NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share data)
(Unaudited)
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, 2016 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, 2016 included in the annual report on Form 10-K of CARBO Ceramics Inc. for the year ended December 31, 2016.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries (the “Company”). All significant intercompany transactions have been eliminated.
Beginning in late 2014, a severe decline in oil and natural gas prices led to a significant decline in oil and natural gas industry drilling activities and capital spending. As a result of the continued negative impact this has had on its business, the Company continues to operate its plants at significantly reduced levels. As of June 30, 2017, the Company was producing ceramic proppants from its Eufaula, Alabama and Kopeysk, Russia manufacturing facilities, and processing sand at its Marshfield, Wisconsin facility. The Company produces ceramic pellets for the industrial markets in a limited capacity, and when market demands, at our McIntyre, Georgia facility. Our Millen, Georgia facility is currently mothballed, and our Toomsboro, Georgia facility is currently idled. As a result of the steps the Company has taken to enhance its liquidity, the Company currently believes that cash on hand 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 liquidity is primarily based on our financial forecast for 2017 and 2018, which is impacted by various assumptions regarding demand and sales prices for our products. Although the Company has observed certain factors in the first six months of 2017 that could be indicative of improving industry conditions, its financial forecasts in recent periods have not always been accurate due to the inability to estimate customer demand, which is highly volatile in the current operating environment. The Company has no committed sales backlog from its customers. As a result, there is no guarantee that its financial forecast, which projects sufficient cash will be available to meet planned operating expenses and other cash needs, will be achieved.
Additionally, the construction projects relating to the second production line at Millen, Georgia and the second phase of the retrofit of an existing plant with the KRYPTOSPHERE® technology remain suspended. As of June 30, 2017, the value of the temporarily suspended projects relating to these two projects totaled approximately 93% of the Company’s total construction in progress, and both projects are over 90% complete.
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 not more likely than not that some portion or all of the deferred tax assets will 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 several quarters prior to the first quarter of 2017, we determined during the three months ended March 31, 2017 that it was 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 taxes as of June 30, 2017 was $19,703. 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.
7
Restricted Cash
As a result of the repayment of the Wells Fargo term loan, combined with the continued use of letters of credit and corporate cards with Wells Fargo (see Note 7), a portion of the Company’s cash balance is now restricted to its use in order to provide collateral to Wells Fargo. As of June 30, 2017 and December 31, 2016, restricted cash was $11,266 and $0, respectively.
Lower of Cost or Market Adjustments
As of June 30, 2017 and 2016, 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 June 30, 2017 and 2016, the Company expensed $10,797 and $13,515, respectively, in production costs. For the six months ended June 30, 2017 and 2016, the Company expensed $22,009 and $23,222, respectively, in production costs.
Long-lived and other noncurrent assets impairment considerations
As noted, the Company has temporarily idled production at various manufacturing facilities, including throughout 2017 and 2016. 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 March 31, 2016, as a result of changes in the planned usage of certain long-term bauxite raw materials, the Company evaluated the carrying value of those bauxite raw materials. Based upon this evaluation, during the three months ended March 31, 2016, the Company recognized an impairment charge of $1,065 on these bauxite raw material inventories. At December 31, 2016, as a result of the continued and severity of the market downturn, the Company identified indicators of impairments related to each of its domestic manufacturing plant asset groups. The Company completed undiscounted cash flow analyses on that date and determined no impairment charge was necessary at that time. As of June 30, 2017, 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 given that results for the first six months of 2017 met our expectations from our analysis as of December 31, 2016 and given that our future outlook has not significantly changed since that date. 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.
The following table sets forth the computation of basic and diluted loss per share under the two-class method:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(24,822
|
)
|
|
$
|
(20,296
|
)
|
|
$
|
(57,266
|
)
|
|
$
|
(44,980
|
)
|
Effect of reallocating undistributed earnings
of participating securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss available under the two-class method
|
|
$
|
(24,822
|
)
|
|
$
|
(20,296
|
)
|
|
$
|
(57,266
|
)
|
|
$
|
(44,980
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share--weighted-average
shares
|
|
|
26,665,092
|
|
|
|
23,108,889
|
|
|
|
26,636,394
|
|
|
|
23,085,725
|
|
Effect of dilutive potential common shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted loss per share--adjusted
weighted-average shares
|
|
|
26,665,092
|
|
|
|
23,108,889
|
|
|
|
26,636,394
|
|
|
|
23,085,725
|
|
Basic loss per share
|
|
$
|
(0.93
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(2.15
|
)
|
|
$
|
(1.95
|
)
|
Diluted loss per share
|
|
$
|
(0.93
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(2.15
|
)
|
|
$
|
(1.95
|
)
|
8
3.
|
Common Stock Repurchase Program
|
On January 28, 2015, 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. As of June 30, 2017, the Company had not repurchased any shares under the plan.
