both our base ceramic and frac sand proppants.we anticipate industrial sales to grow in the second half of 2019 compared to the first half.
We continue to be very encouraged by customer interest input an immense amount of effort into closing contract manufacturing opportunities. The process is long but when the projects are awarded they provide predictable and profitable work utilizing our three sectors’ technology products, increasing international activity, andidled assets. These opportunities are key to overcoming the expected recovery in the North American oilfield in 2019. We expectprofitability challenges we face today.
Within our efforts to reduce working capital levels and the sale of the Millen plant to strengthen cash levels and maintain a strong balance sheet.
We expect our ceramic technologyenvironmental business, additional industrial sales to finish the year strong relative to the third quarter of 2018 driven by sales of KRYPTOSPHERE, the Guard family, NRT and CARBOAIR products.
Demand for STRATAGEN’s consulting services is expected to stay healthyresources were added during the fourth quarter of 2018. We have seen our client list expand as operators rely on STRATAGEN to provide consulting services to optimize their well completions and enhance production.
Our software business is expected to be steady during the fourth quarter of 2018, following the modest growth pattern we have seen in Fracpro sales throughout the year. We continue to look for new opportunities to grow our software business.
Due to the well-publicized lower completion activity in the industry, we now believe our full year revenues for base ceramic and sand proppants to be down 20% to 25% from where we anticipated as we exited the second quarter of 2018. In base ceramic proppants, one of our strategies2019. We expect these additions to reduce working capital islead to changeincreased industrial sales for ASSETGUARD products over the traditional business model from manufacturing and stocking of inventory, to one which incorporates production on demand along with upfront cash commitments. For frac sand, we are pleased to have signed a contract for an estimated 550,000 tons of annual capacity during the third quarter of 2018, which will offset someremainder of the softening demandyear. In addition, our client count is growing through our eCommerce platform, CARBODIRECT, which, over time, will lower client acquisition costs and improve working capital.
18
Maintaining healthy cash levels is a high priority as we encountered during the quarter. The benefits of the contract include the use ofcontinue our sand facility, rail carstransformation process. Excluding any potential M&A transactions, and distribution center.
We anticipate our industrial revenues to increase year-on-year during the fourth quarter driven by increased industrial ceramic media sales along with continued contract manufacturing revenue.
The client gains we have made in industrial ceramic and contract manufacturing is building a growing base of business for 2019. The Industrial sector outlook through 2019 is positive and we should continue to see double digit revenue growth along with strong margins.
ASSETGUARD continues to perform well and its profitability has significantly improved year-on-year. Given the recent slowdown inassuming oil and gas activity stabilizes, we believe the fourth quarter will result in more modest growth year-on-year than what we witnessed in the third quarter of 2018. We expect continued growth in industrial applications for ASSETGUARD’s products.
As demonstrated byanticipate our evolving revenue mix, our long term growth strategy to diversify our revenue streams across multiple industries is proving to be successful. Swings in oilfield activity have a significant impact on us today but successful execution of our transformation strategy will help lessen the negative impact of those swings and improve our profitability. Maintaining healthy cash levels during this transformation is key and we continue to take actions to maintain a strong balance sheet.remain fairly flat for the remainder of the year.
Liquidity and Capital Resources
At SeptemberJune 30, 2018,2019, we had cash and cash equivalents and restricted cash of $58.6$50.9 million compared to cash and cash equivalents and restricted cash of $78.4$83.3 million at December 31, 2017. During the nine months ended September 30, 2018, we received proceeds of $5.2 million relating to the asset sales and $2.8 million relating to sales of common stock under our ATM program. 2018. Uses of cash included $24.9$8.6 million used in operating activities, $1.7$2.2 million for capital expenditures, $0.4investing activities, and $21.8 million for purchases of our common stock, and $0.9 millionused in repayments on an insurance financing agreement.activities.
We estimate thatour total capital expenditures for the remainder of 20182019 will be less than $1.0$2.0 million. DueIn April 2019, we repaid the Notes with two of our directors totaling $27 million. During the second quarter of 2019, we entered into an amended credit agreement with the Wilks Brothers, LLC and a promissory note entered into with Equify Financial LLC, an affiliate of the Wilks. The outstanding principal balance remains at $65 million, but the Company’s repayment obligations are now split between the Wilks and Equify, at $33 million and $32 million, respectively. The interest rate of 9%, maturity on December 31, 2022, and the terms and conditions for both loans remain the same. By amending the previous credit agreement, we are able to market conditions,retain the net cash proceeds from the sale of our Millen, Georgia facility that otherwise would have been required to pay down the credit facility principle if not reinvested within 270 days from the completion of the second phase of a plant retrofit with KRYPTOSPHERE® technology has been suspended until such time that market conditions warrant completion. In addition, we are marketing our Millen, Georgia facility for sale.
We anticipate that cash on hand will be sufficient to meet planned operating expenses and other cash needs for at least one year from the date of this Form 10-Q. OurThe Company’s view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2018 and 2019,the next twelve months, which is impacted by various assumptions regarding demand and sales prices for our products. Generally, we expect demand for our products and the sales prices to increase. Although we have observed certain factors that could be indicative ofremain consistent over the next twelve months compared to the last twelve months. We also expect to decrease our operating costs in the next twelve months compared to the last twelve months while improving industry conditions, our cash position through continued balance sheet management. Our financial forecasts are based on estimates of customer demand, which is highly volatile in the current operating environment, and we have no committed sales backlog with our customers. As a result, there is inherent uncertainty in our forecasts. In the event that we experience lower customer demand, lower prices for our products and services, or higher expenses than we have forecasted or if we underperform relative to our forecast, we could experience negative cash flows from operations, as has been the case in prior years, which would reduce our cash balances and liquidity.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of SeptemberJune 30, 2018.2019.
