Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

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)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of April 23, 2014, 23,102,178 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

 

 

 


Table of Contents

CARBO CERAMICS INC.

Index to Quarterly Report on Form 10-Q

 

     PAGES  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3   

Consolidated Balance Sheets - March 31, 2014 (Unaudited) and December 31, 2013

     3   

Consolidated Statements of Income (Unaudited) - Three months ended March 31, 2014 and 2013

     4   

Consolidated Statements of Comprehensive Income (Unaudited) - Three months ended March 31, 2014 and 2013

     5   

Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2014 and 2013

     6   

Notes to Consolidated Financial Statements (Unaudited)

     7-9   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     10-12   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     12   

Item 4. Controls and Procedures

     12-13   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     14   

Item 1A. Risk Factors

     14   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     15   

Item 3. Defaults Upon Senior Securities

     15   

Item 4. Mine Safety Disclosures

     15   

Item 5. Other Information

     15   

Item 6. Exhibits

     15   

Signatures

     16   

Exhibit Index

     17   

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1 . FINANCIAL STATEMENTS

CARBO CERAMICS INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands, except per share data)

 

     March 31,     December 31,  
     2014     2013  
     (Unaudited)     (Note 1)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 86,098      $ 94,250   

Trade accounts and other receivables, net

     107,036        125,179   

Inventories:

    

Finished goods

     98,175        87,218   

Raw materials and supplies

     41,813        47,042   
  

 

 

   

 

 

 

Total inventories

     139,988        134,260   

Prepaid expenses and other current assets

     4,706        5,442   

Prepaid income taxes

     —          1,888   

Deferred income taxes

     10,483        10,363   
  

 

 

   

 

 

 

Total current assets

     348,311        371,382   

Property, plant and equipment:

    

Land and land improvements

     31,225        31,163   

Land-use and mineral rights

     14,138        12,751   

Buildings

     72,425        72,702   

Machinery and equipment

     532,402        535,529   

Construction in progress

     145,191        109,735   
  

 

 

   

 

 

 

Total

     795,381        761,880   

Less accumulated depreciation and amortization

     291,762        283,345   
  

 

 

   

 

 

 

Net property, plant and equipment

     503,619        478,535   

Goodwill

     12,164        12,164   

Intangible and other assets, net

     18,633        16,870   
  

 

 

   

 

 

 

Total assets

   $ 882,727      $ 878,951   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 23,985      $ 24,570   

Accrued payroll and benefits

     5,959        13,650   

Accrued freight

     9,032        6,873   

Accrued income taxes

     6,367        —     

Dividends payable

     6,931        —     

Other accrued expenses

     10,939        11,595   
  

 

 

   

 

 

 

Total current liabilities

     63,213        56,688   

Deferred income taxes

     52,901        53,676   

Shareholders’ equity:

    

Preferred stock, par value $0.01 per share, 5,000 shares authorized, none outstanding

     —          —     

Common stock, par value $0.01 per share, 80,000,000 shares authorized; 23,102,178 and 23,080,632 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively

     231        231   

Additional paid-in capital

     55,052        56,782   

Retained earnings

     717,669        714,835   

Accumulated other comprehensive loss

     (6,339     (3,261
  

 

 

   

 

 

 

Total shareholders’ equity

     766,613        768,587   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 882,727      $ 878,951   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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CARBO CERAMICS INC.

CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except per share data)

(Unaudited)

 

     Three months ended  
     March 31,  
     2014     2013  

Revenues

   $ 148,564      $ 147,657   

Cost of sales

     104,200        105,273   
  

 

 

   

 

 

 

Gross profit

     44,364        42,384   

Selling, general, and administrative, and other operating expenses

     16,953        16,993   
  

 

 

   

 

 

 

Operating profit

     27,411        25,391   

Other income:

    

Interest income, net

     171        185   

Foreign currency exchange loss, net

     (23     (12

Other, net

     (56     (61
  

 

 

   

 

 

 
     92        112   
  

 

 

   

 

 

 

Income before income taxes

     27,503        25,503   

Income taxes

     9,076        7,926   
  

 

 

   

 

 

 

Net income

   $ 18,427      $ 17,577   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.80      $ 0.76   
  

 

 

   

 

 

 

