UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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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
incorporation or organization)
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72-1100013
(I.R.S. Employer
Identification Number)
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6565
MacArthur Boulevard
Suite 1050
Irving, Texas 75039
(Address
of principal executive offices)
(972) 401-0090
(Registrants
telephone number)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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New York Stock Exchange
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Preferred Stock Purchase Rights
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
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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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
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. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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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
Act) Yes
o
No
þ
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the closing sale
price of the Common Stock on June 30, 2008, as reported on
the New York Stock Exchange, was approximately $856,257,000.
Shares of Common Stock held by each executive officer and
director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
As of February 24, 2009, the Registrant had
23,648,668 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrants Annual
Meeting of Shareholders to be held May 19, 2009, are
incorporated by reference in Part III.
PART I
General
CARBO Ceramics Inc. (the Company) is the
worlds largest supplier of ceramic proppant, the provider
of the worlds most popular fracture simulation software,
and a leading provider of fracture design, engineering and
consulting services. On October 10, 2008, the Company
completed the sale of its fracture and reservoir diagnostics
business to Halliburton Energy Services, Inc. Because of the
transaction, the results of this business have been accounted
for as discontinued operations. Continuing operations include
the Companys ceramic proppant, software, consulting
services and geotechnical monitoring businesses. The Company
sells the majority of its products and services to operators of
oil and natural gas wells and to oilfield service companies to
help increase the production rates and the amount of oil and
natural gas ultimately recoverable from these wells. The
Companys products and services are primarily used in the
hydraulic fracturing of natural gas and oil wells. The Company
was incorporated in 1987 in Delaware.
Hydraulic fracturing is the most widely used method of
increasing production from oil and natural gas wells. The
hydraulic fracturing process consists of pumping fluids down a
natural gas or oil well at pressures sufficient to create
fractures in the hydrocarbon-bearing rock formation. A granular
material, called proppant, is suspended and transported in the
fluid and fills the fracture, propping it open once
high-pressure pumping stops. The proppant-filled fracture
creates a permeable channel through which the hydrocarbons can
flow more freely from the formation to the well and then to the
surface.
There are three primary types of proppant that can be utilized
in the hydraulic fracturing process: sand, resin-coated sand and
ceramic. Sand is the least expensive proppant, resin-coated sand
is more expensive and ceramic proppant is typically the most
expensive. The higher initial cost of ceramic proppant is
justified by the fact that the use of these proppants in certain
well conditions results in an increase in the production rate of
oil and natural gas, an increase in the total oil or natural gas
that can be recovered from the well and, consequently, an
increase in cash flow for the operators of the well. The
increased production rates are primarily attributable to the
higher strength and more uniform size and shape of ceramic
proppant versus alternative materials.
The Company primarily manufactures five distinct ceramic
proppants. The Company has historically pursued a strategy of
introducing new products that expand the market for ceramic
proppants relative to sand-based proppants.
CARBO
HSP
®
and
CARBO
PROP
®
are premium priced, high strength proppants designed primarily
for use in deep gas wells.
CARBO
HSP
®
has the highest strength of any of the ceramic proppants
manufactured by the Company and is used primarily in the
fracturing of deep gas wells.
CARBO
PROP
®
is slightly lower in weight and strength than
CARBO
HSP
®
and was developed for use in deep gas wells that do not require
the strength of
CARBO
HSP
®
.
CARBO
LITE
®
and
CARBO
ECONOPROP
®
are lightweight ceramic proppants designed for use in natural
gas wells of moderate depth and oil wells.
CARBO
LITE
®
is used in medium depth oil and gas wells, where the additional
strength of ceramic proppant may not be essential, but where
higher production rates can be achieved due to the
products uniform size and spherical shape.
CARBO
LITE
®
is most commonly used in oil wells.
CARBO
ECONOPROP
®
,
introduced in 1992 to compete directly with sand-based proppant,
and
CARBO
HYDROPROP
tm
,
introduced in late 2007 to improve performance in
slickwater fracture treatments, are the
Companys lowest priced products.
During the year ended December 31, 2008, the Company
generated approximately 71% of its revenues in the United States
and 29% in international markets.
The Company also sells fracture simulation software and provides
fracture design, engineering and consulting services to oil and
natural gas companies worldwide. The Company provides a suite of
stimulation software solutions to the industry that have marked
capabilities for
on-site
real-time analysis. This has enabled recognition and remediation
of potential stimulation problems. This stimulation software is
tightly integrated with reservoir simulators, thus allowing for
stimulation treatment and production optimization. The
Companys specialized engineering team consults and works
with operators around the world to help optimize well placement,
fracture
1
treatment design and production stimulation. The broad range of
expertise of the Companys consultants includes: fracture
treatment design; completion engineering support;
on-site
treatment supervision, engineering and quality control;
post-treatment evaluation and optimization; reservoir and
fracture engineering studies; rock mechanics and software
application and training.
Demand for the Companys products and services depends
primarily upon the demand for natural gas and oil and on the
number of natural gas and oil wells drilled, completed or
re-completed worldwide. More specifically, the demand for the
Companys products and services is dependent on the number
of oil and natural gas wells that are hydraulically fractured to
stimulate production.
The Company also provides a broad range of technologies for
geotechnical monitoring through its wholly owned subsidiary
Applied Geomechanics, Inc. (AGI). AGI provides
monitoring systems and services for bridges, buildings, tunnels,
dams, slopes, embankments, volcanoes, landslides, mines and
construction projects around the world. It serves a wide
spectrum of customers in markets ranging from auto racing teams
to surveyors, experimental physicists, radio astronomers and
naval architects.
Competition
The Companys largest worldwide proppant competitor is
Saint-Gobain Proppants (Saint-Gobain). Saint-Gobain
Proppants is a division of Compagnie de Saint-Gobain, a large
French glass and materials company. Saint-Gobain manufactures a
variety of high-strength and intermediate strength ceramic
proppants that it markets in competition with each of the
Companys products. Saint-Gobains primary
manufacturing facility is located in Fort Smith, Arkansas.
Saint-Gobain also manufactures ceramic proppant in China and
Venezuela. Mineracao Curimbaba (Curimbaba), based in
Brazil, manufactures high-strength and intermediate strength
ceramic proppants that it markets in competition with each of
the Companys products.
There are two major manufacturers of ceramic proppant in Russia.
Borovichi Refractory Plant (Borovichi) located in
Borovichi, Russia, and FORES Refractory Plant
(FORES) located in Ekaterinburg, Russia. While the
Company has limited information about Borovichi and FORES, the
Company believes that each of these companies primarily
manufactures intermediate strength ceramic proppants and markets
their products principally within Russia. The Company also
believes that these companies have added manufacturing capacity
in recent years and now provide a majority of the ceramic
proppant used in Russia. The Company is also aware of an
increasing number of manufacturers in China. Two of the largest
are Yixing Orient Petroleum Proppant Company, Ltd. and GuiZhou
LinHai New Material Company, Ltd. Each of these companies
produces intermediate strength ceramic proppants that are
marketed primarily in China.
Competition for
CARBO
HSP
®
and
CARBO
PROP
®
principally includes ceramic proppant manufactured by
Saint-Gobain and Curimbaba. The Companys
CARBO
LITE
®
,
CARBO
ECONOPROP
®
and CARBO
HYDROPROP
TM products compete primarily with
ceramic proppant produced by Saint-Gobain and Curimbaba and with
sand-based proppant for use in the hydraulic fracturing of
medium depth natural gas and oil wells. The leading suppliers of
mined sand are Unimin Corp., Badger Mining Corp., Fairmount
Minerals Limited, Inc., and Ogelbay-Norton Company. The leading
suppliers of resin-coated sand are Hexion Specialty Chemicals,
Inc. and Santrol, a subsidiary of Fairmount Minerals.
The Company believes that the most significant factors that
influence a customers decision to purchase the
Companys ceramic proppant are (i) price/performance
ratio, (ii) on-time delivery performance,
(iii) technical support and (iv) proppant
availability. The Company believes that its products are
competitively priced and that its delivery performance is
excellent. The Company also believes that its superior technical
support has enabled it to persuade customers to use ceramic
proppant in an increasingly broad range of applications and thus
increased the overall market for the Companys products.
Since 1993, the Company has consistently expanded its
manufacturing capacity and plans to continue its strategy of
adding capacity, as needed, to meet anticipated future increases
in sales demand. Over the last four years, the Company has
expanded its proppant manufacturing capacity by approximately
70%.
The Company continually conducts testing and development
activities with respect to alternative raw materials to be used
in the Companys existing and alternative production
methods. The Company is actively involved in the
2
development of alternative products for use as proppant in the
hydraulic fracturing process and is aware of others engaged in
similar development activities. The Company believes that while
there are potential specialty applications for these products,
they will not significantly impact the use of ceramic proppants.
The Company believes that, although patent rights held by the
Company and certain of its competitors are barriers to entry,
the know-how and trade secrets necessary to
efficiently manufacture a product of consistently high quality
may ultimately prove a more difficult barrier to overcome.
Customers
and Marketing
The Companys largest customers are, in alphabetical order,
BJ Services Company, Halliburton Energy Services, Inc. and
Schlumberger Limited, three of the largest participants in the
worldwide petroleum pressure pumping industry. These companies
collectively accounted for approximately 72% and 70% of the
Companys 2008 and 2007 revenues, respectively. However,
the end users of the Companys products are the operators
of natural gas and oil wells that hire the pressure pumping
service companies to hydraulically fracture wells. The Company
works both with the pressure pumping service companies and
directly with the operators of natural gas and oil wells to
present the technical and economic advantages of using ceramic
proppant. The Company generally supplies its customers with
products on a
just-in-time
basis, as specified in individual purchase orders. Continuing
sales of product depend on the Companys direct customers
and the well operators being satisfied with product quality,
availability and delivery performance. The Company provides its
software simulation products and consulting services directly to
owners
and/or
operators of oil and gas wells.
The Company recognizes the importance of a technical marketing
program in demonstrating long-term economic advantages when
selling products and services that offer financial benefits over
time. The Company has a broad technical sales force to advise
end users on the benefits of using ceramic proppant and
performing fracture simulation and consultation services.
While the Companys products have historically been used in
deep wells that require high-strength proppant, the Company
believes that there is economic benefit to well operators of
using ceramic proppant in shallower wells that do not
necessarily require a high-strength proppant. The Company
believes that its new product introductions and education-based
technical marketing efforts have allowed it to capture a greater
portion of the market for sand-based proppant in recent years
and will continue to do so in the future.
The Company provides a variety of technical support services and
has developed computer software that models the return on
investment achievable by using the Companys ceramic
proppant versus alternatives in the hydraulic fracturing of a
natural gas or oil well. In addition to the increased technical
marketing effort, the Company from time to time engages in
large-scale field trials to demonstrate the economic benefits of
its products and validate the findings of its computer
simulations. Periodically, the Company provides proppant to
production companies for field trials, on a discounted basis, in
exchange for a production companys agreement to provide
production data for direct comparison of the results of
fracturing with ceramic proppant as compared to alternative
proppants.
The Companys international marketing efforts are conducted
primarily through its sales offices in Aberdeen, Scotland;
Beijing, China and Moscow, Russia, and through commissioned
sales agents located in South America and China. The
Companys products and services are used worldwide by
U.S. customers operating domestically and abroad, and by
foreign customers. Sales outside the United States accounted for
29%, 36% and 36% of the Companys sales for 2008, 2007 and
2006, respectively. The decrease in the proportion of
international sales in 2008 was primarily attributable to
undersupplying certain international markets in order to keep up
with demand for the
3
Companys products in the U.S. The distribution of the
Companys international and domestic revenues is shown
below, based upon the region in which the customer used the
products and services:
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For the Years Ended December 31,
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2008
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2007
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2006
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($ in millions)
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Location
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United States
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$
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273.8
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$
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191.6
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$
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181.9
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International
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114.0
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108.4
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101.9
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Total
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$
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387.8
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$
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300.0
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$
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283.8
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Production
Capacity
The Company believes that constructing adequate capacity ahead
of demand while incorporating new technology to reduce
manufacturing costs are important competitive strategies to
increase its overall share of the market for proppant.
In early 2006, the Company completed construction of a
manufacturing facility in Toomsboro, Georgia. A second
production line at this facility was completed in the fourth
quarter of 2007 and commenced operations in January 2008. The
plant is designed to accommodate future expansion to a capacity
of up to one billion pounds per year through the construction of
two additional production lines. The addition of subsequent
lines will be dependent on the expected future demand for the
Companys products. The Company is currently working on the
construction of a third production line, with a production
capacity of 250 million pounds per year, in Toomsboro and
anticipates that it will be completed during the first half of
2010.
In the fourth quarter of 2007, the Company announced its plan to
idle production at its New Iberia facility originally
constructed in 1978. The Companys decision to idle
production at this facility was based on the rising cost of
imported raw material and the small scale of the New Iberia
facility. During the fourth quarter of 2008, the Company
re-started the New Iberia manufacturing facility due to
increased demand for certain specialty products that could be
produced at this location with minimal engineering modifications
to the facility.
The following table sets forth the current capacity of each of
the Companys existing manufacturing facilities:
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Annual
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Location
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Capacity
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(Millions of pounds)
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New Iberia, Louisiana
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50
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Eufaula, Alabama
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260
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McIntyre, Georgia
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275
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Toomsboro, Georgia
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500
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Luoyang, China
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100
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Kopeysk, Russia
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100
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Total current capacity
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1,285
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The Company generally supplies its domestic pumping service
customers with products on a
just-in-time
basis and operates without any material backlog.
4
Long-Lived
Assets By Geographic Area
Long-lived assets, consisting of net property, plant and
equipment, goodwill and intangibles, as of December 31 in the
United States and other countries are as follows:
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2008
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2007
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2006
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($ in millions)
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Long-lived assets:
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United States
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$
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196.0
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$
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195.2
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$
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160.8
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International (primarily China and Russia)
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55.1
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64.4
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58.1
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Total
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$
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251.1
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$
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259.6
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$
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218.9
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Distribution
The Company maintains finished goods inventories at each of its
manufacturing facilities and at remote stocking facilities. The
North American remote stocking facilities consist of bulk
storage silos with truck trailer loading facilities as well as
rail yards for direct transloading from rail car to tank trucks.
International remote stocking sites are duty-free warehouses
operated by independent owners. North American sites are
typically supplied by rail, and international sites are
typically supplied by container ship. In total, the Company
leases 775 rail cars for use in the distribution of its
products. The price of the Companys products sold for
delivery in the lower 48 United States and Canada includes
just-in-time
delivery of proppant to the operators well site, which
eliminates the need for customers to maintain an inventory of
ceramic proppant.
Raw
Materials
Ceramic proppant is made from alumina-bearing ores (commonly
referred to as clay, bauxite, bauxitic clay or kaolin, depending
on the alumina content) that are readily available on the world
market. Bauxite is largely used in the production of aluminum
metal, refractory material and abrasives. The main known
deposits of alumina-bearing ores in the United States are in
Arkansas, Alabama and Georgia; other economically mineable known
deposits are located in Australia, Brazil, China, Gabon, Guyana,
India, Jamaica, Russia and Surinam.
For the production of
CARBO
HSP
®
and
CARBO
PROP
®
in the United States the Company uses bauxite, and typically
purchases its annual requirements at the sellers current
prices. In 2008, the Company signed multi-year agreements with
both a domestic and international supplier for a portion of its
annual bauxite requirement, and is actively evaluating
alternative suppliers for future bauxite requirements.
The Companys Eufaula facility uses primarily locally mined
kaolin for the production of
CARBO
LITE
®
and
CARBO
ECONOPROP
®
.
The Company has entered into a bi-lateral contract that requires
a supplier to sell to the Company, and the Company to purchase
from the supplier, a majority of the Eufaula facilitys
annual kaolin requirements through 2010.
The Companys Toomsboro and McIntyre production facilities
in Wilkinson County, Georgia, use locally mined uncalcined
kaolin for the production of
CARBO
LITE
®
,
CARBO
ECONOPROP
®
and
CARBO
HYDROPROP
tm
.
The Company has obtained ownership rights in acreage in
Wilkinson County, Georgia, which contains in excess of a fifteen
year supply of kaolin for these facilities at current production
rates. The Company has entered into a long-term agreement with a
third party to mine and transport this material at a fixed price
subject to annual adjustment. The agreement requires the Company
to utilize the third party to mine and transport a majority of
the McIntyre facilitys annual kaolin requirement.
