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CRR > SEC Filings for CRR > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for CARBO CERAMICS INC

Form 10-Q for CARBO CERAMICS INC


1-Nov-2013

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 production enhancement products and services to the oil and natural gas industry. The Company's principal business consists of manufacturing and selling proppant products for use primarily in the hydraulic fracturing of oil and natural gas wells. These proppant products include ceramic, resin-coated ceramic, and resin-coated sand. The Company also provides the industry's most widely used hydraulic fracture simulation software, FracProฎ, 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.

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, 2012). The Company believes that some of its accounting policies involve a higher degree of judgment and complexity than others. As of December 31, 2012, 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, 2012. There have been no changes in the Company's evaluation of its critical accounting policies since December 31, 2012.

Results of Operations

Three Months Ended September 30, 2013

Revenues. Revenues of $201.5 million for the third quarter of 2013 increased 33% compared to $151.1 million for the same period in 2012. The increase is mainly attributed to a 48% increase in proppant sales volumes offset by a 6% decrease in the average proppant selling price for all proppants. The decrease in average selling price is primarily the result of higher volumes of sand-based products sold, which have a lower average selling price compared to ceramic proppants. The average selling price per pound of all proppant was $0.306 during the third quarter of 2013 compared to $0.327 for the same period in 2012.

Worldwide proppant sales volume totaled 609 million pounds for the third quarter of 2013 compared to 412 million pounds for the same period in 2012. Ceramic proppant sales volumes increased to 534 million pounds in the third quarter of 2013 from 401 million pounds in the same period last year. Resin-coated sand sales volumes increased to 59 million pounds in the third quarter of 2013 from 11 million pounds in the same period last year. Other Proppants (defined as raw sand sold in the course of producing substrate for resin-coating) was 16 million pounds in the third quarter of 2013 compared to none in the same period in last year. North American (defined as Canada and the U.S.) proppant sales volume increased 63%, driven largely by market share gains. International (excluding Canada) sales volume decreased 17% primarily due to decreased sales volumes in China, Mexico, and Russia, offset by increased sales volumes in Europe and Latin America.

Gross Profit. Gross profit for the third quarter of 2013 was $62.8 million, or 31% of revenues, compared to $50.2 million, or 33% of revenues, for the third quarter of 2012. The increase in gross profit was primarily the result of higher proppant sales volumes. As a percent of revenues, gross profit declined primarily as a result of a change in product sales mix towards more lower-margin sand-based products.

Selling, General and Administrative (SG&A) and Other Operating Expenses. SG&A and other operating expenses totaled $18.6 million for the third quarter of 2013 compared to $15.1 million for the same period in 2012. The increase in SG&A expenses primarily resulted from an increase in administrative, marketing, and research and development spending. As a percentage of revenues, SG&A and other operating expenses decreased to 9.2% compared to 10.0% for the third quarter of 2012.

Other Income (Expense). Other income (expense) for the third quarter of 2013 increased $0.4 million compared to the same period in 2012. This increase is primarily due to changes in exchange rates between the functional currency and the foreign currency in which the effective transactions were denominated, and an increase in interest income.


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Income Tax Expense. Income tax expense was $14.3 million, or 32.1% of pretax income, for the third quarter of 2013 compared to $11.0 million, or 31.4% of pretax income, for the same period last year. The $3.3 million increase is primarily due to higher pre-tax income.

Nine Months Ended September 30, 2013

Revenues. Revenues of $502.9 million for the nine months ended September 30, 2013 increased 2% compared to $491.9 million for the same period in 2012. The increase is mainly attributed to a 19% increase in proppant sales volumes, partially offset by a 14% decrease in the average proppant selling price. The decrease in average selling price is the result of price decreases in response to market conditions during mid-2012 and higher volumes of sand-based products, which have a lower average selling price than ceramic proppants. The average selling price per pound of all proppant was $0.304 during the nine months ended September 30, 2013 compared to $0.352 for the same period in 2012.

Worldwide proppant sales volume totaled 1.510 billion pounds for the nine months ended September 30, 2013 compared to 1.270 billion pounds for the same period in 2012. Ceramic proppant sales volumes increased to 1.309 billion pounds in the nine months ended September 30, 2013 from 1.234 billion pounds in the same period last year. Resin-coated sand increased to 153 million pounds in the nine months ended September 30, 2013 from 36 million pounds in the same period last year. Other Proppants was 48 million pounds in the nine months ended September 30, 2013 compared to none in the same period last year. North American (defined as Canada and the U.S.) proppant sales volume increased 26% due largely to market share gains. International (excluding Canada) sales volume decreased 11% primarily due to decreased sales volumes in China, Africa, and Mexico, offset by increased sales volumes in Europe and Latin America.

Gross Profit. Gross profit for the nine months ended September 30, 2013 was $144.5 million, or 29% of revenues, compared to $177.9 million, or 36% of revenues, for the same period in 2012. The decrease in gross profit was primarily the result of a decrease in average selling price, a change in the product sales mix resulting from volume gains of the Company's lower-margin sand-based products, and spending to bring the Company's new proppant technology to a commercial state, partially offset by higher proppant sales volumes.

