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CARBO CERAMICS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

April 28, 2014

Business

The Company generates revenue primarily through the sale of production enhancement products and services to the oil and natural gas industry. The Company's principal business consists of manufacturing and selling proppant products for use primarily in the hydraulic fracturing of oil and natural gas wells. These proppant products include ceramic, resin-coated ceramic, and resin-coated sand. The Company also provides the industry's most widely used hydraulic fracture simulation software, FracProฎ, as well as hydraulic fracture design and consulting services. In addition, the Company provides a broad range of technologies for spill prevention, containment and countermeasures.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, which require the Company to make estimates and assumptions (see Note 1 to the consolidated financial statements included in the annual report on Form 10-K for the year ended December 31, 2013). The Company believes that some of its accounting policies involve a higher degree of judgment and complexity than others. As of December 31, 2013, critical accounting policies for the Company included revenue recognition, estimating the recoverability of accounts receivable, inventory valuation, accounting for income taxes and accounting for long-lived assets. These critical accounting policies are discussed more fully in the Company's annual report on Form 10-K for the year ended December 31, 2013. There have been no changes in the Company's evaluation of its critical accounting policies since December 31, 2013.

Results of Operations

Three Months Ended March 31, 2014

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

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

Proppant Sales Volumes Three Months Ended (in million lbs) March 31, 2014 2013 Ceramic 373 398 Resin Coated Sand 48 25 Northern White Sand 157 22 Total 578 445



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

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

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

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

Outlook

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

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

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

Liquidity and Capital Resources

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

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

The Company maintains a $50 million unsecured line of credit with a bank that matures in July 2018. As of March 31, 2014, there was no outstanding debt under the credit agreement. The Company anticipates that cash on hand, cash provided by operating activities and funds provided by its line of credit will be sufficient to meet planned operating expenses, tax obligations, capital expenditures and other cash needs for the next 12 months. The Company also believes that it could acquire additional debt financing, if needed. Based on these assumptions, the Company believes that its fixed costs could be met even with a moderate decrease in demand for the Company's products.

Off-Balance Sheet Arrangements

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

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Forward-Looking Information

The statements in this Form 10-Q that are not historical statements, including statements regarding our future financial and operating performance and liquidity and capital resources, are forward-looking statements within the meaning of the federal securities laws. All forward-looking statements are based on management's current expectations and estimates, which involve risks and uncertainties that could cause actual results to differ materially from those expressed in forward-looking statements. Among these factors are:

• changes in overall economic conditions, • changes in the cost of raw materials and natural gas used in manufacturing our products, • our ability to manage distribution costs effectively, • changes in demand and prices charged for our products, • changes in the demand for, or price of, oil and natural gas, • risks of increased competition, • technological, manufacturing and product development risks, • loss of key customers, • changes in foreign and domestic government regulations, including environmental restrictions on operations and regulation of hydraulic fracturing, • changes in foreign and domestic political and legislative risks, • the risks of war and international and domestic terrorism, • risks associated with foreign operations and foreign currency exchange rates and controls, and • weather-related risks and other risks and uncertainties.



Additional factors that could affect our future results or events are described from time to time in our reports filed with the Securities and Exchange Commission (the "SEC"). See in particular our annual report on Form 10-K for the fiscal year ended December 31, 2013 under the caption "Risk Factors" and similar disclosures in subsequently filed reports with the SEC. We assume no obligation to update forward-looking statements, except as required by law.


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Source: Edgar Glimpses