We have audited the accompanying consolidated balance sheets of CARBO Ceramics Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CARBO Ceramics Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CARBO Ceramics Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2017 expressed an unqualified opinion thereon.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share data)
1.
|
Significant Accounting Policies
|
Description of Business
CARBO Ceramics Inc. (the “Company”) was formed in 1987 and is a manufacturer of ceramic proppants and also produces resin-coated ceramic proppants. The Company has production plants in: New Iberia, Louisiana; Eufaula, Alabama; McIntyre, Georgia; Toomsboro, Georgia; Millen, Georgia; and Kopeysk, Russia; and a sand processing facility in Marshfield, Wisconsin. The Company predominantly sells its proppant products through pumping service companies that perform hydraulic fracturing for oil and gas companies. Finished goods inventories are stored at the plant sites and various domestic and international remote distribution facilities. 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.
Beginning in late 2014 and continuing throughout 2015 and 2016, 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 2015, the Company implemented a number of initiatives to preserve cash and lower costs, including: reducing workforce across the organization, lowering production output levels in order to align with lower demand, limiting capital expenditures and reducing dividends. The Company incurred severance costs of $6,426 and $9,497 during 2016 and 2015, respectively, as a result of these actions.
Temporarily idled facilities are expected to remain closed for a short period of time, generally less than one year. Mothballed facilities are expected to remain closed for one year or longer. The accounting treatment is the same for both temporarily idled and mothballed facilities, except that mothballed assets are evaluated for possible impairment while temporarily idled assets are not necessarily assessed for impairment. The Company continues to depreciate both temporarily idled and mothballed assets.
As of December 31, 2016, we are producing ceramic proppants from our Eufaula, Alabama and Kopeysk, Russia manufacturing facilities, and processing sand at our Marshfield, Wisconsin facility. We are currently producing ceramic pellets only in a limited capacity at our McIntyre, Georgia facility. Our Millen facility is currently mothballed, and our Toomsboro facility is currently idled. 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. 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 this Form 10-K is issued. The Company’s view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2017, which is impacted by various assumptions regarding demand and sales prices for our products. Generally, we expect demand for our products and the sales prices to increase in 2017 compared to 2016, and this expectation is included within our 2017 financial forecast. Although we have observed certain factors in the fourth quarter 2016 that support improving industry conditions, our financial forecasts in recent periods have proven less reliable given customer demand, which is highly volatile in the current operating environment and no committed sales backlog exists with our customers. As a result, there is no guarantee that our financial forecast, which projects sufficient cash will be available to meet planned operating expenses and other cash needs as well as maintain compliance with the minimum cash balance required by the Credit Agreement, will be achieved.
Additionally, the Company suspended completion of two large construction projects until such time that market conditions improve enough to warrant completion. The two suspended projects include the second production line at Millen, Georgia and the second phase of the retrofit of an existing plant with the new KRYPTOSPHERE® technology. As of December 31, 2016, the value of the temporarily suspended assets relating to these two projects totaled approximately 94% of the Company’s total construction in progress and both projects are over 90% complete.
Principles of Consolidation
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries. All significant intercompany transactions have been eliminated.
Concentration of Credit Risk, Accounts Receivable and Other Receivables
The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Receivables are generally due within 30 days. The majority of the Company’s receivables are from customers in the
F-9
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
petroleum pressure pumping industry. The Company establishes an allowance for doubtful accounts based on its assessment of collectability risk and periodically evaluates the balance in the allowance based on a review of trade accounts receivable.
Trade accounts receivable are periodically reviewed for collectability based on customers’ past credit history and current financial condition, and the allowance is adjusted if necessary. Credit losses historically have been insignificant. The allowance
for doubtful accounts at December 31, 2016 and 2015 was $2,804 and $2,688, respectively. Other receivables were $650 and $300 as of December 31, 2016 and 2015, respectively, of which related mainly to miscellaneous receivables in the United States.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheet for cash equivalents approximate fair value.
Inventories
Inventories are stated at the lower of cost (weighted average) or market. Finished goods inventories include costs of materials, plant labor and overhead incurred in the production of the Company’s products and costs to transfer finished goods to distribution centers. The Company evaluates the carrying value of its inventories relative to market value generally on a geographic by-country basis. As needed, more specific reviews within a particular country are made on a product group basis.
The Company evaluated the carrying values of its inventories and concluded that market prices had fallen below carrying costs for certain inventory. Consequently, the Company recognized $1,515 and $4,546 lower of cost or market adjustments in cost of sales in 2016 and 2015, respectively, to adjust finished goods and raw materials carrying values to the lower market prices.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Repair and maintenance costs are expensed as incurred. Depreciation is computed on the straight-line method for financial reporting purposes using the following estimated useful lives:
Buildings and improvements
|
|
15 to 30 years
|
Machinery and equipment
|
|
3 to 30 years
|
Land-use rights
|
|
30 years
|
The Company holds approximately 4,618 acres of land and leasehold interests containing kaolin reserves near its plants in Georgia and Alabama. The Company also holds approximately 113 acres of land and leasehold interests containing sand reserves near its sand processing facility in Marshfield, Wisconsin. The capitalized costs of land and mineral rights as well as costs incurred to develop such property are amortized using the units-of-production method based on estimated total tons of these reserves.
Impairment of Long-Lived Assets and Intangible Assets
Long-lived assets to be held and used and intangible assets that are subject to amortization are reviewed for impairment whenever events or circumstances indicate their carrying amounts might not be recoverable. Recoverability is assessed by comparing the undiscounted expected future cash flows from the assets with their carrying amount. If the carrying amount exceeds the sum of the undiscounted future cash flows an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Intangible assets that are not subject to amortization are tested for impairment at least annually by comparing their fair value with the carrying amount and recording an impairment loss for any excess of carrying amount over fair value. Fair values are generally determined based on discounted expected future cash flows or appraised values, as appropriate. For additional information on the Company’s long-lived assets and intangible assets impairment assessment, please refer to Note 4 - Impairment of Long-Lived Assets.
