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, 2015 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, 2015 included in the annual report on Form 10-K of CARBO Ceramics Inc. for the year ended December 31, 2015.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries (the “Company”). All significant intercompany transactions have been eliminated.
In late 2014 and early 2015, 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. Beginning in early 2015, the Company implemented a number of initiatives to preserve cash and lower costs, including: (1) reducing workforce across the organization, (2) lowering production output levels in order to align with lower demand, (3) limiting capital expenditures and (4) eliminating dividends. As a result of these measures, the Company temporarily idled production and furloughed employees at alternating manufacturing plants. The Company continues to depreciate these assets. During 2016, the Company also implemented programs that allow it to further reduce cash compensation. Further, during 2016, the Company idled the majority of the production activities at its New Iberia, Louisiana plant and its Toomsboro, Georgia facility until such time as market conditions warrant bringing them back online. The Company continues to assess liquidity needs and manage cash flows and, if industry conditions do not improve and/or demand for its products does not otherwise increase, the Company would expect to temporarily idle all or a portion of our currently active facilities in the short term. Given continuing uncertainties with regards to the length of the industry downturn, the Company is evaluating alternative sources of capital. As a result of the steps the Company has taken to enhance its liquidity, the Company currently believes that cash on hand, cash flow from operations, and cash flow from other liquidity-generating transactions will enable the Company to meet its working capital, capital expenditure, debt service and other funding requirements for the next twelve months.
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 new KRYPTOSPHERE® technology remain suspended. As of June 30, 2016, the value of the temporarily suspended projects relating to these two projects totaled approximately 90% of the Company’s total construction in progress, and both projects are over 90% complete.
Lower of Cost or Market Adjustments
During the three-month period ended March 31, 2015, the Company reviewed the carrying values of all inventories and concluded that certain inventories in China had been impacted by changes in market conditions. Current market prices had fallen below carrying costs for certain inventories. Consequently, during the three-month period ended March 31, 2015, the Company recognized a $4,372 loss in cost of sales, primarily to adjust finished goods and raw materials carrying values to the lower market prices on inventories inside China. The adjustments were based on current market prices for these or similar products, as determined by actual sales, bids, and/or quotes from third parties. As of June 30, 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, 2016 and 2015, the Company expensed $13,515 and $11,208, respectively, in production costs. For the six months ended June 30, 2016 and 2015, the Company expensed $23,222 and $19,629, respectively, in production costs.
7
Long-lived and other noncurrent assets impairment considerations
As noted, the Company has temporarily idled production at various manufacturing facilities throughout 2016. The Company does not necessarily 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. As of June 30, 2016, the Company concluded that there were no events or circumstances that would indicate that carrying amounts of other long-lived and other noncurrent assets might be further impaired. However, the Company continues to monitor market conditions closely. Further deterioration of market conditions could result in impairment charges being taken on these and/or other 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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,296
|
)
|
|
$
|
(17,004
|
)
|
|
$
|
(44,980
|
)
|
|
$
|
(45,606
|
)
|
Effect of reallocating undistributed earnings
of participating securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss available under the two-class method
|
|
$
|
(20,296
|
)
|
|
$
|
(17,004
|
)
|
|
$
|
(44,980
|
)
|
|
$
|
(45,606
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share--weighted-average
shares
|
|
|
23,108,889
|
|
|
|
22,999,157
|
|
|
|
23,085,725
|
|
|
|
22,987,086
|
|
Effect of dilutive potential common shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted loss per share--adjusted
weighted-average shares
|
|
|
23,108,889
|
|
|
|
22,999,157
|
|
|
|
23,085,725
|
|
|
|
22,987,086
|
|
Basic loss per share
|
|
$
|
(0.88
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
(1.98
|
)
|
Diluted loss per share
|
|
$
|
(0.88
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
(1.98
|
)
|
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, 2016, 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 5.5%, 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, 2016. The last of these natural gas contracts will expire in December 2018. During the three months ended June 30, 2016 and 2015, the Company recognized an $824 gain and $58 loss, respectively, in cost of sales on derivatives instruments. During the six
8
months ended June 30, 2016 and 2015, the Company recognized a $597 gain and $12,605 loss, respectively, in cost of sales on
derivatives instruments. The cumulative present value of these natural gas derivative contracts as of June 30, 2016 are presented as current and long-term liabilities, as applicable, in the Consolidated Balance Sheet.
