UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
|
þ
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|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2008
or
|
|
|
o
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|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
.
Commission File No. 001-15903
CARBO CERAMICS INC.
(Exact name of registrant as specified in its charter)
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|
|
DELAWARE
State or other jurisdiction of
|
|
72-1100013
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification Number)
|
6565 MacArthur Boulevard
Suite 1050
Irving, Texas 75039
(Address of principal executive offices)
(972) 401-0090
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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|
Large accelerated filer:
þ
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|
Accelerated filer:
o
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|
Non-accelerated filer:
o
|
|
Smaller reporting company:
o
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|
|
|
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
þ
As of November 5, 2008, 24,456,862 shares of the registrants Common Stock, par value
$.01 per share, were outstanding.
CARBO CERAMICS INC.
Index to Quarterly Report on Form 10-Q
2
PART I. FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
|
|
|
|
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|
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|
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September 30,
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December 31,
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2008
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2007
|
|
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|
(Unaudited)
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|
(Note 1)
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ASSETS
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Current assets:
|
|
|
|
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Cash and cash equivalents
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|
$
|
31,931
|
|
|
$
|
12,296
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|
Trade accounts and other receivables, net
|
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|
69,965
|
|
|
|
51,353
|
|
Inventories:
|
|
|
|
|
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|
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Finished goods
|
|
|
34,202
|
|
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35,070
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Raw materials and supplies
|
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|
25,293
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18,917
|
|
|
|
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|
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Total inventories
|
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|
59,495
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|
|
|
53,987
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|
Prepaid expenses and other current assets
|
|
|
2,977
|
|
|
|
2,246
|
|
Deferred income taxes
|
|
|
7,914
|
|
|
|
6,451
|
|
Assets of discontinued operations
|
|
|
70,983
|
|
|
|
66,191
|
|
|
|
|
|
|
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Total current assets
|
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|
243,265
|
|
|
|
192,524
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Property, plant and equipment:
|
|
|
|
|
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Land and land improvements
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|
10,097
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|
|
|
8,880
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|
Land-use and mineral rights
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|
6,258
|
|
|
|
6,168
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|
Buildings
|
|
|
43,613
|
|
|
|
42,881
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Machinery and equipment
|
|
|
289,978
|
|
|
|
281,629
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Construction in progress
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|
12,980
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11,455
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|
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Total
|
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362,926
|
|
|
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351,013
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|
Less accumulated depreciation
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115,825
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97,752
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Net property, plant and equipment
|
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|
247,101
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|
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|
253,261
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Goodwill
|
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|
4,859
|
|
|
|
4,873
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|
Intangible and other assets, net
|
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|
2,360
|
|
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2,465
|
|
|
|
|
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Total assets
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|
$
|
497,585
|
|
|
$
|
453,123
|
|
|
|
|
|
|
|
|
|
|
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|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
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|
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|
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|
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Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
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|
$
|
7,104
|
|
|
$
|
8,206
|
|
Accrued payroll and benefits
|
|
|
10,353
|
|
|
|
8,812
|
|
Accrued freight
|
|
|
4,811
|
|
|
|
2,979
|
|
Accrued utilities
|
|
|
3,854
|
|
|
|
3,132
|
|
Accrued income taxes
|
|
|
2,912
|
|
|
|
2,474
|
|
Other accrued expenses
|
|
|
4,160
|
|
|
|
3,637
|
|
Liabilities of discontinued operations
|
|
|
2,217
|
|
|
|
4,024
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
35,411
|
|
|
|
33,264
|
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Deferred income taxes
|
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|
36,618
|
|
|
|
30,420
|
|
Shareholders equity:
|
|
|
|
|
|
|
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|
Preferred stock, par value $0.01 per share, 5,000 shares authorized,
none outstanding
|
|
|
|
|
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Common stock, par value $0.01 per share, 40,000,000 shares authorized;
24,609,698 and 24,516,370 shares issued and outstanding at September 30,
2008 and December 31, 2007, respectively
|
|
|
246
|
|
|
|
245
|
|
Additional paid-in capital
|
|
|
110,663
|
|
|
|
108,686
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|
Retained earnings
|
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|
311,851
|
|
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|
276,879
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|
Accumulated other comprehensive income
|
|
|
2,796
|
|
|
|
3,629
|
|
|
|
|
|
|
|
|
Total shareholders equity
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|
|
425,556
|
|
|
|
