UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2009
or
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o
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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
.
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
þ
As of May 4, 2009, 23,263,778 shares of the registrants Common Stock, par
value $.01 per share, were outstanding.
CARBO CERAMICS INC.
Index to Quarterly Report on Form 10-Q
2
PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
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March 31,
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December 31,
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2009
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2008
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(Unaudited)
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(Note 1)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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94,642
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$
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154,817
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Trade accounts and other receivables, net
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62,565
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65,724
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Inventories:
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Finished goods, net
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39,988
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34,886
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Raw materials and supplies
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25,884
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29,958
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Total inventories
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65,872
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64,844
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Prepaid expenses and other current assets
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2,239
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2,243
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Deferred income taxes
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11,536
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8,084
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Total current assets
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236,854
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295,712
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Property, plant and equipment:
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Land and land improvements
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10,208
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10,208
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Land-use and mineral rights
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6,279
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6,257
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Buildings
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41,293
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42,416
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Machinery and equipment
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280,937
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281,894
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Construction in progress
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29,600
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24,881
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Total
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368,317
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365,656
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Less accumulated depreciation
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126,020
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120,754
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Net property, plant and equipment
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242,297
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244,902
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Goodwill
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4,859
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4,859
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Intangible and other assets, net
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3,492
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3,806
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Total assets
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$
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487,502
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$
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549,279
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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4,736
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$
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15,615
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Accrued payroll and benefits
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4,069
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9,373
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Accrued freight
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3,412
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3,668
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Accrued utilities
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3,783
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4,089
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Accrued income taxes
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4,102
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47,929
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Dividends payable
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3,955
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Other accrued expenses
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5,627
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3,174
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Total current liabilities
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29,684
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83,848
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Deferred income taxes
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25,183
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22,897
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Shareholders equity:
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Preferred stock, par value $0.01 per share, 5,000 shares authorized,
none outstanding
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Common stock, par value $0.01 per share, 40,000,000 shares authorized;
23,263,778 and 23,637,678 shares issued and outstanding at March 31,
2009 and December 31, 2008, respectively
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233
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236
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Additional paid-in capital
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59,973
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73,460
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Retained earnings
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379,885
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371,602
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Accumulated other comprehensive loss
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(7,456
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)
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(2,764
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)
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Total shareholders equity
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432,635
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442,534
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Total liabilities and shareholders equity
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$
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487,502
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$
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549,279
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The accompanying notes are an integral part of these statements.
3
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited)
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Three months ended
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March 31,
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2009
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2008
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Revenues
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$
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90,642
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$
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90,375
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Cost of sales
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54,658
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63,331
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Gross profit
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35,984
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27,044
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Selling, general and administrative expenses
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11,432
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8,582
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Start-up costs
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231
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Loss (gain) on disposal or impairment of assets
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67
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(68
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)
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Operating profit
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24,485
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18,299
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Other income (expense):
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Interest income, net
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204
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34
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Foreign currency exchange (loss) gain, net
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(41
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)
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1,493
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Other, net
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175
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17
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338
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1,544
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Income before income taxes
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24,823
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19,843
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Income taxes
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8,395
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6,988
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Income from continuing operations
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16,428
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12,855
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Income from discontinued operations, net of income taxes
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1,376
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Net income
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$
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16,428
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$
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14,231
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Basic earnings per share:
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Income from continuing operations
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$
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0.70
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$
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0.52
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Income from discontinued operations, net of tax
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0.06
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Basic earnings per share
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$
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0.70
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$
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0.58
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Diluted earnings per share:
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Income from continuing operations
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$
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0.70
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$
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0.52
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Income from discontinued operations, net of tax
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0.06
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Diluted earnings per share
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$
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0.70
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$
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0.58
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Other information:
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Dividends declared per common share
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$
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0.34
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$
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0.14
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The accompanying notes are an integral part of these statements.