At June 30, 2016, the Company had contracted for delivery a total of 6,120,000 MMBtu of natural gas at an average price of $4.44 per MMBtu through December 31, 2018. Contracts covering 5,820,000 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, 2016 and 2015 were $1.95 per MMBtu and $2.64 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, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
|
—
|
|
|
|
(7,429
|
)
|
|
|
—
|
|
|
|
(7,429
|
)
|
Total fair value
|
|
$
|
—
|
|
|
$
|
(7,429
|
)
|
|
$
|
—
|
|
|
$
|
(7,429
|
)
|
|
|
Fair value as of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
|
—
|
|
|
|
(11,155
|
)
|
|
|
—
|
|
|
|
(11,155
|
)
|
Total fair value
|
|
$
|
—
|
|
|
$
|
(11,155
|
)
|
|
$
|
—
|
|
|
$
|
(11,155
|
)
|
At June 30, 2016, the fair value of the Company’s long-term debt approximated the carrying value.
6.
|
Stock Based Compensation
|
The 2014 CARBO Ceramics Inc. Omnibus Incentive Plan (the “2014 Omnibus Incentive Plan”) provides for the 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 June 30, 2016, 295,833 shares were available for issuance under the 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. Additionally, certain units of phantom stock remain outstanding under the 2009 Omnibus Incentive Plan, as described below.
9
A summary of restricted stock activity and related information for the six months ended June 30, 2016 is presented below:
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair Value
Per Share
|
|
Nonvested at January 1, 2016
|
|
|
266,152
|
|
|
$
|
51.39
|
|
Granted
|
|
|
234,412
|
|
|
$
|
17.27
|
|
Vested
|
|
|
(106,885
|
)
|
|
$
|
58.34
|
|
Forfeited
|
|
|
(28,941
|
)
|
|
$
|
30.68
|
|
Nonvested at June 30, 2016
|
|
|
364,738
|
|
|
$
|
29.07
|
|
As of June 30, 2016, there was $8,111 of total unrecognized compensation cost related to restricted shares granted under both the expired 2009 Omnibus Incentive Plan and the 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, 2016 was $6,236.
The Company made market-based cash awards to certain executives of the Company pursuant to the 2014 Omnibus Incentive Plan. As of June 30, 2016, the total target award outstanding was $2,077. 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 international employees pursuant to the expired 2009 Omnibus Incentive Plan prior to its expiration and pursuant to the 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, 2016, there were 18,180 units of phantom stock granted under the expired 2009 Omnibus Incentive Plan, of which 13,737 have vested and 3,954 have been forfeited. As of June 30, 2016, there were 11,115 units of phantom stock granted under the 2014 Omnibus Incentive Plan, of which 1,302 have vested and 2,292 have been forfeited. As of June 30, 2016, nonvested units of phantom stock under the 2009 Omnibus Incentive Plan and the 2014 Omnibus Incentive Plan had a total value of $105, a portion of which is accrued as a liability within Accrued Payroll and Benefits.
7.
|
Long-Term Debt and Notes Payable
|
The Company maintains a credit agreement, which until April 2016 included a revolving line of credit, with a bank lender. As of January 31, 2016, February 29, 2016 and March 31, 2016, the Company failed to comply with the asset coverage ratio covenant in such credit agreement. In connection with entering into Agreement and Amendment No. 7 to the Credit Agreement referred to below (the “Amended Credit Agreement”), the bank lender waived non-compliance with the asset coverage ratio for the months of January, February and March 2016.
As of June 30, 2016, the Company’s outstanding debt under its Amended Credit Agreement was $61,967, of which $12,566 was classified as current and $49,401 was classified as long-term. As of June 30, 2016, the Company had $621 of debt issuance costs that are presented as a direct reduction from the carrying amount of the long-term debt obligation. For the six months ended June 30, 2016, the weighted average interest rate was 5.604% based on LIBOR-based rate borrowings. The Company had $9,355 and $8,875 in standby letters of credit issued as of June 30, 2016 and December 31, 2015, respectively, primarily as collateral relating to our natural gas commitments. As of December 31, 2015, the Company’s outstanding debt under the prior credit agreement was $88,000, of which $33,000 was classified as current and $55,000 was classified as long-term. As of December 31, 2015, the weighted average interest rate was 4.664% based on LIBOR-based rate borrowings. Interest cost for the six months ended June 30, 2016 and 2015 was $2,747 and $937, respectively, of which $80 and $639 was capitalized into the cost of property, plant and equipment in the six months ended June 30, 2016 and 2015, respectively.