4.
|
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-term spikes in the price of this commodity, from time to time, 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 reducing production levels and not taking delivery of all of the contracted natural gas quantities, the Company accounts for relevant contracts as derivative instruments.
Derivative accounting requires the 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 six months ended June 30, 2017. The last of these natural gas contracts will expire in December 2018. During the three months ended June 30, 2017 and 2016, the Company recognized a $309 and $824 loss, respectively, in cost of sales on derivatives instruments. During the six months ended June 30, 2017 and 2016, the Company recognized a $1,200 loss and a $597 gain, respectively, in cost of sales on derivative instruments. The cumulative present value of these natural gas derivative contracts as of June 30, 2017 are presented as current and long-term liabilities, as applicable, in the Consolidated Balance Sheet.
At June 30, 2017, the Company had contracted for delivery a total of 3,060,000 MMBtu of natural gas at an average price of $4.37 per MMBtu through December 31, 2018. Contracts covering 2,880,000 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 June 30, 2017 and 2016 were $3.18 per MMBtu and $1.95 per MMBtu, respectively.
5.
|
Fair Value Measurements
|
The Company’s derivative instruments are measured at fair value on a recurring basis. U.S. GAAP establishes a fair value hierarchy that has three levels 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 4 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 June 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
|
—
|
|
|
|
(3,626
|
)
|
|
|
—
|
|
|
|
(3,626
|
)
|
Total fair value
|
|
$
|
—
|
|
|
$
|
(3,626
|
)
|
|
$
|
—
|
|
|
$
|
(3,626
|
)
|
|
|
Fair value as of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
|
—
|
|
|
|
(3,468
|
)
|
|
|
—
|
|
|
|
(3,468
|
)
|
Total fair value
|
|
$
|
—
|
|
|
$
|
(3,468
|
)
|
|
$
|
—
|
|
|
$
|
(3,468
|
)
|
At June 30, 2017, the fair value of the Company’s long-term debt approximated the carrying value.
9
6.
|
Stock Based Compensation
|
On May 16, 2017, the shareholders approved the Amended and Restated 2014 CARBO Ceramics Inc. Omnibus Incentive Plan (the “Amended and Restated 2014 Omnibus Incentive Plan”). Under the Amended and Restated 2014 Omnibus Incentive Plan, 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 Amended and Restated 2014 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 1,450,000 shares prior to the fifth anniversary of its effective date, plus (i) the number of shares that are forfeited, cancelled or returned, and (ii) the number of shares that are withheld from the participants to satisfy an option exercise price or minimum statutory tax withholding obligations. 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 June 30, 2017, 745,594 shares were available for issuance under the Amended and Restated 2014 Omnibus Incentive Plan. Although the 2009 CARBO Ceramics Inc. Omnibus Incentive Plan (the “2009 Omnibus Incentive Plan”) has expired, certain nonvested restricted shares granted under that plan remain outstanding in accordance with its terms.
A summary of restricted stock activity and related information for the six months ended June 30, 2017 is presented below:
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair Value
Per Share
|
|
Nonvested at January 1, 2017
|
|
|
339,140
|
|
|
$
|
28.59
|
|
Granted
|
|
|
297,685
|
|
|
$
|
10.30
|
|
Vested
|
|
|
(143,094
|
)
|
|
$
|
36.02
|
|
Forfeited
|
|
|
(37,024
|
)
|
|
$
|
18.42
|
|
Nonvested at June 30, 2017
|
|
|
456,707
|
|
|
$
|
15.17
|
|
As of June 30, 2017, there was $5,178 of total unrecognized compensation cost related to restricted shares granted under both the expired 2009 Omnibus Incentive Plan and the Amended and Restated 2014 Omnibus Incentive Plan. That cost is expected to be recognized over a weighted-average period of 2.1 years. The total fair value of shares vested during the six months ended June 30, 2017 was $2,002.
The Company made market-based cash awards to certain executives of the Company pursuant to the Amended and Restated 2014 Omnibus Incentive Plan. As of June 30, 2017, the total target award outstanding was $2,822. 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.
The Company also made phantom stock awards to key employees pursuant to the Amended and Restated 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 June 30, 2017, there were 163,215 units of phantom stock granted under the Amended and Restated 2014 Omnibus Incentive Plan, of which 4,189 have vested and 8,234 have been forfeited. As of June 30, 2017, nonvested units of phantom stock under the Amended and Restated 2014 Omnibus Incentive Plan had a total value of $1,033, 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.