Diluted

   $ 0.80      $ 0.76   
  

 

 

   

 

 

 

Other information:

    

Dividends declared per common share (See Note 4)

   $ 0.60      $ 0.54   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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CARBO CERAMICS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

(Unaudited)

 

     Three months ended  
     March 31,  
     2014     2013  

Net income

   $ 18,427      $ 17,577   

Other comprehensive loss:

    

Foreign currency translation adjustment

     (4,448     (695

Deferred income tax benefit

     1,370        243   
  

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (3,078     (452
  

 

 

   

 

 

 

Comprehensive income

   $ 15,349      $ 17,125   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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CARBO CERAMICS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

(Unaudited)

 

     Three months ended  
     March 31,  
     2014     2013  

Operating activities

    

Net income

   $ 18,427      $ 17,577   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     11,803        11,908   

Provision for doubtful accounts

     89        25   

Deferred income taxes

     482        1,059   

Excess tax benefits from stock based compensation

     (372     (67

(Gain) loss on disposal or impairment of assets

     (8     (2

Foreign currency transaction loss, net

     23        12   

Stock compensation expense

     2,086        1,757   

Changes in operating assets and liabilities:

    

Trade accounts and other receivables

     17,701        (5,767

Inventories

     (7,352     (6,893

Prepaid expenses and other current assets

     680        (542

Long-term prepaid expenses

     (1,927     855   

Accounts payable

     134        (1,276

Accrued expenses

     (6,235     (7,727

Accrued income taxes, net

     8,578        6,108   
  

 

 

   

 

 

 

Net cash provided by operating activities

     44,109        17,027   

Investing activities

    

Capital expenditures

     (38,908     (13,752
  

 

 

   

 

 

 

Net cash used in investing activities

     (38,908     (13,752

Financing activities

    

Dividends paid

     (6,945     (6,256

Purchase of common stock

     (5,779     (3,671

Excess tax benefits from stock based compensation

     372        67   
  

 

 

   

 

 

 

Net cash used in financing activities

     (12,352     (9,860

Effect of exchange rate changes on cash

     (1,001     (253
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (8,152     (6,838

Cash and cash equivalents at beginning of period

     94,250        90,635   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 86,098      $ 83,797   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Interest paid

   $ 10      $ 1   
  

 

 

   

 

 

 

Income taxes paid

   $ 16      $ 761   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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CARBO CERAMICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands, except per share 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 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, 2013 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, 2013 included in the annual report on Form 10-K of CARBO Ceramics Inc. for the year ended December 31, 2013.

The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries (the “Company”). All significant intercompany transactions have been eliminated.

 

2. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share under the two-class method:

 

     Three months ended  
     March 31,  
     2014     2013  

Numerator for basic and diluted earnings per share:

    

Net income

   $ 18,427      $ 17,577   

Effect of reallocating undistributed earnings of participating securities

     (136     (117
  

 

 

   

 

 

 

Net income available under the two-class method

   $ 18,291      $ 17,460   
  

 

 

   

 

 

 

Denominator:

    

Denominator for basic earnings per share—weighted-average shares

     22,948,109        22,990,048   

Effect of dilutive potential common shares

     —          —     
  

 

 

   

 

 

 

Denominator for diluted earnings per share—adjusted weighted-average shares

     22,948,109        22,990,048   
  

 

 

   

 

 

 

Basic earnings per share

   $ 0.80      $ 0.76   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 0.80      $ 0.76   
  

 

 

   

 

 

 

 

3. Common Stock Repurchase Program

On August 28, 2008, the Company’s Board of Directors authorized the repurchase of up to two million shares of the Company’s common stock. Shares are effectively retired at the time of purchase. During the three months ended March 31, 2014, the Company repurchased and retired 36,969 shares at an aggregate purchase price of $4,062. As of March 31, 2014, the Company has repurchased and retired 1,989,545 shares at an aggregate purchase price of $88,196.

 

4. Dividends Paid

On January 21, 2014, the Board of Directors declared a cash dividend of $0.30 per common share payable to shareholders of record on February 3, 2014. The dividend was paid on February 18, 2014. On March 18, 2014, the Board of Directors declared a cash dividend of $0.30 per common share payable to shareholders of record on May 1, 2014. The dividend is payable on May 15, 2014 and is presented in Current Liabilities at March 31, 2014.