In April 2016, the Company restructured its revolving credit agreement by entering into the Amended Credit Agreement, as it is reasonably likely the Company would have been unable to comply with certain financial covenants under the prior credit agreement. The Amended Credit Agreement consists of a $65,000 fully drawn term loan, which replaced the previous $90,000 revolving line of credit, and up to $15,000 in standby letters of credit. The Company’s obligations under the Amended Credit Agreement are secured by a pledge of substantially all of the Company’s domestic assets and guaranteed by its two domestic operating subsidiaries. Such obligations bear interest at a floating rate of LIBOR plus 7.00%. Under the Amended Credit Agreement, all of the cash of the Company, including any of the subsidiary guarantors, that is held in U.S. banks must be deposited into accounts at the administrative agent and therefore will be subject to set-off in the event, and to the extent, CARBO Ceramics Inc. or any of the subsidiary guarantors
10
is unable to satisfy its obligations under the Amended Credit Agreement. The Amended Credit Agreement
requires minimum quarterly repayments of principal of $3,033 during each remaining quarter in 2016, and $3,250 per quarter thereafter until its maturity on December 31, 2018. The Amended Credit Agreement eliminates the financial covenants contained in th
e prior credit agreement, but instead requires the Company to maintain minimum cash amounts held with the administrative agent at the end of each calendar month commencing August 2016 as follows: $40,000 from August 2016 until March 2017; $30,000 from Apri
l 2017 until December 2017; and $25,000 thereafter. The Company is required to use proceeds from the sale of certain assets to repay principal amounts outstanding under the Amended Credit Agreement. As of July 28, 2016, the Company’s outstanding debt und
er the Amended Credit Agreement was $58,934.
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%. Additionally, in May 2016, each of those directors entered into a Subordination and Intercreditor Agreement with the Company’s bank lender, which, among other things, provides that each Note is subordinated to the indebtedness outstanding under the Amended Credit Agreement.
In June 2016, the Company entered into an agreement with a financing company to finance certain insurance premiums in the amount of $1,468. Payments are due monthly through April 1, 2017 with an effective interest rate of 0.75%. The liability is included in Notes Payable within Current Liabilities on the Consolidated Balance Sheet.
As of June 30, 2016, the Company’s net investment that is subject to foreign currency fluctuations totaled $17,789, and the Company has recorded a cumulative foreign currency translation loss of $35,132, 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 March 2016, the FASB issued ASU No. 2016-09, “
Compensation – Stock Compensation (Topic 718)
,” which amends and simplifies the accounting for stock compensation. The guidance addresses various stock compensation aspects including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, among other things. In order to simplify the accounting for stock-based compensation, the Company made a change in accounting policy to account for forfeitures when they occur, and as a result, the Company recognized a $697 cumulative-effect reduction to retained earnings under the modified retrospective approach. The Company elected prospective transition for the requirement to classify excess tax benefits as an operating activity. No prior periods have been adjusted. Additionally, as a result of the new guidance requirements, on a prospective basis, the Company now recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement as a discrete item in the period in which restricted shares vest. During the six months ended June 30, 2016, the Company recognized $1,540, or $0.07 per share, in tax deficiencies, which reduced our income tax benefit. The Company adopted this guidance as of January 1, 2016. The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows, other than the cumulative-effect reduction to retained earnings and income tax benefit effect.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
,” which amends current lease guidance. This guidance requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The new guidance will be effective for the interim and annual periods beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the potential impact of adopting this new guidance on the consolidated financial statements and related disclosures.
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
11
or services. The Company is currently evaluating the potential impact, if any, of adopting thi
s new guidance on the consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11,
“Inventory (Topic 330),”
(“ASU 2015-11”), which amends and simplifies the measurement of inventory. The main provisions of the standard require that inventory be measured at the lower of cost and net realizable value. Prior to the issuance of the standard, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). ASU 2015-11 will be effective for the interim and annual periods beginning after December 15, 2016 with early adoption permitted. The Company is currently evaluating the potential impact, if any, of adopting this new guidance on the consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU No. 2015-03,
“Interest – Imputation of Interest (Subtopic 835-30),”
(“ASU 2015-03”), which amends and simplifies the presentation of debt issuance costs. The main provisions of the standard require that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, and amortization of the debt issuance costs must be reported as interest expense. In August 2015, the FASB issued ASU No. 2015-15,
“Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update),”
which clarified that the SEC (as defined below) staff will not object to an entity presenting the costs of securing line-of-credit arrangements as an asset. The Company adopted this guidance as of January 1, 2016 on a retroactive basis. The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.
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.
On July 20, 2016, the Company repaid $3,033 under its Amended Credit Agreement.
On July 28, 2016, the Company filed a prospectus supplement and associated sales agreement related to an “at-the-market” 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.
12