389,439
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
497,585
|
|
|
$
|
453,123
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
3
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Three months ended
|
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|
Nine months ended
|
|
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|
September 30,
|
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|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
102,587
|
|
|
$
|
74,313
|
|
|
$
|
282,247
|
|
|
$
|
219,004
|
|
Cost of sales
|
|
|
70,449
|
|
|
|
49,189
|
|
|
|
196,645
|
|
|
|
142,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32,138
|
|
|
|
25,124
|
|
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|
85,602
|
|
|
|
76,447
|
|
Selling, general and administrative expenses
|
|
|
10,183
|
|
|
|
7,555
|
|
|
|
27,502
|
|
|
|
21,544
|
|
Start-up costs
|
|
|
|
|
|
|
204
|
|
|
|
231
|
|
|
|
1,171
|
|
Loss on disposal or impairment of assets
|
|
|
1,449
|
|
|
|
|
|
|
|
1,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
20,506
|
|
|
|
17,365
|
|
|
|
56,310
|
|
|
|
53,732
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
21
|
|
|
|
72
|
|
|
|
77
|
|
|
|
424
|
|
Foreign currency exchange gain (loss),
net
|
|
|
(511
|
)
|
|
|
1,581
|
|
|
|
916
|
|
|
|
2,377
|
|
Other, net
|
|
|
75
|
|
|
|
(36
|
)
|
|
|
262
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(415
|
)
|
|
|
1,617
|
|
|
|
1,255
|
|
|
|
2,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
20,091
|
|
|
|
18,982
|
|
|
|
57,565
|
|
|
|
56,438
|
|
Income taxes
|
|
|
4,779
|
|
|
|
6,128
|
|
|
|
17,649
|
|
|
|
18,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
15,312
|
|
|
|
12,854
|
|
|
|
39,916
|
|
|
|
37,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of
income taxes
|
|
|
3,108
|
|
|
|
1,209
|
|
|
|
6,265
|
|
|
|
2,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,420
|
|
|
$
|
14,063
|
|
|
$
|
46,181
|
|
|
$
|
40,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.62
|
|
|
$
|
0.53
|
|
|
$
|
1.63
|
|
|
$
|
1.55
|
|
Discontinued operations
|
|
|
0.13
|
|
|
|
0.05
|
|
|
|
0.26
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.75
|
|
|
$
|
0.58
|
|
|
$
|
1.89
|
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.62
|
|
|
$
|
0.52
|
|
|
$
|
1.62
|
|
|
$
|
1.54
|
|
Discontinued operations
|
|
|
0.13
|
|
|
|
0.05
|
|
|
|
0.26
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.75
|
|
|
$
|
0.57
|
|
|
$
|
1.88
|
|
|
$
|
1.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.45
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
4
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
46,181
|
|
|
$
|
40,243
|
|
Adjustments to reconcile net income to net cash provided by
operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
(6,265
|
)
|
|
|
(2,548
|
)
|
Depreciation
|
|
|
18,115
|
|
|
|
13,783
|
|
Amortization
|
|
|
358
|
|
|
|
223
|
|
Provision for doubtful accounts
|
|
|
72
|
|
|
|
59
|
|
Deferred income taxes
|
|
|
5,183
|
|
|
|
(552
|
)
|
Excess tax benefits from stock based compensation
|
|
|
(375
|
)
|
|
|
(124
|
)
|
Loss on disposal or impairment of assets
|
|
|
1,559
|
|
|
|
|
|
Foreign currency transaction gain, net
|
|
|
(916
|
)
|
|
|
(2,378
|
)
|
Stock compensation expense
|
|
|
1,531
|
|
|
|
1,313
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts and other receivables
|
|
|
(18,825
|
)
|
|
|
(1,877
|
)
|
Inventories
|
|
|
(5,553
|
)
|
|
|
(12,290
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,208
|
)
|
|
|
(426
|
)
|
Long-term prepaid expenses
|
|
|
36
|
|
|
|
103
|
|
Accounts payable
|
|
|
(1,128
|
)
|
|
|
3,380
|
|
Accrued payroll and benefits
|
|
|
1,552
|
|
|
|
(347
|
)
|
Accrued freight
|
|
|
1,831
|
|
|
|
199
|
|
Accrued utilities
|
|
|
716
|
|
|
|
(923
|
)
|
Accrued income taxes
|
|
|
1,635
|
|
|
|
(2,089
|
)
|
Other accrued expenses
|
|
|
730
|
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations
|
|
|
45,229
|
|
|
|
35,334
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
(12,379
|
)
|
|
|
(47,137
|
)
|
Acquisition of business, net of cash acquired
|
|
|
|
|
|
|
(2,545
|
)
|
Investment in cost-method investee
|
|
|
(1,000
|
)
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(4,000
|
)
|
Proceeds from maturities of short-term investments
|
|
|
|
|
|
|
11,500
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(13,379
|
)
|
|
|
(42,182
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings
|
|
|
6,500
|
|
|
|
3,000
|
|
Repayments on bank borrowings
|
|
|
(6,500
|
)
|
|
|
(3,000
|
)
|
Net proceeds from stock based compensation
|
|
|
2,268
|
|
|
|
764
|
|
Dividends paid
|
|
|
(11,067
|
)
|
|
|
(9,293
|
)
|
Purchase of common stock
|
|
|
(3,540
|
)
|
|
|
|
|
Excess tax benefits from stock based compensation
|
|
|
375
|
|
|
|
124
|
|
|
|
|
|
|
|
|
Net cash used in financing activities of continuing operations
|
|
|
(11,964
|
)
|
|
|
(8,405
|
)
|
|
Effect of exchange rate changes on cash
|
|
|
(38
|
)
|
|
|
193
|
|
Net cash used in discontinued operations
|
|
|
(213
|
)
|
|
|
(2,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
19,635
|
|
|
|
(17,524
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
12,296
|
|
|
|
24,973
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
31,931
|
|
|
$
|
7,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
44
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
14,932
|
|
|
$
|
22,946
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of CARBO Ceramics Inc.
have been prepared in accordance with accounting principles generally accepted in the United States
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 by
accounting principles generally accepted in the United States 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, 2007 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, 2007 included in the annual report on Form 10-K of CARBO Ceramics Inc. for
the year ended December 31, 2007.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its
operating subsidiaries (the Company). The significant operating subsidiaries include: CARBO
Ceramics (China) Company Limited, CARBO Ceramics (Eurasia) LLC, and Pinnacle Technologies, Inc.
The consolidated financial statements also include a 49% interest in a fracture-related services
company in Canada that was acquired in April 2005 and a 32% interest in a Texas-based equipment
manufacturing company that was acquired in October 2007, both reported under the equity method of
accounting, and a 6% interest in a Texas-based electronic equipment manufacturing company that was
acquired in March 2008 that is reported under the cost method of accounting. All significant
intercompany transactions have been eliminated.
Change in Method of Accounting for Inventories
- During the second quarter of 2008, the
Company changed its method of accounting for inventories from the first-in, first-out (FIFO) method
to the weighted average cost method. The Company believes that the weighted average cost method
more appropriately reflects costs in relation to the physical movement of bulk-processed finished
goods. A change in accounting method requires retroactive application and thus restatement of all
prior periods presented. However, this change in inventory costing method did not result in a
material cumulative difference or a material difference in any one reporting period, and
consequently the prior periods have not been restated. The cumulative effect of the accounting
change, which was immaterial, was reflected in the results of operations in the second quarter of
2008.