4
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
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Three months ended
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March 31,
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2009
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2008
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Operating activities
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Net income
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$
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16,428
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$
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14,231
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Adjustments to reconcile net income to net cash (used in) provided by
operating activities
of continuing operations:
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Income from discontinued operations
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(1,376
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)
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Depreciation and amortization
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6,191
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6,065
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Provision for doubtful accounts
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587
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49
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Deferred income taxes
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1,361
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1,927
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Excess tax benefits from stock based compensation
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(16
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)
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(1
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)
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Loss (gain) on disposal or impairment of assets
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67
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(68
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)
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Foreign currency transaction loss (gain), net
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41
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(1,493
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)
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Stock compensation expense
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713
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558
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Changes in operating assets and liabilities:
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Trade accounts and other receivables
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1,635
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(11,029
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)
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Inventories
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(3,004
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)
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(5,644
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)
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Prepaid expenses and other current assets
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(110
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)
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(169
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)
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Long-term prepaid expenses
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36
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Accounts payable
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(10,918
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)
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(3,631
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)
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Accrued expenses
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(2,437
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)
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(830
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)
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Accrued income taxes
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(43,831
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)
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5,770
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Net cash (used in) provided by operating activities of continuing operations
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(33,293
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)
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4,395
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Investing activities
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Capital expenditures, net
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(8,232
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)
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(4,111
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)
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Investment in cost-method investee
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(1,000
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)
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Net cash used in investing activities of continuing operations
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(8,232
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)
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(5,111
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)
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Financing activities
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Proceeds from bank borrowings
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2,000
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Repayments on bank borrowings
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(2,000
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)
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Net proceeds from stock based compensation
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|
157
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248
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Dividends paid
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(4,033
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)
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(3,442
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)
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Purchase of common stock
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|
(14,485
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)
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Excess tax benefits from stock based compensation
|
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|
16
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|
1
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Net cash used in financing activities of continuing operations
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(18,345
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)
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(3,193
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)
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Effect of exchange rate changes on cash
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(305
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)
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176
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Net cash provided by discontinued operations
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|
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5,967
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|
|
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|
|
|
|
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|
|
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Net (decrease) increase in cash and cash equivalents
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|
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(60,175
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)
|
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|
2,234
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|
Cash and cash equivalents at beginning of period
|
|
|
154,817
|
|
|
|
12,296
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|
|
|
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Cash and cash equivalents at end of period
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$
|
94,642
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|
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$
|
14,530
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|
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|
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|
|
|
|
|
|
|
|
|
|
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Supplemental cash flow information
|
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|
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|
|
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|
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|
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Interest paid
|
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$
|
|
|
|
$
|
31
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|
|
|
|
|
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Income taxes paid
|
|
$
|
50,865
|
|
|
$
|
135
|
|
|
|
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|
|
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|
The accompanying notes are an integral part of these statements.
5
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of CARBO Ceramics Inc.
have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and notes required by
accounting principles generally accepted in the United States for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. The results of the interim
periods presented herein are not necessarily indicative of the results to be expected for any other
interim period or the full year. The consolidated balance sheet as of December 31, 2008 has been
derived from the audited financial statements at that date. These financial statements should be
read in conjunction with the audited consolidated financial statements and notes thereto for the
year ended December 31, 2008 included in the annual report on Form 10-K of CARBO Ceramics Inc. for
the year ended December 31, 2008.
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 that is reported under the cost method of accounting. All significant intercompany
transactions have been eliminated.
2. Sale of Assets (Discontinued Operations)
On October 10, 2008, the Company sold a substantial portion of the assets of its wholly-owned
subsidiary, Pinnacle Technologies, Inc. (Pinnacle), to Halliburton Energy Services, Inc.
(Halliburton). The sale included all of the fracture and reservoir diagnostic business, the
Pinnacle name and related trademarks (see Note 2 to the Consolidated Financial Statements included
in the Companys Form 10-K for the year ended December 31, 2008, for additional information). As a
result, the operations and cash flows associated with these assets have been classified as
discontinued operations. 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.
Revenues and income before income taxes from discontinued operations were as follows:
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31, 2008
|
|
Revenues
|
|
$
|
11,514
|
|
|
|
|
|
Income before income taxes
|
|
$
|
2,221
|
|
|
|
|
|
6
Cash flows from discontinued operations were as follows:
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31, 2008
|
|
Operating activities:
|
|
|
|
|
Net income
|
|
$
|
1,376
|
|
Depreciation, amortization and other
|
|
|
1,550
|
|
Changes in operating assets and liabilities, net
|
|
|
3,414
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,340
|
|
|
|
|
|
|
Investing activities: Capital expenditures, net
|
|
|
(408
|
)
|
|
|
|
|
|
Financing activities: Excess tax benefits from stock based compensation
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
$
|
5,967
|
|
|
|
|
|
3. Earnings Per Share
Effective January 1, 2009, the Company adopted Financial Accounting Standards Board
Staff Position (FSP) No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities.