Selling, General and Administrative (SG&A) and Other Operating Expenses. SG&A expenses totaled $51.0 million for the nine months ended September 30, 2013 compared to $48.9 million for the same period in 2012. The increase in SG&A expenses primarily resulted from an increase in research and development and marketing spending. As a percentage of revenues, SG&A expenses increased to 10.1% for the nine months ended September 30, 2013 compared to 9.9% for the same period in 2012.

Other Income (Expense). Other income (expense) for the nine months ended September 30, 2013 increased $0.8 million compared to the same period in 2012 primarily due to an increase in interest income.

Income Tax Expense. Income tax expense was $30.0 million, or 31.9% of pretax income, for the nine months ended September 30, 2013 compared to $42.6 million, or 33.1% of pretax income for the same period last year. The $12.6 million decrease is primarily due to lower pre-tax income. In addition, the Company realized $0.4 million in R&D tax credits as a result of legislation enacted in the first quarter of 2013, as well as additional tax benefits from mining depletion deductions.

Outlook

Given the cyclical nature of the industry, the Company believes that market conditions will continue to fluctuate, driven by several factors, including oil and natural gas commodity prices and quarterly seasonality trends. The Company expects activity over the short-term will be variable and driven by a focus on reduction of well costs and a continued over-supply in the proppant market. However, the Company believes the inventories of Chinese ceramic proppant appear to be shrinking in North America. The Company has seen some recent improvement in the operating environment, as well as recovery from seasonality that negatively affected ceramic sales volumes for the second quarter of 2013 due to the Canadian spring break-up. During the third quarter of 2013, proppant sales volumes increased 33% compared to the second quarter of 2013. To meet this increased demand, which was primarily in the major U.S. shale plays as well as in Canada, the Company drew down finished goods inventory levels.


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Industry activity during the fourth quarter of 2013 will likely remain at steady levels, with the exception of the typical reduction in activity due to the holidays and seasonality. In addition, the Company expects to see a sequential decline in sales volume due to the large drawdown of its ceramic proppant inventory, caused by high demand in the third quarter. While the general pricing environment appears to have stabilized, the Company believes the continued oversupply of pressure pumping equipment in the industry will likely keep price increases from being realized in the near-term.

Resin-coated sand products are unlikely to realize large, near-term price increases, given the current low natural gas activity and industry oversupply. While the Company continues to focus on improving these margins, they are expected to remain challenging until the oversupply situation improves.

The Company is moving forward with construction of the first 250 million pound line at its Millen, Georgia facility, which it anticipates could commence operation near the end of the second quarter of 2014. Additionally, the Company is also accelerating the planning stages of a second 250 million pound production line at this facility, and accordingly a number of items with long-lead delivery times have already been purchased for the second line.

The increased amount of activity in infrastructure-limited, liquids-rich basins introduced supply chain challenges to the industry and resulted in higher distribution costs during 2012 and the first six months of 2013. The Company is addressing distribution costs with a number of ongoing initiatives. One initiative is rationalizing the Company's rail fleet to reduce reliance on the fleet as a form of storage. Other initiatives include reducing transportation costs. The Company anticipates completing a majority of these initiatives during the remainder of 2013 and first half of 2014, with the resulting benefits seen in the second half of 2014.

Commercialization of KRYPTOSPHERE, the Company's new ultra-high conductivity, ultra-high strength proppant technology, is progressing well. The Company continues to complete the formal qualification milestones with its clients and anticipates initial sales of KRYPTOSPHERE during the first half of 2014. The next phase for KRYPTOSPHERE will be to apply this technology to the Company's existing manufacturing footprint. Currently, the Company is engaged in an engineering study to determine the capital cost of retrofitting an existing plant with KRYPTOSPHERE technology.

Liquidity and Capital Resources

At September 30, 2013, the Company had cash and cash equivalents of $73.8 million compared to cash and cash equivalents of $90.6 million at December 31, 2012. During the nine months ended September 30, 2013, the Company generated $71.2 million of cash from operating activities. Uses of cash included $61.2 million for capital expenditures, $19.4 million for the payment of cash dividends and $6.8 million for repurchases 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 17, 2013, the Board of Directors declared a cash dividend of $0.30 per common share payable to shareholders of record on November 1, 2013. This dividend is payable on November 15, 2013. The Company estimates its total capital expenditures for the remainder of 2013 will be between $35.0 million and $45.0 million. Capital expenditures for the remainder of 2013 are expected to include costs associated with the construction of the new manufacturing facility in Millen, Georgia and expansion of the Company's distribution infrastructure.

The Company maintains an unsecured line of credit with Wells Fargo Bank, N.A. On July 25, 2013, this line of credit was increased from $25.0 million to $50.0 million, and the expiration date of the facility was extended to 2018. As of September 30, 2013, 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, 2013.


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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,

• ability to manage distribution costs effectively,

• 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, 2012 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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