2. Sale of Assets (Discontinued Operations)
On August 28, 2008, the Company entered into a definitive agreement to sell a substantial
portion of the assets of its wholly-owned subsidiary, Pinnacle Technologies, Inc. (Pinnacle), to
Halliburton Energy Services, Inc. (Halliburton). The sale, which includes all of the fracture
and reservoir diagnostic business, the Pinnacle name and related trademarks, was completed on
October 10, 2008, for $143,740 in cash, including $6,740 for preliminary working capital
adjustments. The final purchase price is subject to post-closing working capital adjustments. The
group of assets sold meets the definition of a
component of an entity
as defined by the Financial
Accounting Standards Boards SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (as amended).
The Company has no continuing involvement in these operations. Consequently,
the related operations are reported as discontinued operations and the related assets and
liabilities, which are held for sale, are presented as assets and liabilities of discontinued
operations in the consolidated balance sheets. The Company retains the hydraulic
fracturing simulation software FracProPT, the hydraulic fracturing design, engineering and
consulting business and Applied Geomechanics, Inc., a provider of tiltmeter technology for
geotechnical applications. Previously, the Pinnacle assets and operations were presented in the
Fracture and Reservoir Diagnostics segment, one of the Companys two reportable segments. Segment
information is no longer presented because the remaining operations, which were previously reported
in the Fracture and Reservoir Diagnostics segment, do not meet the criteria for a reportable
segment.
6
The detail of assets and liabilities of discontinued operations reported in the consolidated
balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Trade accounts and other receivables, net
|
|
$
|
23,178
|
|
|
$
|
17,597
|
|
Prepaid expenses and other current assets
|
|
|
280
|
|
|
|
342
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
827
|
|
|
|
827
|
|
Buildings
|
|
|
4,629
|
|
|
|
4,022
|
|
Machinery and equipment
|
|
|
29,651
|
|
|
|
28,964
|
|
Construction in progress
|
|
|
1,289
|
|
|
|
1,312
|
|
|
|
|
|
|
|
|
Total
|
|
|
36,396
|
|
|
|
35,125
|
|
Less accumulated depreciation
|
|
|
14,860
|
|
|
|
12,560
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
21,536
|
|
|
|
22,565
|
|
Goodwill
|
|
|
18,340
|
|
|
|
18,340
|
|
Intangible and other assets, net
|
|
|
7,649
|
|
|
|
7,347
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
70,983
|
|
|
$
|
66,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,424
|
|
|
$
|
3,611
|
|
Other accrued expenses
|
|
|
793
|
|
|
|
413
|
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
2,217
|
|
|
$
|
4,024
|
|
|
|
|
|
|
|
|
Revenues and income before income taxes from discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
17,337
|
|
|
$
|
10,475
|
|
|
$
|
42,603
|
|
|
$
|
27,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
$
|
5,012
|
|
|
$
|
1,950
|
|
|
$
|
10,105
|
|
|
$
|
4,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,265
|
|
|
$
|
2,548
|
|
Depreciation, amortization and other
|
|
|
3,931
|
|
|
|
3,669
|
|
Changes in operating assets and liabilities, net
|
|
|
(7,469
|
)
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,727
|
|
|
|
4,423
|
|
|
|
|
|
|
|
|
|
|
Investing activities: Capital expenditures, net
|
|
|
(3,321
|
)
|
|
|
(6,913
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities: Excess tax benefits from stock based compensation
|
|
|
381
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operations
|
|
$
|
(213
|
)
|
|
$
|
(2,464
|
)
|
|
|
|
|
|
|
|
7
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
15,312
|
|
|
$
|
12,854
|
|
|
$
|
39,916
|
|
|
$
|
37,695
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per shareWeighted-average shares
|
|
|
24,481,635
|
|
|
|
24,376,869
|
|
|
|
24,466,490
|
|
|
|
24,356,648
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
24,976
|
|
|
|
84,799
|
|
|
|
47,088
|
|
|
|
84,203
|
|
Nonvested and deferred stock awards
|
|
|
60,597
|
|
|
|
42,512
|
|
|
|
46,823
|
|
|
|
33,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
85,573
|
|
|
|
127,311
|
|
|
|
93,911
|
|
|
|
117,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per shareAdjusted weighted-average shares
|
|
|
24,567,208
|
|
|
|
24,504,180
|
|
|
|
24,560,401
|
|
|
|
24,474,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.62
|
|
|
$
|
0.53
|
|
|
$
|
1.63
|
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.62
|
|
|
$
|
0.52
|
|
|
$
|
1.62
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Common Stock Repurchase Program
On August 28, 2008 the Companys Board of Directors authorized the repurchase of up to two
million shares of the Companys common stock. Shares are effectively retired at the time of
purchase. As of September 30, 2008, the Company repurchased and retired 72,600 shares at an
aggregate price of $3,540.
5. Dividends Paid
On July 15, 2008, the Board of Directors declared a cash dividend of $0.17 per common
share payable to shareholders of record on July 31, 2008. The dividend was paid on August 15,
2008. On October 14, 2008, the Board of Directors declared a cash dividend of $0.17 per common
share payable to shareholders of record on October 31, 2008. The dividend is payable on November
14, 2008.
6. Comprehensive Income
The following table sets forth the components of comprehensive income for the three
and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
18,420
|
|
|
$
|
14,063
|
|
|
$
|
46,181
|
|
|
$
|
40,243
|
|
Foreign currency translation adjustment
|
|
|
(2,650
|
)
|
|
|
814
|
|
|
|
(832
|
)
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
15,770
|
|
|
$
|
14,877
|
|
|
$
|
45,349
|
|
|
$
|
41,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign currency translation adjustment for the three months ended September 30, 2008 and
2007 is net of deferred income tax (benefit) expense of $(1,427) and $438, respectively. For the
nine months ended September 30, 2008 and 2007, the foreign currency translation adjustment is net
of deferred income tax (benefit) expense of $(448) and $1,589, respectively.