The Companys production facility in Luoyang, China, uses
both kaolin and bauxite for the production of
CARBO
PROP
®
and
CARBO
LITE
®
.
Each of these materials is purchased under long-term contracts
that stipulate fixed prices subject to periodic adjustment and
provides for minimum purchase requirements.
The Companys production facility in Kopeysk, Russia
currently uses uncalcined bauxite for the production of
CARBO
PROP
®
.
Bauxite is purchased under annual agreements that stipulate
fixed prices for up to a specified quantity of material.
5
Production
Process
Ceramic proppants are made by grinding or dispersing ore to a
fine powder, combining the powder into small pellets and firing
the pellets in a rotary kiln. The Company uses two different
methods to produce ceramic proppant. The Companys plants
in New Iberia, Louisiana; McIntyre, Georgia; Kopeysk, Russia and
Luoyang, China use a dry process, which utilizes clay, bauxite,
bauxitic clay or kaolin. The raw material is ground, pelletized
and screened. The manufacturing process is completed by firing
the product in a rotary kiln.
The Companys plants in Eufaula, Alabama and Toomsboro,
Georgia, use a wet process, which starts with kaolin from local
mines that is formed into a slurry. The slurry is then
pelletized in a dryer and the pellets are then fired in a rotary
kiln.
Patent
Protection and Intellectual Property
The Company makes ceramic proppant and ceramic media used in
foundry and scouring processes (the later two items comprising a
minimal volume of overall sales) by processes and techniques
that involve a high degree of proprietary technology, some of
which are protected by patents.
The Company owns six U.S. patents, three Russian patents,
and one Singapore patent. One of the Companys
U.S. patents relates to the
CARBO
LITE
®
and
CARBO
ECONOPROP
®
products and will expire in 2009. Another of the Companys
U.S. patents relates to a low-apparent specific gravity
ceramic proppant, and will expire in 2022. Two of the
Companys U.S. patents and the Companys
Singapore patent relate to
T
i
O
2
scouring media, a titanium-based media used in scouring
processes, and will expire in 2023 through 2025. One of the
Companys recently issued U.S. patents relates to the
spray drying of proppant and will expire in 2025. The
Companys Russian patents relate to lightweight and
intermediate strength proppants that it produces in its Russian
manufacturing facility and will expire in 2025 through 2026.
The Company owns eleven U.S. patent applications (together
with a number of counterpart applications pending in foreign
jurisdictions). Nine of the U.S. patent applications
(together with a number of counterpart applications pending in
foreign jurisdictions) cover ceramic proppant and processes for
making ceramic proppant. The applications are in various stages
of the patent prosecution process, and patents may not issue on
such applications in any jurisdiction for some time, if they
issue at all.
The Company believes that its patents have been important in
enabling the Company to compete in the market to supply proppant
to the natural gas and oil industry. The Company intends to
enforce, and has in the past vigorously enforced, its patents.
The Company may from time to time in the future be involved in
litigation to determine the enforceability, scope and validity
of its patent rights. In addition to patent rights, and perhaps
more notably, the Company uses a significant amount of trade
secrets, or know-how, and other proprietary
information and technology in the conduct of its business. None
of this know-how and technology is licensed to or
from third parties.
Environmental
and Other Governmental Regulations
The Company believes that its operations are in substantial
compliance with applicable domestic and foreign federal, state
and local environmental and safety laws and regulations.
However, 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. The Company received an additional
NOV with respect to emissions from its McIntyre facility in May
2007. New emissions operating permits for the McIntyre and
Toomsboro facilities were received in May and November 2008,
respectively, and the Company is now conducting operations
pursuant to these new permits. However, in response to the NOVs,
and its desire to expand its production capacities at both
facilities, the Company also submitted Prevention of Significant
Deterioration (PSD) permit applications for both
facilities in June 2008. The Company continues to conduct
further dialogue with the relevant government agencies
concerning whether additional emissions controls are
commercially feasible. The Company is assessing what impact,
financial or otherwise, that might result from the NOVs, and
does not at this time have an estimate of costs associated with
compliance. See Item 3. Legal Proceedings.
6
Employees
At December 31, 2008, the Company had 648 employees
worldwide. In addition to the services of its employees, the
Company employs the services of consultants as required. The
Companys employees are not represented by labor unions.
There have been no work stoppages or strikes during the last
three years that have resulted in the loss of production or
production delays. The Company believes its relations with its
employees are satisfactory.
Forward-Looking
Information
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. This
Form 10-K,
the Companys Annual Report to Shareholders, any
Form 10-Q
or any
Form 8-K
of the Company or any other written or oral statements made by
or on behalf of the Company may include forward-looking
statements which reflect the Companys current views with
respect to future events and financial performance. The words
believe, expect, anticipate,
project, estimate, forecast,
plan or intend and similar expressions
identify forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements,
each of which speaks only as of the date the statement was made.
The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise. The Companys
forward-looking statements are based on assumptions that we
believe to be reasonable but that may not prove to be accurate.
All of the Companys forward-looking information is subject
to risks and uncertainties that could cause actual results to
differ materially from the results expected. Although it is not
possible to identify all factors, these risks and uncertainties
include the risk factors discussed below.
The Companys results of operations could be adversely
affected if its business assumptions do not prove to be accurate
or if adverse changes occur in the Companys business
environment, including but not limited to:
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a potential decline in the demand for oil and natural gas;
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potential declines or increased volatility in oil and natural
gas prices that would adversely affect our customers, the energy
industry or our production costs;
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potential reductions in spending on exploration and development
drilling in the oil and natural gas industry that would reduce
demand for our products and services;
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an increase in competition in the proppant market;
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the development of alternative stimulation techniques, such as
extraction of oil or gas without fracturing;
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the development of alternative proppants for use in hydraulic
fracturing;
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general global economic and business conditions;
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an increase in raw materials costs;
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fluctuations in foreign currency exchange rates; and
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the potential expropriation of assets by foreign governments.
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The Companys results of operations could also be adversely
affected as a result of worldwide economic, political and
military events, including war, terrorist activity or
initiatives by the Organization of the Petroleum Exporting
Countries (OPEC). For further information, see
Item 1A. Risk Factors.
Available
Information
The Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (Exchange Act) are made available free of
charge on the Companys internet website at
http://www.carboceramics.com
as soon as reasonably practicable after such material is filed
with, or furnished to, the Securities and Exchange Commission
(SEC).
7
The public may read and copy any materials that the Company
files with the SEC at the SECs Public Reference Room at
100 F Street, Room 1580, N.E.,
Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC, at
http://www.sec.gov.
You should consider carefully the trends, risks and
uncertainties described below and other information in this
Form 10-K
and subsequent reports filed with the SEC before making any
investment decision with respect to our securities. If any of
the following trends, risks or uncertainties actually occurs or
continues, our business, financial condition or operating
results could be materially adversely affected, the trading
prices of our securities could decline, and you could lose all
or part of your investment.
Our
business and financial performance depend on the level of
activity in the natural gas and oil industries.
Our operations are materially dependent upon the levels of
activity in natural gas and oil exploration, development and
production. More specifically, the demand for our products is
closely related to the number of natural gas and oil wells
completed in geologic formations where ceramic proppants are
used in fracture treatments. These activity levels are affected
by both short-term and long-term trends in natural gas and oil
prices. In recent years, natural gas and oil prices and,
therefore, the level of exploration, development and production
activity, have experienced significant fluctuations. Worldwide
economic, political and military events, including war,
terrorist activity, events in the Middle East and initiatives by
OPEC, have contributed, and are likely to continue to
contribute, to price volatility. Additionally, warmer than
normal winters in North America and other weather patterns may
adversely impact the short-term demand for natural gas and,
therefore, demand for our products and services. Natural gas and
oil prices experienced a significant decline in the second half
of 2008. A prolonged reduction in natural gas and oil prices
would generally depress the level of natural gas and oil
exploration, development, production and well completions
activity and result in a corresponding decline in the demand for
our products. Such a decline could have a material adverse
effect on our results of operations and financial condition.
Our
business and financial performance could suffer if new processes
are developed to replace hydraulic fracturing.
Substantially all of our products are proppants used in the
completion and re-completion of natural gas and oil wells
through the process of hydraulic fracturing. The development of
new processes for the completion of natural gas and oil wells
leading to a reduction in, or discontinuation of the use of,
hydraulic fracturing could cause a decline in demand for our
products and could have a material adverse effect on our results
of operations and financial condition.
We may
be adversely affected by decreased demand for ceramic proppant
or the development by our competitors of effective alternative
proppants.
Ceramic proppant is a premium product capable of withstanding
higher pressure and providing more highly conductive fractures
than mined sand, which is the most commonly used proppant type.
Although we believe that the use of ceramic proppant generates
higher production rates and more favorable production economics
than mined sand, a significant shift in demand from ceramic
proppant to mined sand could have a material adverse effect on
our results of operations and financial condition. The
development and use of effective alternative proppant could also
cause a decline in demand for our products, and could have a
material adverse effect on our results of operations and
financial condition.
8
We
rely upon, and receive a significant percentage of our revenues
from, a limited number of key customers.
During 2008, our largest customers included three of the largest
participants in the worldwide petroleum pressure pumping
industry. Although the end users of our products are numerous
operators of natural gas and oil wells that hire pressure
pumping service companies to hydraulically fracture wells, these
three customers accounted collectively for approximately 72% of
our 2008 revenues. We generally supply our domestic pumping
service customers with products on a
just-in-time
basis, with transactions governed by individual purchase orders.
Continuing sales of product depend on our direct customers and
the end user well operators being satisfied with product
quality, availability and delivery performance. Although we
believe our relations with our customers and the major well
operators are satisfactory, a material decline in the level of
sales to any one of our major customers due to unsatisfactory
product performance, delivery delays or any other reason could
have a material adverse effect on our results of operations and
financial condition.
We
rely on certain patents.
We own six United States patents, three Russian patents and one
Singapore patent relating to ceramic proppant. These patents
generally cover the manufacture and use of some of our products.
The U.S. patents expire at various times in the years 2009
through 2025, with one key patent expiring in 2009. We believe
that these patents have been important in enabling us to compete
in the market to supply proppant to the natural gas and oil
industry. There can be no assurance that our patents will not be
challenged or circumvented by competitors in the future or will
provide us with any competitive advantage, or that other
companies will not be able to market functionally similar
products without violating our patent rights. In addition, if
our patents are challenged, there can be no assurance that they
will be upheld. The entry of additional competitors into the
market to supply ceramic proppant following expiration of our
U.S. patent rights could have a material adverse effect on
our results of operations and financial condition.
Third
parties may claim that we are infringing their intellectual
property rights.
In addition to patent rights, the Company uses a significant
amount of trade secrets, or know-how, and other
proprietary information and technology in the conduct of its
business. Although the Company does not believe that it is
infringing upon the intellectual property rights of others by
using such proprietary information and technology, it is
possible that such a claim will be asserted against the Company
in the future. In the event any third party makes a claim
against us for infringement of patents or other intellectual
property rights of a third party, such claims, with or without
merit, could be time-consuming and result in costly litigation.
In addition, the Company could experience loss or cancellation
of customer orders, experience product shipment delays, or be
subject to significant liabilities to third parties. If our
products or services were found to infringe on a third
partys proprietary rights, the Company could be required
to enter into royalty or licensing agreements to continue
selling its products or services. Royalty or licensing
agreements, if required, may not be available on acceptable
terms, if at all, which could seriously harm our business.
Involvement in any patent dispute or other intellectual property
dispute or action to protect trade secrets and expertise could
have a material adverse effect on the Companys business.
We
operate in an increasingly competitive market.
We compete with other principal suppliers of ceramic proppant,
as well as with suppliers of sand and resin-coated sand for use
as proppant, in the hydraulic fracturing of natural gas and oil
wells. The proppant market is highly competitive and no one
supplier is dominant. The expiration of key patents owned by the
Company may result in additional competition in the market for
ceramic proppant.
Significant
increases in fuel prices for any extended periods of time will
increase our operating expenses.
The price and supply of natural gas is unpredictable, and can
fluctuate significantly based on international, political and
economic circumstances, as well as other events outside our
control, such as changes in supply and demand due to weather
conditions, actions by OPEC and other oil and gas producers,
regional production patterns and environmental concerns. Natural
gas is a significant component of our direct manufacturing costs
and price escalations will likely increase our operating
expenses and can have a negative impact on income from
operations
9
and cash flows. We operate in a competitive marketplace and may
not be able to pass through all of the increased costs that
could result from an increase in the cost of natural gas.
Environmental
compliance costs and liabilities could reduce our earnings and
cash available for operations.
We are subject to increasingly stringent laws and regulations
relating to environmental protection, including laws and
regulations governing air emissions, water discharges and waste
management. As discussed in Item 3 Legal
Proceedings of this
Form 10-K,
we received two NOVs from the State of Georgia EPD during 2007.
Moreover, we are in the process of further applying for new
environmental permits for our facilities in McIntyre and
Toomsboro, Georgia in order to proceed with the construction of
additional manufacturing and calcining capacity. We incur, and
expect to continue to incur, capital and operating costs to
comply with environmental laws and regulations. The technical
requirements of environmental laws and regulations are becoming
increasingly expensive, complex and stringent. These laws may
provide for strict liability for damages to natural
resources or threats to public health and safety. Strict
liability can render a party liable for environmental damage
without regard to negligence or fault on the part of the party.
Some environmental laws provide for joint and several strict
liability for remediation of spills and releases of hazardous
substances.
We use some hazardous substances and generate certain industrial
wastes in our operations. In addition, many of our current and
former properties are or have been used for industrial purposes.
Accordingly, we could become subject to potentially material
liabilities relating to the investigation and cleanup of
contaminated properties, and to claims alleging personal injury
or property damage as the result of exposures to, or releases
of, hazardous substances. In addition, stricter enforcement of
existing laws and regulations, new laws and regulations, the
discovery of previously unknown contamination or the imposition
of new or increased requirements could require us to incur costs
or become the basis of new or increased liabilities that could
reduce our earnings and our cash available for operations.
Our
international operations subject us to risks inherent in doing
business on an international level that could adversely impact
our results of operations.
International revenues accounted for approximately 29%, 36% and
36% of our total revenues in 2008, 2007 and 2006, respectively.
We cannot assure you that we will be successful in overcoming
the risks that relate to or arise from operating in
international markets. Risks inherent in doing business on an
international level include, among others, the following:
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economic and political instability (including as a result of the
threat or occurrence of armed international conflict or
terrorist attacks);
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changes in regulatory requirements, tariffs, customs, duties and
other trade barriers;
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transportation delays;
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power supply shortages and shutdowns;
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difficulties in staffing and managing foreign operations and
other labor problems;
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currency rate fluctuations, convertibility and repatriation;
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taxation of our earnings and the earnings of our personnel;
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potential expropriation of assets by foreign
governments; and
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other risks relating to the administration of or changes in, or
new interpretations of, the laws, regulations and policies of
the jurisdictions in which we conduct our business.
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In particular, we are subject to risks associated with our
production facilities in Luoyang, China, and Kopeysk, Russia.
The legal systems in both China and Russia are still developing
and are subject to change. Accordingly, our operations and
orders for products in both countries could be adversely
impacted by changes to or interpretation of
10
each countrys law. Further, if manufacturing in either
region is disrupted, our overall capacity could be significantly
reduced and sales
and/or
profitability could be negatively impacted.
Undetected
defects in our fracture simulation software could adversely
affect our business.
Despite extensive testing, our software could contain defects,
bugs or performance problems. If any of these problems are not
detected, the Company could be required to incur extensive
development costs or costs related to product recalls or
replacements. The existence of any defects, errors or failures
in our software products may subject us to liability for
damages, delay the development or release of new products and
adversely affect market acceptance or perception of our software
products or related services, any one of which could materially
and adversely affect the Companys business, results of
operations and financial condition.
The
market price of our common stock will fluctuate, and could
fluctuate significantly.
The market price of the Companys common stock will
fluctuate, and could fluctuate significantly, in response to
various factors and events, including the following:
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the liquidity of the market for our common stock;
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differences between our actual financial or operating results
and those expected by investors and analysts;
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changes in analysts recommendations or projections;
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new statutes or regulations or changes in interpretations of
existing statutes and regulations affecting our business;
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changes in general economic or market conditions; and
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broad market fluctuations.
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Our
actual results could differ materially from results anticipated
in forward-looking statements we make.