 

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5. Stock Based Compensation

The CARBO Ceramics Inc. Omnibus Incentive Plan (the “Omnibus Incentive Plan”) provides for granting of 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. As of March 31, 2014, 451,226 shares were available for issuance under the Omnibus Incentive Plan.

The Company has made restricted stock awards pursuant to the Omnibus Incentive Plan. A summary of restricted stock activity and related information for the three months ended March 31, 2014 is presented below:

 

     Shares     Weighted-
Average
Grant-Date
Fair Value
 

Nonvested at January 1, 2014

     136,195      $ 90.50   

Granted

     73,785      $ 112.19   

Vested

     (53,152   $ 97.08   

Forfeited

     (279   $ 112.96   
  

 

 

   

Nonvested at March 31, 2014

     156,549      $ 98.44   
  

 

 

   

As of March 31, 2014, there was $12,234 of total unrecognized compensation cost, net of estimated forfeitures, related to restricted shares granted under the Omnibus Incentive Plan. That cost is expected to be recognized over a weighted-average period of 2.3 years. The total fair value of shares vested during the three months ended March 31, 2014 was $5,160.

The Company has made phantom stock awards to key international employees pursuant to the Omnibus Incentive Plan. The units subject to an award vest and cease to be forfeitable in equal annual installments over a three-year period. Participants awarded units of phantom shares 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 shares. As of March 31, 2014, there were 18,180 units of phantom shares granted under the Omnibus Incentive Plan, of which 9,397 have vested and 1,570 have been forfeited, with a total value of $995, a portion of which is accrued as a liability within Other Accrued Expenses.

 

6. Bank Borrowings

The Company has an unsecured revolving credit agreement with a bank. The credit agreement provides the Company with a revolving credit facility of $50,000 and expires on July 25, 2018. The Company has the option of choosing either the bank’s fluctuating Base Rate or LIBOR Fixed Rate, plus an Applicable Margin, all as defined in the credit agreement. The terms of the credit agreement provide for certain affirmative and negative covenants and require the Company to maintain certain financial ratios. Commitment fees are payable quarterly at an annual rate between 0.375% and 0.50% of the unused line of credit.

 

7. Foreign Currencies

As of March 31, 2014, the Company’s net investment that is subject to foreign currency fluctuations totaled $82,461 and the Company has recorded a cumulative foreign currency translation loss of $6,339, net of deferred income tax benefit. This cumulative translation loss is included in and is the only component of Accumulated Other Comprehensive Loss. There were no amounts reclassified to net income during the three months ended March 31, 2014.

 

8. 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.

 

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On February 9, 2012, the Company and two of its officers, Gary A. Kolstad and Ernesto Bautista III, were named as defendants in a purported class-action lawsuit filed in the United States District Court for the Southern District of New York (the “February SDNY Lawsuit”), brought on behalf of shareholders who purchased the Company’s Common Stock between October 27, 2011 and January 26, 2012 (the “Relevant Time Period”). On April 10, 2012, a second purported class-action lawsuit was filed against the same defendants in the United States District Court for the Southern District of New York, brought on behalf of shareholders who purchased or sold CARBO Ceramics Inc. option contracts during the Relevant Time Period (the “April SDNY Lawsuit”, and collectively with the February SDNY Lawsuit, the “Federal Securities Lawsuit”). In June 2012, the February SNDY Lawsuit and the April SDNY Lawsuit were consolidated. The Federal Securities Lawsuit alleges violations of the federal securities laws arising from statements concerning the Company’s business operations and business prospects that were made during the Relevant Time Period and requests unspecified damages and costs. In September 2012, the Company and Messrs. Kolstad and Bautista filed a motion to dismiss this lawsuit. The motion to dismiss was granted, and the Federal Securities Lawsuit was dismissed without prejudice in June 2013. In September 2013, the plaintiffs filed a motion requesting leave to file a second amended complaint and sustain the lawsuit. In January 2014, the Court denied plaintiffs’ motion, and entered a judgment in favor of the Company and Messrs. Kolstad and Bautista. The plaintiffs did not timely appeal this judgment, and it has become final.

