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CRR > SEC Filings for CRR > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for CARBO CERAMICS INC

Form 10-Q for CARBO CERAMICS INC


31-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business

The Company generates revenue primarily through the sale of products and services to the oil and natural gas industry. The Company's principal business consists of manufacturing and selling ceramic proppant and resin-coated sand for use primarily in the hydraulic fracturing of oil and natural gas wells. The Company also provides the industry's most popular hydraulic fracture simulation software FracPro , as well as hydraulic fracture design and consulting services. In addition, the Company provides a broad range of technologies for spill prevention, containment and countermeasures, along with geotechnical monitoring.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, which require the Company to make estimates and assumptions (see Note 1 to the consolidated financial statements included in the annual report on Form 10-K for the year ended December 31, 2011). The Company believes that some of its accounting policies involve a higher degree of judgment and complexity than others. As of December 31, 2011, critical accounting policies for the Company included revenue recognition, estimating the recoverability of accounts receivable, inventory valuation, accounting for income taxes and accounting for long-lived assets. These critical accounting policies are discussed more fully in the Company's annual report on Form 10-K for the year ended December 31, 2011. There have been no changes in the Company's evaluation of its critical accounting policies since December 31, 2011.

Results of Operations

Three Months Ended September 30, 2012

Revenues. Revenues of $151.1 million for the quarter ended September 30, 2012 decreased 10% compared to $167.1 million in revenues for the same period in 2011. The decrease is mainly attributed to a 5% decrease in proppant sales volume and a 9% decrease in the average proppant selling price partially offset by an increase in revenues of the Company's other business units. Worldwide proppant sales volume totaled 412 million pounds for the third quarter of 2012 compared to 432 million pounds for the third quarter of 2011. North American (defined as Canada and the U.S.) sales volume decreased 11% driven by several factors including a shift in drilling activity from natural gas to oily, liquids-rich basins and increased competition from an over-supply of Chinese ceramic proppant. International (excluding Canada) sales volume increased 33% primarily due to increased sales volumes in Mexico and China. Other Proppants
(resin-coated sand and ceramic proppant manufactured on an outsourced basis)
represented 27 million pounds of the Company's worldwide sales volumes in the third quarter of 2012, as compared to 34 million pounds in the third quarter of 2011. The average selling price per pound of all proppant was $0.327 during the third quarter of 2012 compared to $0.358 for the same period in 2011.

Gross Profit. Gross profit for the third quarter of 2012 was $50.2 million, or 33% of revenues, compared to $72.7 million, or 44% of revenues, for the third quarter of 2011. Operations in 2012 continued to be impacted by the shift in drilling activity away from natural gas basins due to the severe decline in natural gas prices in late 2011 and the resulting logistical challenges and competitive pressures created by this shift. The decrease in gross profit and in gross profit as a percentage of revenue was primarily the result of lower proppant sales volumes, a decrease in the average proppant selling price, higher fixed cost absorption and an increase in freight and logistics costs. Greater contribution from the Company's other business units partially offset the decline in gross profit from proppant sales.

Selling, General and Administrative (SG&A). SG&A expenses totaled $15.1 million for the third quarter of 2012 compared to $16.6 million for the same period in 2011. As a percentage of revenues, SG&A expenses remained relatively flat at 10.0% for the third quarter of 2012 compared to 9.9% for the same period last year. The decrease in SG&A expenses primarily resulted from lower marketing, research and development, and administrative spending.

Income Tax Expense. Income tax expense was $11.0 million, or 31.4% of pretax income, for the third quarter of 2012 compared to $19.3 million, or 34.3% of pretax income, for the same period last year. The $8.3 million decrease is primarily due to lower pre-tax income and a lower effective tax rate primarily associated with the final preparation and filing of the Company's prior year income tax returns and additional tax benefits relating to mining depletion deductions.


Nine Months Ended September 30, 2012

Revenues. Revenues of $491.9 million for the nine months ended September 30, 2012 increased 5% compared to $467.6 million in revenues for the same period in 2011. Revenues increased primarily due to a 4% increase in proppant sales volume and an increase in revenues of the Company's other business units. Worldwide proppant sales volume totaled 1.270 billion pounds in the first nine months of 2012 compared to 1.218 billion pounds for the same period in 2011. North American (defined as Canada and the U.S.) sales volume remained relatively flat for the nine months ended September 30, 2012 as compared to the same period in 2011. International (excluding Canada) sales volume increased 25% primarily due to increased sales volumes in Mexico, Russia and China. Other Proppants
(resin-coated sand and ceramic proppant manufactured on an outsourced basis)
represented 119 million pounds of the Company's worldwide sales volumes for the nine months ended September 30, 2012, as compared to 80 million pounds in the same period in 2011. The average selling price per pound of all proppant was $0.352 during the nine months ended September 30, 2012 compared to $0.355 for the same period in 2011.

Gross Profit. Gross profit for the nine months ended September 30, 2012 was $177.9 million, or 36% of revenues, compared to $196.9 million, or 42% of revenues, for the same period in 2011. Operations in 2012 were impacted by the shift in drilling activity away from natural gas basins due to the severe decline in natural gas prices in late 2011 and the resulting logistical challenges and competitive pressures created by this shift. Despite similar proppant sales volumes in both nine-month periods, gross profit and gross profit as a percentage of revenues decreased in 2012 primarily as a result of an increase in freight and logistics costs and a shift in the sales mix towards heavyweight and Other Proppant products. Greater contribution from the Company's other business units partially offset the decrease in gross profit from proppant sales.