Some of the statements included or incorporated by reference in
this
Form 10-K
are forward-looking statements. These forward-looking statements
include statements relating to trends in the natural gas and oil
industries, the demand for ceramic proppant and our performance
in the Managements Discussion and Analysis of
Financial Condition and Results of Operations and
Business sections of this
Form 10-K.
In addition, we have made and may continue to make
forward-looking statements in other filings with the SEC, and in
written material, press releases and oral statements issued by
us or on our behalf. Forward-looking statements include
statements regarding the intent, belief or current expectations
of the Company or its officers. Our actual results could differ
materially from those anticipated in these forward-looking
statements. (See Business Forward-Looking
Information.)
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
The Company maintains its corporate headquarters (approximately
8,000 square feet of leased office space) in Irving, Texas,
and has recently entered into a lease for approximately
22,000 square feet of office space in Houston, Texas. The
Company owns its manufacturing facilities, land and
substantially all of the related production equipment in New
Iberia, Louisiana, and Eufaula, Alabama, and leases its McIntyre
and Toomsboro, Georgia, facilities. The Company owns the
buildings and production equipment at its facility in Luoyang,
China, and has been granted use of the land on which the
facility is located through 2051 under the terms of a land use
agreement with the Peoples Republic of China. The Company
owns the buildings and production equipment at its facility in
Kopeysk, Russia, and substantially all of the land on which the
facility is located. The Company leases space for sales offices
in Aberdeen, Scotland and Moscow, Russia.
11
The New Iberia, Louisiana facility is located on 26.7 acres
of land owned by the Company and consists of two production
units, a laboratory, two office buildings and a warehouse,
collectively totaling approximately 197,000 square feet
collectively. The Eufaula, Alabama facility is located on
14 acres of land owned by the Company and consists of one
production unit, a laboratory and an office, collectively
totaling approximately 113,700 square feet.
The facilities in McIntyre and Toomsboro, Georgia, include real
property, plant and equipment that are leased by the Company
from the Development Authority of Wilkinson County. The original
lease was executed in 1997 and was last amended in 2008. The
term of the current lease, which covers both locations,
commenced on November 1, 2008, and terminates on
November 1, 2013, subject to the Companys ability to
renew the lease through 2021. Under the terms of the lease, the
Company is responsible for all costs incurred in connection with
the premises, including costs of construction of the plant and
equipment. As an inducement to locate the facility in Wilkinson
County, Georgia, the Company received certain ad-valorem
property tax incentives. At the termination of the lease, title
to all of the real property, plant and equipment is to be
conveyed to the Company in exchange for nominal consideration.
The Company has the right to purchase the property, plant and
equipment at any time during the term of the lease for a nominal
price.
The facility in McIntyre, Georgia is located on approximately
36 acres of land and consists of various production and
support buildings, a laboratory building, a warehouse building
and an administrative building, collectively totaling
approximately 196,100 square feet. The facility in
Toomsboro, Georgia is located on approximately 13 acres of
an approximately
786-acre
tract of property leased by the Company. The facility consists
of various production and support buildings, two laboratory
buildings, and an administrative building, collectively totaling
approximately 113,900 square feet.
The facility in Luoyang, China is located on approximately
11 acres and consists of various production and support
buildings, a laboratory, and two administrative buildings,
collectively totaling approximately 118,000 square feet.
The facility in Kopeysk, Russia is located on approximately
60 acres of land and consists of various production and
support buildings and an administrative building, collectively
totaling approximately 103,000 square feet.
The Company owns or otherwise utilizes distribution facilities
in multiple locations around the world. See Item 1.
Business Distribution.
The Company owns approximately 2,100 acres of land and
leasehold interests in Wilkinson County, Georgia, near its
plants in McIntyre and Toomsboro, Georgia. The land contains raw
material for use in the production of the Companys
lightweight ceramic proppants. The Company has contracted with a
third party to mine and haul the reserves and bear the
responsibility for subsequent reclamation of the mined areas.
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Item 3.
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Legal
Proceedings
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On January 26, 2007, following self-disclosure of certain
air pollution emissions, the Company received a NOV from the
State of Georgia 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. In 2008, the Company received new emissions operating
permits for both of these facilities, which allow for their
current operation.
In response to the NOVs, the Company has submitted to the EPD
information concerning the commercial feasibility of additional
emissions controls, and is engaging in further discussions with
the EPD on this topic. The EPD has not yet issued a definitive
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 resolving the
NOVs or related future compliance activities.
12
From time to time, the Company is the subject of legal
proceedings arising in the ordinary course of business. The
Company does not believe that any of these proceedings will have
a material effect on its business or its results of operations.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders during
the fourth quarter of 2008.
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Item 4A.
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Executive
Officers of the Registrant
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Gary A. Kolstad (age 50) was elected on June 1,
2006, by the Companys Board of Directors to serve as
President and Chief Executive Officer and a Director of the
Company. Mr. Kolstad previously served in a variety of
positions over 21 years with Schlumberger, Ltd.
Mr. Kolstad became a Vice President of Schlumberger, Ltd.
in 2001, where he last held the positions of Vice President,
Oilfield Services U.S. Onshore and Vice
President, Global Accounts.
Ernesto Bautista III (age 37) joined the Company
as a Vice President on January 1, 2009, and was appointed
Chief Financial Officer effective January 20, 2009. From
July 2006 until joining the Company, Mr. Bautista served as
Vice President and Chief Financial Officer of W-H Energy
Services, Inc., a Houston, Texas based diversified oilfield
services company (W-H Energy). From July 2000 to
July 2006, he served as Vice President and Corporate Controller
of W-H Energy. From September 1994 to May 2000,
Mr. Bautista served in various positions at Arthur Andersen
LLP, most recently as a manager in the assurance practice,
specializing in emerging, high growth companies.
Mr. Bautista is a certified public accountant in the State
of Texas.
Mark L. Edmunds (age 53) has been the Vice President,
Operations since April 2002. From 2000 until joining the
Company, Mr. Edmunds served as Business Unit Manager and
Plant Manager for FMC Corporation. Prior to 2000,
Mr. Edmunds served Union Carbide Corporation and The Dow
Chemical Company in a variety of management positions, including
Director of Operations, Director of Internal Consulting and
Manufacturing Operations Manager.
David G. Gallagher (age 50) was appointed as Vice
President, Marketing and Sales on April 16, 2007.
Mr. Gallagher previously held a variety of positions over a
26 year period with Schlumberger, Ltd., where from 2002
until 2007, he served as Director of Marketing for Venezuela,
Trinidad and the Caribbean.
R. Sean Elliott (age 34) joined the Company in
November 2007 as General Counsel, and was appointed as Corporate
Secretary and Chief Compliance Officer in January 2008.
Previously, Mr. Elliott served as legal counsel to Aviall,
Inc. (an international aviation company) from 2004 to 2007,
where he last held the positions of Assistant General Counsel
and Assistant Secretary. From 1999 until 2004, Mr. Elliott
practiced law with Haynes and Boone, LLP, a Dallas, Texas-based
law firm.
All officers are elected for one-year terms or until their
successors are duly elected. There are no arrangements between
any officer and any other person pursuant to which he was
selected as an officer. There is no family relationship between
any of the named executive officers or between any of them and
the Companys directors.
13
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Common
Stock Market Prices, Dividends and Stock Repurchases
The Companys common stock is traded on the New York Stock
Exchange (ticker symbol CRR). The number of record and
beneficial holders of the Companys common stock as of
February 10, 2009 was approximately 9,729.
The following table sets forth the high and low sales prices of
the Companys common stock on the New York Stock Exchange
and dividends for the last two fiscal years:
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2008
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2007
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Cash
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Cash
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Sales Price
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Dividends
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Sales Price
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Dividends
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Quarter Ended
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High
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Low
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Declared
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High
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Low
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Declared
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March 31
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$
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40.10
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$
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33.20
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$
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0.14
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$
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46.93
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$
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34.34
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$
|
0.12
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June 30
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58.90
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41.24
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0.14
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48.33
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41.37
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0.12
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September 30
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61.83
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47.90
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0.17
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51.00
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41.35
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0.14
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December 31
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50.47
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31.50
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0.17
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51.94
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36.69
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0.14
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The Company currently expects to continue its policy of paying
quarterly cash dividends, although there can be no assurance as
to future dividends because they depend on future earnings,
capital requirements and financial condition.
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. During the fourth quarter of 2008, the
Company repurchased and retired 987,200 shares at an
aggregate price of $38.6 million. As of December 31,
2008, the Company has repurchased and retired
1,059,800 shares at an aggregate price of
$42.2 million.
The following table provides information about the
Companys repurchases of common stock during the quarter
ended December 31, 2008:
ISSUER
PURCHASES OF EQUITY SECURITIES
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Total Number of
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Shares Purchased as
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Maximum Number of
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Part of Publicly
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Shares that May Yet
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Total Number of
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Average Price Paid
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Announced
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be Purchased Under
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Period
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Shares Purchased
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per Share(1)
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Plan(2)(3)
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the Plan(4)
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10/01/08 to 10/31/08
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133,061
|
(5)
|
|
$
|
44.73
|
|
|
|
127,400
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/01/08 to 11/30/08
|
|
|
390,000
|
|
|
$
|
41.63
|
|
|
|
390,000
|
|
|
|
1,410,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/01/08 to 12/31/08
|
|
|
469,800
|
|
|
$
|
35.42
|
|
|
|
469,800
|
|
|
|
940,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
992,861
|
(5)
|
|
|
|
|
|
|
987,200
|
|
|
|
940,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Average price paid excludes commissions.
|
|
(2)
|
|
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.
|
|
(3)
|
|
Selected 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 of 1934 (the 10b5-1
|
14
|
|
|
|
|
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 Securities Exchange Act of 1934.
|
|
(4)
|
|
Represents the maximum number of shares that are available to be
repurchased under the previously announced authorization as of
period end. As of February 24, 2009, a maximum of
875,500 shares are available to be repurchased under the
previously announced authorization.
|
|
(5)
|
|
Includes 5,661 shares of restricted stock withheld for the
payment of withholding taxes upon the vesting of restricted
stock.
|
15
Stock
Performance Graph
The following graph compares the cumulative shareholder return
on the Companys common stock versus the total cumulative
return on the S&P 500 Stock Index and the S&P Small
Cap 600, Oil & Gas Equipment & Services
Sub-Industry Group. The comparison assumes $100 was invested as
of December 31, 1998 and all dividends were reinvested.
COMPARISON
OF 10 YEAR CUMULATIVE TOTAL RETURN*
Among
CARBO Ceramics, Inc., The S&P 500 Index
And The S&P SmallCap 600 - Oil & Gas Equipments &
Services Index
*$100 invested on
12/31/98
in
stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright
©
2009 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
16
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data are derived from the
audited consolidated financial statements of the Company. The
data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes
thereto included elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands, except per share data)
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
387,828
|
|
|
$
|
299,996
|
|
|
$
|
283,829
|
|
|
$
|
230,711
|
|
|
$
|
205,554
|
|
Cost of sales
|
|
|
260,394
|
|
|
|
198,070
|
|
|
|
179,897
|
|
|
|
139,844
|
|
|
|
121,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
127,434
|
|
|
|
101,926
|
|
|
|
103,932
|
|
|
|
90,867
|
|
|
|
83,773
|
|
Selling, general and administrative expenses(1)
|
|
|
40,351
|
|
|
|
30,467
|
|
|
|
26,300
|
|
|
|
22,186
|
|
|
|
20,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
87,083
|
|
|
|
71,459
|
|
|
|
77,632
|
|
|
|
68,681
|
|
|
|
62,982
|
|
Other, net
|
|
|
1,266
|
|
|
|
3,120
|
|
|
|
2,944
|
|
|
|
1,536
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
88,349
|
|
|
|
74,579
|
|
|
|
80,576
|
|
|
|
70,217
|
|
|
|
63,711
|
|
Income taxes
|
|
|
27,944
|
|
|
|
24,938
|
|
|
|
28,331
|
|
|
|
24,754
|
|
|
|
23,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
60,405
|
|
|
|
49,641
|
|
|
|
52,245
|
|
|
|
45,463
|
|
|
|
40,116
|
|
Discontinued operations(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
|
5,784
|
|
|
|
4,229
|
|
|
|
2,008
|
|
|
|
1,157
|
|
|
|
1,557
|
|
Gain on disposal of discontinued operations, net of tax
|
|
|
44,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
110,316
|
|
|
$
|
53,870
|
|
|
$
|
54,253
|
|
|
$
|
46,620
|
|
|
$
|
41,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.48
|
|
|
$
|
2.04
|
|
|
$
|
2.15
|
|
|
$
|
1.89
|
|
|
$
|
1.68
|
|
Income from discontinued operations
|
|
|
0.24
|
|
|
|
0.17
|
|
|
|
0.08
|
|
|
|
0.05
|
|
|
|
0.07
|
|
Gain on disposal of discontinued operations
|
|
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.53
|
|
|
$
|
2.21
|
|
|
$
|
2.23
|
|
|
$
|
1.94
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.47
|
|
|
$
|
2.03
|
|
|
$
|
2.14
|
|
|
$
|
1.88
|
|
|
$
|
1.67
|
|
Income from discontinued operations
|
|
|
0.24
|
|
|
|
0.17
|
|
|
|
0.08
|
|
|
|
0.05
|
|
|
|
0.06
|
|
Gain on disposal of discontinued operations
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.51
|
|
|
$
|
2.20
|
|
|
$
|
2.22
|
|
|
$
|
1.93
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands, except per share data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
295,712
|
|
|
$
|
192,524
|
|
|
$
|
133,378
|
|
|
$
|
140,237
|
|
|
$
|
141,496
|
|
Current liabilities
|
|
|
83,848
|
|
|
|
33,264
|
|
|
|
33,164
|
|
|
|
35,846
|
|
|
|
28,695
|
|
Property, plant and equipment, net
|
|
|
244,902
|
|
|
|
253,261
|
|
|
|
214,773
|
|
|
|
167,199
|
|
|
|
116,591
|
|
Total assets
|
|
|
549,279
|
|
|
|
453,123
|
|
|
|
404,665
|
|
|
|
355,796
|
|
|
|
297,517
|
|
Total shareholders equity
|
|
|
442,534
|
|
|
|
389,439
|
|
|
|
342,859
|
|
|
|
293,366
|
|
|
|
244,367
|
|
Cash dividends per share
|
|
$
|
0.62
|
|
|
$
|
0.52
|
|
|
$
|
0.44
|
|
|
$
|
0.36
|
|
|
$
|
0.29
|
|
Discontinued operations (included above)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
|
|
|
$
|
66,191
|
|
|
$
|
51,305
|
|
|
$
|
43,170
|
|
|
$
|
35,460
|
|
Liabilities held for sale
|
|
|
|
|
|
|
4,024
|
|
|
|
1,082
|
|
|
|
463
|
|
|
|
497
|
|
|
|
|
(1)
|
|
Selling, general and administrative (SG&A) expenses for
2008, 2007, 2006, 2005 and 2004 include costs of
start-up
activities of $1,108,000, $1,215,000, $474,000, $1,092,000, and
none, respectively.
Start-up
costs for 2008 relate to the
start-up
of
the second production line at the Companys Toomsboro,
Georgia facility and the reopening of the New Iberia, Louisiana
manufacturing facility previously idled earlier during 2008.
Start-up
costs for 2007 are related primarily to the new production
facility in Kopeysk, Russia.
Start-up
costs for 2006 and 2005 are related primarily to the new
production facility in Toomsboro, Georgia. SG&A expenses in
2008, 2007, 2006, 2005 and 2004 also include losses of
$1,599,000, $268,000, none, $95,000, and $1,144,000,
respectively, associated with the write-off of a prepayment for
the purchase of ceramic proppant from a China proppant
manufacturer in 2008 and disposal of certain equipment and
impairment of certain software in other years.
|
|
(2)
|
|
On October 10, 2008, the Company completed the sale of its
fracture and reservoir diagnostics business, the Pinnacle name
and related trademarks. Consequently, these operations are
presented as discontinued operations and the related assets and
liabilities are presented as held for sale. At December 31,
2007, assets and liabilities held for sale are presented as
current assets and current liabilities, respectively. Assets and
liabilities held for sale as of December 31, 2006, 2005 and
2004, are presented as previously reported in the Companys
financial statements for those periods.