On June 13, 2012, the Directors of the Company and Mr. Bautista were named as defendants in a purported derivative action lawsuit brought on behalf of the Company by a stockholder in District Court in Harris County, Texas (the “Harris County Lawsuit”). This lawsuit alleges various breaches of fiduciary duty and other duties by the defendants that generally are related to the Federal Securities Lawsuit, as well as a breach of duty by certain defendants in connection with stock sales. The lawsuit requests unspecified damages and costs, and had been further stayed, pending final resolution of the Federal Securities Lawsuit. Given the final judgment in the Federal Securities Lawsuit, the plaintiff in the Harris County Lawsuit agreed to dismiss this case. The lawsuit was dismissed without prejudice in March 2014.

 

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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, 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.

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, 2013). The Company believes that some of its accounting policies involve a higher degree of judgment and complexity than others. As of December 31, 2013, 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, 2013. There have been no changes in the Company’s evaluation of its critical accounting policies since December 31, 2013.

Results of Operations

Three Months Ended March 31, 2014

Revenues. Revenues of $148.6 million for the first quarter of 2014 increased 1% compared to $147.7 million for the same period in 2013. The increase is mainly attributed to a 30% increase in the total proppant sales volume that was driven by higher sales volumes of lower priced sand-based proppants, which was partially offset by a decrease in Falcon revenues. The average selling price per pound of all proppant was $0.238 during the first quarter of 2014 compared to $0.302 for the same period in 2013.

Worldwide proppant sales volumes in the first quarter of 2014 compared to the same period in 2013 are as follows.

 

Proppant Sales Volumes

(in million lbs)

   Three Months Ended
March 31,
 
     2014      2013  

Ceramic

     373         398   

Resin Coated Sand

     48         25   

Northern White Sand

     157         22   
  

 

 

    

 

 

 

Total

     578         445   
  

 

 

    

 

 

 

North American (defined as Canada and the U.S.) proppant sales volume increased 39%, driven largely by increases in sand-based sales volumes despite cold weather conditions and related distribution issues that continued to impact drilling activities in the northern regions. International (excluding Canada) sales volume decreased 18% primarily due to decreased sales volumes in China and Russia, partially offset by increased sales volumes in Mexico.

Gross Profit. Gross profit for the first quarter of 2014 was $44.4 million, or 30% of revenues, compared to $42.4 million, or 29% of revenues, for the first quarter of 2013.

Selling, General and Administrative (SG&A) and Other Operating Expenses. SG&A and other operating expenses totaled $17.0 million for the first quarter of 2014, which was flat compared to the first quarter of 2013. As a percentage of revenues, SG&A and other operating expenses decreased to 11.4% in 2014 compared to 11.5% for the first quarter of 2013.

 

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Income Tax Expense. Income tax expense was $9.1 million, or 33.0% of pretax income, for the first quarter of 2014 compared to $7.9 million, or 31.1% of pretax income, for the same period last year. The $1.2 million increase is primarily due to higher pre-tax income combined with $0.4 million in R&D tax credits realized as a result of legislation enacted in the first quarter of 2013 that did not impact the first quarter of 2014.

Outlook

The Company expects activity will continue to be variable and driven by weather conditions in certain regions and by exploration and production companies focusing on a balance between reducing well costs and investment returns through optimization of well completions. However, the Company anticipates demand for its production enhancement products and services to remain intact. Furthermore, as previously mentioned, the Company remains positive on industry activity and ceramic sales volumes for the balance of 2014 and believes the majority of the completion activity that was delayed in the first quarter of 2014 has shifted to the second and third quarters of 2014. The Company believes its ceramic volumes could increase for the second quarter of 2014 when compared to the first quarter of 2014, subject to the typical second quarter spring break up and lingering weather effects. The Company also believes proppant pricing will remain relatively flat during the second quarter of 2014.

Construction on the first and second production lines in Millen, Georgia remain on schedule with completions expected by the end of the second quarter of 2014 and 2015, respectively. Once both lines are completed, the Company’s ceramic proppant manufacturing capacity will increase by 500 million pounds to a total of 2.25 billion pounds per year. Additionally, the retrofit of an existing manufacturing line continues with the Company’s KRYPTOSPHERE TM proppant technology. Initial sales of KRYPTOSPHERE LD from this retrofit are presently expected by the end of the second quarter of 2015.