7. Stock Based Compensation
The Company has three stock based compensation plans: a restricted stock plan and two
stock option plans. The restricted stock plan provides for granting shares of Common Stock in the
form of restricted stock awards to employees and non-employee directors of the Company. Under the
restricted stock plan, the Company may issue up to 375,000 shares, plus (i) the number of shares
that are forfeited, and (ii) the number of shares that are withheld from the participants to
satisfy minimum statutory tax withholding obligations. No more than 75,000 shares may be granted
to any single employee. One-third of the shares subject to award vest
8
(i.e., transfer and forfeiture restrictions on these shares are lifted) on each of the first
three anniversaries of the grant date. All unvested shares granted to an individual vest upon
retirement at or after the age of 62. The stock option plans provided for granting options to
purchase shares of the Companys Common Stock to employees and non-employee directors. Under the
terms of the stock option plans the Companys ability to issue grants of options has expired.
However, there are outstanding stock options that were previously granted under the stock option
plans. Under the stock option plans, the Company was permitted to grant options for up to
2,175,000 shares. The exercise price of each option generally was equal to the market price of the
Companys Common Stock on the date of grant. The maximum term of an option is ten years and
options generally become exercisable (i.e., vest) proportionately on each of the first four
anniversaries of the grant date. The Companys policy is to issue new shares upon exercise of
options. As of September 30, 2008, 136,090 shares were available for issuance under the restricted
stock plan and no options were available for issuance under the stock option plans.
The Company also has a Director Deferred Fee plan (the Plan) that permits non-employee
directors of the Company to elect once in December of each year to defer in the following calendar
year the receipt of cash compensation for service as a director, which would otherwise be payable
in that year, and to receive those fees in the form of the Companys Common Stock on a specified
later date that is on or after the directors retirement from the Board of Directors. The number
of shares reserved for an electing director is based on the fair market value of the Companys
Common Stock on the date immediately preceding the date those fees would have been paid absent the
deferral. As of September 30, 2008, 5,849 shares were reserved for future issuance in payment of
$273 deferred under the Plan by electing directors.
A summary of stock option activity and related information for the nine months ended September
30, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
Intrinsic
|
|
|
Options
|
|
Exercise Price
|
|
Value
|
Outstanding at January 1, 2008
|
|
|
171,075
|
|
|
$
|
22.43
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(112,012
|
)
|
|
$
|
21.52
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
|
59,063
|
|
|
$
|
24.15
|
|
|
$
|
1,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008
|
|
|
59,063
|
|
|
$
|
24.15
|
|
|
$
|
1,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, all compensation cost related to stock options granted under the
plan has been recognized. The weighted-average remaining contractual term of options outstanding
at September 30, 2008 was 3.8 years. The total intrinsic value of options exercised during the
nine months ended September 30, 2008 was $3,537.
A summary of restricted stock activity and related information for the nine months ended
September 30, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
Shares
|
|
Fair Value
|
Nonvested at January 1, 2008
|
|
|
99,721
|
|
|
$
|
45.10
|
|
Granted
|
|
|
58,595
|
|
|
$
|
37.07
|
|
Vested
|
|
|
(39,050
|
)
|
|
$
|
46.29
|
|
Forfeited
|
|
|
(1,412
|
)
|
|
$
|
45.15
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2008
|
|
|
117,854
|
|
|
$
|
40.72
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, there was $2,779 of total unrecognized compensation cost, net of
estimated forfeitures, related to restricted shares granted under the restricted stock plan. That
cost is expected to be recognized over a weighted-average period of 1.7 years. The total fair
value of shares vested during the nine months ended September 30, 2008 was $1,807.
9
The Company also has an International Long-Term Incentive Plan that provides for granting
units of stock appreciation rights (SARs) or phantom shares to key international employees. One
third of the units subject to award vest and cease to be forfeitable on each of the first three
anniversaries of the grant date. Participants awarded units of SARs have the right to receive an
amount, in cash, equal to the excess of fair market value of a share of Common Stock as of the
vesting date, or in some cases on an later exercise date chosen by the participant, over the
exercise price. Participants awarded units of phantom shares are entitled to a lump sum cash
payment equal to the fair market value of a share of Common Stock on the vesting date. In no event
will Common Stock of the Company be issued under the International Long-Term Incentive Plan. As of
September 30, 2008, there were 6,125 units of phantom shares granted under the plan, of which 225
have been forfeited and none have vested, with a total value of $304.
8. Foreign Currencies
As of September 30, 2008, the Companys net investment that is subject to foreign currency
fluctuations totaled $83,640 and the Company has recorded cumulative foreign currency translation
adjustments of $2,796, net of deferred income taxes. These currency translation adjustments are
included in Other Comprehensive Income. Also, the Companys subsidiary in Russia has borrowed
funds from another subsidiary of the Company to finance construction of a manufacturing plant in
Russia. This indebtedness, while eliminated in consolidation of the financial statements, is
subject to exchange rate fluctuations between the local reporting currency and the currency in
which the debt is denominated. Currency exchange rate fluctuations associated with this
indebtedness result in gains and losses that impact net income. The gains and losses are presented
in Other Income (Expense). During the third quarter of 2008, this indebtedness was significantly
reduced. Amounts outstanding under the loan totaled $4,595 as of September 30, 2008.
9. Income Taxes
During the third quarter of 2008, the Company determined that depletion deductions should be
claimed for the Companys kaolin mining activities, which supply its lightweight ceramic proppant
operations, and also completed and filed its prior year federal and state income tax returns. The mining depletion adjustment recorded during the quarter relates to
amounts claimed on the 2007 tax return filed during the quarter, additional amounts to be claimed
through the filing of an amended tax return for 2006 as well as deductions available to the Company
for mining activities conducted during the first and second quarters
of 2008. As the depletion deductions and other adjustments recognized
represent permanent differences, the Company reduced its year to date
income tax expense by $2,078, which represents $298 of 2008 estimated
tax and $1,780 related to tax return filings for 2007 and 2006.