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Executive
Level Overview
CARBO Ceramics Inc. generates revenue primarily through the sale
of products and services to the oil and gas industry. The
Companys principal business consists of manufacturing and
selling ceramic proppant for use primarily in the hydraulic
fracturing of oil and natural gas 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. The Company has no
continuing involvement in these operations. The assets and
liabilities related to this transaction have been segregated
from continuing operations and are reported as assets and
liabilities of discontinued operations in the accompanying
consolidated balance sheet as of December 31, 2007. In
addition, operations associated with these assets have been
classified as income from discontinued operations in the
accompanying consolidated statements of income and the cash
flows associated with discontinued operations have been
segregated in the accompanying consolidated statements of cash
flows. The Company retained the hydraulic fracturing simulation
software FracProPT, the hydraulic fracturing design, engineering
and consulting business and Applied Geomechanics, Inc., a
provider of geotechnical monitoring 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
18
reported in the Fracture and Reservoir Diagnostics segment, do
not meet the quantitative threshold for a reportable segment.
The Companys products and services help oil and gas
producers increase production and recovery rates from their
wells, thereby lowering overall reservoir development costs. As
a result, the Companys business is dependent to a large
extent on the level of drilling activity in the oil and gas
industry worldwide. However, the Company has increased its
revenues and income over an extended period and across various
industry business cycles by increasing its share of the
worldwide market for all types of proppant. While the
Companys ceramic proppants are more expensive than
alternative non-ceramic proppants, the Company has been able to
demonstrate the cost-effectiveness of its products to numerous
operators of oil and gas wells through increased technical
marketing activity. The Company believes its future prospects
will benefit from both an expected increase in drilling activity
worldwide and the desire of industry participants to improve
production results and lower their overall development costs.
In recent years, the Company has expanded its operations outside
the United States. In 2002, the Company constructed its first
manufacturing facility located outside the United States in the
city of Luoyang, China and completed a second production line in
2004 that doubled the capacity of that facility. In 2004, the
Company also opened a sales office in Moscow, Russia and
established distribution operations in the country. In 2005, the
Company broke ground on a new manufacturing facility in the city
of Kopeysk, Russia and completed construction of this new
facility during the first half of 2007. The Company believes
international operations will continue to represent an important
role in its future growth.
Revenue growth in recent years has been driven largely by
increases in ceramic proppant sales volume. Because ceramic
proppant is used on less than 20 percent of fractures
worldwide, the Company believes there is significant potential
for growth in the future. As a result, the Company has expanded
its proppant manufacturing capacity by approximately 70% over a
four year period and has more than tripled its production
capacity since 1997. Because the Companys ceramic
proppants compete in part against lower-cost alternatives, the
Company expects its future revenue growth to be derived from
increasing sales volume more so than from an increase in the
selling price of ceramic proppant.
Management believes the addition of new manufacturing capacity
is critical to the Companys ability to continue its
long-term growth in sales volume and revenue for ceramic
proppant. In regards to future expansion, the Company is
currently constructing a third production line at its Toomsboro
facility that is expected to be completed in early 2010 with an
annual capacity of 250 million pounds. While the Company
has operated near or at full capacity at times during the
previous ten years, the addition of significant new capacity
could adversely impact operating profit margins if the timing of
this new capacity does not match increases in demand for the
Companys products.
Operating profit margin for the Companys proppant business
is principally impacted by manufacturing costs and the
Companys production levels as a percentage of its
capacity. While most direct production expenses have been
relatively stable or predictable over time, the Company has
experienced recent volatility in the cost of natural gas, which
is used in production by the Companys domestic
manufacturing facilities, and bauxite, which is the primary raw
material for production of the Companys high strength
ceramic proppant. The cost of natural gas has varied from
approximately 22% to 40% of total monthly direct production
expense over the last three years due to price volatility of
this fuel source. In an effort to mitigate volatility in the
cost of natural gas purchases and reduce exposure to short term
spikes in the price of this commodity, the Company contracts in
advance for portions of its future natural gas requirements.
During 2007, the Companys long-standing supplier of high
strength raw materials exited the business. The Company has
experienced an increase in the cost of high strength raw
materials as it seeks alternative suitable suppliers in other
parts of the world. These materials are used to manufacture
high-strength products,
CARBO
PROP
®
and
CARBO
HSP
®
,
at the New Iberia, Louisiana and McIntyre, Georgia facilities.
The delivered cost of bauxite, which represents approximately
half of the cost of high strength products, increased 20% during
2007 and remained high during 2008. Management continues to
pursue a long-term source of these materials to complement its
strong position in lightweight raw material supplies. Despite
the efforts to reduce exposure to changes in natural gas prices
and the cost of high strength raw materials, it is possible
that, given the significant
19
portion of manufacturing costs represented by these items, gross
margins as a percentage of sales may continue to decline and
changes in net income may not directly correlate to changes in
revenue.
As the Company has expanded its operations in both domestic and
international markets, there has been an increase in activities
and expenses related to marketing, distribution, research and
development, and finance and administration. As a result,
selling, general and administrative expenses have increased in
recent years. In the future, the Company expects to continue to
actively pursue new business opportunities by:
|
|
|
|
|
increasing marketing activities globally;
|
|
|
|
improving and expanding its distribution capabilities; and
|
|
|
|
focusing on new product development.
|
The Company expects that these activities will generate
increased revenue; however selling, general and administrative
expenses may continue to increase in 2009 from 2008 levels as
the Company continues to expand its operations.
General
Business Conditions
The Companys proppant business is significantly impacted
by the number of natural gas wells drilled in North America,
where the majority of wells are hydraulically fractured. In
markets outside North America, sales of the Companys
products are less dependent on natural gas markets but are
influenced by the overall level of drilling and hydraulic
fracturing activity. Furthermore, because the decision to use
ceramic proppant is based on comparing the higher initial costs
to the future value derived from increased production and
recovery rates, the Companys business is influenced by the
current and expected prices of natural gas and oil.
Worldwide oil and natural gas prices and related drilling
activity levels remained very strong from 2004 until late 2008.
In addition in early 2008, the Company introduced a new product,
CARBO
HYDROPROP
tm
,
a lower priced ceramic proppant designed to be cost competitive
with resin coated sand. This new product has been very well
received in the North American marketplace. Consequently, in
years 2006 through 2008, the Company benefited from the
additional production capacity from its Toomsboro, Georgia
manufacturing facility and established new records for sales
volume, revenue and net income. Despite this increase, the
Companys ability to sell additional ceramic proppant in
2008 was limited by its production capacity and, as such, the
Company commenced planning construction of a third
250 million pound production line at its Toomsboro, Georgia
manufacturing plant. During the second half of 2008, oil and
natural gas prices declined significantly in connection with
declines in many of the worlds economies. As a result, the
number of active drilling rigs in North America declined as
well. While difficult to predict, the Company believes this
reduction in oil and gas prices and drilling activity will be
short-term in duration and does not expect a long-term impact
for the Companys products and services. International
revenues represented 29%, 36% and 36% of total revenues in 2008,
2007 and 2006, respectively. While sales volumes in
international markets increased in 2008, international sales as
a percentage of total sales declined as a result of
proportionately high sales volume in the United States.
Critical
Accounting Policies
The Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the U.S., which
require the Company to make estimates and assumptions (see
Note 1 to the Consolidated Financial Statements). The
Company believes that, of its significant accounting policies,
the following may involve a higher degree of judgment and
complexity.
Revenue is recognized when title passes to the customer
(generally upon delivery of products) or at the time services
are performed. The Company generates a significant portion of
its revenues and corresponding accounts receivable from sales to
the petroleum pressure pumping industry. In addition, the
Company generates a significant portion of its revenues and
corresponding accounts receivable from sales to three major
customers, all of which are in the petroleum pressure pumping
industry. As of December 31, 2008, approximately 68% of the
balance in trade accounts receivable was attributable to those
three customers. The Company records an allowance for doubtful
accounts based on its assessment of collectability risk and
periodically evaluates the allowance based on a review of
20
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. If a
prolonged economic downturn in the petroleum pressure pumping
industry were to occur or, for some other reason, any of the
Companys primary customers were to experience significant
adverse conditions, the Companys estimates of the
recoverability of accounts receivable could be reduced by a
material amount and the allowance for doubtful accounts could be
increased by a material amount. At December 31, 2008, the
allowance for doubtful accounts totaled $1.7 million.
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. Obsolete or unmarketable
inventory historically has been insignificant and generally
written off when identified. Assessing the ultimate realization
of inventories requires judgments about future demand and market
conditions, and management believes that current inventories are
properly valued at the lower of cost or market. Accordingly, no
reserve to write-down inventories has been recorded. If actual
market conditions are less favorable than those projected by
management, inventory write-downs may be required.
Income taxes are provided for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. This standard takes
into account the differences between financial statement
treatment and tax treatment of certain transactions. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
of a change in tax rates is recognized as income or expense in
the period that includes the enactment date. This calculation
requires the Company to make certain estimates about its future
operations. Changes in state, federal and foreign tax laws, as
well as changes in the Companys financial condition, could
affect these estimates.
Long-lived assets, which include net property, plant and
equipment, goodwill and intangibles, comprise a significant
amount of the Companys total assets. The Company makes
judgments and estimates in conjunction with the carrying values
of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives.
Additionally, the carrying values of these assets are
periodically reviewed for impairment or whenever events or
changes in circumstances indicate that the carrying amounts may
not be recoverable. An impairment loss is recorded in the period
in which it is determined that the carrying amount is not
recoverable. This requires the Company to make long-term
forecasts of its future revenues and costs related to the assets
subject to review. These forecasts require assumptions about
demand for the Companys products and services, future
market conditions and technological developments. Significant
and unanticipated changes to these assumptions could require a
provision for impairment in a future period.
Results
of Operations
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net Income
|
|
$
|
110,316
|
|
|
|
105
|
%
|
|
$
|
53,870
|
|
|
|
(1
|
)%
|
|
$
|
54,253
|
|
For the year ended December 31, 2008, the Company reported
net income of $110.3 million, an increase of 105% compared
to the previous year. For 2008, the Company experienced a 29%
increase in revenues, which represented the sixth consecutive
year the Company achieved a new revenue record. The increase in
revenues was partially offset by a decline in gross profit
margin as a percentage of sales compared to the previous year.
Selling, general and administrative expenses increased to
support revenue growth, and other operating expenses in 2008
21
include an impairment charge relating to the write-off of a
prepayment for the purchase of ceramic proppant from a Chinese
proppant manufacturer. Other income in 2008 decreased mainly
from foreign currency exchange rate fluctuations, and income tax
expense in 2008 increased due primarily to higher taxable
income. Finally, net income in 2008 benefitted from an increase
in income from discontinued operations and a $44.1 million
gain from the disposal of discontinued operations. Discontinued
operations relate to the sale of the Companys fracture and
reservoir diagnostics business in 2008.
For the year ended December 31, 2007, the Company reported
net income of $53.9 million, a decline of 1% compared to
the previous year. For 2007, the Company experienced a 6%
increase in revenues, which represented the fifth consecutive
year the Company achieved a new revenue record. Despite the
increase in revenues, gross profit declined versus the previous
year. Selling, general and administrative expenses increased to
support higher operating and sales activity in an expanding
global market and
start-up
costs in 2007 exceeded 2006
start-up
costs, as costs to
start-up
the
Companys manufacturing facility in Russia during 2007
exceeded costs to
start-up
the
first production line in Toomsboro, Georgia during 2006.
Interest income, net of interest expense, in 2007 declined due
to lower cash balances as a result of capital spending to add
proppant manufacturing capacity. Finally, net income in 2007
benefitted from foreign currency exchange gains that resulted
from the appreciation of Russian and Chinese currencies relative
to the U.S. dollar, a reduction in income taxes, and an
increase in income from discontinued operations.
Individual components of financial results are discussed below.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Consolidated revenues
|
|
$
|
387,828
|
|
|
|
29
|
%
|
|
$
|
299,996
|
|
|
|
6
|
%
|
|
$
|
283,829
|
|
Revenues of $387.8 million for the year ended
December 31, 2008 exceeded revenues of $300.0 million
in 2007 by 29%. Revenues increased primarily due to a 28%
increase in proppant sales volume. Worldwide proppant sales
volume increased for the sixth consecutive year to
1.162 billion pounds and exceeded the 2007 sales record of
908 million pounds by 28%. North American sales volume
increased 33% over 2007, driven by the continued strength in the
U.S. market and the introduction of
CARBO
HYDROPROP
tm
in early 2008. Increases in sales volume in Canada of 14% were
partially offset by a decrease in Mexico. Overseas sales volume
increased 5% led by a 61% increase in Russia, which is due to
the
start-up
of a manufacturing plant in that market during the second
quarter of 2007. This increase was offset by the impact of other
overseas sales which declined 13% in 2008 compared to 2007. The
average selling price per pound of ceramic proppant was $0.322
per pound in 2008 compared to $0.321 per pound in 2007.
Revenues of $300.0 million for the year ended
December 31, 2007 surpassed the prior year record of
$283.8 million by 6%. Worldwide proppant sales volume
increased for the fifth consecutive year to 908 million
pounds and exceeded the 2006 sales record of 869 million
pounds by 4%. The volume of ceramic proppant sold in North
America remained unchanged from 2006 as a 5% increase in
U.S. sales volume and a 65% increase in sales to Mexico
were offset by a 26% decline in Canada. Overseas sales volume
increased 30% led by an increase in sales volume in Russia
following completion of the Companys manufacturing
facility there in the first half of 2007. In other overseas
markets, sales volume increased 7% in 2007 compared to 2006. The
average selling price of proppant remained relatively unchanged,
from $0.320 per pound in 2006 compared to $0.321 per pound for
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
Gross Profit
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Consolidated gross profit
|
|
$
|
127,434
|
|
|
|
25
|
%
|
|
$
|
101,926
|
|
|
|
(2
|
)%
|
|
$
|
103,932
|
|
Consolidated gross profit %
|
|
|
33
|
%
|
|
|
|
|
|
|
34
|
%
|
|
|
|
|
|
|
37
|
%
|
The Companys cost of sales related to proppant
manufacturing consists of manufacturing costs, packaging and
transportation expenses associated with the delivery of the
Companys products to its customers and handling costs
related to maintaining finished goods inventory and operating
the Companys remote stocking facilities.
22
Variable manufacturing costs include raw materials, labor,
utilities and repair and maintenance supplies. Fixed
manufacturing costs include depreciation, property taxes on
production facilities, insurance and factory overhead.
Gross profit for the year ended December 31, 2008 was
$127.4 million, or 33% of revenues, compared to
$101.9 million, or 34% of revenues, for 2007. The increase
in gross profit was the result of increased revenues driven
primarily by higher sales volumes. 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, 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, and increased freight to
transport products to customer locations. Although gross profit
margins as a percentage of revenues has declined in recent
years, the Company believes recent price increases in proppant
products may favorably impact the 2009 gross profit
percentage.
Gross profit for the year ended December 31, 2007 was
$101.9 million, or 34% of revenues, compared to
$103.9 million, or 37% of revenues, for 2006. Gross profit
decreased $2.0 million despite an increase of
$16.2 million in revenue. The factors contributing to the
decrease in the proppant gross profit from 2006 to 2007 are
increased manufacturing and freight costs associated with the
production and sale of high-strength proppants, high production
costs during the
start-up
of
the Companys manufacturing facility in Russia, increased
field trial activity in which the Company sells its products at
a discounted price, and increased pricing pressure in certain
international markets. These increased costs were partially
offset by a reduction in natural gas costs in the Companys
U.S. manufacturing facilities.
Selling,
General & Administrative (SG&A) and Other
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Consolidated SG&A and other
|
|
$
|
40,351
|
|
|
|
32
|
%
|
|
$
|
30,467
|
|
|
|
16
|
%
|
|
$
|
26,300
|
|
As a% of revenues
|
|
|
10
|
%
|
|
|
|
|
|
|
10
|
%
|
|
|
|
|
|
|
9
|
%
|
Operating expenses consisted of $37.6 million of SG&A
expenses and $2.7 million of other operating expenses for
the year ended December 31, 2008, compared to
$29.0 million and $1.5 million, respectively, for
2007. As a percentage of revenues, SG&A and other operating
expenses remained unchanged at 10% in 2008 and 2007. SG&A
expenses increased primarily because of global marketing
activity and administrative expenses supporting revenue growth.