FSP EITF 03-6-1 provides that unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The Company has determined that its
outstanding non-vested restricted stock awards are participating securities. Accordingly,
effective January 1, 2009, earnings per common share is computed using the two-class method
prescribed by Statement of Financial Accounting Standards No. 128,
Earnings Per Share.
All
previously reported earnings per common share data must be retrospectively adjusted to conform to
the new computation method. The adoption of FSP EITF 03-6-1 did not have a material effect on
earnings per share in any period.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
16,428
|
|
|
$
|
12,855
|
|
Effect of reallocating undistributed earnings of participating securities
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,428
|
|
|
$
|
14,231
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
weighted-average shares
|
|
|
23,460,057
|
|
|
|
24,451,184
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock options (See Note 7)
|
|
|
13,675
|
|
|
|
53,727
|
|
Nonvested and deferred stock awards (See Note 7)
|
|
|
39,770
|
|
|
|
32,194
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
53,445
|
|
|
|
85,921
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
adjusted weighted-average shares
|
|
|
23,513,502
|
|
|
|
24,537,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.70
|
|
|
$
|
0.52
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.70
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.70
|
|
|
$
|
0.52
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.70
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
7
4. Common Stock Repurchase Program
On August 28, 2008, the Companys Board of Directors authorized the repurchase of up to two
million shares of the Companys Common Stock. Shares are effectively retired at the time of
purchase. During the quarter ended March 31, 2009, the Company repurchased and retired 444,700
shares at an aggregate price of $14,328. As of March 31, 2009, the Company repurchased and retired
a total of 1,504,500 shares at an aggregate price of $56,479.
5. Dividends Paid
On January 20, 2009, the Board of Directors declared a cash dividend of $0.17 per
common share payable to shareholders of record on February 2, 2009. The dividend was paid on
February 17, 2009. On March 17, 2009, the Board of Directors declared a cash dividend of $0.17 per
common share payable to shareholders of record on May 1, 2009. The dividend is payable on May 15,
2009 and is presented in Current Liabilities at March 31, 2009.
6. Comprehensive Income
The following table sets forth the components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net income
|
|
$
|
16,428
|
|
|
$
|
14,231
|
|
Foreign currency translation adjustment
|
|
|
(4,692
|
)
|
|
|
1,321
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
11,736
|
|
|
$
|
15,552
|
|
|
|
|
|
|
|
|
The foreign currency translation adjustment for the three months ended March 31, 2009 and 2008
is net of deferred income tax (benefit) expense of $(2,526) and $713, respectively.
7. 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 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 March 31, 2009, 53,306 shares were available
for issuance under the restricted stock plan and no options were available for issuance under the
stock option plans.
In January 2009, the Board of Directors adopted the CARBO Ceramics Inc. Omnibus Incentive Plan
(the Omnibus Inventive Plan), subject to the approval of the Companys shareholders at the Annual
Meeting of Shareholders to be held on May 19, 2009. The Omnibus Incentive Plan will become
effective upon the date it is approved by the Companys shareholders and will allow for the award
of up to 750,000 shares of the Companys Common Stock prior to the fifth anniversary of such
effective date. The Omnibus Incentive Plan is intended to replace the restricted stock plan, which
expires in April 2009.
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
8
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 March 31, 2009, a
total of 8,695 shares were reserved for future issuance in payment of $361 of deferred fees under
the Plan by electing directors.
A summary of stock option activity and related information for the three months ended March
31, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
Intrinsic
|
|
|
Options
|
|
Exercise Price
|
|
Value
|
Outstanding at January 1, 2009
|
|
|
53,675
|
|
|
$
|
23.85
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,875
|
)
|
|
$
|
19.91
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009
|
|
|
45,800
|
|
|
$
|
24.52
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009
|
|
|
45,800
|
|
|
$
|
24.52
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, all compensation cost related to stock options granted under the plans
has been recognized. The weighted-average remaining contractual term of options outstanding at
March 31, 2009 was 3.6 years. The total intrinsic value of options exercised during the three
months ended March 31, 2009 was $134.
A summary of restricted stock activity and related information for the three months ended
March 31, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
Shares
|
|
Fair Value
|
Nonvested at January 1, 2009
|
|
|
103,850
|
|
|
$
|
40.29
|
|
Granted
|
|
|
77,155
|
|
|
$
|
35.03
|
|
Vested
|
|
|
(28,718
|
)
|
|
$
|
40.33
|
|
Forfeited
|
|
|
(9,771
|
)
|
|
$
|
36.61
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2009
|
|
|
142,516
|
|
|
$
|
37.69
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, there was $3,874 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 2.2 years. The total fair
value of shares vested during the three months ended March 31, 2009 was $1,158.