10. New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (the FASB) issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value and requires enhanced disclosures about fair value measurements. Effective
January 1, 2008, the Company adopted SFAS 157. The adoption did not have a material impact on the
Companys financial position, results of operations or cash flows.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
(SFAS 159). SFAS 159 provides an option to report selected
financial assets and liabilities at fair value and establishes presentation and disclosure
requirements. The fair value option established by SFAS 159 permits the Company to elect to
measure eligible items at fair value on an instrument-by-instrument basis and then report
unrealized gains and losses for those items in the Companys earnings. Effective January 1, 2008,
the Company adopted SFAS 159. The Company elected to not account for any other assets or
liabilities at fair value and therefore the adoption did not have a material impact on the
Companys financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. 142-3,
Determination of the Useful Life of Intangible
Assets
. FSP No. 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142,
Goodwill and Other Intangible Assets
. FSP No. 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The Company is currently
evaluating FSP No. 142-3 and has not yet determined the impact of adoption.
10
In June 2008, the FASB issued FSP No. Emerging Issue Task Force (EITF) 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP
No. EITF 03-6-1 concluded that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities
and shall be included in the computation of basic earnings per share (EPS) pursuant to the
two-class method. This FSP becomes effective on April 1, 2009 and it will apply retrospectively to
EPS data for all periods presented in the financial statements or in financial data. The Company
does not currently anticipate that adoption will have a material impact on its earnings per share
data.
11. Legal Proceedings
The Company is subject to legal proceedings, claims and litigation arising in the
ordinary course of business. While the outcome of these matters is currently not determinable,
management does not expect that the ultimate cost to resolve these matters will have a material
adverse effect on the Companys consolidated financial position, results of operations, or cash
flows.
On January 26, 2007, following self-disclosure of certain air pollution emissions, the Company
received a Notice of Violation (NOV) from the State of Georgia Environmental Protection Division
(EPD) regarding appropriate permitting for emissions of two specific substances from its
Toomsboro facility. Pursuant to the NOV, the Company conducted performance testing of these
emissions and provided updated results in the course of additional dialogue with the relevant
government agencies, including discussions of emissions at the Companys nearby McIntyre, Georgia
manufacturing facility. Following these discussions, a second NOV was issued on May 22, 2007 for
the McIntyre plant for alleged violations similar to those in the January NOV related to the
Toomsboro facility. The Company submitted to the EPD a schedule of responsive activities in
mid-June 2007, submitted additional information to the EPD during the second quarter of 2008 and
continues to respond to EPD inquiries. The EPD has not yet issued a response regarding required
remedial actions or fines, if any, resulting from the NOVs and as such the Company does not at this
time have an estimate of costs associated with compliance.
12. Subsequent Events
On October 10, 2008, the Company awarded 15,400 shares of restricted stock to certain
employees. The fair value of the stock award on the date of grant totaled $590, which will be
expensed net of estimated forfeitures over the three year vesting period.
As part of the Board of Directors authorization for the repurchase of up to two million
shares of the Companys Common Stock, the Company repurchased an additional 167,400 shares
subsequent to September 30, 2008. As of November 5, 2008, the Company repurchased a total of
240,000 shares at an aggregate price of $11,092.
11
ITEM
2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business
The Company manufactures ceramic proppant and provides services and software that are used in the
hydraulic fracturing of natural gas and oil wells.
On August 28, 2008, the Company entered into a definitive agreement to sell a substantial portion of the assets
of its wholly-owned subsidiary, Pinnacle Technologies, Inc. (Pinnacle) to Halliburton Energy
Services, Inc. (Halliburton). The sale, which includes all of the fracture and reservoir
diagnostic business, the Pinnacle name and related trademarks, was completed on October 10, 2008,
for $143.7 million cash, including $6.7 million for preliminary working capital adjustments. The
final purchase price is subject to post-closing working capital adjustments. The group of assets
sold meets the definition of a
component of an entity
as defined by the Financial Accounting
Standards Boards SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (as
amended).
The Company has no continuing involvement in these operations. Consequently, the
related operations are reported as discontinued operations and the related assets and liabilities,
which are held for sale, are presented as assets and liabilities of discontinued operations in the
consolidated balance sheets. The Company retains the hydraulic fracturing
simulation software FracProPT, the hydraulic fracturing design, engineering and consulting business
and Applied Geomechanics, Inc., a provider of tiltmeter technology for geotechnical applications.
Prior to the sale, the Pinnacle assets and operations were reported in the Fracture and Reservoir
Diagnostics segment, one of the Companys two reportable segments. Segment information is no
longer presented because the remaining businesses, which were previously reported in the Fracture
and Reservoir Diagnostics segment, do not meet the criteria for a reportable segment.
Also, on August 28, 2008, the Companys Board of Directors authorized the repurchase of up to two
million shares of the Companys common stock. As of September 30, 2008, the Company repurchased
and retired 72,600 shares at an aggregate price of $3.5 million.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require the Company to make estimates and
assumptions (see Note 1 to the consolidated financial statements included in the Companys annual
report on Form 10-K for the year ended December 31, 2007). The Company believes that some of its
accounting policies involve a higher degree of judgment and complexity than others. Critical
accounting policies for the Company include revenue recognition, estimating the recoverability of
accounts receivable, inventory valuation, accounting for income taxes, accounting for long-lived
assets and accounting for legal contingencies. Critical accounting policies are discussed more
fully in the Companys annual report on Form 10-K for the year ended December 31, 2007. During the
second quarter of 2008, the Company changed its method of accounting for inventories from the
first-in, first-out (FIFO) method to the weighted average cost method. There has been no change in
the Companys evaluation of its other critical accounting policies since the preparation of that
report.
Results of Operations
Three Months Ended September 30, 2008
Revenues.
Revenues of $102.6 million for the quarter ended September 30, 2008 increased 38%
compared to $74.3 million in revenues for the quarter ended September 30, 2007. Revenues increased
primarily due to a 35% increase in proppant sales volume and a 2% increase in the average selling
price of proppant sold. Worldwide proppant sales totaled 306 million pounds for the third quarter
of 2008 compared to 226 million pounds for the third quarter of 2007. North American sales volume
increased 47% due primarily to increased U.S. sales volume driven by sales of CARBO
HYDROPROP
, a
ceramic proppant introduced in early 2008 to be cost competitive with resin-coated sand, and
increased demand for most of the Companys other products in key U.S. markets. Sales volume in
Canada and Mexico increased 37% and 16%, respectively. These increases were partially offset by
the impact of overseas sales which declined 6% compared to last years third quarter. The average
selling price of proppant in the third quarter of 2008 was $0.324 per pound compared to the third
12
quarter 2007 average selling price of $0.318 per pound.