Manufacturing Production Levels Below Normal Capacity
As a result of the Company substantially reducing manufacturing production levels, including by idling and mothballing certain facilities, the component of the Company’s accounting policy for inventory relating to operating at production levels below normal capacity was triggered and resulted in certain production costs being 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
F-10
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
production at normal production levels. For the years ended December 31, 2016 and 2015, the Compan
y expensed $47,318 and $33,724, respectively, in production costs. There were no such costs in 2014.
Capitalized Software
The Company capitalizes certain software costs, after technological feasibility has been established, which are amortized utilizing the straight-line method over the economic lives of the related products, generally not to exceed five years.
Goodwill
Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the date of acquisition. Goodwill relating to each of the Company’s reporting units is tested for impairment annually, during the fourth quarter, as well as when an event, or change in circumstances, indicates an impairment is more likely than not to have occurred. For additional information on the Company’s goodwill impairment assessment, please refer to Note 4 - Impairment of Long-Lived Assets.
Revenue Recognition
Revenue from proppant sales is recognized when title passes to the customer, generally upon delivery. Revenue from consulting and geotechnical services is recognized at the time service is performed. Revenue from the sale of fracture simulation software is recognized when title passes to the customer at time of shipment. Revenue from the sale of spill prevention services is recognized at the time service is performed. Revenue from the sale of containment goods is recognized at the time goods are delivered.
Shipping and Handling Costs
Shipping and handling costs are classified as cost of sales. Shipping costs consist of transportation costs to deliver products to customers. Handling costs include labor and overhead to maintain finished goods inventory and operate distribution facilities.
Cost of Start-Up Activities
Start-up activities, including organization costs, are expensed as incurred. Start-up costs for 2016 and 2015 related to the start-up of the first phase of a retrofit of an existing plant to produce KRYPTOSPHERE® products. Start-up costs for 2014 related to the start-up of the new manufacturing facility in Millen, Georgia.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Research and Development Costs
Research and development costs are charged to operations when incurred and are included in Selling, General and Administrative expenses. The amounts incurred in 2016, 2015 and 2014 were $3,817, $7,047 and $10,855, respectively.
Foreign Subsidiaries
Financial statements of the Company’s foreign subsidiaries are translated using current exchange rates for assets and liabilities; average exchange rates for the period for revenues, expenses, gains and losses; and historical exchange rates for equity accounts. Resulting translation adjustments are included in, and the only component of, Accumulated Other Comprehensive Loss as a separate component of shareholders’ equity. For additional information on the Company’s Cumulative Translation Adjustment, please refer to Note 17 – Foreign Currencies.
F-11
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
New Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 will be effective for the interim and annual periods beginning after December 15, 2019, with early adoption permitted, and will be applied on a prospective basis. The adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),” which clarifies existing guidance on cash flow statement presentation and classification. ASU 2016-15 will be effective for the interim and annual periods beginning after December 15, 2017 with early adoption permitted. The adoption of ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
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 as permitted by this ASU, 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 year ended December 31, 2016, the Company recognized $789, or $0.03 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 consolidated financial statements and related disclosures, 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 November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes,” (“ASU 2015-17”), which requires that deferred tax liabilities and assets be classified as noncurrent in the balance sheet. The Company adopted this guidance as of January 1, 2016 on a prospective basis. The Company’s deferred tax liabilities and assets for prior periods were not retrospectively adjusted. The Company has changed its accounting principle to present deferred taxes as noncurrent in order to simplify the accounting for income taxes and to comply with ASU 2015-17.
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. 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
F-12
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
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.
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 consolidated financial statements and related disclosures.
In January 2015, the FASB issued ASU No. 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” (“ASU 2015-01”), which eliminates the concept of extraordinary items from U.S. GAAP. 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.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” (“ASU 2014-15”) which provides guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The Company adopted ASU 2014-15 for the annual period ending December 31, 2016. The adoption of ASU 2014-15 did not have a material impact on the Company’s consolidated financial position, results of operations, cash flows, or related footnote disclosures.
In June 2014, the FASB issued ASU No. 2014-12, “
Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force),” (“ASU 2014-12”)
, which amends current guidance for stock compensation tied to performance targets. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. 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.
F-13
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
2.
|
I
ntangible and Other Assets
|
Following is a summary of intangible assets as of December 31:
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Weighted
Average
Life
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
Intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses, software and hardware designs
|
|
6 years
|
|
$
|
5,033
|
|
|
$
|
3,187
|
|
|
$
|
4,754
|
|
|
$
|
2,839
|
|
Developed technology
|
|
10 years
|
|
|
2,782
|
|
|
|
2,017
|
|
|
|
2,782
|
|
|
|
1,739
|
|
Customer relationships and non-compete
|
|
9 years
|
|
|
2,838
|
|
|
|
2,331
|
|
|
|
2,838
|
|
|
|
2,042
|
|
|
|
|
|
$
|
10,653
|
|
|
$
|
7,535
|
|
|
$
|
10,374
|
|
|
$
|
6,620
|
|
Amortization expense for 2016, 2015 and 2014 was $915, $1,235 and $1,313, respectively. Estimated amortization expense for each of the ensuing years through December 31, 2021 is $638, $565, $279, $17 and $0, respectively.
Following is a summary of other assets as of December 31:
|
|
2016
|
|
|
2015
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Bauxite raw materials:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
3,989
|
|
|
$
|
4,145
|
|
Other assets
|
|
|
1,524
|
|
|
|
1,962
|
|
|
|
$
|
5,513
|
|
|
$
|
6,107
|
|
Bauxite raw materials are used in the production of heavyweight ceramic products. As of December 31, 2016 and 2015, the Company has classified as long-term assets those bauxite raw materials inventories that are not expected to be consumed in production during the upcoming twelve month period. For additional information, refer to Note 4 – Impairment of Long-Lived Assets.