Other operating expenses of $2.7 million for the year ended
December 31, 2008, consisted primarily of a
$1.4 million impairment charge of a 2005 prepayment for the
purchase of ceramic proppant from a Chinese proppant
manufacturer and $1.1 million relating to
start-up
costs for the second production line at the Companys
Toomsboro, Georgia facility and the reopening of the New Iberia,
Louisiana manufacturing facility idled earlier in 2008. Other
operating expenses of $1.5 million for the year ended
December 31, 2007 consisted of $1.2 million relating
to
start-up
costs associated with the Companys new manufacturing
facility in Russia and a $0.3 million loss related to
equipment disposals.
Operating expenses consisted of $29.0 million of SG&A
expenses and $1.5 million of other operating expenses for
the year ended December 31, 2007, compared to
$25.8 million and $0.5 million, respectively, for
2006. As a percentage of revenues, SG&A and other operating
expenses increased to 10% in 2007 compared to 9% in 2006.
SG&A expenses increased by $3.2 million due to
increases in research and development activity, marketing
activity in both domestic and international markets, and
administrative expenses necessary to support higher sales
activity in an expanding global market. Other operating expenses
of $1.5 million for the year ended December 31, 2007
consisted primarily of
start-up
costs related to the
start-up
of
the Companys manufacturing facility in Russia. Other
operating expenses in 2006 were primarily related to the startup
of the Companys new manufacturing facility in Toomsboro,
Georgia that began operating in January of 2006.
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Consolidated Other Income
|
|
$
|
1,266
|
|
|
|
(59
|
)%
|
|
$
|
3,120
|
|
|
|
6
|
%
|
|
$
|
2,944
|
|
23
Other income for the year ended December 31, 2008 declined
$1.8 million compared to 2007 primarily due to a
$2.6 million decrease in foreign currency exchange gains
resulting from exchange rate fluctuations between the local
reporting currency and the currency in which certain liabilities
of the Companys subsidiary in Russia are denominated. The
Company recognizes gains and losses resulting from fluctuations
in these currencies as a result of the capital structure of its
investment in that country. By the end of 2008, the Company had
restructured its investment in Russia thereby limiting income
statement exposure to future changes in currency exchange rates.
This reduction in foreign currency gains was partially offset by
a $0.5 million increase in gains resulting from changes in
exchange rates between the functional currency and the foreign
currency in which the effective transactions were denominated.
Other income for the year ended December 31, 2007 increased
$0.2 million compared to 2006. This increase is mainly
attributed to a $1.5 million increase in foreign currency
exchange gains due to exchange rate fluctuations between the
local reporting currency and the currency in which certain
liabilities of the Companys subsidiary in Russia are
denominated, partially offset by a $1.2 decrease in interest
income attributed to lower cash balances as a result of capital
spending to add proppant manufacturing capacity.
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Income Tax Expense
|
|
$
|
27,944
|
|
|
|
12
|
%
|
|
$
|
24,938
|
|
|
|
(12
|
)%
|
|
$
|
28,331
|
|
Effective Income Tax Rate
|
|
|
31.6
|
%
|
|
|
|
|
|
|
33.4
|
%
|
|
|
|
|
|
|
35.2
|
%
|
Consolidated income tax expense was $27.9 million, or 31.6%
of pretax income, for the year ended December 31, 2008
compared to $24.9 million, or 33.4% of pretax income for
2007. The decrease in the effective tax rate is due to
additional tax benefits associated with the depletion of kaolin
minerals owned by the Company. During 2008, the Company
determined that depletion deductions could be claimed for the
Companys kaolin mining activities, which supplies its
lightweight ceramic proppant manufacturing operations. Mining
depletion recorded during 2008 relates to deductions available
to the Company for mining activities conducted during 2008,
amounts claimed on the 2007 tax return, as well as additional
amounts to be claimed through the filing of an amended tax
return for 2006. In addition, the effective tax rate declined in
part due to the final preparation and filing of the
Companys prior year tax returns.
Consolidated income tax expense of $24.9 million for the
year ended December 31, 2007 decreased 12% compared to 2006
due to a 7% decrease in pretax income, lower state income tax
obligations compared to prior year, an adjustment of deferred
income tax liabilities resulting from changes in certain state
income tax regulations, and a $0.9 million reduction of
estimated income tax resulting from preparation and filing of
prior years tax returns. The effective income tax rate for
2007 was 33.4% compared to 35.2% for 2006.
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Income from Discontinued Operations, net of taxes
|
|
$
|
5,784
|
|
|
|
37
|
%
|
|
$
|
4,229
|
|
|
|
111
|
%
|
|
$
|
2,008
|
|
Gain on Disposal of Discontinued Operations, net of taxes
|
|
$
|
44,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 28, 2008, the Company entered into a definitive
agreement to sell its fracture and reservoir diagnostics
business, including the Pinnacle name and related trademarks.
The resulting gain on sale and operations of this business are
presented as discontinued operations. The sale was completed on
October 10, 2008 for $142.3 million in cash, net of
working capital adjustments. The Company recorded a gain of
$44.1 million, which is net of income taxes of
$24.4 million.
Income from discontinued operations, net of income taxes, for
the year end December 31, 2008 of $5.8 million
increased 37% compared to $4.2 million for 2007. The
increase of $1.6 million is attributed to a
$2.4 million
24
increase in gross profit and a $0.2 million decrease in
selling, general, and administrative expenses offset by a
$1.0 million increase in income taxes. The increase in
gross profit was attributed to an increase of $3.7 million
in sales offset by an increase in cost of sales of
$1.3 million.
Income from discontinued operations, net of income taxes, for
the year end December 31, 2007 of $4.2 million
increased 111% compared to $2.0 million for 2006. The
increase of $2.2 million is mainly attributed to a
$5.2 million increase in gross profit offset by a
$1.7 million increase in selling, general, and
administrative expenses and a $1.3 million increase in
income taxes. The increase in gross profit was attributed to an
increase of $12.1 million in sales offset by an increase in
cost of sales of $6.9 million.
Liquidity
and Capital Resources
At December 31, 2008, the Company had cash and cash
equivalents of $154.8 million compared to cash and cash
equivalents of $12.3 million at December 31, 2007.
During 2008, the Company generated $76.1 million of cash
from operating activities of continuing operations, received
$2.5 million from employee exercises of stock options,
received $142.3 million from net proceeds on the sale of
discontinued operations, retained $0.4 million cash from
excess tax benefits relating to stock based compensation to
employees, and generated $3.7 million of cash from
activities of discontinued operations. Uses of cash included
$23.4 million of capital spending, $1.0 million for
part ownership in another company, $15.2 million of cash
dividends, $42.5 million on the repurchase of the
Companys common stock and $0.4 million from the
effect of exchange rate changes on cash. In addition, during
2008 the Company borrowed and fully-repaid a total of
$6.5 million on its credit facility. Major capital spending
in 2008 included $6.7 million on a third production line at
the Toomsboro facility, which is scheduled to be completed
during early 2010 with an annual capacity of 250 million
pounds at a total estimated cost of $70.0 million,
$3.3 million on the implementation of a new accounting
information system in the Companys North American proppant
operations, $1.1 million for equipment upgrades relating to
the restart of the New Iberia manufacturing facility, and
$7.4 million for land, ore reserves and replacement of
various equipment associated with the McIntyre facility.
The Company believes its 2009 results will be influenced by the
level of natural gas drilling in North America but expects its
ability to demonstrate the value of ceramic proppant relative to
alternatives will allow it to continue to generate new sales
opportunities. The Company believes its introduction of
CARBO
HYDROPROP
tm
should further the penetration of the market for sand-based
proppant in slickwater fracturing treatments. Given the levels
of natural gas inventories in North America and the limited
levels of availability in the current credit market, the Company
believes the recent contraction in drilling activity is likely
to persist, but also expects that the steep decline curves in
the resource plays providing much of the incremental natural gas
supply in North America will help in bringing supply and demand
more into balance as the rig activity continues to decline.
However, the Company is unable to determine how detrimental of
an effect the U.S. economic crisis will have on overall
natural gas demand.
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
January 20, 2009, 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
February 2, 2009. The Company estimates its total capital
expenditures in 2009 will be between $87.0 million and
$93.0 million.
The Company maintains an unsecured line of credit of
$10.0 million. As of December 31, 2008, there was no
outstanding debt under the credit agreement. The Company
anticipates that cash on hand, cash provided by operating
activities and funds available under its line of credit will be
sufficient to meet planned operating expenses, tax obligations,
capital expenditures and other cash needs for the next
12 months. The Company also believes that it could acquire
additional debt financing, if needed. Based on these
assumptions, the Company believes that its fixed costs could be
met even with a moderate decrease in demand for the
Companys products.
Off-Balance
Sheet Arrangements
The Company had no off-balance sheet arrangements as of
December 31, 2008.
25
Contractual
Obligations
The following table summarizes the Companys contractual
obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in Period
|
|
|
|
|
|
|
Less than
|
|
|
1 - 3
|
|
|
3 - 5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
($ in thousands)
|
|
|
Long-term debt obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primarily railroad equipment
|
|
|
23,986
|
|
|
|
5,536
|
|
|
|
9,492
|
|
|
|
4,949
|
|
|
|
4,009
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas contracts
|
|
|
48,753
|
|
|
|
30,180
|
|
|
|
18,573
|
|
|
|
|
|
|
|
|
|
Raw materials contracts
|
|
|
295
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
73,034
|
|
|
$
|
36,011
|
|
|
$
|
28,065
|
|
|
$
|
4,949
|
|
|
$
|
4,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 6 and Note 15 to the Notes to the
Consolidated Financial Statements.
Operating lease obligations relate primarily to railroad
equipment leases and include leases of other property, plant and
equipment.
The Company uses natural gas to power its domestic manufacturing
plants. From time to time, the Company enters into contracts to
purchase a portion of the anticipated natural gas requirements
at specified prices. As of December 31, 2008, the last such
contract was due to expire in December 2010.
The Company has entered into contracts to supply raw materials,
primarily kaolin and bauxite, to each of its manufacturing
plants. Each of the contracts is described in Note 15 to
the Notes to the Consolidated Financial Statements. Four of the
contracts do not require the Company to purchase minimum annual
quantities, but do require the purchase of minimum annual
percentages, ranging from 70% to 100% of the respective
plants requirements for the specified raw materials. One
outstanding contract requires the Company to purchase a minimum
annual quantity of material, which is included in the above
table.
|
|
Item 7A.
|
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 December 31, 2008, the Companys net
investment that is subject to foreign currency fluctuations
totaled $75.6 million, and the Company has recorded a
cumulative foreign currency translation loss of
$2.8 million, net of deferred income tax benefit. This
cumulative translation loss is included in Accumulated Other
Comprehensive Loss. Also, the Companys subsidiary in
Russia has borrowed funds from another subsidiary of the Company
to fund 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). Amounts outstanding under the loan totaled
$35.6 million as of December 31, 2007 but had been
reduced to $4.6 million as of December 31, 2008 and
further reduced to $1.0 million in January 2009. 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
December 31, 2008.
The Company has a $10.0 million line of credit with a
commercial bank. Under the terms of the revolving credit
agreement, the Company may elect to pay interest at either a
fluctuating base rate established by the bank from time to time
or at a rate based on the rate established in the London
inter-bank market. There were no borrowings outstanding under
this agreement at December 31, 2008. The Company does not
believe that it has any material exposure to market risk
associated with interest rates.
26
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The information required by this Item is contained in pages F-3
through F-23 of this Report.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
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 December 31, 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 assurances
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) Managements Report on Internal Control Over
Financial Reporting
For Managements Report on Internal Control Over Financial
Reporting, see
page F-1
of this Report.
(c) Report of Independent Registered Public Accounting Firm
For the Report of Independent Registered Public Accounting Firm
on the Companys internal control over financial reporting,
see
page F-2
of this Report.
(d) Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control
over financial reporting during the quarter ended
December 31, 2008, that materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
Certain information required by Part III is omitted from
this Report. The Company will file a definitive proxy statement
pursuant to Regulation 14A (the Proxy
Statement) not later than 120 days after the end of
the fiscal year covered by this Report and certain information
included therein is incorporated herein by reference. Only those
sections of the Proxy Statement that specifically address the
items set forth herein are incorporated by reference. Such
incorporation does not include the Compensation Committee Report
included in the Proxy Statement.
27
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Information concerning executive officers under Item 401 of
Regulation S-K
is set forth in Part I of this
Form 10-K.
The other information required by this Item is incorporated by
reference to the portions of the Companys Proxy Statement
entitled Security Ownership of Certain Beneficial Owners
and Management, Election of Directors
Nominees, Election of Directors
Committees of the Board of Directors and Meeting
Attendance, Code of Business Conduct and
Ethics, Section 16(a) Beneficial Ownership
Compliance and Report of the Audit Committee.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference to the portions of the Companys Proxy Statement
entitled Election of Directors-Committees of the Board of
Directors and Meeting Attendance, Compensation of
Executive Officers, Director Compensation and
Termination and Change in Control Payments.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item is incorporated by
reference from the Companys Proxy Statement under the
captions Securities Ownership of Certain Beneficial Owners
and Management and Equity Compensation Plan
Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item is incorporated by
reference to the portion of the Companys Proxy Statement
entitled Election of Directors Nominees.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item is incorporated by
reference to the portion of the Companys Proxy Statement
entitled Ratification of Appointment of the Companys
Independent Registered Public Accounting Firm.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) Exhibits, Financial Statements and Financial Statement
Schedules:
1. Consolidated Financial Statements
The Consolidated Financial Statements of CARBO Ceramics Inc.
listed below are contained in pages F-3 through F-23 of this
Report:
2. Consolidated Financial Statement Schedules
Schedule II Consolidated Valuation and
Qualifying Accounts is contained on
page S-1
of this Report. All other schedules have been omitted since they
are either not required or not applicable.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are
filed as part of, or incorporated by reference into, this Report.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CARBO Ceramics Inc.
Gary A. Kolstad
President and Chief Executive Officer
|
|
|
|
By:
|
/s/ Ernesto
Bautista III
|
Ernesto Bautista III
Vice President and
Chief Financial Officer
Dated: February 27, 2009
29
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Gary A. Kolstad
and Ernesto Bautista III, jointly and severally, his
attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report
on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact, or his substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ William
C. Morris
William
C. Morris
|
|
Chairman of the Board
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Gary
A. Kolstad
Gary
A. Kolstad
|
|
President, Chief Executive Officer and
Director (Principal Executive Officer)
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Ernesto
Bautista III
Ernesto
Bautista III
|
|
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Claude
E. Cooke, Jr.
Claude
E. Cooke, Jr.
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Chad
C. Deaton
Chad
C. Deaton
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ James
B. Jennings
James
B. Jennings
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ H.E.
Lentz, Jr.
H.E.
Lentz, Jr.
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Randy
L. Limbacher
Randy
L. Limbacher
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Robert
S. Rubin
Robert
S. Rubin
|
|
Director
|
|
February 27, 2009
|
30
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external reporting purposes in accordance with generally
accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and our Chief
Financial Officer, assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2008. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on its
assessment and those criteria, management has concluded that the
Company maintained effective internal control over financial
reporting as of December 31, 2008.
The Companys independent registered public accounting
firm, Ernst & Young LLP, has issued an attestation
report on the Companys internal control over financial
reporting. That report is included herein.
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
CARBO Ceramics Inc.
We have audited CARBO Ceramics Inc.s internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). CARBO Ceramics
Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting included in the accompanying Managements Report
on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, CARBO Ceramics Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of CARBO Ceramics Inc. as of
December 31, 2008, and 2007, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2008 and our report dated February 26,
2009 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
February 26, 2009
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
CARBO Ceramics Inc.
We have audited the accompanying consolidated balance sheets of
CARBO Ceramics Inc. as of December 31, 2008 and 2007, and
the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with 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,
2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, in 2008 the Company changed its method of accounting
for inventories and in 2007 the Company changed its method of
accounting for income taxes.