The Company is building inventories of KRYPTOSPHERE HD, the new ultra-conductive, ultra-high strength proppant for deep well applications. The Gulf of Mexico is the primary target market; but some Gulf of Mexico deep water completion activity has been delayed at least until the second half of 2014.

Liquidity and Capital Resources

At March 31, 2014, the Company had cash and cash equivalents of $86.1 million compared to cash and cash equivalents of $94.3 million at December 31, 2013. During the first quarter of 2014, the Company generated $44.1 million of cash from operating activities. Uses of cash included $38.9 million for capital expenditures, $6.9 million for the payment of cash dividends and $5.8 million for repurchases of the Company’s common stock.

Subject to its 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 March 18, 2014, the Company’s Board of Directors approved the payment of a quarterly cash dividend of $0.30 per share to shareholders of the Company’s common stock on May 1, 2014. The dividend is payable on May 15, 2014. The Company estimates its total capital expenditures for the remainder of 2014 will be between $140.0 million and $160.0 million, which include costs associated with the construction of the new manufacturing facility in Millen, Georgia, retrofitting an existing plant with the new proppant manufacturing technology, expansion of the Company’s distribution infrastructure, as well as various other projects and additions.

The Company maintains a $50 million unsecured line of credit with a bank that matures in July 2018. As of March 31, 2014, there was no outstanding debt under the credit agreement. The Company anticipates that cash on hand, cash provided by operating activities and funds provided by 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. The Company also believes that it could acquire additional debt financing, if needed. Based on these assumptions, the Company believes that its fixed costs could be met even with a moderate decrease in demand for the Company’s products.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements as of March 31, 2014.

 

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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 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,

 

    our 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, 2013 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s major market risk exposure is to foreign currency fluctuations that could impact its investments in China and Russia. As of March 31, 2014, the Company’s net investment that is subject to foreign currency fluctuations totaled $82.5 million and the Company has recorded cumulative foreign currency translation loss of $6.3 million, net of deferred income tax benefit. This cumulative translation loss is included in Accumulated Other Comprehensive Loss. From time to time, the Company may enter into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations. There were no such foreign exchange contracts outstanding at March 31, 2014.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the 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.

 

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As of March 31, 2014, management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurances of achieving their control objectives. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its 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 March 31, 2014 that materially affected, or are reasonably likely to materially affect, those controls.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

On February 9, 2012, the Company and two of its officers, Gary A. Kolstad and Ernesto Bautista III, were named as defendants in a purported class-action lawsuit filed in the United States District Court for the Southern District of New York (the “February SDNY Lawsuit”), brought on behalf of shareholders who purchased the Company’s Common Stock between October 27, 2011 and January 26, 2012 (the “Relevant Time Period”). On April 10, 2012, a second purported class-action lawsuit was filed against the same defendants in the United States District Court for the Southern District of New York, brought on behalf of shareholders who purchased or sold CARBO Ceramics Inc. option contracts during the Relevant Time Period (the “April SDNY Lawsuit”, and collectively with the February SDNY Lawsuit, the “Federal Securities Lawsuit”). In June 2012, the February SNDY Lawsuit and the April SDNY Lawsuit were consolidated. The Federal Securities Lawsuit alleges violations of the federal securities laws arising from statements concerning the Company’s business operations and business prospects that were made during the Relevant Time Period and requests unspecified damages and costs. In September 2012, the Company and Messrs. Kolstad and Bautista filed a motion to dismiss this lawsuit. The motion to dismiss was granted, and the Federal Securities Lawsuit was dismissed without prejudice in June 2013. In September 2013, the plaintiffs filed a motion requesting leave to file a second amended complaint and sustain the lawsuit. In January 2014, the Court denied plaintiffs’ motion, and entered a judgment in favor of the Company and Messrs. Kolstad and Bautista. The plaintiffs did not timely appeal this judgment, and it has become final.