10
7.
|
Long-Term Debt and Notes Payable
|
On March 2, 2017, the Company entered into an Amended and Restated Credit Agreement (the “New Credit Agreement”) with Wilks Brothers, LLC (“Wilks”) to replace its current 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, that consists of a $52,651 term loan that was made at closing to pay off Wells Fargo and an additional term loan of $12,349 that was made in a single advance to the Company in July 2017 after the Company satisfied certain post-closing conditions. The $52,651 term loan was a non-cash transaction to the Company as Wilks directly paid Wells Fargo and assumed the New Credit Agreement. 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 unusual circumstances), and there are no financial covenants. In lieu of making cash interest payments, the Company has the option during the first two years of the loan to make interest payments as payment-in-kind, or PIK, by applying an 11.00% rate to the interest payment due (instead of the 9.00% cash interest rate) and capitalizing the resulting amount to the outstanding principal balance of the loan. The Company is required to provide Wilks 30 day notice 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.
The loan cannot be prepaid during the first three years without making the lenders whole for interest that would have been payable over the entire remaining term of the loan. The Company’s obligations under the New 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. Other liens previously in favor of Wells Fargo were released.
As of June 30, 2017, the Company’s outstanding debt under its New Credit Agreement was $52,651. During the six months ended June 30, 2017, the Company expensed $455 of debt issuance costs relating to the previous Wells Fargo Amended Credit Agreement. As of June 30, 2017, the Company had $825 of unamortized debt issuance costs relating to the New Credit Agreement that are presented as a direct reduction from the carrying amount of the long-term debt obligation. The Company had $10,230 and $11,980 in standby letters of credit issued through Wells Fargo as of June 30, 2017 and December 31, 2016, respectively, primarily as collateral relating to our natural gas commitments and railcar leases. As of December 31, 2016, the Company’s outstanding debt under its previous Wells Fargo Amended Credit Agreement was $55,901, of which $13,000 was classified as current and $42,901 was classified as long-term. As of December 31, 2016, the Company had $497 of debt issuance costs that are presented as a direct reduction from the carrying amount of the long-term debt obligation. For the year ended December 31, 2016, the weighted average interest rate was 6.447% based on LIBOR-based rate borrowings.
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 entitles 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 on December 31, 2022. Based on a Schedule 13D filing with the SEC, as of March 10, 2017, Wilks owned 9.6% of the Company’s outstanding common stock, and should Wilks fully exercise the Warrant to purchase an additional 523,022 shares, it would hold 11.5% of the Company’s outstanding common stock. The Company allocated the proceeds received of $52,651 to each of these two instruments based on their relative fair values. Accordingly, the Company recorded long-term debt of $48,780 and warrants of $3,871 at inception. The amount associated with the Warrant was recorded as an increase to additional paid-in capital. The original issue discount of the long-term debt will be amortized using the effective interest method over the term of the loan. As of June 30, 2017, the unamortized original issue discount was $3,707.
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 matures on April 1, 2019 and bears 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. On April 1, 2017, the Company made a $997 interest payment as PIK, and capitalized the resulting amount to the outstanding principal balance. As of June 30, 2017, the outstanding principal balance of the Notes was $25,997.
Interest cost for the six months ended June 30, 2017 and 2016 was $3,965 and $2,747, respectively, of which $0 and $80 was capitalized into the cost of property, plant and equipment in the six months ended June 30, 2017 and 2016, respectively. Interest cost primarily includes interest expense relating to our debts as well as amortization and the write-off of debt issuance costs and amortization of the original issue discount associated with the New Credit Agreement and Warrant.
In June 2017, the Company entered into an agreement with a financing company to finance certain insurance premiums in the amount of $1,246. Payments are due monthly through April 1, 2018 with an effective interest rate of 0.91%. The liability is included in Notes Payable within Current Liabilities on the Consolidated Balance Sheet.
11
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. As of June 30, 2017, the Company had sold a total of 3,405,709 shares of its common stock under the ATM program for $46,612, or an average of $13.69 per share, and received proceeds of $45,564, net of commissions of $1,048. These sales occurred in August 2016 and September 2016, and the Company has not utilized the program since those sales.
As of June 30, 2017, the Company’s net investment that is subject to foreign currency fluctuations totaled $15,626, and the Company has recorded a cumulative foreign currency translation loss of $33,649, all related to the Russian Ruble. This cumulative translation loss is included in and is the only component of accumulated other comprehensive loss within shareholders’ equity. No income tax benefits have been recorded on these losses as a result of the uncertainty about recoverability of the related deferred income tax benefits.