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, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 26, 2009 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
February 26, 2009
F-3
CARBO
CERAMICS INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
154,817
|
|
|
$
|
12,296
|
|
Trade accounts and other receivables, net
|
|
|
65,724
|
|
|
|
51,353
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
34,886
|
|
|
|
35,070
|
|
Raw materials and supplies
|
|
|
29,958
|
|
|
|
18,917
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
64,844
|
|
|
|
53,987
|
|
Prepaid expenses and other current assets
|
|
|
2,243
|
|
|
|
2,246
|
|
Deferred income taxes
|
|
|
8,084
|
|
|
|
6,451
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
66,191
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
295,712
|
|
|
|
192,524
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
10,208
|
|
|
|
8,880
|
|
Land-use and mineral rights
|
|
|
6,257
|
|
|
|
6,168
|
|
Buildings
|
|
|
42,416
|
|
|
|
42,881
|
|
Machinery and equipment
|
|
|
281,894
|
|
|
|
281,629
|
|
Construction in progress
|
|
|
24,881
|
|
|
|
11,455
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
365,656
|
|
|
|
351,013
|
|
Less accumulated depreciation
|
|
|
120,754
|
|
|
|
97,752
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
244,902
|
|
|
|
253,261
|
|
Goodwill
|
|
|
4,859
|
|
|
|
4,873
|
|
Intangible and other assets, net
|
|
|
3,806
|
|
|
|
2,465
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
549,279
|
|
|
$
|
453,123
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
15,615
|
|
|
$
|
8,206
|
|
Accrued payroll and benefits
|
|
|
9,373
|
|
|
|
8,812
|
|
Accrued freight
|
|
|
3,668
|
|
|
|
2,979
|
|
Accrued utilities
|
|
|
4,089
|
|
|
|
3,132
|
|
Accrued income taxes
|
|
|
47,929
|
|
|
|
2,474
|
|
Other accrued expenses
|
|
|
3,174
|
|
|
|
3,637
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
4,024
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
83,848
|
|
|
|
33,264
|
|
Deferred income taxes
|
|
|
22,897
|
|
|
|
30,420
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share, 5,000 shares
authorized, none outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 40,000,000 shares
authorized; 23,637,678 and 24,516,370 shares issued and
outstanding at December 31, 2008 and 2007, respectively
|
|
|
236
|
|
|
|
245
|
|
Additional paid-in capital
|
|
|
73,460
|
|
|
|
108,686
|
|
Retained earnings
|
|
|
371,602
|
|
|
|
276,879
|
|
Accumulated other comprehensive income (loss)
|
|
|
(2,764
|
)
|
|
|
3,629
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
442,534
|
|
|
|
389,439
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
549,279
|
|
|
$
|
453,123
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
CARBO
CERAMICS INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except per share data)
|
|
|
Revenues
|
|
$
|
387,828
|
|
|
$
|
299,996
|
|
|
$
|
283,829
|
|
Cost of sales
|
|
|
260,394
|
|
|
|
198,070
|
|
|
|
179,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
127,434
|
|
|
|
101,926
|
|
|
|
103,932
|
|
Selling, general and administrative expenses
|
|
|
37,644
|
|
|
|
28,984
|
|
|
|
25,826
|
|
Start-up
costs
|
|
|
1,108
|
|
|
|
1,215
|
|
|
|
474
|
|
Loss on disposal or impairment of assets
|
|
|
1,599
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
87,083
|
|
|
|
71,459
|
|
|
|
77,632
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
491
|
|
|
|
419
|
|
|
|
1,590
|
|
Foreign currency exchange gain, net
|
|
|
257
|
|
|
|
2,882
|
|
|
|
1,387
|
|
Other, net
|
|
|
518
|
|
|
|
(181
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,266
|
|
|
|
3,120
|
|
|
|
2,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
88,349
|
|
|
|
74,579
|
|
|
|
80,576
|
|
Income taxes
|
|
|
27,944
|
|
|
|
24,938
|
|
|
|
28,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
60,405
|
|
|
|
49,641
|
|
|
|
52,245
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of income taxes
|
|
|
5,784
|
|
|
|
4,229
|
|
|
|
2,008
|
|
Gain on disposal of discontinued operations, net of income taxes
|
|
|
44,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
110,316
|
|
|
$
|
53,870
|
|
|
$
|
54,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.48
|
|
|
$
|
2.04
|
|
|
$
|
2.15
|
|
Income from discontinued operations, net of tax
|
|
|
0.24
|
|
|
|
0.17
|
|
|
|
0.08
|
|
Gain on disposal of discontinued operations, net of income taxes
|
|
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.53
|
|
|
$
|
2.21
|
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.47
|
|
|
$
|
2.03
|
|
|
$
|
2.14
|
|
Income from discontinued operations, net of tax
|
|
|
0.24
|
|
|
|
0.17
|
|
|
|
0.08
|
|
Gain on disposal of discontinued operations, net of income taxes
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.51
|
|
|
$
|
2.20
|
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
CARBO
CERAMICS INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Unearned
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
($ in thousands, except per share data)
|
|
|
Balances at January 1, 2006
|
|
$
|
243
|
|
|
$
|
102,536
|
|
|
$
|
(2,135
|
)
|
|
$
|
192,196
|
|
|
$
|
526
|
|
|
$
|
293,366
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,253
|
|
|
|
|
|
|
|
54,253
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,573
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,826
|
|
Exercise of stock options
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,024
|
|
Tax benefit from stock based compensation
|
|
|
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554
|
|
Stock based compensation
|
|
|
1
|
|
|
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,806
|
|
Adoption of SFAS 123(R) (Note 9)
|
|
|
|
|
|
|
(2,135
|
)
|
|
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.44 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,717
|
)
|
|
|
|
|
|
|
(10,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
244
|
|
|
|
104,784
|
|
|
|
|
|
|
|
235,732
|
|
|
|
2,099
|
|
|
|
342,859
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,870
|
|
|
|
|
|
|
|
53,870
|
|
Foreign currency translation adjustment, net of tax of $1,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,530
|
|
|
|
1,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,400
|
|
Exercise of stock options
|
|
|
1
|
|
|
|
1,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,399
|
|
Tax benefit from stock based compensation
|
|
|
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328
|
|
Stock based compensation
|
|
|
|
|
|
|
2,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,176
|
|
Cash dividends ($0.52 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,723
|
)
|
|
|
|
|
|
|
(12,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
245
|
|
|
|
108,686
|
|
|
|
|
|
|
|
276,879
|
|
|
|
3,629
|
|
|
|
389,439
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,316
|
|
|
|
|
|
|
|
110,316
|
|
Foreign currency translation adjustment, net of tax benefit of
($3,442)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,393
|
)
|
|
|
(6,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,923
|
|
Exercise of stock options
|
|
|
1
|
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,557
|
|
Tax benefit from stock based compensation
|
|
|
|
|
|
|
1,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,186
|
|
Stock based compensation
|
|
|
|
|
|
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,172
|
|
Shares repurchased and retired
|
|
|
(10
|
)
|
|
|
(42,140
|
)
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
(42,240
|
)
|
Shares surrendered by employees to pay taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
|
|
|
|
(269
|
)
|
Cash dividends ($0.62 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,234
|
)
|
|
|
|
|
|
|
(15,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
$
|
236
|
|
|
$
|
73,460
|
|
|
$
|
|
|
|
$
|
371,602
|
|
|
$
|
(2,764
|
)
|
|
$
|
442,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
CARBO
CERAMICS INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
110,316
|
|
|
$
|
53,870
|
|
|
$
|
54,253
|
|
Adjustments to reconcile net income to net cash provided by
operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
(5,784
|
)
|
|
|
(4,229
|
)
|
|
|
(2,008
|
)
|
Depreciation and amortization
|
|
|
24,638
|
|
|
|
19,895
|
|
|
|
15,630
|
|
Gain on disposal of discontinued operations
|
|
|
(44,127
|
)
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
72
|
|
|
|
82
|
|
|
|
507
|
|
Deferred income taxes
|
|
|
(5,714
|
)
|
|
|
(776
|
)
|
|
|
584
|
|
Excess tax benefits from stock based compensation
|
|
|
(375
|
)
|
|
|
(170
|
)
|
|
|
(307
|
)
|
Loss on disposal or impairment of assets
|
|
|
1,599
|
|
|
|
237
|
|
|
|
|
|
Foreign currency transaction gain, net
|
|
|
(257
|
)
|
|
|
(2,882
|
)
|
|
|
(1,387
|
)
|
Stock compensation expense
|
|
|
2,052
|
|
|
|
1,709
|
|
|
|
2,311
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts and other receivables
|
|
|
(15,515
|
)
|
|
|
2,773
|
|
|
|
(7,243
|
)
|
Inventories
|
|
|
(13,162
|
)
|
|
|
(12,143
|
)
|
|
|
(14,104
|
)
|
Prepaid expenses and other current assets
|
|
|
(596
|
)
|
|
|
204
|
|
|
|
(57
|
)
|
Long-term prepaid expenses
|
|
|
(1,464
|
)
|
|
|
173
|
|
|
|
92
|
|
Accounts payable
|
|
|
234
|
|
|
|
1,325
|
|
|
|
1,313
|
|
Accrued expenses
|
|
|
1,905
|
|
|
|
871
|
|
|
|
2,982
|
|
Accrued income taxes
|
|
|
22,247
|
|
|
|
(369
|
)
|
|
|
(6,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
|
76,069
|
|
|
|
60,570
|
|
|
|
46,294
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
(23,343
|
)
|
|
|
(53,944
|
)
|
|
|
(61,013
|
)
|
Acquisition of business, net of cash acquired
|
|
|
|
|
|
|
(2,545
|
)
|
|
|
|
|
Investment in cost-method investee
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
Net proceeds from sale of discontinued operations
|
|
|
142,278
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
(26,765
|
)
|
Proceeds from maturities of short-term investments
|
|
|
|
|
|
|
11,500
|
|
|
|
61,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities of
continuing operations
|
|
|
117,935
|
|
|
|
(48,989
|
)
|
|
|
(26,538
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings
|
|
|
6,500
|
|
|
|
12,000
|
|
|
|
|
|
Repayments on bank borrowings
|
|
|
(6,500
|
)
|
|
|
(12,000
|
)
|
|
|
|
|
Net proceeds from stock based compensation
|
|
|
2,557
|
|
|
|
1,398
|
|
|
|
1,024
|
|
Dividends paid
|
|
|
(15,234
|
)
|
|
|
(12,723
|
)
|
|
|
(10,717
|
)
|
Purchase of common stock
|
|
|
(42,509
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefits from stock based compensation
|
|
|
375
|
|
|
|
170
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities of continuing operations
|
|
|
(54,811
|
)
|
|
|
(11,155
|
)
|
|
|
(9,386
|
)
|
Effect of exchange rate changes on cash
|
|
|
(371
|
)
|
|
|
243
|
|
|
|
(68
|
)
|
Net cash provided by (used in) discontinued operations
|
|
|
3,699
|
|
|
|
(13,346
|
)
|
|
|
(5,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
142,521
|
|
|
|
(12,677
|
)
|
|
|
5,278
|
|
Cash and cash equivalents at beginning of year
|
|
|
12,296
|
|
|
|
24,973
|
|
|
|
19,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
154,817
|
|
|
$
|
12,296
|
|
|
$
|
24,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
44
|
|
|
$
|
43
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
15,305
|
|
|
$
|
28,675
|
|
|
$
|
35,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
CARBO
CERAMICS INC.
($ 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. The Company has six
production plants operating in: New Iberia, Louisiana; Eufaula,
Alabama; McIntyre, Georgia; Toomsboro, Georgia; Luoyang, China;
and Kopeysk, Russia. The Company predominantly markets its
proppant products through pumping service companies that perform
hydraulic fracturing for major 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 consulting and software services to oil
and gas companies worldwide, as well as tiltmeter technology for
geotechnical applications.
Principles
of Consolidation
The consolidated financial statements include the accounts of
CARBO Ceramics Inc. and its operating subsidiaries (the
Company). The consolidated financial statements also
include a 6% interest in a Texas-based electronic equipment
manufacturing company that was acquired in March 2008 and is
reported under the cost method of accounting. 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 Companys receivables are
from customers in the 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, 2008 and 2007 was $1,739 and $1,636,
respectively. Other receivables were $2,206 and $3,462 as of
December 31, 2008 and 2007, respectively, which related
mainly to miscellaneous receivables in China for 2008 and value
added tax receivables in Russia for 2007.
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 Companys products.
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.
F-8
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2,500 acres of land and
leasehold interests in Wilkinson County, Georgia, near its
plants in McIntyre and Toomsboro, Georgia and 80 acres of
land and leasehold interests in Barbour County, Alabama near its
plant in Eufaula, Alabama. The Company estimates the land in
Wilkinson County, Georgia and Barbour County, Alabama has an
aggregate total of 12.0 million tons of kaolin reserves for
use as raw material in production of its products. 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
kaolin reserves.
Impairment
of Long-Lived Assets and Intangible Assets
Long-lived assets to be held and used or 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
determined based on discounted expected future cash flows or
appraised values, as appropriate. Long-lived assets that are
held for disposal are reported at the lower of the assets
carrying amount or fair value less costs related to the
assets disposition. During 2008 and 2007, the Company
recognized losses of $1,599 and $268, respectively, on disposal
or impairment of various assets from continuing operations.
During 2008, the disposals related to the write-off of a
prepayment for the purchase of ceramic proppant from a Chinese
proppant manufacturer, while 2007 disposals mainly related to
equipment disposals in its U.S. manufacturing facilities.
Capitalized
Costs of Software for Sale or Use in Revenue Generating
Activities
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, 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. Realization of goodwill is assessed at least
annually by management based on the fair value of the respective
reporting unit. The latest impairment review indicated goodwill
was not impaired.
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.
F-9
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2008 relate to the
start-up
of
the second production line at the Companys Toomsboro,
Georgia facility and the reopening of the New Iberia, Louisiana
manufacturing facility idled earlier during 2008.
Start-up
costs for 2007 are related primarily to the new proppant
manufacturing facility in Kopeysk, Russia, which began proppant
production in the first half of 2007.
Start-up
costs for 2006 are related primarily to the new proppant
manufacturing facility in Toomsboro, Georgia, which began
proppant production in January 2006.
Start-up
costs include organizational and administrative costs associated
with the facilities as well as labor, materials, and utilities
to bring installed equipment to operating condition.
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 2008, 2007 and 2006 were
$3,130, $3,361 and $2,974, respectively.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FASB Statement No. 123(R),
Share-Based Payment
(SFAS 123(R)), which
is a revision of SFAS 123 and supersedes APB 25.
SFAS 123(R) requires the Company to recognize compensation
expense in the income statement for all share-based payments to
employees. Under SFAS 123(R), the cost of employee services
received in exchange for stock is measured based on the
grant-date fair value. The Company recognizes that cost on a
straight-line basis over the period during which an employee is
required to provide services in exchange for the award (usually
the vesting period). The fair value of stock options is
estimated using a Black-Scholes option-pricing model and the
fair value of restricted stock is determined based on the market
price of the Companys Common Stock on the date of grant.
Compensation expense is recognized only for share based payments
expected to vest; therefore the Company estimates forfeitures at
the time of grant based on historical forfeiture rates and
future expectations and reduces compensation expense
accordingly. Forfeiture rates are revised, if necessary, in
subsequent periods, with the Company ultimately recognizing
expense only on awards that actually vest. Excess tax benefits,
as defined in SFAS 123(R), are recognized as additions to
paid-in capital and classified as financing cash flows.
Foreign
Subsidiaries
Financial statements of the Companys 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
income (loss) as a separate component of shareholders
equity.
F-10
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (the
FASB) issued Statement 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 December 2007, the FASB issued Statement No. 141R,
Business Combinations
(SFAS 141R), which replaces FASB Statement
No. 141 (SFAS 141). The statement retains
the purchase method of accounting for acquisitions, but requires
a number of changes, including changes in the way assets and
liabilities are recognized in purchase accounting. It also
changes the recognition of assets acquired and liabilities
assumed arising from contingencies, requires the capitalization
of in-process research and development at fair value, and
requires the expensing of acquisition-related costs as incurred.
The guidance in SFAS 141(R) will be applied prospectively
to business combinations completed on or after January 1,
2009.
|
|
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 included all of the
fracture and reservoir diagnostic business, the Pinnacle name
and related trademarks, was completed on October 10, 2008
for $142,278 in cash, net of working capital adjustments. The
Company recorded a gain of $44,127, net of goodwill of $18,340
allocated to the business sold and income taxes of $24,394. 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)
(SFAS 144). The Company has no continuing
involvement in these operations. In accordance with
SFAS No. 144
,
the assets and liabilities
related to this transaction have been segregated from continuing
operations and are reported as assets and liabilities of
discontinued operations in the accompanying consolidated balance
sheet as of December 31, 2007. In addition, operations
associated with these assets have been classified as income from
discontinued operations in the accompanying consolidated
statements of income and the cash flows associated with
discontinued operations have been segregated in the accompanying
consolidated statements of cash flows. The Company retained 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 quantitative thresholds for a reportable segment.
