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 (“U.S. GAAP”) 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, 2014 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, 2014 included in the annual report on Form 10-K of CARBO Ceramics Inc. for the year ended December 31, 2014.

The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries (the “Company”). All significant intercompany transactions have been eliminated.

In late 2014 and early 2015, a severe decline in oil and natural gas prices led to a significant decline in oil and natural gas industry drilling activities and capital spending. During the three month period ended March 31, 2015, the Company implemented a number of initiatives to preserve cash and lower costs, including: reducing workforce across the organization, lowering production output levels in order to align with lower demand, limiting capital expenditures and reducing dividends. As a result of these measures, the Company temporarily idled production and furloughed employees at the Toomsboro and Millen, Georgia manufacturing plants for approximately 90 days and mothballed the manufacturing plants in McIntyre, Georgia and Luoyang, China. Production resumed at both of the temporarily idled facilities during the second quarter of 2015.

In general, temporarily idled facilities are expected to remain closed for a short period of time, generally less than one year. Mothballed facilities are expected to remain closed for one year or longer. The accounting treatment is the same for both temporarily idled and mothballed facilities, except that mothballed assets are evaluated for possible impairment while temporarily idled assets are not necessarily assessed for impairment. The Company continues to depreciate both temporarily idled and mothballed assets.

The facility in Toomsboro, Georgia is the Company’s largest manufacturing facility consisting of four production lines. During the third quarter of 2015, one of the four manufacturing lines at the Toomsboro plant ran the entire quarter, while a second line ran part of the quarter. Production levels at the Millen, Georgia and Eufaula, Alabama facilities were near the stated capacity of those facilities. However, the Company expects to temporarily idle the Millen, Georgia facility during the fourth quarter of 2015. The mothballed plants in McIntyre, Georgia and Luoyang, China remained closed.

Lower of Cost or Market and Other Inventory Adjustments

During the three-month period ended March 31, 2015, the Company reviewed the carrying values of all inventories and concluded that certain inventories in China had been impacted by changes in market conditions. Current market prices had fallen below carrying costs for certain inventories. Consequently, the Company recognized a $3,887 loss in cost of sales, to adjust finished goods and raw materials carrying values to the lower market prices on inventories inside China. The adjustments were based on current market prices for these or similar products, as determined by actual sales, bids, and/or quotes from third parties. The Company again reviewed the carrying values of all inventories as of June 30, 2015 and September 30, 2015 and concluded that no further adjustments were warranted as of those times. In addition, during the three month period ended March 31, 2015, the Company recognized a $485 loss in cost of sales as a result of other inventory adjustments unrelated to lower of cost or market issues.

Production Levels Below Normal Capacity

As a result of the Company substantially reducing manufacturing production levels, including by idling and mothballing certain facilities, the component of the Company’s accounting policy for inventory relating to operating at production levels below normal capacity was triggered and resulted in certain production costs being expensed instead of being capitalized into inventory. Under this policy, the Company expenses fixed production overhead amounts in excess of amounts that would have been allocated to each unit of production at normal production levels. The Company expensed $25,157 in production costs during the nine month period ended September 30, 2015. There were no such costs in the prior year period.

Long-lived assets impairment considerations

As noted, the Company plans to idle production at the Millen, Georgia manufacturing facility during the fourth quarter of 2015. The Company does not necessarily assess temporarily idled assets for impairment unless events or circumstances indicate their carrying amounts might not be recoverable. Short-term stoppages of production for less than one year do not necessarily significantly impact the long-term expected cash flows of the idled facility. As of September 30, 2015, the Company did not assess the Millen plant for impairment. However, the Company continues to monitor market conditions closely and, during the fourth quarter of 2015, expects to collect additional information regarding customers’ 2016 drilling plans and budgets that could affect future production plans for the Company’s Millen, Georgia and other manufacturing facilities. Further deterioration of market conditions could result in impairment charges being taken on these and/or other long-lived assets, including the Company’s manufacturing plants, goodwill and intangible assets. The Company will evaluate long-lived assets for impairment at such time that events or circumstances indicate that carrying amounts might be impaired.