3.
|
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 December 31, 2016, the Company’s outstanding debt under its 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. The Company had $11,980 and $8,875 in standby letters of credit issued as of December 31, 2016 and December 31, 2015, respectively, primarily as collateral relating to our natural gas commitments and railcar leases. 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 years ended December 31, 2016, 2015 and 2014 was $6,022, $2,973 and $135, respectively, of which $80 and $2,038 was capitalized into the cost of property, plant and equipment in the years ended December 31, 2016 and 2015, respectively. No interest was capitalized in 2014.
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 $15,000 in standby letters of credit. The Company’s obligations under the Amended Credit Agreement are secured by a pledge of substantially all of the Company’s domestic assets and guaranteed by its two domestic operating subsidiaries. Such
F-14
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
obligations bear interest at a floating rate of LIBOR plus 7.00%. Under the Amended Credit Agreement, al
l 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. o
r any of the subsidiary guarantors is unable to satisfy its obligations under the Amended Credit Agreement. The Amended Credit Agreement requires minimum quarterly repayments of principal of $3,250 per quarter until its maturity on December 31, 2018. The
Amended Credit Agreement eliminates the financial covenants contained in the 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 2
016 as follows: $40,000 from August 2016 until March 2017; $30,000 from April 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 Amende
d Credit Agreement.
In January 2017, the Company repaid $3,250 under its Amended Credit Agreement. As of February 28, 2017, the Company’s outstanding debt under the Amended Credit Agreement was $52,651.
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 December 31, 2016, the outstanding balance was $551.
4.
|
Impairment of Long-Lived Assets
|
During 2016, 2015 and 2014, the Company recorded losses totaling $1,065, $43,697 and $15,120, respectively, on impairment of certain long-lived assets as market conditions changed with regard to demand for certain products offered by the Company.
A decline in oil and natural gas prices during the second half of 2014 resulted in a severe decline in market conditions beginning in early 2015. During the fourth quarter of 2015, industry conditions further deteriorated as oil prices fell below $30 per barrel. As a result of these worsening conditions, the Company evaluated substantially all of its long-lived assets for possible impairment as of December 31, 2015. Key assumptions used in the analysis varied by facility. However, the overriding assumptions included: 1) the industry downturn would last longer than originally anticipated, taking up to five years to fully recover; 2) production levels would rise over the recovery period eventually returning to production levels within normal capacity; 3) market pricing would be similar to lower 2015 levels, thus conservatively reducing expected gross profit and thus cash flows; 4) the Company’s wet process manufacturing plants (Toomsboro and Millen, Georgia and Eufaula, Alabama) were evaluated as a group of assets because these facilities manufacture like products; and 5) other facilities were separately evaluated. Pursuant to that analysis, the Company determined that the projected gross cash flows attributable to certain assets did not exceed the carrying value of the assets; therefore, the Company concluded that there was indication of possible impairment. The Company engaged the services of a third party consulting firm to assist with the determination of the fair market value of the related assets and concluded that the assets were impaired. The key assumptions and inputs impacting the fair value analysis were the weighted average cost of capital and perpetuity growth rate as well as certain market data with respect to the property and equipment at each facility. As a result, during the year-ended December 31, 2015, the Company recorded a $36,177 impairment of long-lived assets, primarily relating to machinery and equipment at the McIntyre, Georgia manufacturing plant and Marshfield, Wisconsin sand processing facility.
During the year-ended December 31, 2016, industry conditions remained depressed, however showed signs of improvement in the second half of the year with oil prices above $50 per barrel exiting the year. The Company evaluated substantially all of its long-lived assets for impairment as of December 31, 2016. Key assumptions were not materially different from the December 31, 2015 analysis. Pursuant to the December 31, 2016 analysis, the Company determined that the projected gross cash flows attributable to each asset group exceeded the carrying value; therefore, the Company concluded there was no indication of impairment for the year-ended December 31, 2016.
The Company also evaluated the carrying value of the long-term portion of bauxite raw materials. Much of the bauxite raw material was intended for use in production at the McIntyre facility. Based upon this evaluation, during 2016 and 2015, the Company recognized an impairment charge of $1,065 and $6,488, respectively, on the long-term portion of the bauxite raw material inventories.
F-15
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
Market conditions inside China deteriorated somewhat earlier relative to conditions in the United
States. As a result of deteriorating market conditions in China during the fourth quarter of 2014, the Company recorded a $10,164 impairment of its long-lived assets in China during that period. As a result of the further deterioration of conditions in 2
015, the Company ceased production activities at its Luoyang, China manufacturing plant. During the course of 2015, the Company released substantially all of its employees inside China, sold off inventories and proceeded to wind-down the operation. The C
ompany does not intend to resume operations in China. During the fourth quarter of 2015, the Company incurred a loss of $1,033 related to the write-off of abandoned inventories and other assets, and substantially liquidated the China assets and liabilitie
s, as defined by U.S generally accepted accounting principles. As a result, during the fourth quarter of 2015, the foreign currency cumulative translation gain of $8,853 was released into the statement of operations and is netted with other impairment los
ses.
In addition, during late 2014, the Company made a decision that it will not move forward with construction of a resin coating plant in Marshfield, Wisconsin for which the Company had previously developed engineering plans and procured certain equipment that had long-lead delivery times. As such, the Company recorded a $4,956 impairment of those assets during the year ended December 31, 2014.
The Company assesses goodwill for possible impairment annually or sooner if circumstances indicate possible impairment may have occurred. The Company evaluated goodwill during the fourth quarter of 2015, and as a result of the further decline in the oil and natural gas industry during the fourth quarter of 2015, concluded that Asset Guard Products Inc. (“AGPI”) projected future cash flows were negatively impacted and thus indicated possible impairment of the AGPI goodwill. AGPI was formerly known as Falcon Technologies and Services, Inc. The Company engaged a third party to assist in the evaluation and concluded that impairment had occurred. Fair value, which was determined using a discounted cash flows method, fell below the carrying value. Consequently, during the fourth quarter of 2015, the Company recorded an $8,664 impairment of AGPI goodwill and an $833 impairment of the indefinite-lived AGPI Trademark intangible asset, both the full value of each of those assets. Evaluation of the StrataGen goodwill resulted in no indication of possible impairment. There were no such impairments during 2016 or 2014.