F-11
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The detail of assets and liabilities of discontinued operations
reported in the consolidated balance sheet as of
December 31, 2007 is as follows:
|
|
|
|
|
Current assets:
|
|
|
|
|
Trade accounts and other receivables, net
|
|
$
|
17,597
|
|
Prepaid expenses and other current assets
|
|
|
342
|
|
Property, plant and equipment:
|
|
|
|
|
Land and land improvements
|
|
|
827
|
|
Buildings
|
|
|
4,022
|
|
Machinery and equipment
|
|
|
28,964
|
|
Construction in progress
|
|
|
1,312
|
|
|
|
|
|
|
Total
|
|
|
35,125
|
|
Less accumulated depreciation
|
|
|
12,560
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
22,565
|
|
Goodwill
|
|
|
18,340
|
|
Intangible and other assets, net
|
|
|
7,347
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
66,191
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
3,611
|
|
Other accrued expenses
|
|
|
413
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
4,024
|
|
|
|
|
|
|
Revenues and income before income taxes, excluding the gain on
disposed assets, from discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
44,087
|
|
|
$
|
40,355
|
|
|
$
|
28,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
9,330
|
|
|
$
|
6,821
|
|
|
$
|
3,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49,911
|
|
|
$
|
4,229
|
|
|
$
|
2,008
|
|
Gain on disposal
|
|
|
(44,127
|
)
|
|
|
|
|
|
|
|
|
Depreciation, amortization and other
|
|
|
3,932
|
|
|
|
5,059
|
|
|
|
4,245
|
|
Changes in operating assets and liabilities, net
|
|
|
235
|
|
|
|
(10,121
|
)
|
|
|
(1,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
9,951
|
|
|
|
(833
|
)
|
|
|
4,370
|
|
Investing activities: Capital expenditures and other, net
|
|
|
(6,664
|
)
|
|
|
(12,590
|
)
|
|
|
(9,447
|
)
|
Financing activities: Excess tax benefits from stock based
compensation
|
|
|
412
|
|
|
|
77
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) discontinued operations
|
|
$
|
3,699
|
|
|
$
|
(13,346
|
)
|
|
$
|
(5,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Acquisition
of Business
|
On April 12, 2007, the Company purchased 100 percent
of the outstanding shares of Applied Geomechanics, Inc.
(AGI), a supplier of tiltmeters. Results of
operations for AGI, included in the consolidated financial
statements since that date, are not material. AGI develops and
markets precision measurement instruments for geotechnical and
scientific applications. The Companys acquisition and the
resulting goodwill were attributable to the Companys
strategy to expand its ability to produce tiltmeters and related
equipment and improve the Companys revenue generating
potential in the geotechnical (non-oilfield) monitoring
business. The acquisition was accounted for using the purchase
method of accounting provided for under Financial Accounting
Standards Board Statement No. 141, Business
Combinations. The aggregate cost of the acquisition was
$2,553 in cash and direct costs of the transaction. Goodwill of
$1,373 arising in the transaction is not deductible for income
tax purposes.
|
|
4.
|
Intangible
and Other Assets
|
Following is a summary of intangible assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses
|
|
$
|
610
|
|
|
$
|
278
|
|
|
$
|
610
|
|
|
$
|
156
|
|
Hardware designs
|
|
|
590
|
|
|
|
236
|
|
|
|
512
|
|
|
|
84
|
|
Software
|
|
|
1,263
|
|
|
|
643
|
|
|
|
1,093
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,463
|
|
|
$
|
1,157
|
|
|
$
|
2,215
|
|
|
$
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average amortization period for patents and
licenses, hardware designs, and software is 5 years.
Amortization expense for 2008, 2007 and 2006 was $462, $402 and
$111, respectively. Estimated amortization expense for each of
the ensuing years through December 31, 2012 is $406, $341,
$260, and $87, respectively, and none thereafter.
Other assets totaling $2,500 at December 31, 2008 consisted
of a 6% interest in a Texas-based electronic equipment
manufacturing company that was acquired in March 2008 and is
reported under the cost method of accounting and a prepayment
for ore reserves and mineral rights to land in Saline County,
Arkansas. Other assets totaling $945 at December 31, 2007
consisted of the long-term portion of a prepayment for the
purchase of ceramic proppant from a manufacturer, which was
written-off in 2008.
Under the terms of an unsecured revolving credit agreement with
a bank, dated December 31, 2000, and amended
December 23, 2003, December 10, 2004 and
December 31, 2006, the Company may borrow up to $10,000
through December 31, 2009, with the option of choosing
either the banks fluctuating Base Rate or LIBOR Fixed Rate
(as defined in the credit agreement). At December 31, 2008,
the unused portion of the credit facility was $10,000. The terms
of the credit agreement provide for certain affirmative and
negative covenants and require the Company to maintain certain
financial ratios. Commitment fees are payable quarterly at the
annual rate of 0.375% of the unused line of credit. Commitment
fees were $37, $35, and $38 in 2008, 2007, and 2006,
respectively.
F-13
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases certain property, plant and equipment under
operating leases, primarily consisting of railroad equipment
leases. Minimum future rental payments due under non-cancelable
operating leases with remaining terms in excess of one year as
of December 31, 2008 are as follows:
|
|
|
|
|
2009
|
|
$
|
5,536
|
|
2010
|
|
|
5,082
|
|
2011
|
|
|
4,410
|
|
2012
|
|
|
3,175
|
|
2013
|
|
|
1,774
|
|
Thereafter
|
|
|
4,009
|
|
|
|
|
|
|
Total
|
|
$
|
23,986
|
|
|
|
|
|
|
Leases of railroad equipment generally provide for renewal
options for periods from one to five years 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. Rent expense for all operating leases
was $7,493 in 2008, $6,205 in 2007, and $4,801 in 2006.
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
Companys deferred tax assets and liabilities as of
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
975
|
|
|
$
|
1,390
|
|
Inventories
|
|
|
2,769
|
|
|
|
1,826
|
|
Foreign tax credits
|
|
|
2,402
|
|
|
|
1,600
|
|
Goodwill
|
|
|
3,777
|
|
|
|
|
|
Other
|
|
|
1,938
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
11,861
|
|
|
|
6,451
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
25,553
|
|
|
|
21,665
|
|
Goodwill
|
|
|
|
|
|
|
2,697
|
|
Foreign earnings and other
|
|
|
1,121
|
|
|
|
6,058
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
26,674
|
|
|
|
30,420
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
14,813
|
|
|
$
|
23,969
|
|
|
|
|
|
|
|
|
|
|
F-14
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the provision for income taxes from
continuing operations for the years ended December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
30,626
|
|
|
$
|
23,641
|
|
|
$
|
24,287
|
|
State
|
|
|
2,072
|
|
|
|
774
|
|
|
|
3,416
|
|
Foreign
|
|
|
960
|
|
|
|
1,299
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
33,658
|
|
|
|
25,714
|
|
|
|
27,747
|
|
Deferred
|
|
|
(5,714
|
)
|
|
|
(776
|
)
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,944
|
|
|
$
|
24,938
|
|
|
$
|
28,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In China, the Company benefited from a full income tax holiday
from the inception of that business through 2004 and a partial
tax holiday from 2005 through 2008. However, provision has been
made for deferred U.S. income taxes on all foreign earnings
based on the Companys intent to repatriate foreign
earnings. The reconciliation of income taxes computed at the
U.S. statutory tax rate to the Companys income tax
expense for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
U.S. statutory rate
|
|
$
|
30,922
|
|
|
|
35.0
|
%
|
|
$
|
26,102
|
|
|
|
35.0
|
%
|
|
$
|
28,201
|
|
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
1,100
|
|
|
|
1.2
|
|
|
|
405
|
|
|
|
0.5
|
|
|
|
1,906
|
|
|
|
2.4
|
|
Mining depletion
|
|
|
(1,865
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Section 199 Manufacturing Benefit, ETI Exclusion and other
|
|
|
(2,213
|
)
|
|
|
(2.5
|
)
|
|
|
(1,569
|
)
|
|
|
(2.1
|
)
|
|
|
(1,776
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,944
|
|
|
|
31.6
|
%
|
|
$
|
24,938
|
|
|
|
33.4
|
%
|
|
$
|
28,331
|
|
|
|
35.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, the Company determined that depletion deductions
should be claimed for the Companys kaolin mining
activities, which supply its lightweight ceramic proppant
operations. Mining depletion recorded during 2008 relates to
deductions available to the Company for mining activities
conducted during 2008, amounts claimed on the 2007 tax return,
as well as additional amounts to be claimed through the filing
of an amended tax return for 2006. State income taxes, net of
federal tax benefit, in 2007 are net of adjustments totaling
$913 resulting from the preparation and filing of prior years
tax returns and a reduction in deferred income tax liabilities
associated with changes in certain state tax regulations.
Effective January 1, 2007, the Company adopted the
FASBs Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes
(FIN 48).
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in financial statements and requires the impact
of a tax position to be recognized in the financial statements
if that position will more likely than not be sustained by the
taxing authority. The Company had a recorded reserve of
approximately $575 associated with uncertain tax positions as of
January 1, 2007. There were no significant changes to the
recorded reserve as a result of the adoption of FIN 48 or
during the years ended December 31, 2007 or
December 31, 2008. If these uncertain tax positions are
recognized, substantially all of this amount would impact the
effective tax rate. Related accrued interest and penalties are
recorded in income tax expense and are not material.
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.
The Company does not currently have material income tax exposure
in foreign jurisdictions due to tax holidays, recent
commencement of operations or immaterial operations. In June
2007 the Company concluded an audit by the U.S. Internal
Revenue Service for its 2003 tax year. The outcome did not have
a material effect on the financial statements. The 2005 through
2007 tax
F-15
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years are still subject to examination. Various U.S. state
jurisdiction tax years remain open to examination as well though
the Company believes assessments, if any, would be immaterial to
its consolidated financial statements.
Income tax expense included in discontinued operations for the
years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income from discontinued operations
|
|
$
|
3,546
|
|
|
$
|
2,592
|
|
|
$
|
1,230
|
|
Gain on disposal of discontinued operations
|
|
|
24,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,940
|
|
|
$
|
2,592
|
|
|
$
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 20, 2009, the Board of Directors declared a cash
dividend of $0.17 per share. The dividend is payable on
February 17, 2009 to shareholders of record on
February 2, 2009.
Preferred
Stock
The Companys 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 Companys shareholders. In connection with adoption of
a shareholder rights plan on February 13, 2002, the Company
created the Series A Preferred Stock and authorized
2,000 shares of the Series A Preferred Stock.
Shareholder
Rights Plan
On February 13, 2002, the Company adopted a shareholder
rights plan and declared a dividend of one right for each
outstanding share of Common Stock to shareholders of record on
February 25, 2002. With certain exceptions, the rights
become exercisable if a tender offer for the Company is
announced or any person or group acquires beneficial ownership
of at least 15 percent of the Companys Common Stock.
If exercisable, each right entitles the holder to purchase one
fifteen-thousandth of a share of Series A Preferred Stock
at an exercise price of $133 and, if any person or group
acquires beneficial ownership of at least 15 percent of the
Companys Common Stock, to acquire a number of shares of
Common Stock having a market value of two times the $133
exercise price. The Company may redeem the rights for $0.01 per
right at any time before any person or group acquires beneficial
ownership of at least 15 percent of the Common Stock. The
rights expire on February 13, 2012.
|
|
9.
|
Stock
Based Compensation
|
The Company has three stock based compensation plans: one
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
F-16
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 (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. 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
December 31, 2008, 120,690 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
December 31, 2008, 6,960 shares were reserved for
future issuance in payment of $313 of deferred fees under the
Plan by electing directors.
A summary of stock option activity and related information for
the year ended December 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Outstanding at January 1, 2008
|
|
|
171,075
|
|
|
$
|
22.43
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(117,400
|
)
|
|
$
|
21.78
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
53,675
|
|
|
$
|
23.85
|
|
|
$
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
53,675
|
|
|
$
|
23.85
|
|
|
$
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, all compensation cost related to
stock options granted under the plans has been recognized. The
weighted-average remaining contractual term of options
outstanding at December 31, 2008 was 3.5 years. The
total intrinsic value of options exercised during the years
ended December 31, 2008, 2007 and 2006 was $3,622, $1,401,
and $1,513, respectively.
F-17
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of restricted stock activity and related information
for the year ended December 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2008
|
|
|
99,721
|
|
|
$
|
45.10
|
|
Granted
|
|
|
73,995
|
|
|
$
|
37.33
|
|
Vested
|
|
|
(68,454
|
)
|
|
$
|
44.00
|
|
Forfeited
|
|
|
(1,412
|
)
|
|
$
|
45.15
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
103,850
|
|
|
$
|
40.29
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was $2,319 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 weighted-average
grant date fair value of restricted stock granted during the
years ended December 31, 2007 and 2006 was $38.75 and
$57.52, respectively. The total fair value of shares vested
during the years ended December 31, 2008, 2007 and 2006 was
$3,012, $1,997 and $1,698, respectively.
During October 2008, in connection with the sale of assets to
Halliburton, restricted stock vesting was accelerated for
certain Pinnacle employees transferring employment to
Halliburton. Vesting of 26,000 restricted shares accelerated on
October 10, 2008, resulting in accelerated compensation
cost of $588, which is included in the gain on sale of
discontinued operations.
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 vests and
ceases 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 December 31, 2008, there were 6,125 units
of phantom shares granted under the plan, of which 1,125 have
vested and 325 have been forfeited, with a total value of $166,
the vested portion of which is recorded as a liability within
Other Accrued Expenses in the Consolidated Balance Sheet.
F-18
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
60,405
|
|
|
$
|
49,641
|
|
|
$
|
52,245
|
|
Income from discontinued operations, net of tax
|
|
|
5,784
|
|
|
|
4,229
|
|
|
|
2,008
|
|
Gain on disposal of discontinued operations, net of tax
|
|
|
44,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
110,316
|
|
|
$
|
53,870
|
|
|
$
|
54,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
Weighted-average shares
|
|
|
24,373,007
|
|
|
|
24,367,479
|
|
|
|
24,280,778
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options (See Note 9)
|
|
|
39,995
|
|
|
|
80,203
|
|
|
|
100,640
|
|
Nonvested and deferred stock awards (See Note 9)
|
|
|
47,956
|
|
|
|
36,220
|
|
|
|
19,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
87,951
|
|
|
|
116,423
|
|
|
|
119,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted
weighted-average shares
|
|
|
24,460,958
|
|
|
|
24,483,902
|
|
|
|
24,400,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.48
|
|
|
$
|
2.04
|
|
|
$
|
2.15
|
|
Income from discontinued operations, net of tax
|
|
|
0.24
|
|
|
|
0.17
|
|
|
|
0.08
|
|
Gain on disposal of discontinued operations, net of tax
|
|
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.53
|
|
|
$
|
2.21
|
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.47
|
|
|
$
|
2.03
|
|
|
$
|
2.14
|
|
Income from discontinued operations, net of tax
|
|
|
0.24
|
|
|
|
0.17
|
|
|
|
0.08
|
|
Gain on disposal of discontinued operations, net of tax
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.51
|
|
|
$
|
2.20
|
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Quarterly
Operating Results (Unaudited)
|
Quarterly results for the years ended December 31, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
90,375
|
|
|
$
|
89,285
|
|
|
$
|
102,587
|
|
|
$
|
105,581
|
|
Gross profit
|
|
|
27,044
|
|
|
|
26,420
|
|
|
|
32,138
|
|
|
|
41,832
|
|
Income from continuing operations
|
|
|
12,855
|
|
|
|
11,749
|
|
|
|
15,312
|
|
|
|
20,489
|
|
Discontinued operations
|
|
|
1,376
|
|
|
|
1,781
|
|
|
|
3,108
|
|
|
|
43,646
|
|
Net income
|
|
|
14,231
|
|
|
|
13,530
|
|
|
|
18,420
|
|
|
|
64,135
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.52
|
|
|
$
|
0.48
|
|
|
$
|
0.62
|
|
|
$
|
0.85
|
|
Discontinued operations
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
$
|
1.81
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.52
|
|
|
$
|
0.48
|
|
|
$
|
0.62
|
|
|
$
|
0.85
|
|
Discontinued operations
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
$
|
1.81
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
75,284
|
|
|
$
|
69,407
|
|
|
$
|
74,313
|
|
|
$
|
80,992
|
|
Gross profit
|
|
|
25,538
|
|
|
|
25,785
|
|
|
|
25,124
|
|
|
|
25,479
|
|
Income from continuing operations
|
|
|
12,838
|
|
|
|
12,003
|
|
|
|
12,854
|
|
|
|
11,946
|
|
Discontinued operations
|
|
|
461
|
|
|
|
878
|
|
|
|
1,209
|
|
|
|
1,681
|
|
Net income
|
|
|
13,299
|
|
|
|
12,881
|
|
|
|
14,063
|
|
|
|
13,627
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.53
|
|
|
$
|
0.49
|
|
|
$
|
0.53
|
|
|
$
|
0.49
|
|
Discontinued operations
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.53
|
|
|
$
|
0.49
|
|
|
$
|
0.52
|
|
|
$
|
0.49
|
|
Discontinued operations
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
Quarterly data may not sum to full year data reported in the
Consolidated Financial Statements due to rounding. Discontinued
operations for the quarter ended December 31, 2008, include
the affects of the gain on sale of discontinued operations.