Gross Profit
.
Gross profit for the third quarter of 2008 was $32.1 million, or 31% of revenues,
compared to $25.1 million, or 34% of revenues, for the third quarter of 2007. Gross profit for the
third quarter of 2008 increased by 28% compared to last years third quarter as a result of
increased revenues. Despite the revenue and gross profit growth, gross profit as a percentage of
revenues declined primarily due to increased sales of lower-margin CARBO
HYDROPROP
TM
, higher
manufacturing costs in the Companys U.S. plants primarily resulting from increases in the cost of
natural gas and raw materials consumed in the production of bauxite-based products, and increased
freight to transport product to customer locations.
Selling, General and Administrative (SG&A) and Other Operating Expenses.
Expenses consisted of
$10.2 million of SG&A expenses and $1.4 million of other operating expenses for the third quarter
of 2008 compared to $7.6 million of SG&A expenses and $0.2 million of other operating expenses for
the corresponding period in 2007. As a percentage of revenues, SG&A expenses decreased to 9.9%
compared to 10.2% for the third quarter of 2007. Increases in SG&A expenses related to marketing,
engineering and information technology activities. Other operating expenses of $1.4 million in the
third quarter of 2008 mainly resulted from write-off of a prepayment for the purchase of
ceramic proppant from a China proppant manufacturer while other operating expenses of $0.2 million
in the third quarter of 2007 mainly consisted of startup costs for the Companys new manufacturing
facility in Russia.
Other Income (Expense).
Other income of $1.6 million for the quarter ended September 30, 2007
declined $2.0 million to a net expense of $0.4 million in the same period in 2008 due primarily to
exchange rate fluctuations between the local reporting currency and the currency in which certain
liabilities of the Companys subsidiary in Russia are denominated.
Income Tax Expense
. Income tax expense was $4.8 million, or 23.8% of pretax income, for the third
quarter of 2008 compared to $6.1 million, or 32.3% of pretax income, for the same period last year.
During the third quarter of 2008, the Company determined that depletion deductions should be
claimed for the Companys kaolin mining activities, which supply its lightweight ceramic proppant
operations, and also completed and filed its prior year federal and state income tax returns. The mining depletion adjustment recorded during the
quarter relates to amounts claimed on the 2007 tax return filed during the quarter, additional
amounts to be claimed through the filing of an amended tax return for 2006 as well as deductions
available to the Company for mining activities conducted during the first and second quarters of
2008.As the depletion deductions and other adjustments recognized represent permanent differences, the Company reduced its year to date income tax expense by $2.1 million, which represents $0.3 million of 2008 estimated tax ad $1.8 million related to tax return filings for 2007 and 2006.
Income from Discontinued Operations, Net of Income Taxes
. Income from discontinued operations of $3.1 million increased 157% compared to $1.2 million for the same period last
year. The $1.9 million increase is mainly attributed to a $4.2 million increase in gross profit
offset by increases in selling, general, and administrative expenses and income taxes of $1.1
million and $1.2 million, respectively. The increase in gross profit was attributed to an increase
of $6.8 million in sales offset by an increase in cost of sales of $2.6 million.
Nine Months Ended September 30, 2008
Revenues
. Revenues of $282.2 million for the nine months ended September 30, 2008 exceeded
revenues of $219.0 million for the same period in 2007 by 29%. Revenues increased primarily due to
a 31% increase in sales volume partially offset by a 3% decrease in the average selling price.
Worldwide proppant sales totaled 869 million pounds in the first nine months of 2008 compared to
661 million pounds for the same period in 2007. North American sales volume increased 35% over
last year, driven by the continued strength in the U.S. market resulting from the introduction of
CARBO
HYDROPROP
TM
in early 2008 as well as increased demand for most of the Companys other
products. Overseas sales volume increased 18% led by an increase in Russia, which is due to the
start-up of a manufacturing plant in that market during the second quarter of 2007. The average
selling price per pound of ceramic proppant in the first nine months of 2008 was $0.313 versus
$0.322 for the same period last year. The lower average selling price was due to increased sales
of CARBO
HYDROPROP
TM
, increased sales in Russia where the average selling price is lower than North
America and a change in the mix of other products sold.
13
Gross Profit.
Gross profit for the nine months ended September 30, 2008 was $85.6 million, or 30%
of revenues, compared to $76.4 million, or 35% of revenues, for the same period in 2007. The
increase in gross profit was the result of increased revenues. Despite the revenue and gross
profit growth, gross profit as a percentage of revenues declined primarily as a result of
lower-margin sales in Russia, increased sales of lower-margin CARBO
HYDROPROP
, higher
manufacturing costs in the Companys U.S. plants primarily resulting from increases in the cost of
natural gas and raw materials, and increased freight to transport product to customer locations.
Selling, General and Administrative (SG&A) and Other Operating Expenses.
Expenses consisted of
$27.5 million of SG&A expenses and $1.8 million of other operating expenses for the nine months
ended September 30, 2008 compared to $21.5 million and $1.2 million, respectively, for the nine
months ended September 30, 2007. As a percentage of revenues, SG&A expenses were 9.7% in 2008
compared to 9.8% in 2007. SG&A expenses increased primarily because of global marketing activity
and administrative expenses supporting revenue growth. Other operating expenses of $1.8 million for
the nine months ended September 30, 2008 consisted of a $1.4 million write-off of a 2005
prepayment for the purchase of ceramic proppant from a Chinese proppant manufacturer, $0.2 million
relating to start-up costs for the second production line at the Companys Toomsboro, Georgia
facility, and a $0.2 million loss related to equipment disposals. Other operating expenses of $1.2
million for the nine months ended September 30, 2007 consisted primarily of start-up costs
associated with the Companys new manufacturing facility in Russia.