During the years ended December 31, 2016, 2015, and 2014, the Company recognized gains of $176, $230, and $41 on disposal of various assets.
Components of loss (gain) on disposal or impairment of assets are as follows:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic long-lived assets impairment
|
|
$
|
1,065
|
|
|
$
|
42,664
|
|
|
$
|
4,956
|
|
China assets impairment
|
|
|
—
|
|
|
|
1,033
|
|
|
|
10,164
|
|
Goodwill and intangible assets impairment
|
|
|
—
|
|
|
|
9,497
|
|
|
|
—
|
|
China CTA gain realization
|
|
|
—
|
|
|
|
(8,853
|
)
|
|
|
—
|
|
Gain on disposal of assets
|
|
|
(176
|
)
|
|
|
(230
|
)
|
|
|
(41
|
)
|
Total
|
|
$
|
889
|
|
|
$
|
44,111
|
|
|
$
|
15,079
|
|
The Company leases certain property, plant and equipment under operating leases, primarily consisting of railroad equipment leases. Net minimum future rental payments due under non-cancelable operating leases with remaining terms in excess of one year as of December 31, 2016 are as follows:
2017
|
|
$
|
15,272
|
|
2018
|
|
|
13,262
|
|
2019
|
|
|
14,367
|
|
2020
|
|
|
16,174
|
|
2021
|
|
|
15,895
|
|
Thereafter
|
|
|
37,865
|
|
Total
|
|
$
|
112,835
|
|
F-16
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
Leases of railroad equipment
generally provide for renewal options at their fair rental value at the time of renewal. In the normal course of business, operating leases for railroad equipment are generally renewed or replaced by other leases. For the years ended December 31, 2017 an
d 2018, minimum future rental payments in the table above are presented net of sublease income related to subleases of railroad equipment of $993 and $581, respectively. Rent expense for all operating leases was $22,040 in 2016, $23,757 in 2015 and $24,11
6 in 2014. For the years ended December 31, 2016, 2015 and 2014, rent expense is stated net of sublease income of $4,778, $5,031 and $1,816, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31 are as follows:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
1,349
|
|
|
$
|
1,296
|
|
Inventories
|
|
|
8,811
|
|
|
|
7,071
|
|
Natural gas derivatives
|
|
|
1,281
|
|
|
|
4,183
|
|
Goodwill & other intangibles
|
|
|
4,881
|
|
|
|
3,980
|
|
Net operating loss
|
|
|
51,722
|
|
|
|
39,360
|
|
Other
|
|
|
2,027
|
|
|
|
1,723
|
|
Foreign losses
|
|
|
—
|
|
|
|
1,230
|
|
Foreign tax assets valuation allowance
|
|
|
—
|
|
|
|
(1,230
|
)
|
Total deferred tax assets
|
|
|
70,071
|
|
|
|
57,613
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
71,308
|
|
|
|
71,976
|
|
Total deferred tax liabilities
|
|
|
71,308
|
|
|
|
71,976
|
|
Net deferred tax liabilities
|
|
$
|
1,237
|
|
|
$
|
14,363
|
|
Significant components of the provision for income taxes for the years ended December 31 are as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(495
|
)
|
|
$
|
1,509
|
|
|
$
|
11,310
|
|
State
|
|
|
(496
|
)
|
|
|
120
|
|
|
|
500
|
|
Foreign
|
|
|
445
|
|
|
|
966
|
|
|
|
1,084
|
|
Total current
|
|
|
(546
|
)
|
|
|
2,595
|
|
|
|
12,894
|
|
Deferred
|
|
|
(50,535
|
)
|
|
|
(56,800
|
)
|
|
|
24,389
|
|
|
|
$
|
(51,081
|
)
|
|
$
|
(54,205
|
)
|
|
$
|
37,283
|
|
F-17
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
The reconciliation of income taxes computed at the U.S. statutory tax rate to the Company’s income tax expense for the years ended December 31 is as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
U.S. statutory rate
|
|
$
|
(45,923
|
)
|
|
|
(35.0
|
)%
|
|
$
|
(57,312
|
)
|
|
|
(35.0
|
)%
|
|
$
|
32,505
|
|
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
(3,283
|
)
|
|
|
(2.5
|
)
|
|
|
(3,474
|
)
|
|
|
(2.1
|
)
|
|
|
1,882
|
|
|
|
2.0
|
|
Mining depletion
|
|
|
(378
|
)
|
|
|
(0.3
|
)
|
|
|
(1,557
|
)
|
|
|
(0.9
|
)
|
|
|
(3,035
|
)
|
|
|
(3.3
|
)
|
Change in election for foreign tax credits
|
|
|
(2,753
|
)
|
|
|
(2.1
|
)
|
|
|
1,442
|
|
|
|
0.9
|
|
|
|
—
|
|
|
|
—
|
|
Foreign tax assets valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
|
1,230
|
|
|
|
0.7
|
|
|
|
4,300
|
|
|
|
4.6
|
|
Foreign investments
|
|
|
(323
|
)
|
|
|
(0.2
|
)
|
|
|
847
|
|
|
|
0.5
|
|
|
|
2,980
|
|
|
|
3.2
|
|
Stock compensation excess tax deficiency
|
|
|
789
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other permanent differences
|
|
|
790
|
|
|
|
0.6
|
|
|
|
4,619
|
|
|
|
2.8
|
|
|
|
(1,349
|
)
|
|
|
(1.4
|
)
|
|
|
$
|
(51,081
|
)
|
|
|
(38.9
|
)%
|
|
$
|
(54,205
|
)
|
|
|
(33.1
|
)%
|
|
$
|
37,283
|
|
|
|
40.1
|
%
|
Provision has been made for deferred U.S. income taxes on all foreign earnings based on the Company’s intent to repatriate foreign earnings. During the year ended December 31, 2016, the Company adjusted the DTL associated with its foreign investments which resulted in an additional benefit of $323. During the year ended December 31, 2015, the Company did not recognize benefits on foreign investments of $847 and recorded a valuation allowance of $1,230 due to the uncertainty of the Company being able to realize the foreign tax assets in light of current market conditions in China. During 2016, there was no change to this foreign valuation allowance.