The following schedule presents the percentages of total
revenues related to the Companys three major customers for
the three-year period ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Customers
|
|
|
|
|
|
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
Others
|
|
|
Total
|
|
|
2008
|
|
|
30.9
|
%
|
|
|
25.3
|
%
|
|
|
15.3
|
%
|
|
|
28.5
|
%
|
|
|
100
|
%
|
2007
|
|
|
25.8
|
%
|
|
|
21.5
|
%
|
|
|
22.6
|
%
|
|
|
30.1
|
%
|
|
|
100
|
%
|
2006
|
|
|
26.9
|
%
|
|
|
21.2
|
%
|
|
|
28.8
|
%
|
|
|
23.1
|
%
|
|
|
100
|
%
|
F-20
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Geographic
Information
|
Long-lived assets, consisting of net property, plant and
equipment, goodwill and intangibles, as of December 31 in the
United States and other countries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
195,970
|
|
|
$
|
195,242
|
|
|
$
|
160,800
|
|
International (primarily China and Russia)
|
|
|
55,097
|
|
|
|
64,413
|
|
|
|
58,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
251,067
|
|
|
$
|
259,655
|
|
|
$
|
218,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues outside the United States accounted for 29%, 36% and
36% of the Companys revenues for 2008, 2007 and 2006,
respectively. Revenues for the years ended December 31 in the
United States, Canada and other countries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
273,805
|
|
|
$
|
191,632
|
|
|
$
|
181,949
|
|
Canada
|
|
|
42,233
|
|
|
|
36,133
|
|
|
|
48,233
|
|
Other international
|
|
|
71,790
|
|
|
|
72,231
|
|
|
|
53,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
387,828
|
|
|
$
|
299,996
|
|
|
$
|
283,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Contributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit sharing
|
|
$
|
1,289
|
|
|
$
|
1,385
|
|
|
$
|
1,256
|
|
Savings
|
|
|
1,020
|
|
|
|
879
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,309
|
|
|
$
|
2,264
|
|
|
$
|
1,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All contributions to the plans are 100% participant directed.
Participants are allowed to invest up to 20% of contributions in
the Companys Common Stock.
In 2003, the Company entered into a new agreement with an
existing supplier to purchase kaolin for its Eufaula, Alabama,
plant at a specified contract price. The term of the agreement
is seven years commencing January 1, 2004 and requires the
Company to purchase from the supplier at least 70 percent
of its annual kaolin requirements for its Eufaula, Alabama,
plant at specified contract prices. For the years ended
December 31, 2008, 2007, and 2006, the Company purchased
from the supplier $3,891, $3,092 and $3,022, respectively, of
kaolin under the agreement.
In January 2003, the Company entered into a mining agreement
with a contractor to provide kaolin for the Companys
McIntyre plant at specified contract prices, from lands owned or
leased by either the Company or the contractor. The term of the
agreement is twenty years commencing on January 1, 2003,
and requires the Company to accept delivery from the contractor
of at least 80 percent of the McIntyre plants annual
kaolin requirements. For the
F-21
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years ended December 31, 2008, 2007 and 2006, the Company
purchased $810, $556 and $873, respectively, of kaolin under the
agreement.
In June 2007, the Company entered into an agreement with a
supplier to purchase calcined bauxite for its McIntyre, Georgia
facility at a specified contract price. The term of the
agreement was to purchase 10,000 metric tons in 2007. However,
during 2007 the supplier was unable to obtain a ship to
transport the material to the port of Savannah, Georgia;
therefore, no purchases were made during 2007 and 2008.
In 2002, the Company entered into a five-year agreement and a
ten-year agreement with two different suppliers to purchase
bauxite and hard clays for its China plant at specified contract
prices. The five-year agreement was automatically renewed for an
additional three years and requires the Company to purchase a
minimum of 10,000 metric tons of material annually, or
100 percent of its annual requirements for bauxite if less
than 10,000 metric tons. The ten-year agreement requires the
Company to accept delivery from the supplier for at least
80 percent of the plants annual requirements. For the
years ended December 31, 2008, 2007 and 2006, the Company
purchased $1,007, $1,580 and $763, respectively, of material
under these agreements.
The Company has entered into a lease agreement dated
November 1, 2008 with the Development Authority of
Wilkinson County (the Development Authority) in the
State of Georgia. This 2008 agreement supersedes and replaces
the prior lease agreement dated November 1, 2003. Pursuant
to the 2008 agreement, the Development Authority holds the title
to the real and personal property of the Companys McIntyre
and Toomsboro manufacturing facilities and leases the facilities
to the Company for an annual rental fee of $50 per year through
the year 2022. At any time prior to the scheduled termination of
the 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 a security interest in the title held by the
Development Authority. The Company has also entered into a
Memorandum of Understanding (the MOU) with the
Development Authority 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 Company is
required to achieve certain employment levels in order to retain
its tax incentive. 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. The property subject to the lease agreement is
included in Property, Plant and Equipment (net book value of
$155,710 at December 31, 2008) in the accompanying
consolidated financial statements.
The Company uses natural gas to power its domestic manufacturing
plants. From time to time the Company enters into contracts to
purchase a portion of the anticipated natural gas requirements
at specified prices. As of December 31, 2008, the Company
had natural gas contracts totaling $30,180 and $18,573 for years
ended 2009 and 2010, respectively.
|
|
16.
|
Employment
Agreements
|
The Company has an employment agreement through
December 31, 2009 with its President and Chief Executive
Officer. The agreement, as amended on October 31, 2008,
provides for an annual base salary and incentive bonus. If the
President is terminated early without cause, the Company will be
obligated to pay two years base salary and a prorated incentive
bonus. 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. 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.
F-22
CARBO
CERAMICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, the Companys net investment
that is subject to foreign currency fluctuations totaled $75,598
and the Company has recorded a cumulative foreign currency
translation loss of $2,764, net of deferred income tax benefit.
This cumulative translation loss is included in Accumulated
Other Comprehensive Income (Loss). Also, the Companys
subsidiary in Russia has borrowed funds from another subsidiary
of the Company to fund 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
December 31, 2008, and were subsequently reduced to $1,000
in 2009.
|
|
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
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. New emissions operating
permits for the McIntyre and Toomsboro facilities were received
in May and November 2008, respectively. In response to the NOVs,
and the Companys desire to expand its production
capacities at both facilities, the Company submitted Prevention
of Significant Deterioration (PSD) permit
applications for both facilities in June 2008. The EPD has not
yet issued a definitive 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.
On January 19, 2009, the Company awarded 77,155 shares
of restricted stock to certain employees. The fair value of the
stock award on the date of grant totaled $2,703, which will be
expensed net of estimated forfeitures over the three year
vesting period.
On January 19, 2009, the Company awarded 5,490 units
of phantom shares to certain key international employees. The
fair value of the stock award on the date of grant totaled $192.
In January 2009, the Russian ruble lost approximately
20 percent of its value relative to the U.S. dollar
resulting in a $5,867 reduction, net of deferred income taxes,
in the Companys net investment in that country. This
reduction in the foreign currency cumulative translation
adjustment is included in Accumulated Other Comprehensive Income
(Loss) in Shareholders Equity in 2009.
F-23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
Discontinued
|
|
|
End of
|
|
Year Ended
|
|
Year
|
|
|
Expenses
|
|
|
Write-offs
|
|
|
Operations
|
|
|
Year
|
|
|
|
($ in thousands)
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
1,636
|
|
|
$
|
72
|
|
|
$
|
175
|
|
|
$
|
(206
|
)
|
|
$
|
1,739
|
|
December 31, 2007
|
|
$
|
1,605
|
|
|
$
|
82
|
|
|
$
|
(7
|
)
|
|
$
|
58
|
|
|
$
|
1,636
|
|
December 31, 2006
|
|
$
|
1,335
|
|
|
$
|
507
|
|
|
$
|
89
|
|
|
$
|
148
|
|
|
$
|
1,605
|
|
S-1
Exhibit Index
|
|
|
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of CARBO
Ceramics Inc. (incorporated by reference to exhibit 3.1 of the
registrants Form S-1 Registration Statement No. 333-1884
filed July 19,1996)
|
|
3
|
.2
|
|
Second Amended and Restated By-Laws of CARBO Ceramics Inc.
(incorporated by reference to exhibit 3.1 of the
registrants Form 10-Q Quarterly Report for the quarter
ended September 30, 2008)
|
|
4
|
.1
|
|
Form of Common Stock Certificate of CARBO Ceramics Inc.
(incorporated by reference to exhibit 4.1 of the
registrants Form S-1 Registration Statement No. 333-1884
filed July 19, 1996)
|
|
4
|
.2
|
|
Certificate of Designations of Series A Preferred Stock
(incorporated by reference to exhibit 2 of the registrants
Form 8-A Registration Statement No. 001-15903 filed February 25,
2002)
|
|
10
|
.1
|
|
Second Amended and Restated Credit Agreement dated as of
December 31, 2000, as amended December 23, 2003 and as further
amended December 10, 2004, between Brown Brothers Harriman
& Co. and CARBO Ceramics Inc. (incorporated by reference to
exhibit 10.1 of the registrants Form 10-K Annual Report
for the year ended December 31, 2000)
|
|
10
|
.2
|
|
Purchase and Sale Agreement dated as of March 31, 1995, between
CARBO Ceramics Inc. and GEO Specialty Chemicals, Inc., as
amended (incorporated by reference to exhibit 10.5 of the
registrants Form S-1 Registration Statement No. 333-1884
filed July 19, 1996)
|
|
10
|
.3
|
|
Raw Material Requirements Agreement dated as of June 1, 2003,
between CARBO Ceramics Inc. and C-E Minerals Inc. (incorporated
by reference to exhibit 10.4 of the registrants Form 10-K
Annual Report for the year ended December 31, 2003)
|
|
*10
|
.4
|
|
CARBO Ceramics Inc. 1996 Stock Option Plan for Key Employees
(incorporated by reference to exhibit 10.9 of the
registrants Form S-1 Registration Statement No. 333-1884
filed July 19, 1996)
|
|
*10
|
.5
|
|
Amendment No. 1 to the CARBO Ceramics Inc. 1996 Stock Option
Plan for Key Employees (incorporated by reference to exhibit 4.5
of the registrants Form S-8 Registration Statement No.
333-88100 filed May 13, 2002)
|
|
*10
|
.6
|
|
Form of Stock Option Award Agreement (incorporated by reference
to exhibit 10.10 of the registrants Form S-1 Registration
Statement No. 333-1884 filed July 19, 1996)
|
|
10
|
.7
|
|
Mining Agreement dated as of January 1, 2003 between CARBO
Ceramics Inc. and Arcilla Mining and Land Co. (incorporated by
reference to exhibit 10.8 of the registrants Form 10-K
Annual Report for the year ended December 31, 2002)
|
|
*10
|
.8
|
|
1996 Stock Option Plan of Pinnacle Technologies, Inc., as
amended and restated May 31, 2002 (incorporated by reference to
exhibit 4.1 of the registrants Form S-8 Registration
Statement No. 333-91252 filed June 26, 2002)
|
|
*10
|
.9
|
|
CARBO Ceramics Inc. Incentive Compensation Plan (incorporated by
reference to exhibit 99.1 of the registrants Form 8-K
Current Report filed January 24, 2005)
|
|
*10
|
.10
|
|
2004 CARBO Ceramics Inc. Long-Term Incentive Plan (incorporated
by reference to exhibit 99.2 of the registrants Form 8-K
Current Report filed January 24, 2005)
|
|
*10
|
.11
|
|
Amendment No. 1 to the 2004 CARBO Ceramics Inc. Long-Term
Incentive Plan (incorporated by reference to exhibit 10.1 of the
registrants Form 8-K Current Report filed April 24, 2006)
|
|
*10
|
.12
|
|
Form of Officer Restricted Stock Award Agreement (incorporated
by reference to exhibit 99.3 of the registrants Form 8-K
Current Report filed January 24, 2005)
|
|
*10
|
.13
|
|
CARBO Ceramics Inc. Director Deferred Fee Plan (incorporated by
reference to exhibit 99.1 of the registrants Form 8-K
Current Report filed December 19, 2005)
|
|
*10
|
.14
|
|
Amendment No. 1 to CARBO Ceramics Inc. Director Deferred Fee
Plan (incorporated by reference to exhibit 10.1 of the
registrants Form 10-Q Quarterly Report for the period
ended September 30, 2008)
|
|
*10
|
.15
|
|
Form of Non-Employee Director Restricted Stock Award Agreement
(incorporated by reference to exhibit 10.2 of the
registrants Form 8-K Current Report filed April 24, 2006)
|
|
*10
|
.16
|
|
Form of Officer Restricted Stock Award Agreement (incorporated
by reference to exhibit 10.3 of the registrants Form 8-K
Current Report filed April 24, 2006)
|
|
*10
|
.17
|
|
Amended and Restated Employment Agreement dated as of October
31, 2008 between CARBO Ceramics Inc. and Gary Kolstad
(incorporated by reference to exhibit 10.2 of the
registrants Form 10-Q Quarterly Report for the quarter
ended September 30, 2008)
|
|
*10
|
.18
|
|
Corporate and Proppant Incentive Compensation Plan for Key
Employees (effective January 1, 2008) (incorporated by reference
to exhibit 10.1 of the registrants Form 8-K Current Report
filed January 22, 2008)
|
|
|
|
|
|
|
*10
|
.19
|
|
Corporate and Proppant Incentive Compensation Plan for Key
Employees (effective January 1, 2009) (incorporated by reference
to exhibit 10.1 of the registrants Form 8-K Current Report
filed January 26, 2009)
|
|
10
|
.20
|
|
Acquisition Agreement dated as of August 28, 2008 between
Pinnacle Technologies, Inc., CARBO Ceramics Inc. and Halliburton
Energy Services, Inc. (incorporated by reference to exhibit 10.1
of the registrants Form 8-K Current Report filed on
September 4, 2008)
|
|
10
|
.21
|
|
Proppant Supply Agreement dated as of August 28, 2008 between
CARBO Ceramics Inc. and Halliburton Energy Services, Inc.
(incorporated by reference to exhibit 10.3 of the
registrants Form 10-Q Quarterly Report for the quarter
ended September 30, 2008)
|
|
10
|
.22
|
|
Lease Agreement dated as of November 1, 2008 between the
Development Authority of Wilkinson County and CARBO Ceramics
Inc. (incorporated by reference to exhibit 10.1 of the
registrants Form 8-K Current Report filed December 30,
2008)
|
|
10
|
.23
|
|
Option Agreement dated as of November 1, 2008 between the
Development Authority of Wilkinson County and CARBO Ceramics
Inc. (incorporated by reference to exhibit 10.2 of the
registrants Form 8-K Current Report filed December 30,
2008)
|
|
14
|
|
|
Code of Ethics (incorporated by reference to exhibit 14 of the
registrants Form 10-K Annual Report for the year ended
December 31, 2003)
|
|
21
|
|
|
Subsidiaries
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a) Certification by Ernesto
Bautista III
|
|
32
|
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
*
|
|
Management contract or compensatory plan or arrangement filed as
an exhibit pursuant to Item 15(b) of the requirements for
an Annual Report on
Form 10-K.
|
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