Selling, General and Administrative (SG&A) and Other Operating Expenses. SG&A expenses totaled $48.8 million for the nine months ended September 30, 2012 compared to $46.8 million for the same period in 2011. As a percentage of revenues, SG&A expenses remained relatively flat at 9.9% for the nine months ended September 30, 2012 compared to 10.0% for the same period in 2011. The increase in SG&A expenses primarily resulted from higher marketing and administrative spending. Start-up costs of $0.1 million in 2012 related to the start-up of the second resin-coating line at the Company's New Iberia, Louisiana facility. Start-up costs of $0.1 million in 2011 related to costs associated with the start-up of the fourth production line at the Company's Toomsboro, Georgia facility. Loss on disposal or impairment of assets of $1.5 million in 2011 consists primarily of a $0.9 million impairment of goodwill related to the Company's geotechnical monitoring business and a $0.8 million write-down of a 6% interest in an investment accounted for under the cost method as a result of the sale of the business by majority shareholders.

Income Tax Expense. Income tax expense was $42.6 million, or 33.1% of pretax income, for the nine months ended September 30, 2012 compared to $51.2 million, or 34.6% of pretax income for the same period last year. The $8.6 million decrease is primarily due to lower pre-tax income and a lower effective tax rate primarily associated with the final preparation and filing of the Company's prior year income tax returns and additional tax benefits relating to mining depletion deductions.

Outlook

The Company believes its operating results for the remainder of 2012 will continue to be influenced by the level of oil and natural gas drilling in North America. A severe decline in natural gas prices in the U.S. in late 2011 led businesses engaged in the exploration and production of oil and natural gas to reduce drilling activity and capital spending in natural gas basins, including shale plays, and to increase capital spending towards oily, liquids-rich basins. In addition, the fourth quarter may be adversely affected by normal seasonality issues, including weather and holidays.

The combination of a low natural gas price, volatility in oil and natural gas liquids markets, and the over-supply of imported Chinese ceramic proppant are causing disruptions within the industry, and the Company believes these disruptions will continue to place pressure on proppant pricing, volumes and margins for the remainder of the year. In addition, the increased amount of activity in infrastructure-limited, liquids-rich basins introduced supply chain challenges to the industry. These challenges resulted in higher supply chain costs during the first three quarters of 2012 for the Company. The Company expects these costs will continue at current levels for the balance of the year.


The Company expects to support near-term demand with its current ceramic production capacity of 1.7 billion pounds per year, along with existing inventories of ceramic proppant manufactured on an outsourced basis. With respect to resin-coating capacity expansion, the second production line in New Iberia, Louisiana was completed during the first quarter of 2012 and increased the Company's annual resin-coating capacity to 400 million pounds. Near the end of the second quarter of 2012, the Company began to utilize its own CARBO Northern White sand in its sand processing facility in Marshfield, Wisconsin. With respect to the resin-coating expansion in Marshfield, the Company has deferred further construction at this time. The Company will consider resuming construction when warranted by market conditions. Additionally, the Company has been issued an Air Quality Permit for its proposed ceramic proppant manufacturing plant in Millen, Georgia. The Company is moving forward with construction of the first 250 million pound line and anticipates the Millen plant could commence operation near the end of 2013.

Liquidity and Capital Resources

At September 30, 2012, the Company had cash and cash equivalents of $52.0 million compared to cash and cash equivalents of $41.3 million at December 31, 2011. For the nine months ended September 30, 2012, the Company generated $98.5 million of cash from operating activities and $1.3 million from excess tax benefits relating to stock based compensation. Uses of cash included $64.1 million of capital spending, $17.3 million of cash dividends and $7.7 million for the repurchase of the Company's common stock.

Subject to the Company's financial condition, the amount of funds generated from operations and the level of capital expenditures, the Company's current intention is to continue to pay quarterly dividends to holders of its common stock. On September 18, 2012, the Board of Directors declared a cash dividend of $0.27 per common share, or $6.2 million in the aggregate, to shareholders of record on November 1, 2012. That dividend is payable on November 15, 2012. The Company estimates its total capital expenditures for the remainder of 2012 will be between $15 million and $25 million. Capital expenditures for the remainder of 2012 are expected to include costs associated with expansion of the Company's distribution infrastructure and the construction of the new manufacturing facility in the Millen, Georgia area.

The Company maintains a $25.0 million unsecured line of credit with Wells Fargo Bank, N.A. As of September 30, 2012, there was no outstanding debt under the credit agreement. The Company anticipates that cash on hand, cash provided by operating activities and funds available under its line of credit will be sufficient to meet planned operating expenses, tax obligations, capital expenditures and other cash needs for the next 12 months. Based on these assumptions, the Company believes that its fixed costs could be met even with a moderate decrease in demand for the Company's products.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements as of September 30, 2012.

Forward-Looking Information

The statements in this 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 federal securities laws. All forward-looking statements are based on management's current expectations and estimates, which involve risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Among these factors are:

changes in overall economic conditions,

changes in the cost of raw materials and natural gas used in manufacturing our products,

changes in demand and prices charged for our products,

changes in the demand for, or price of, oil and natural gas,

risks of increased competition,

technological, manufacturing and product development risks,

loss of key customers,

changes in foreign and domestic government regulations, including environmental restrictions on operations and regulation of hydraulic fracturing,



changes in foreign and domestic political and legislative risks,

the risks of war and international and domestic terrorism,

risks associated with foreign operations and foreign currency exchange rates and controls, and

weather-related risks 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"). See in particular our annual report on Form 10-K for the fiscal year ended December 31, 2011 under the caption "Risk Factors" 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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