Other Income (Expense).
Other income of $1.3 million for the nine months ended September 30, 2008
declined $1.4 million from $2.7 million in the same period in 2007 due primarily to exchange rate
fluctuations between the local reporting currency and the currency in which certain liabilities of
the Companys subsidiary in Russia are denominated.
Income Tax Expense
. Income tax expense was $17.6 million, or 30.7% of pretax income, for the nine
months ended September 30, 2008 compared to $18.7 million, or 33.2% of pretax income for the same
period last year. The decrease in the effective tax rate is due to the final preparation and
filing of the Companys tax returns and additional tax benefits associated with the depletion of
ore minerals owned by the Company. The 2007 effective tax rate also included a reduction of
deferred state taxes resulting from tax law changes in certain states.
Income from Discontinued Operations, Net of Income Taxes
. Income from discontinued operations of $6.2 million increased 146% compared to $2.5 million for the same period last
year. The growth of $3.7 million is mainly attributed to an $8.1 million increase in gross profit
offset by increases in selling, general, and administrative expenses and income taxes of $2.1
million and $2.3 million, respectively. The increase in gross profit was attributed to an increase
of $14.9 million in sales offset by an increase in cost of sales of $6.8 million.
Liquidity and Capital Resources
At September 30, 2008, the Company had cash and cash equivalents of $31.9 million compared to cash
and cash equivalents of $12.3 million at December 31, 2007. For the nine months ended September
30, 2008, the Company generated $45.2 million in cash from operating activities of continuing
operations, received $2.3 million in net proceeds from employee exercises of stock options and
retained $0.4 million in cash from excess tax benefits relating to stock based compensation to
employees. Use of cash included $12.4 million of capital spending, $1.0 million to acquire a 6%
ownership in another company, $3.6 million to repurchase and retire shares of the Companys Common
Stock, $11.1 million of cash dividends and $0.2 million from activities of discontinued operations.
In addition, during the nine months ended September 30, 2008, the Company borrowed and
fully-repaid a total of $6.5 million on its credit facility.
The Company believes its 2008 results will continue to be influenced by the level of natural gas
drilling in North America. The lack of credit availability and a slowing global economy raise
concerns about the level of drilling activity for the remainder of 2008 and 2009. However, the
Company believes that any downturn in drilling will be relatively short due to the steep decline
curves in reservoirs currently producing the bulk of U.S. natural gas.
14
The Company believes the introduction of its new CARBO
HYDROPROP
product has helped penetrate the
market for sand-based proppant resulting in growth in North America. As a result, the Company has
nearly reached full capacity utilization at its U.S.-based manufacturing facilities and expects to
invest additional capital to expand production capacity. The Company recently announced plans to
construct a third production line at its Toomsboro, Georgia manufacturing facility that is expected
to add 250 million pounds of capacity in the first half of 2010 at a total cost of approximately
$70 million. Until construction of additional capacity is completed, North American sales volumes
may be limited by production capacities.
On August 28, 2008, in connection with the announcement to sell certain assets of Pinnacle, the
Companys Board of Directors authorized the repurchase of up to two million shares of its Common
Stock. As of September 30, 2008, the Company repurchased 72,600 shares at an aggregate price of
$3.5 million.
Subject to its financial condition, the amount of funds generated from operations and the level of
capital expenditures, the Companys current intention is to continue to pay quarterly dividends to
holders of its Common Stock. On October 14, 2008, the Companys Board of Directors approved the
payment of a quarterly cash dividend of $0.17 per share to shareholders of the Companys Common
Stock on October 31, 2008. The Company estimates its total capital expenditures for the fourth
quarter of 2008 will be between $10 million and $15 million.
The Company maintains an unsecured line of credit of $10.0 million. As of September 30, 2008,
there was no outstanding debt under the credit agreement.
On October 10, 2008, the Company completed the sale of a substantial portion of the assets of
Pinnacle for $143.7 million in cash, including estimated working capital adjustments that are
subject to post-closing adjustment. The Company anticipates that cash collected from the sale of
Pinnacles assets, cash on hand, cash provided by ongoing operating activities and funds available
under its line of credit will be sufficient to meet planned operating expenses, tax obligations and
capital expenditures for the next 12 months. The Company also believes that it could acquire
additional debt financing, if needed.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of September 30, 2008.
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 managements current expectations and estimates, which involve risks and
uncertainties that could cause actual results to differ materially from those expressed in the
forward-looking statements. Among these factors are:
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changes in overall economic conditions,
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changes in the cost of raw materials and natural gas used in manufacturing our
products,
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changes in demand for our products,
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changes in the demand for, or price of, oil and natural gas,
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risks of increased competition,
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technological, manufacturing and product development risks,
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loss of key customers,
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changes in foreign and domestic government regulations,
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changes in foreign and domestic political and legislative risks,
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the risks of war and international and domestic terrorism,
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risks associated with foreign operations and foreign currency exchange rates and
controls, and
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weather-related risks and other risks and uncertainties.
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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 Form 10-K for the fiscal year ended December 31, 2007 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.
15
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys major market risk exposure is to foreign currency fluctuations that could impact
its investments in China and Russia. As of September 30, 2008, the Companys net investment that
is subject to foreign currency fluctuations totals $83.6 million and the Company has recorded
cumulative foreign currency translation adjustments of $2.8 million, net of deferred income taxes.
These currency translation adjustments are included in Other Comprehensive Income. Also, the
Companys subsidiary in Russia has borrowed funds from another subsidiary of the Company to finance
construction of a manufacturing plant in Russia. This indebtedness, while eliminated in
consolidation of the financial statements, is subject to exchange rate fluctuations between the
local reporting currency and the currency in which the debt is denominated. Currency exchange rate
fluctuations associated with this indebtedness result in gains and losses that impact net income.
During the third quarter of 2008, this indebtedness was significantly reduced. Amounts outstanding
under the loan totaled $4.6 million as of September 30, 2008. When necessary, the Company may
enter into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations.
There were no such foreign exchange contracts outstanding at September 30, 2008.