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 the fair market value of a share of Common Stock
as of the vesting date, or in some cases on a 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
March 31, 2009, there were 11,615 units of phantom shares granted under the plan, of which 1,125
have vested and 325 have been forfeited, with a total value of $289, the vested portion of which is
recorded as a liability within Other Accrued Expenses.
8. Foreign Currencies
As of March 31, 2009, the Companys net investment that is subject to foreign currency
fluctuations totaled $68,854 and the Company has recorded a cumulative foreign currency translation
loss of $7,456, 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 up
to $40,845 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
9
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, and was further reduced to $155 at March 31, 2009.
9. New Accounting Pronouncements
Effective January 1, 2009, the Company adopted the Financial Accounting Standards Boards (the
FASB) Statement of Financial Accounting Standards No. 141(R),
Business Combinations
(SFAS
141(R)), 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) is applied prospectively to
business combinations completed on or after January 1, 2009.
10. Legal Proceedings
The Company is subject to legal proceedings, claims and litigation arising in the
ordinary course of business. While the outcome of these matters is currently not determinable,
management does not expect that the ultimate 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, Georgia 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 resulting from the NOVs. However, the Company is in the process of
negotiating a consent order with the EPD to resolve the NOVs, and currently estimates that the
amount of fines payable under such consent order will be approximately $400. There can be no
assurance that the Company will be able to successfully negotiate the consent order with the EPD,
and the amount of fines and other costs that are ultimately paid to resolve the NOVs could exceed
the Companys current fine estimate.
10
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business
The Company manufactures ceramic proppant and provides services and software that are used in the
hydraulic fracturing of natural gas and oil wells.
On October 10, 2008, the Company sold a substantial portion of the assets of its wholly-owned
subsidiary, Pinnacle Technologies, Inc. (Pinnacle), to Halliburton Energy Services, Inc.
(Halliburton). The sale included all of the fracture and reservoir diagnostic business, the
Pinnacle name and related trademarks (see Note 2 to the Consolidated Financial Statements included
in the Companys Form 10-K for the year ended December 31, 2008, for additional information). As a
result, operations and cash flows associated with these assets have been classified as discontinued
operations. 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.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require the Company to make estimates and
assumptions (see Note 1 to the consolidated financial statements included in the annual report on
Form 10-K for the year ended December 31, 2008). The Company believes that some of its accounting
policies involve a higher degree of judgment and complexity than others. Critical accounting
policies for the Company include revenue recognition, estimating the recoverability of accounts
receivable, inventory valuation, accounting for income taxes, accounting for long-lived assets and
accounting for legal contingencies. Critical accounting policies are discussed more fully in the
Companys annual report on Form 10-K for the year ended December 31, 2008 and there has been no
changes in the Companys evaluation of its critical accounting policies since the preparation of
that report.
Results of Operations
Three Months Ended March 31, 2009
Revenues.
Revenues of $90.6 million for the first quarter of 2009 were flat compared to revenues
of $90.4 million for the same period in 2009. The effect of price increases, introduced in the
second half of 2008, more than offset an 11% decrease in proppant sales volume. Sales volume
decreased mainly as a result of the decline in the number of rigs drilling for oil and natural gas
worldwide. Proppant sales totaled 253 million pounds for the first quarter of 2009 compared to 283
million pounds for the first quarter of 2008. Despite a 29% decrease in the natural gas rig count
in North American, sales volume in that region decreased by only 4%. Sales volume decreases for
most of the Companys products in the U.S. and Canada were partially offset by increases in Mexico
and greater demand for CARBO
HYDROPROP
TM
. Overseas sales volume decreased 46% primarily
due to decreases in Russia.
Gross Profit.
Gross profit for the first quarter of 2009 was $36.0 million, or 40% of revenues,
compared to $27.0 million, or 30% of revenues, for the first quarter of 2008. Gross profit, as
well as gross profit as a percentage of revenues, for the first quarter of 2009 increased compared
to last years first quarter primarily as a result of a change in the mix of products sold, price
increases introduced during the second half of 2008, and a decrease in freight costs.
Selling, General and Administrative (SG&A) and Other Operating Expenses.