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The statements in this Quarterly Report on Form 10-Q that are not historical statements, including statements regarding our future financial and operating performance and liquidity and capital resources, are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may”, “will”, “estimate”, “intend”, “continue”, “believe”, “expect”, “anticipate”, “should”, “could”, “potential”, “opportunity”, or other similar terminology. All forward-looking statements are based on management's current expectations and estimates, which involve risks and uncertainties that could cause actual results to differ materially from those expressed in forward-looking statements. Among these factors are:
changes in the cost of raw materials and natural gas used in manufacturing our products;
risks related to our ability to access needed cash and capital;
our ability to meet our current and future debt service obligations, including our ability to maintain compliance with our debt covenants;
our ability to manage distribution costs effectively;
our ability to successfully implement strategic changes in our business;
changes in demand and prices charged for our products;
changes in the demand for, or price of, oil and natural gas;
changes in overall economic conditions;
technological, manufacturing and product development risks;
our dependence on and loss of key customers and end users;
potential declines or increased volatility in oil and natural gas prices that adversely affect our customers, the energy industry or our production costs;
potential reductions in spending on exploration and development drilling in the oil and natural gas industry that could reduce demand for our products and services;
seasonal sales fluctuations;
an increase in competition in the proppant market, including imports from foreign countries;
logistical and distribution challenges relating to certain resource plays that do not have the type of infrastructure systems that are needed to efficiently support oilfield services activities;
the development of alternative stimulation techniques that would not benefit from the use of our existing products and services, such as extraction of oil or gas without fracturing;
changes in foreign and domestic governmental regulations, including environmental restrictions on operations and regulation of hydraulic fracturing;
increased regulation of emissions from our manufacturing facilities;
the development and utilization of alternative proppants for use in hydraulic fracturing;
general global economic and business conditions;
weather-related risks;
changes in foreign and domestic political and legislative risks;
risks of war and international and domestic terrorism;
risks associated with foreign operations and foreign currency exchange rates and controls;
the potential expropriation of assets by foreign governments; and
other risks and uncertainties.
Additional factors that could affect our future results or events are described from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”). Please see the discussion set forth under the caption “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2017,2018, under the caption “Risk Factors” in this report, and similar disclosures in subsequently filed reports with the SEC. We assume no obligation to update forward-looking statements, except as required by law.
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We are exposed to market risk in the price of natural gas, which is used in production by our domestic manufacturing facilities and is subject to volatility. In an effort to mitigate potential volatility in the cost of natural gas purchases and reduce exposure to short-term spikes in the price of the commodity, from time to time, we enter into contracts to purchase a portion of our anticipated monthly natural gas requirements at specified prices. At September 30, 2018, we had contracted for a total of 480,000 MMBtu of natural gas at an average price of $4.31 per MMBtu through December 31, 2018.Not required.
(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 SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of SeptemberJune 30, 2018,2019, management had 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 our 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 our disclosure controls and procedures were effective to ensure that information required to be disclosed by the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) | Changes in Internal Control over Financial Reporting |
There were no changes in the Company’s internal control over financial reporting during the quarter ended SeptemberJune 30, 20182019 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
The following table provides information about our repurchases of Common Stock during the quarter ended SeptemberJune 30, 2018:2019:
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plan(1) |
|
| Maximum Number of Shares that May be Purchased Under the Plan(1) |
| ||||
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,000,000 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,000,000 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,000,000 |
|
|
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
(1) | On January 28, 2015, we announced the authorization by our Board of Directors for the repurchase of up to two million shares of our Common Stock. The Plan is effective until all shares have been purchased under the Plan, or until such date that our Board of Directors cancels the Plan. No shares have been purchased under the Plan. |
Not applicable.
Our U.S. manufacturing facilities process mined minerals, and therefore are viewed as mine operations subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the recently proposed Item 106 of Regulation S-K (17 CFR 229.106) is included in Exhibit 95 to this quarterly report.
Not applicable.
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The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:
|
|
|
*10.2 | Contract Manufacturing Services Agreement | |
|
|
|
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 Ernesto Bautista III |
|
|
|
32 |
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
95 |
| Mine Safety Disclosure |
|
|
|
101 |
| The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
*Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential Confidential portions of these exhibitsthis exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.omitted.
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EXHIBIT |
| DESCRIPTION |
|
|
|
|
| |
*10.2 | ||
|
|
|
31.1 |
| |
|
|
|
31.2 |
| Rule 13a-14(a)/15d-14(a) Certification by Ernesto Bautista III. |
|
|
|
32 |
| |
|
|
|
95 |
| |
|
|
|
101 |
| The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
*Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential Confidential portions of these exhibitsthis exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.omitted.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CARBO CERAMICS INC. | |
|
| |
| /s/ Gary A. Kolstad | |
| Gary A. Kolstad | |
| President and Chief Executive Officer | |
|
| |
| /s/ Ernesto Bautista III | |
| Ernesto Bautista III | |
| Chief Financial Officer | |
|
| |
| Date: |
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