9.
|
New Accounting Pronouncements
|
In August 2015, the FASB issued ASU No. 2015-14, “
Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date
,” which revises the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”) to interim and annual periods beginning after December 15, 2017, with early adoption permitted no earlier than interim and annual periods beginning after December 15, 2016. In May 2014, the FASB issued ASU 2014-09, which amends current revenue guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Upon initial evaluation, the Company does not believe there will be a material impact on its consolidated financial statements, and is currently evaluating the potential impact on disclosures. The Company’s analysis of proppant sales contracts under ASC 606 supports the recognition of revenue at a point in time, typically when title passes to the customer upon delivery, for the majority of contracts, which is consistent with the current revenue recognition model. The Company is still evaluating the potential impact, if any, on sales contracts relating to the sale of fracture stimulation software and environmental products and services. The Company expects to utilize the modified retrospective approach, which requires a cumulative adjustment to retained earnings and no adjustments to prior periods. The Company does not expect a material cumulative adjustment upon adoption based on the annual revenue generated from the sale of fracture stimulation software and environmental products and services.
The Company has two operating segments: 1) oilfield technologies and services and 2) environmental products and 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, 2016.
The Company’s oilfield technologies and services segment manufactures and sells technology ceramic, base ceramic, and frac sand proppants for use primarily in the hydraulic fracturing of natural gas and oil wells. All of the Company’s ceramic proppant products have similar production processes and economic characteristics and are marketed predominantly to pressure pumping companies that perform hydraulic fracturing for major oil and gas companies. The Company’s manufacturing facilities also produce ceramic pellets for use in various industrial technology applications, including but not limited to casting and milling. This 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 Frac
TM
. 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.
Our environmental products and services segment is intended to protect operators’ assets, minimize environmental risks, and lower lease operating expense (“LOE”). AGPI, a wholly-owned subsidiary of ours, provides spill prevention, containment and countermeasure systems for the oil and gas industry. 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.
12
Summarized financial informatio
n for the Company’s operating segments for the three and six months ended June 30, 2017 and 2016 is shown in the following tables. Intersegment sales are not material.
|
|
Oilfield Technologies and Services
|
|
|
Environmental Products and Services
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
37,202
|
|
|
$
|
6,370
|
|
|
$
|
43,572
|
|
(Loss) income before income taxes
|
|
|
(25,436
|
)
|
|
|
115
|
|
|
|
(25,321
|
)
|
Depreciation and amortization
|
|
|
11,340
|
|
|
|
331
|
|
|
|
11,671
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
17,677
|
|
|
$
|
2,974
|
|
|
$
|
20,651
|
|
Loss before income taxes
|
|
|
(30,644
|
)
|
|
|
(994
|
)
|
|
|
(31,638
|
)
|
Depreciation and amortization
|
|
|
11,753
|
|
|
|
404
|
|
|
|
12,157
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
66,823
|
|
|
$
|
11,419
|
|
|
$
|
78,242
|
|
Loss before income taxes
|
|
|
(57,199
|
)
|
|
|
(278
|
)
|
|
|
(57,477
|
)
|
Depreciation and amortization
|
|
|
23,434
|
|
|
|
667
|
|
|
|
24,101
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
47,086
|
|
|
$
|
6,667
|
|
|
$
|
53,753
|
|
Loss before income taxes
|
|
|
(66,644
|
)
|
|
|
(1,779
|
)
|
|
|
(68,423
|
)
|
Depreciation and amortization
|
|
|
23,606
|
|
|
|
842
|
|
|
|
24,448
|
|
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 July 2017, the Company satisfied certain post-closing conditions of the New Credit Agreement and received additional proceeds of $12,349 from the Wilks. As of July 27, 2017, the outstanding principal balance of the New Credit Agreement was $65,000.
On July 21, 2017, the Company entered into a Share Purchase Agreement to sell our Russian proppant business for $22,000. The transaction is subject to local regulatory approval and is expected to close during the third quarter of 2017. The net book value of net assets held by our Russian proppant business is $16,113 as of June 30, 2017. The Company also has recorded a cumulative translation adjustment loss of $33,649 as a reduction of shareholders’ equity as of June 30, 2017. Given the terms of the agreement involve the sale of our Russian proppant business, we anticipate reclassifying this amount out of accumulated other comprehensive loss and into earnings upon the close of the transaction during the third quarter. The exact amount of the loss recorded on this transaction will depend on foreign exchange rates on the date of close.
13