ITEM 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed
in the reports filed or submitted under the Securities Exchange Act of 1934 (the Exchange Act) is
recorded, processed, summarized and reported, within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in the reports filed under the
Exchange Act is accumulated and communicated to management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
As of September 30, 2008, management carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon and as of the date of that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls
and procedures were effective to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms, and to ensure that
information required to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
(b) Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the quarter
ended September 30, 2008 that materially affected, or are reasonably likely to materially affect,
those controls.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about the Companys repurchases of Common Stock during the
quarter ended September 30, 2008:
ISSUER PURCHASES OF EQUITY SECURITIES
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Maximum
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Total Number of
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Number of
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Shares Purchased
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Shares that May
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Total Number
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Average
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as Part of Publicly
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Yet be Purchased
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of Shares
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Price Paid
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Announced
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Under the
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Period
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Purchased
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per Share(1)
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Plan(2)(3)
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Plan(4)
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07/01/08 to 07/31/08
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0
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$
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0
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0
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08/01/08 to 08/31/08
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0
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$
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0
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0
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09/01/08 to 09/30/08
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72,600
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$
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48.76
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72,600
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1,927,400
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Total
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72,600
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72,600
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1,927,400
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(1)
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Average price paid excludes commissions
.
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(2)
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On August 28, 2008, the Company announced the authorization by its Board of Directors
for the repurchase of up to two million shares of its Common Stock.
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(3)
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Repurchases were made under a Written Plan for the Repurchase of Securities with an
agent that complies with the requirements of Rule 10b5-1 of the Securities Exchange Act
(the 10b5-1 Agreement). The agent repurchased a number of shares of our common stock
determined under the terms of the 10b5-1 Agreement each trading day based on the trading
price of the stock on that day. Shares were repurchased by the agent at the prevailing
market prices, in open market transactions which complied with Rule 10b-18 of the Exchange
Act.
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(4)
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Represents maximum number of shares that may be repurchased under the previously
announced authorization as of September 30, 2008. As of November 5, 2008, a maximum of
1,760,000 shares may be repurchased under the previously announced authorization.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Amendment of Director Deferred Fee Plan
On October 31, 2008, the Companys Director Deferred Fee Plan (the Plan) was amended. The
amendment modifies the Plan to state that upon any termination of the Plan, Plan benefits will be
paid in accordance with the payment terms that would otherwise be applicable had the termination
not occurred. The Company adopted the amendment in order to comply with the provisions of Section
409A of the Internal Revenue Code of 1986, as amended, and associated regulations (collectively,
Section 409A). The foregoing summary does not
17
purport to be complete and is qualified in its entirety by reference to the amendment, which is
included as Exhibit 10.1 hereto.
Amendment to Kolstad Employment Agreement
On October 31, 2008, the Company entered into an Amended and Restated Employment Agreement (the
Amended Agreement) with Gary Kolstad, the Companys President and Chief Executive Officer. Under
the Amended Agreement, the timing of the payment of severance obligations to Mr. Kolstad 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. In addition, the Amended Agreement provides the Company with the
right to receive notice and an opportunity to cure any event that could be asserted as Good Reason
for resignation after a Change in Control (both as defined in the Amended Agreement). The Company
entered into the Amended Agreement with Mr. Kolstad in order to comply with the provisions of
Section 409A. The foregoing summary does not purport to be complete and is qualified in its
entirety by reference to the Amended Agreement, which is included as Exhibit 10.2 hereto.
Second Amended and Restated Bylaws
The Company adopted Second Amended and Restated Bylaws effective as of October 31, 2008 (the
Amended Bylaws). The Amended Bylaws add provisions that require the Company to receive advance
notice of any item of business that is to be brought before an annual or special meeting of the
shareholders of the Company. Further, the Amended Bylaws specify certain procedural conditions
that must be satisfied in order for shareholders to take action by written consent. Finally, the
Amended Bylaws state the size of the Board of the Directors (the Board) will be specified by
resolution of the Board from time to time, as opposed fixed in the Companys bylaws. The
foregoing summary does not purport to be complete and is qualified in its entirety by reference to
the Amended Bylaws, which are included as Exhibit 3.1 hereto.
ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, this
Quarterly Report on Form 10-Q:
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3.1
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Second Amended and Restated Bylaws of CARBO Ceramics Inc.
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10.1
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Amendment No. 1 to CARBO Ceramics Inc. Director Deferred Fee Plan.
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10.2
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Amended and Restated Employment Agreement, dated as of October 31, 2008, between
CARBO Ceramics Inc. and Gary Kolstad.
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10.3
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Proppant Supply Agreement, dated August 28, 2008, by and between CARBO
Ceramics Inc. and Halliburton Energy Services, Inc. (Confidential treatment has been
requested for certain confidential portions of this exhibit pursuant to Rule 24b-2
under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these
confidential portions have been omitted from this exhibit and filed separately with
the Securities and Exchange Commission).
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31.1
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Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification by Paul G. Vitek.
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32
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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CARBO CERAMICS INC.
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/s/ Gary A. Kolstad
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Gary A. Kolstad
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President and Chief Executive Officer
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/s/ Paul G. Vitek
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Paul G. Vitek
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Sr. Vice President, Finance and
Chief Financial Officer
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Date: November 6, 2008
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EXHIBIT INDEX
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EXHIBIT
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DESCRIPTION
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3.1
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Second Amended and Restated Bylaws of CARBO Ceramics Inc.
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10.1
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Amendment No. 1 to CARBO Ceramics Inc. Director Deferred Fee Plan.
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10.2
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Amended and Restated Employment Agreement, dated as of October 31, 2008, between CARBO Ceramics Inc. and Gary Kolstad.
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10.3
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Proppant Supply Agreement, dated August 28, 2008, by and between CARBO Ceramics Inc. and
Halliburton Energy Services, Inc. (Confidential treatment has been requested for certain
confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from
this exhibit and filed separately with the Securities and Exchange Commission).
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31.1
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Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification by Paul G. Vitek.
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32
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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20
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