During 2016 and 2015, the Company incurred a net operating loss in the United States. The tax benefit of these net operating losses totals $51,722 and $39,360, respectively, and is included in the deferred income tax asset. The Company filed amended 2013 and 2014 Federal income tax returns to claim $37,397 of the tax benefit which was received as a refund in April 2016. After finalization of the 2015 Federal return and a change in the attribute of the NOL carryback, additional refunds for 2012 through 2014 tax years are being claimed in the amount of $1,732. These amounts are included within deferred tax assets as of December 31, 2016. The federal NOLs generated in 2016 will be carried forward until they are utilized or their expiration in 2036.
The Company elected to claim bonus tax depreciation totaling $29,221 and $61,781 on assets placed in service in the United States during 2015 and 2014, respectively. This election increased the net operating loss in 2015 and reduced current taxable income in 2014. No such bonus depreciation is anticipated for 2016.
The Company has not recognized any uncertain tax positions as of December 31, 2016. The reserve recorded as of December 31, 2015 of $153 was associated with a period no longer subject to audit and thus was reduced to $0 during 2016.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates, the most significant of which are U.S. federal and certain state jurisdictions. In 2016, the Company received an audit notice from the Internal Revenue Service for periods 2013-2015. The Company does not anticipate any material findings. Various U.S. state jurisdiction tax years remain open to examination as well, although the Company believes assessments, if any, would be immaterial to its consolidated financial statements.
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders and do not have cumulative voting rights. Subject to preferences of any Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of any Preferred Stock then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and non-assessable.
On January 19, 2016, the Board of Directors suspended the Company’s policy of paying quarterly cash dividends.
F-18
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
Preferred Stock
The Company’s charter authorizes 5,000 shares of Preferred Stock. The Board of Directors has the authority to issue Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the Company’s shareholders.
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 December 31, 2016, the Company had not repurchased any shares under the plan.
Equity Offering Program
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 with an aggregate offering price of up to $75,000 through Cowen and Company LLC, as sales agent, for general corporate purposes. As of December 31, 2016, the Company 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 during August and September 2016, and we have not utilized the program since those sales.
8.
|
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. Historically, the Company has taken delivery of all natural gas quantities under contract, which exempted the Company from accounting for the contracts as derivative instruments. However, due to the severe decline in industry activity beginning in early 2015, the Company significantly reduced production levels and consequently did not take delivery of all of the contracted natural gas quantities. As a result, the Company began to account 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 year ended December 31, 2016 and 2015. The last natural gas contract will expire in December 2018. As a result, during the year ended December 31, 2016 and 2015, the Company recognized a gain on derivative instruments of $1,886 and a loss on derivative instruments of $15,040, respectively in cost of sales. The cumulative present value of the losses on these natural gas derivative contracts as of December 31, 2016 and 2015 are presented as current and long-term liabilities, as applicable, in the Consolidated Balance Sheet.
At December 31, 2016, the Company has contracted for delivery a total of 4,320,000 MMBtu of natural gas at an average price of $4.36 per MMBtu through December 31, 2018. Contracts covering 4,080,000 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 years ended December 31, 2016 and 2015 were $2.46 per MMBtu and $2.66 per MMBtu, respectively.
9.
|
Fair Value Measurements
|
The Company’s derivative instruments are measured at fair value on a recurring basis. U.S. GAAP establishes a fair value hierarchy that has three levels based on the reliability of the inputs used to determine the fair value. These levels include: Level 1,
F-19
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and 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 the Level 2 fair value hierarchy. For additional information on the derivative instruments, refer to Note 8 – Natural Gas 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 December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
—
|
|
|
$
|
(3,468
|
)
|
|
$
|
—
|
|
|
$
|
(3,468
|
)
|
Total fair value
|
|
$
|
—
|
|
|
$
|
(3,468
|
)
|
|
$
|
—
|
|
|
$
|
(3,468
|
)
|
|
|
Fair value as of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired long-lived assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,896
|
|
|
$
|
5,896
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
|
—
|
|
|
|
(11,155
|
)
|
|
|
—
|
|
|
|
(11,155
|
)
|
Total fair value
|
|
$
|
—
|
|
|
$
|
(11,155
|
)
|
|
$
|
5,896
|
|
|
$
|
(5,259
|
)
|
At December 31, 2016, the fair value of the Company’s long-term debt approximated the carrying value.
10.
|
Stock Based Compensation
|
On May 20, 2014, the shareholders approved the 2014 CARBO Ceramics Inc. Omnibus Incentive Plan (the “2014 Omnibus Incentive Plan”). The 2014 Omnibus Incentive Plan replaces the expired 2009 Omnibus Incentive Plan. Under the 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 2014 Omnibus Incentive Plan to any single participant in any calendar year with respect to any cash-based award shall not exceed $5,000. Awards may be granted with respect to a number of shares of the Company’s Common Stock that in the aggregate does not exceed 750,000 shares prior to the fifth anniversary of its effective date, plus (i) the number of shares that are forfeited, cancelled or returned, and (ii) the number of shares that are withheld from the participants to satisfy an option exercise price or minimum statutory tax withholding obligations. No more than 50,000 shares may be granted to any single participant in any calendar year. Equity-based awards may be subject to performance-based and/or service-based conditions. With respect to stock options and stock appreciation rights granted, the exercise price shall not be less than the market value of the underlying Common Stock on the date of grant. The maximum term of an option is ten years. Restricted stock awards granted generally vest (i.e., transfer and forfeiture restrictions on these shares are lifted) proportionately on each of the first three anniversaries of the grant date, but subject to certain limitations, awards may specify other vesting periods. As of December 31, 2016, 316,848 shares were available for issuance under the 2014 Omnibus Incentive Plan. Although the Company’s 2009 Omnibus Incentive Plan has expired, certain unvested shares granted under that plan remain outstanding in accordance with its terms. Additionally, certain units of phantom stock remain outstanding under the 2009 Omnibus Incentive Plan, as described below.