SG&A expenses totaled
$11.4 million for the first quarter of 2009 compared to $8.6 million for the first quarter of 2008.
As a percentage of revenues, SG&A expenses increased to 12.6% compared to 9.5% for first quarter
of 2008. Increases primarily resulted from increased marketing activity in both domestic and
international markets, higher administrative expenses necessary to support the infrastructure for
an enterprise information system implemented during the second quarter of 2008, additional
allowances for the collection of doubtful accounts, and costs associated with the relocation of
certain Company offices. Start-up costs of $0.2 million in 2008 related to the start-up of the
second production line at the Companys Toomsboro, Georgia facility.
11
Other Income (Expense).
Other income for the first quarter of 2009 declined $1.2 million compared
to the same period in 2008. This decline is mainly attributed to a $1.5 million decrease in
foreign currency exchange gains recognized in the first quarter of 2008 that did not recur in 2009
as a result of the reduction in intercompany liabilities that were subject to exchange rate
fluctuations.
Income Tax Expense
. Income tax expense was $8.4 million, or 33.8% of pretax income, for the first
quarter of 2009 compared to $7.0 million, or 35.2% of pretax income, for the same period last year.
The $1.4 million increase is due to higher pre-tax income partially offset by a lower effective
tax rate primarily associated with mining depletion deductions the Company began claiming in the
third quarter of 2008.
Income from Discontinued Operations, Net of Income Taxes
. Income from discontinued operations in
2008 was $1.4 million and includes gross profit of $4.8 million offset by selling, general, and
administrative expenses of $2.6 million. Income taxes related to discontinued operations for the
first quarter of 2008 was $0.8 million. The sale of the discontinued operations was completed on
October 10, 2008.
Liquidity and Capital Resources
At March 31, 2009, the Company had cash and cash equivalents of $94.6 million compared to cash and
cash equivalents of $154.8 million at December 31, 2008. During the first quarter of 2009, the
Company used $33.3 million of cash from operating activities of continuing operations mainly
attributed to payments of income taxes owed as a result of the sale of discontinued operations on
October 10, 2008, and third and fourth quarter 2008 estimated tax payments that were deferred to
2009 as a result of hurricane Gustav tax relief. The Company also used $8.2 million for capital
spending, $4.0 million for the payment of cash dividends, $14.5 million for the repurchase of the
Companys Common Stock, and $0.3 million from the effect of exchange rate changes on cash.
Increases in cash included $0.1 million from employee exercises of stock options.
The Company believes its operating results in the remainder of 2009 will be influenced by the
decline in the level of natural gas drilling in North America. As a result of increased economic
pressures from the decline in rig counts fueled by low natural gas and oil prices and continued
weakness in the U.S. credit markets, the Company instituted in April 2009 certain price reductions
for its products in an effort to mitigate sales volume erosion. These price reductions will likely
lower gross profit margins and net income. However, the Company 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
market penetration of ceramic 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 throughout 2009, 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 the Companys 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 March 17, 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 May 1, 2009. The Company estimates its total capital expenditures for
the remainder of 2009 will be between $45.0 million and $50.0 million. Capital expenditures in
2009 are expected to include costs associated with the previously announced construction of the
Companys third production line at its Toomsboro, Georgia facility. However, the project has been
delayed, as certain permits needed to proceed with construction have not been received as expected.
The Company currently anticipates that the project will be completed in the second half of 2010.
The Company maintains an unsecured line of credit of $10.0 million. As of March 31, 2009, 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.
12
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of March 31, 2009.
Forward-Looking Information
The statements in this Form 10-Q that are not historical statements, including statements regarding
our future financial and operating performance and liquidity and capital resources, are
forward-looking statements within the meaning of the federal securities laws. All forward-looking
statements are based on managements current expectations and estimates, which involve risks and
uncertainties that could cause actual results to differ materially from those expressed in
forward-looking statements. Among these factors are:
|
|
|
changes in overall economic conditions,
|
|
|
|
|
changes in the cost of raw materials and natural gas used in manufacturing our
products,
|
|
|
|
|
changes in demand and prices charged for our products,
|
|
|
|
|
changes in the demand for, or price of, oil and natural gas,
|
|
|
|
|
risks of increased competition,
|
|
|
|
|
technological, manufacturing and product development risks,
|
|
|
|
|
loss of key customers,
|
|
|
|
|
changes in foreign and domestic government regulations,
|
|
|
|
|
changes in foreign and domestic political and legislative risks,
|
|
|
|
|
the risks of war and international and domestic terrorism,
|
|
|
|
|
risks associated with foreign operations and foreign currency exchange rates and
controls, and
|
|
|
|
|
weather-related risks and other risks and uncertainties.