On June 13, 2012, the Directors of the Company and Mr. Bautista were named as defendants in a purported derivative action lawsuit brought on behalf of the Company by a stockholder in District Court in Harris County, Texas (the “Harris County Lawsuit”). This lawsuit alleges various breaches of fiduciary duty and other duties by the defendants that generally are related to the Federal Securities Lawsuit, as well as a breach of duty by certain defendants in connection with stock sales. The lawsuit requests unspecified damages and costs, and had been further stayed, pending final resolution of the Federal Securities Lawsuit. Given the final judgment in the Federal Securities Lawsuit, the plaintiff in the Harris County Lawsuit agreed to dismiss this case. The lawsuit was dismissed without prejudice in March 2014.

Additionally, from time to time, the Company is the subject of legal proceedings arising in the ordinary course of business. The Company does not believe that any of these proceedings will have a material effect on its business or its results of operations.

 

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2013.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about the Company’s repurchases of Common Stock during the quarter ended March 31, 2014:

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
Yet be Purchased
Under the
Plan(1)
 

01/01/14 to 01/31/14

     3,890      $ 112.19         —           47,424   

02/01/14 to 02/28/14

     47,921      $ 111.08         36,969         10,455   

03/01/14 to 03/31/14

     149      $ 132.95         —           10,455   
  

 

 

      

 

 

    

Total

     51,960 (2)         36,969      
  

 

 

      

 

 

    

 

(1) On August 28, 2008, the Company announced the authorization by its Board of Directors for the repurchase of up to two million shares of its Common Stock.
(2) Includes 14,991 shares of stock withheld for the payment of withholding taxes upon the vesting of restricted stock.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

 

ITEM 4. MINE SAFETY DISCLOSURES

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.

 

ITEM 5. OTHER INFORMATION

Not applicable

 

ITEM 6. EXHIBITS

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:

10.1    Amendment No. 3 to Proppant Supply Agreement dated as of March 24, 2014 between CARBO Ceramics Inc. and Halliburton Energy Services, Inc.
10.2    Description of Modification to the Annual Non-Employee Director Stock Grants.
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 Disclosures
101    The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Cash Flows; and (v) Notes to the Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

CARBO CERAMICS INC.

/s/ Gary A. Kolstad

Gary A. Kolstad
President and Chief Executive Officer

/s/ Ernesto Bautista III

Ernesto Bautista III
Chief Financial Officer

Date: April 28, 2014

 

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EXHIBIT INDEX

 

EXHIBIT

  

DESCRIPTION

10.1    Amendment No. 3 to Proppant Supply Agreement dated as of March 24, 2014 between CARBO Ceramics Inc. and Halliburton Energy Services, Inc.
10.2    Description of Modification to the Annual Non-Employee Director Stock Grants.
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 Disclosures
101    The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Cash Flows; and (v) Notes to the Consolidated Financial Statements.

 

17

Exhibit 10.1

Amendment No. 3 to the Proppant Supply Agreement

This Amendment No. 3 to the Proppant Supply Agreement (this “Amendment”) is entered into as of March 24, 2014 (the “Effective Date”), by and between Halliburton Energy Services, Inc. (“Buyer”) and CARBO Ceramics Inc. (“Seller”). Defined terms used herein, but not otherwise defined, shall have such meanings as are set forth in the Agreement (as defined below).

WITNESSETH:

WHEREAS, Buyer and Seller entered into that certain Proppant Supply Agreement dated August 28, 2008 (as most recently amended on August 26, 2011, the “Agreement”);

WHEREAS, Buyer and Seller wish to amend the Agreement to reflect certain changes as set forth herein in accordance with Section 11.3 of the Agreement.

NOW, THEREFORE, in consideration of the premises, the terms and conditions stated herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto hereby agree as follows:

1. New Section 8.4 of the Agreement . The following is added and incorporated by this reference to the Agreement as a new Section 8.4:

 

8.4 Disclosure of Chemical Samples. For any samples provided under this Agreement, recipient agrees:

 

  a) Not to analyze, have analyzed or otherwise attempt to ascertain the composition of said sample without prior written permission from the disclosing party; and

 

  b) Not to transmit said sample to any third party without prior written permission from the disclosing party; and

 

  c) To return or destroy any portion of said sample not used by recipient unless otherwise notified by the disclosing party; and

 

  d) Not to use said sample for any other purpose other than as authorized under this Agreement.