F-20
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
A summary of restricted stock activity and related information for the year e
nded December 31, 2016 is presented below:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
Nonvested at January 1, 2016
|
|
|
266,152
|
|
|
$
|
51.39
|
|
Granted
|
|
|
234,412
|
|
|
$
|
17.27
|
|
Vested
|
|
|
(110,367
|
)
|
|
$
|
59.18
|
|
Forfeited
|
|
|
(51,057
|
)
|
|
$
|
29.31
|
|
Nonvested at December 31, 2016
|
|
|
339,140
|
|
|
$
|
28.59
|
|
As of December 31, 2016, there was $4,978 of total unrecognized compensation cost, net of estimated forfeitures, related to restricted shares granted under the Omnibus Incentive Plans. That cost is expected to be recognized over a weighted-average period of 1.6 years. The weighted-average grant date fair value of restricted stock granted during the years ended December 31, 2016, 2015 and 2014 was $17.27, $34.62 and $111.99, respectively. The total fair value of shares vested during the years ended December 31, 2016, 2015 and 2014 was $6,532, $6,910 and $5,638, respectively.
As of December 31, 2016, the Company’s outstanding market-based cash awards to certain executives of the Company had a total Target Award of $1,938. The amount of awards that will ultimately vest 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 an 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 December 31, 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 December 31, 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 December 31, 2016, nonvested units of phantom stock under the 2009 Omnibus Incentive Plan and the 2014 Omnibus Incentive Plan have a total value of $84, a portion of which is accrued as a liability within Accrued Payroll and Benefits.
11.
|
(Loss) Earnings Per Share
|
ASC Topic 260, “
Earnings Per Share
”, provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company’s outstanding non-vested restricted stock awards are participating securities. Accordingly, earnings per common share are computed using the two-class method.
F-21
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
The following table sets forth the computation of basic and diluted (loss) earnings per share under the two-class method:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator for basic and diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(80,127
|
)
|
|
$
|
(109,544
|
)
|
|
$
|
55,588
|
|
Effect of reallocating undistributed earnings of
participating securities
|
|
|
—
|
|
|
|
—
|
|
|
|
(376
|
)
|
Net (loss) income available under the two-class
method
|
|
$
|
(80,127
|
)
|
|
$
|
(109,544
|
)
|
|
$
|
55,212
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic (loss) earnings per
share—weighted-average shares
|
|
|
24,377,839
|
|
|
|
22,999,318
|
|
|
|
22,946,395
|
|
Effect of dilutive potential common shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted (loss) earnings per
share—adjusted weighted-average shares
|
|
|
24,377,839
|
|
|
|
22,999,318
|
|
|
|
22,946,395
|
|
Basic (loss) earnings per share
|
|
$
|
(3.29
|
)
|
|
$
|
(4.76
|
)
|
|
$
|
2.41
|
|
Diluted (loss) earnings per share
|
|
$
|
(3.29
|
)
|
|
$
|
(4.76
|
)
|
|
$
|
2.41
|
|
12.
|
Quarterly Operating Results––(Unaudited)
|
Quarterly results for the years ended December 31, 2016 and 2015 were as follows:
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,102
|
|
|
$
|
20,651
|
|
|
$
|
20,241
|
|
|
$
|
29,058
|
|
Gross loss
|
|
|
(23,641
|
)
|
|
|
(20,012
|
)
|
|
|
(20,865
|
)
|
|
|
(20,495
|
)
|
Net loss
|
|
|
(24,684
|
)
|
|
|
(20,296
|
)
|
|
|
(19,950
|
)
|
|
|
(15,197
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.07
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.57
|
)
|
Diluted
|
|
$
|
(1.07
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.57
|
)
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
73,747
|
|
|
$
|
73,752
|
|
|
$
|
75,807
|
|
|
$
|
56,768
|
|
Gross profit
|
|
|
(25,998
|
)
|
|
|
(10,302
|
)
|
|
|
(4,597
|
)
|
|
|
(15,228
|
)
|
Net income
|
|
|
(28,602
|
)
|
|
|
(17,004
|
)
|
|
|
(13,898
|
)
|
|
|
(50,040
|
)
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.24
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(2.17
|
)
|
Diluted
|
|
$
|
(1.24
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(2.17
|
)
|
Quarterly data may not sum to full year data reported in the Consolidated Financial Statements due to rounding.
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. For the year ended December 31, 2016, the Company concluded that the Environmental Products and Services operating segment met the disclosure requirements defined by ASC 280,
Segment Reporting
, and that operating segment became a reportable segment.
F-22
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
The Company’s oilfield technologies and services segment manufactures and sells ceramic proppants on a global basis for use primarily in the hydraulic fracturing of natural gas and oil wells. All of the Company’s ceramic proppant products have similar pro
duction 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 v
arious 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.