|
Additional factors that could affect our future results or events are described from time to time
in our reports filed with the Securities and Exchange Commission (the SEC). See in particular
our Form 10-K for the fiscal year ended December 31, 2008 under the caption Risk Factors and
similar disclosures in subsequently filed reports with the SEC. We assume no obligation to update
forward-looking statements, except as required by law.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys major market risk exposure is to foreign currency fluctuations that could impact its
investments in China and Russia. As of March 31, 2009, the Companys net investment that is
subject to foreign currency fluctuations totals $68.9 million and the Company has recorded a
cumulative foreign currency translation loss of $7.5 million, net of deferred income tax benefit.
This cumulative translation loss is included in Accumulated Other Comprehensive Loss. Also, the
Companys subsidiary in Russia previously borrowed up to $40.8 million from another subsidiary of
the Company to fund construction of a manufacturing plant in Russia. During the third quarter of
2008, this indebtedness was significantly reduced and subsequently further reduced to $0.2 million
as of March 31, 2009. 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). 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 March 31, 2009.
ITEM 4.
CONTROLS AND PROCEDURES
(a)
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Evaluation of Disclosure Controls and Procedures
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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.
13
As of March 31, 2009, 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)
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Changes in Internal Control over Financial Reporting
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There were no changes in the Companys internal control over financial reporting during the quarter
ended March 31, 2009, that materially affected, or are reasonably likely to materially affect,
those controls.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, Georgia 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 resulting from the NOVs. However, the Company is in the process of
negotiating a consent order with the EPD to resolve the NOVs, and currently estimates that the
amount of fines payable under such consent order will be approximately $400,000. There can be no
assurance that the Company will be able to successfully negotiate the consent order with the EPD,
and the amount of fines and other costs that are ultimately paid to resolve the NOVs could exceed
the Companys current fine estimate.
ITEM 1A. RISK FACTORS
Not required
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about the Companys repurchases of Common Stock during the
quarter ended March 31, 2009:
ISSUER PURCHASES OF EQUITY SECURITIES
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Maximum
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Total Number of
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Number of
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Shares Purchased
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Shares that May
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Total Number
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Average
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as Part of Publicly
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Yet be Purchased
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of Shares
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Price Paid
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Announced
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Under the
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Period
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Purchased
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per Share(1)
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Plan(2)(3)
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Plan(4)
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01/01/09 to 01/31/09
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9,159
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(5)
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$
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35.98
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4,700
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935,500
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02/01/09 to 02/28/09
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90,000
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$
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35.55
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90,000
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845,500
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03/01/09 to 03/31/09
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350,000
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$
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31.30
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350,000
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495,500
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Total
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449,159
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444,700
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(1)
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Average price paid excludes commissions
.
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(2)
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On August 28, 2008, the Company announced the authorization by its Board of Directors
for the repurchase of up to two million shares of its Common Stock.
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(3)
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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 (the 10b5-1 Agreement). The agent repurchased a number of shares of our
common stock determined under the terms of the 10b5-1 Agreement each trading day based on
the trading price of the stock on that day. Shares were repurchased by the agent at the
prevailing market prices, in open market transactions which complied with Rule 10b-18 of
the Exchange Act.
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(4)
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Represents the maximum number of shares that may be repurchased under the previously
announced authorization as of period end. As of May 4, 2009, a maximum of 495,500 shares
may be repurchased under the previously announced authorization.
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15
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(5)
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Includes 4,459 shares of restricted stock withheld for the payment of withholding
taxes upon the vesting of restricted stock.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
The following exhibits are filed as part of the Quarterly Report on Form 10-Q:
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31.1
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Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification by Ernesto Bautista III.
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32
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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CARBO CERAMICS INC.
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/s/ Gary A. Kolstad
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Gary A. Kolstad
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President and Chief Executive Officer
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/s/ Ernesto Bautista III
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Ernesto Bautista III
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Chief Financial Officer
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Date: May 6, 2009
17
EXHIBIT INDEX
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EXHIBIT
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DESCRIPTION
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31.1
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Rule 13a-14(a)/15d-14(a) Certification by Gary A. Kolstad.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification by Ernesto Bautista III.
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32
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the
Sarbanes-Oxley Act of 2002.
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18
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