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 United States generally accepted accounting principles 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 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, 2011 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, 2011 included in the annual report on Form 10-K of CARBO Ceramics Inc. for the year ended
December 31, 2011.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating
subsidiaries (the Company). All significant intercompany transactions have been eliminated.
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.
Disposal or Impairment of Assets
During the three month period ended March 31, 2011, the Company recorded an $890 impairment of goodwill related to
the Companys geotechnical monitoring business and a $760 write-down of a 6% interest in an investment accounted for under the cost method, as a result of the sale of the business by majority shareholders.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share under the two-class method:
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Three months ended
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Nine months ended
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September 30,
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September 30,
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2012
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2011
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2012
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2011
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Numerator for basic and diluted earnings per share:
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Net income
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$
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23,898
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$
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36,911
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$
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86,106
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$
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97,019
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Effect of reallocating undistributed earnings of participating securities
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(122
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)
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(212
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)
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(458
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)
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(562
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)
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Net income available under the two-class method
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$
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23,776
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$
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36,699
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$
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85,648
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$
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96,457
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Denominator:
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Denominator for basic earnings per shareweighted-average shares
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22,963,318
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23,026,741
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22,966,134
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23,022,836
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Effect of dilutive securities:
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Employee stock options
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1,351
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833
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1,333
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Dilutive potential common shares
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1,351
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833
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1,333
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Denominator for diluted earnings per shareadjusted weighted-average shares
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22,963,318
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23,028,092
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22,966,967
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23,024,169
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Basic earnings per share
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$
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1.04
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$
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1.59
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$
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3.73
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$
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4.19
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Diluted earnings per share
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$
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1.04
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$
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1.59
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$
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3.73
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$
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4.19
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7
3. 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 nine months ended September 30, 2012, the Company repurchased and retired 60,000 shares at an aggregate price of $5,726. As of
September 30, 2012, the Company has repurchased and retired 1,877,576 shares at an aggregate price of $78,301.
4. Dividends Paid
On July 17, 2012, the Board of Directors declared a cash dividend of $0.27 per common share payable to
shareholders of record on August 1, 2012. The dividend was paid on August 15, 2012. On September 18, 2012, the Board of Directors declared a cash dividend of $0.27 per common share payable to shareholders of record on November 1,
2012. This dividend is payable on November 15, 2012 and is presented in Current Liabilities at September 30, 2012.
5. Stock Based Compensation
The CARBO Ceramics Inc. Omnibus Incentive Plan (the Omnibus Incentive Plan) provides for granting of
cash-based awards, stock options (both non-qualified and incentive) and other equity-based awards (including stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units or
share-denominated performance units) to employees and non-employee directors. The amount paid under the Omnibus Incentive Plan to any single participant in any calendar year with respect to any cash-based award shall not exceed $2,000. Awards may be
granted with respect to a number of shares of the Companys Common Stock that in the aggregate does not exceed 750,000 shares prior to the fifth anniversary of its effective date, plus (i) the number of shares that are forfeited, cancelled
or returned, and (ii) the number of shares that are withheld from the participants to satisfy an option exercise price or minimum statutory tax withholding obligations. No more than 50,000 shares may be granted to any single participant in any
calendar year. Equity-based awards may be subject to performance-based and/or service-based conditions. With respect to stock options and stock appreciation rights granted, the exercise price shall not be less than the market value of the underlying
Common Stock on the date of grant. The maximum term of an option is ten years. Restricted stock awards granted generally vest (i.e., transfer and forfeiture restrictions on these shares are lifted) in equal annual installments over a three-year
period but subject to certain limitations, awards may specify other vesting periods. As of September 30, 2012, 578,100 shares were available for issuance under the Omnibus Incentive Plan.
As of September 30, 2012, all compensation cost related to stock options granted under the expired stock option plan has been
recognized. There were 2,425 stock options exercised during the nine months ended September 30, 2012 with a total intrinsic value of $118. There are no outstanding options remaining under the Companys previous stock option plans at
September 30, 2012.
A summary of restricted stock activity and related information for the nine months ended
September 30, 2012 is presented below:
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Shares
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Weighted-
Average
Grant-Date
Fair
Value
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Nonvested at January 1, 2012
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129,082
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$
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75.00
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Granted
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55,652
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$
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119.22
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Vested
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(58,461
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)
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$
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66.15
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Forfeited
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(12,754
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)
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$
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101.26
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Nonvested at September 30, 2012
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113,519
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$
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98.29
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As of September 30, 2012, there was $6,202 of total unrecognized compensation cost, net of estimated
forfeitures, related to restricted shares granted under the Omnibus Incentive Plan. That cost is expected to be recognized over a weighted-average period of 1.4 years. The total fair value of shares vested during the nine months ended
September 30, 2012 was $3,867.