Summarized financial information for the Company’s operating segments for the three-year period ended December 31, 2016 is shown in the following tables. Intersegment sales are not material.
|
|
Oilfield Technologies and Services
|
|
|
Environmental Products and Services
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
89,351
|
|
|
$
|
13,700
|
|
|
$
|
103,051
|
|
Loss before income taxes
|
|
|
(128,128
|
)
|
|
|
(3,080
|
)
|
|
|
(131,208
|
)
|
Total assets
|
|
|
709,180
|
|
|
|
14,277
|
|
|
|
723,457
|
|
Capital expenditures, net
|
|
|
7,008
|
|
|
|
(160
|
)
|
|
|
6,848
|
|
Depreciation and amortization
|
|
|
46,871
|
|
|
|
1,580
|
|
|
|
48,451
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
257,373
|
|
|
$
|
22,201
|
|
|
$
|
279,574
|
|
Loss before income taxes
|
|
|
(151,772
|
)
|
|
|
(11,977
|
)
|
|
|
(163,749
|
)
|
Total assets
|
|
|
817,845
|
|
|
|
18,524
|
|
|
|
836,369
|
|
Capital expenditures, net
|
|
|
62,996
|
|
|
|
(249
|
)
|
|
|
62,747
|
|
Depreciation and amortization
|
|
|
52,451
|
|
|
|
2,006
|
|
|
|
54,457
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
617,233
|
|
|
$
|
31,092
|
|
|
$
|
648,325
|
|
Income (loss) before income taxes
|
|
|
94,019
|
|
|
|
(1,148
|
)
|
|
|
92,871
|
|
Total assets
|
|
|
899,709
|
|
|
|
34,517
|
|
|
|
934,226
|
|
Capital expenditures, net
|
|
|
160,820
|
|
|
|
649
|
|
|
|
161,469
|
|
Depreciation and amortization
|
|
|
48,361
|
|
|
|
2,499
|
|
|
|
50,860
|
|
Geographic Information
Long-lived assets, consisting of net property, plant and equipment and other long-term assets, as of December 31 in the United States and other countries are as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
489,374
|
|
|
$
|
531,518
|
|
|
$
|
561,109
|
|
International
|
|
|
10,241
|
|
|
|
12,320
|
|
|
|
18,052
|
|
Total
|
|
$
|
499,615
|
|
|
$
|
543,838
|
|
|
$
|
579,161
|
|
F-23
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
Revenues outside the United States accounted for 34%, 29% and 24% of the Company’s revenues for 2016, 2015 and 2014, respectively. Revenues for the years ended December 31 in the United States, Canada and other countries are a
s follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
67,609
|
|
|
$
|
199,187
|
|
|
$
|
491,004
|
|
Canada
|
|
|
7,460
|
|
|
|
33,614
|
|
|
|
73,092
|
|
Other international
|
|
|
27,982
|
|
|
|
46,773
|
|
|
|
84,229
|
|
Total
|
|
$
|
103,051
|
|
|
$
|
279,574
|
|
|
$
|
648,325
|
|
Sales to Customers
The following schedule presents customers, primarily from the oilfield technologies and services segment, from whom the Company derived 10% or more of total revenues for the years ended December 31:
|
|
Major Customers
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
2016
|
|
|
—
|
|
|
|
20.4
|
%
|
|
|
11.1
|
%
|
2015
|
|
|
10.7
|
%
|
|
|
26.9
|
%
|
|
|
—
|
|
2014
|
|
|
22.4
|
%
|
|
|
29.9
|
%
|
|
|
—
|
|
The Company has defined contribution savings and profit sharing plans pursuant to Section 401(k) of the Internal Revenue Code. Benefit costs recognized as expense under these plans consisted of the following for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Contributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit sharing
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,337
|
|
Savings
|
|
|
939
|
|
|
|
1,547
|
|
|
|
1,849
|
|
|
|
$
|
939
|
|
|
$
|
1,547
|
|
|
$
|
4,186
|
|
All contributions to the plans are 100% participant directed. Participants are allowed to invest up to 20% of contributions in the Company’s Common Stock.
In January 2011, the Company entered into an agreement with one of the Company’s existing suppliers to purchase from the supplier at least 70 percent of the annual kaolin requirements for the Eufaula plant at specified contract prices. The term of the agreement was three years, with options to extend for an additional six years. In May 2012, the agreement was amended to require the Company to purchase from the supplier at least 50 percent of the annual kaolin requirements for the Eufaula, Alabama plant at specified contract prices for the remainder of 2012 and the ensuing five calendar years. The agreement has options to extend the term for an additional three years. For the years ended December 31, 2016, 2015 and 2014, the Company purchased from the supplier $968, $2,380 and $2,263, respectively, of kaolin under the agreement.
In January 2003, the Company entered into a mining agreement with a contractor to provide kaolin for the Company’s McIntyre plant at specified contract prices, from lands owned or leased by either the Company or the contractor. The term of the agreement, which commenced on January 1, 2003, and remains in effect until such time as all Company-owned minerals have been depleted, previously required the Company to accept delivery from the contractor of at least 80 percent of the McIntyre plant’s annual kaolin requirements. In 2006, the Company’s plant in Toomsboro, Georgia commenced operations and became part of this agreement. In November 2015, the agreement was amended to require the Company to accept delivery from the contractor of 100 percent of the annual kaolin requirements for the plants in McIntyre and Toomsboro. For the years ended December 31, 2016, 2015 and 2014, the Company purchased $1,196, $3,245 and $14,823, respectively, of kaolin under the agreement.
F-24
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
In July 2011
, the Company entered into an agreement with a supplier to provide hydro sized sand for the Company’s Marshfield, Wisconsin plant at a specified contract price. The term of the agreement was five years commencing on July 30, 2011 and required the Company
to purchase a minimum of 40,000 tons and 100,000 tons of hydro sized sand during 2011 and 2012, respectively. Effective January 30, 2012, the agreement was amended and requires the Company to purchase a minimum of 150,000 tons of hydro sized sand annually
during 2012 and 2013 and a minimum of 350,000 tons of hydro sized sand in 2014, all at a stated contract price. There were no purchase commitments required during 2015 or through the end of the agreement. For the years ended December 31, 2016, 2015 and
2014, the Company purchased $0, $3,997, and $6,922, respectively, of sand under this agreement.
In May 2012, the Company entered into a supply agreement with a contractor to provide kaolin for the Company’s manufacturing plant in Millen, Georgia at specified contract prices, from lands owned or leased by either the Company or the contractor. The term of the agreement, which commenced in July 2014, has an initial term of five years with options to extend for an additional five years and requires the Company to accept delivery from the contractor of at least 50 percent of the Millen plant’s annual kaolin requirements. For the years ended December 31, 2016, 2015 and 2014, the Company purchased $0, $561 and $1,465, respectively, of kaolin under this agreement.