2. Miscellaneous . Except as otherwise expressly modified or amended herein, all terms and conditions contained in the Agreement shall remain in full force and effect and shall not be altered or changed by this Amendment. The Agreement, as amended by this Amendment, shall constitute the entire agreement of the parties. All references to Sections in this Amendment correspond to Sections contained in the Agreement unless otherwise expressly stated.

IN WITNESS WHEREOF, Seller and Buyer have caused this Amendment to be duly executed by their authorized representatives as of the Effective Date.

 

Halliburton Energy Services, Inc.

Signature:

    

CARBO Ceramics Inc.

Signature:

/s/ Kevin Dersch

    

/s/ Don P. Conkle

By: Kevin Dersch      By: Don P. Conkle
Title: Sr. Category Manager      Title: Vice President, Sales and Marketing
Date: March 26, 2014      Date: March 26, 2014

Exhibit 10.2

Description of Modification to

Annual Non-Employee Director Stock Grants

In March 2014, the Compensation Committee of the Board of Directors of CARBO Ceramics Inc. (the “Company”) approved a change in the calculation of the number of shares of the Company’s common stock to be made each year on the first business day after the date of the Company’s Annual Meeting of Stockholders to each non-employee Director of the Company serving as such on such date (each, an “Annual Director Stock Grant”). Beginning with the 2014 Annual Director Stock Grant, the number of shares granted will be determined by dividing One Hundred Thousand Dollars ($100,000) by the closing price for the Company’s Common Stock on the grant date. All other terms of the Annual Director Stock Grants, as established in May 2010, remain unchanged.

Exhibit 31.1

Quarterly Certification

As required by Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934

I, Gary A. Kolstad, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CARBO Ceramics Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 28, 2014

 

/s/ Gary A. Kolstad
Gary A. Kolstad
President & CEO

Exhibit 31.2

Quarterly Certification

As required by Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934

I, Ernesto Bautista III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CARBO Ceramics Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 28, 2014

 

/s/ Ernesto Bautista III
Ernesto Bautista III
Chief Financial Officer

Exhibit 32

Certification Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of CARBO Ceramics Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

Dated: April 28, 2014

 

/s/ Gary A. Kolstad

Name:   Gary A. Kolstad
Title:   Chief Executive Officer

Dated: April 28, 2014

 

/s/ Ernesto Bautista III

Name:   Ernesto Bautista III
Title:   Chief Financial Officer

Exhibit 95

MINE SAFETY DISCLOSURES

For the first quarter of 2014, the Company has the following mine safety information to report in accordance with Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, in connection with the Eufaula, Alabama processing facility, the McIntyre, Georgia processing facility, the Toomsboro, Georgia processing facility, and the Marshfield, Wisconsin processing facility.

 

Mine or

Operating

Name/MSHA

Identification

Number

  Section
104 S&S
Citations
(#)
    Section
104(b)
Orders
(#)
    Section
104(d)
Citations
and
Orders
(#)
    Section
110(b)(2)
Violations
(#)
    Section
107(a)
Orders
(#)
    Total Dollar
Value of
MSHA
Assessments
Proposed
($) (1)
    Total
Number
of Mining
Related
Fatalities
(#)
    Received
Notice of
Pattern of
Violations
Under
Section
104(e)
(yes/no)
    Received
Notice of
Potential
to Have
Pattern
Under
Section
104(e)
(yes/no)
    Legal
Actions
Pending
as of
Last Day
of Period
(#)
    Aggregate
Legal
Actions
Initiated
During
Period (#)
    Aggregate
Legal
Actions
Resolved
During
Period (#)
 

Eufaula Facility

MSHA ID 0102687

Eufaula, Alabama

    1        0        0        0        0      $ 785        0        No        No        0        0        0   

McIntyre Facility

MSHA ID 0901108

McIntyre, Georgia

    0        0        0        0        0      $ 100        0        No        No        0        0        0   

Toomsboro Facility

MSHA ID 0901164

Toomsboro, Georgia

    0        0        0        0        0      $ 327        0        No        No        0        0        0   

Marshfield Facility

MSHA ID 4073636

Marshfield, Wisconsin

    0        0        0        0        0      $ 0        0        No        No        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Totals

    1        0        0        0        0      $ 1,212        0            0        0        0   

 

(1) Amounts represent the total dollar value of proposed assessments received.