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The Company has made phantom stock awards to key international employees pursuant to the
Omnibus Incentive Plan. The units subject to an award vest and cease to be forfeitable in equal annual installments over a three-year period. Participants awarded units of phantom 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 with regard to outstanding phantom shares. As of September 30, 2012, there were 10,105 units of phantom shares granted under the
Omnibus Incentive Plan, of which 3,429 have vested and 1,277 have been forfeited, with a total value of $340, a portion of which is accrued as a liability within Other Accrued Expenses.
6. Bank Borrowings
The Company has an unsecured revolving credit agreement with a bank. On March 5, 2012, the Company entered into a
first amendment to this credit agreement to (i) extend its maturity date from January 29, 2013 to July 29, 2013, (ii) increase the size from $10,000 to $25,000, and (iii) make other administrative changes to certain
covenants and provisions. The Company has the option of choosing either the banks fluctuating Base Rate or LIBOR Fixed Rate, plus an Applicable Margin, all as defined in the credit agreement. 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 0.50% of the unused line of credit.
7. Foreign Currencies
As of September 30, 2012, the Companys net investment that is subject to foreign currency fluctuations
totaled $89,192 and the Company has recorded cumulative foreign currency translation loss of $2,786, net of deferred income tax benefit. This cumulative translation loss is included in Accumulated Other Comprehensive Loss.
8. New Accounting Pronouncements
In December 2010, the FASB issued authoritative guidance on application of the goodwill impairment model when a
reporting unit has a zero or negative carrying amount. When a reporting unit has a zero or negative carrying value, Step 2 of the goodwill impairment test should be performed if qualitative factors indicate that it is more likely than not that a
goodwill impairment exists. The guidance is effective for the Company beginning in the first quarter of fiscal 2012. The Company adopted this guidance as of January 1, 2012. The adoption did not have a material impact on the Companys
financial position, results of operations or cash flows.
In December 2010, the FASB issued authoritative guidance on
disclosure of supplementary pro forma information for business combinations. The new guidance requires that pro forma financial information should be prepared as if the business combination occurred as of the beginning of the prior annual period.
The guidance is effective for the Company for business combinations with acquisition dates occurring in and from the first quarter of fiscal 2012. The Company adopted this guidance as of January 1, 2012. The adoption did not have a material
impact on the Companys financial position, results of operations or cash flows.
9. 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 February 9, 2012, the Company and two of its officers, Gary A. Kolstad and Ernesto Bautista III, were
named as defendants in a purported class-action lawsuit filed in the United States District Court for the Southern District of New York (the February SDNY Lawsuit), brought on behalf of shareholders who purchased the Companys
Common Stock between October 27, 2011 and January 26, 2012 (the Relevant Time Period). On April 10, 2012, a second purported class-action lawsuit was filed against the same defendants in the United States District Court
for the Southern District of New York, brought on behalf of shareholders who purchased or sold CARBO Ceramics Inc. option contracts during the Relevant Time Period (the April SDNY
9
Lawsuit, and collectively with the February SDNY Lawsuit, the Federal Securities Lawsuit). In June 2012, the February SNDY Lawsuit and the April SDNY Lawsuit were consolidated, and
will now proceed as one lawsuit. The suit alleges violations of the federal securities laws arising from statements concerning the Companys business operations and business prospects that were made during the Relevant Time Period and requests
unspecified damages and costs. In September 2012, the Company and Messrs. Kolstad and Bautista filed a motion to dismiss this lawsuit, which is expected to be considered by the court after response and reply briefs are filed by the parties during
the fourth quarter of 2012.
On March 1, 2012, the Directors of the Company and Mr. Bautista were named as
defendants in a purported derivative action lawsuit brought on behalf of the Company by a stockholder in District Court in Harris County, Texas (the March Harris County Lawsuit). The suit alleges various breaches of fiduciary duty and
other duties by the defendants that generally are related to the February SDNY Lawsuit, and requests unspecified damages and costs. In September 2012, this lawsuit was dismissed without prejudice.
On June 13, 2012, the Directors of the Company and Mr. Bautista were named as defendants in a second purported derivative
action lawsuit brought on behalf of the Company by a stockholder in District Court in Harris County, Texas (the June Harris County Lawsuit). This lawsuit alleges substantially similar claims as the March Harris County Lawsuit as well as
a breach of duty against certain defendants in connection with stock sales. This lawsuit also requests unspecified damages and costs. The parties to this lawsuit have entered into an agreement to stay further proceedings pending the outcome of a
motion to dismiss the Federal Securities Lawsuit.
While each of the Federal Securities Lawsuit and the June Harris County
Lawsuit are in their preliminary stages, the Company does not believe they have merit, and plans to vigorously contest and defend against them.
The Company cannot predict the ultimate outcome or duration of these lawsuits.
10. Subsequent Events
On October 1, 2012, the Company awarded 18,808 shares of restricted stock to an employee. The fair value of the
stock award on the date of grant totaled $1,200, which will be recognized as expense, net of estimated forfeitures, on a straight-line basis over the vesting periods. Half of the shares will vest over a three-year period and half over a five-year
period.
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