In October 2014, the Company entered into an agreement with a supplier to mine kaolin and process into a slurry for the Company’s manufacturing plant in Millen, Georgia at specified contract prices. The term of the agreement was five years with automatic two (2) year extensions and requires the Company to source at least 50 percent of the Millen plant’s annual slurry requirement from the supplier. For the years ended December 31, 2016, 2015 and 2014, the Company purchased $0, $1,300 and $577, respectively, of slurry under this agreement.
In November 2014, the Company entered into an agreement with a supplier to provide frac sand for the Company’s Marshfield, Wisconsin plant at a specified contract price. The term of the agreement, which commenced on November 13, 2014, remains in effect until the specified sand is depleted and required the Company to purchase a minimum of 300,000 tons of frac sand during 2015 and 400,000 tons of frac sand for each year thereafter. Effective October 12, 2015, the Company entered into a Letter Agreement with the supplier resulting in the adjustment of required annual minimum purchased tons of frac sand to 123,203 and 116,599 for years 2015 and 2016, respectively. On July 21, 2016, the Company entered into a Letter Agreement with the supplier which removed the required annual minimum purchased tons of frac sand for 2016. The minimum frac sand purchase requirements of 400,000 tons for years 2017 and thereafter until the specified sand is depleted remains unchanged. For the year ended December 31, 2016 and 2015, the Company purchased $252 and $1,751, respectively, of frac sand under this agreement.
The Company has entered into a lease agreement dated November 1, 2008 with the Development Authority of Wilkinson County (the “Wilkinson County Development Authority”) and a lease agreement dated November 1, 2012 with the Development Authority of Jenkins County (the “Jenkins County Development Authority” and together with the Wilkinson County Development Authority, the “Development Authorities”) each in the State of Georgia. Pursuant to the 2008 agreement, the Wilkinson County Development Authority holds the title to the real and personal property of the Company's McIntyre and Toomsboro manufacturing facilities and leases the facilities to the Company for an annual rental fee of $50 per year through November 1, 2017, and includes a Company renewal option to extend through November 1, 2021. Pursuant to the 2012 agreement, the Jenkins County Development Authority holds title to the real estate and personal property of the Company’s Millen, Georgia manufacturing facility, and leases the facility to the Company until the tenth anniversary of completion of the final phase of the facility. At any time prior to the scheduled termination of either lease, the Company has the option to terminate the lease and purchase the property for a nominal fee plus the payment of any rent payable through the balance of the lease term. Furthermore, the Company has security interests in the titles held by the Development Authorities. The Company has also entered into a Memorandum of Understanding (the “MOU”) with the Development Authorities and other local agencies, under which the Company receives tax incentives in exchange for its commitment to invest in the county and increase employment. The MOU with the Jenkins County Development Authority also requires the Company to pay an administrative payment of $50 per year during the term of the Millen lease. The Company is required to achieve certain employment levels in order to retain its tax incentives. In the event the Company does not meet the agreed-upon employment targets or the MOU is otherwise terminated, the Company would be subjected to additional property taxes annually. Based on adverse economic conditions beyond the Company’s control that negatively impacted employment levels, a notice dated December 1, 2015 sent by the Company to the Development Authority of Jenkins County declared a force majeure, which suspended employment levels defined in the original agreement and preserved tax incentives until further notification of the restart of plant operations. The suspension period defined in the amended agreement cannot extend beyond January 1, 2021. Based on adverse economic conditions beyond the Company’s control that negatively impacted employment levels, a notice dated February 1, 2016 sent by the Company to the Development Authority of Wilkinson County declared a force majeure, which suspended employment levels defined in the original agreement and preserved tax incentives until further notification of the restart of plant operations. The Development
F-25
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
($ in thousands, except per share data)
Authority of Jenkins County and the Development Authority of Wilkinson County has not challenged the Company’s declaring a force majeure. The pro
perties subject to these lease agreements are included in Property, Plant and Equipment (net book value of $289,154 at December 31, 2016) in the accompanying consolidated financial statements.
16.
|
Employment Agreements
|
The Company has an employment agreement through December 31, 2017 with its President and Chief Executive Officer. The agreement provides for an annual base salary and incentive bonus. If the President and Chief Executive Officer is terminated early without cause, the Company will be obligated to pay two years base salary and a prorated incentive bonus. Under the agreement, the timing of the payment of severance obligations to the President in the event of the termination of his employment under certain circumstances has been conformed so that a portion of such obligations will be payable in a lump sum, with the remainder of the obligations to be paid over an 18 month period. The agreement also contains a two-year non-competition covenant that would become effective upon termination for any reason. The employment agreement extends automatically for successive one-year periods without prior written notice.
As of December 31, 2016, the Company’s net investment that is subject to foreign currency fluctuations totaled $15,710, and the Company has recorded a cumulative foreign currency translation loss of $34,326, all related to Russia. This cumulative translation loss is included in and is the only component of accumulated other comprehensive loss within shareholders’ equity. During 2014 and continuing into 2015 and 2016, the value of the Russian Ruble significantly declined relative to the U.S. dollar for which the financial impact on the Company’s net assets in Russia is included in other comprehensive income and the cumulative foreign currency translation loss noted above. 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.
18.
|
Legal Proceedings and Regulatory Matters
|
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 January 2017, the Company awarded the following:
297,685 shares of restricted stock to certain employees. The fair value of the stock award on the date of grant totaled $3,066, which will be recognized as expense, less actual forfeitures as they occur, on a straight-line basis over the three-year vesting period.
147,950 units of phantom shares to certain employees. The fair value of the phantom shares on the date of grant totaled $1,524. Compensation expense for these shares 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.
In January 2017, the Company repaid $3,250 under its Amended Credit Agreement.
F-26