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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2002 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
act of 1934 for the transition period from _______ to _______
Commission file number 1-15903
CALGON CARBON CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 25-0530110
--------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 717, Pittsburgh, PA 15230-0717
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(412) 787-6700
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year
if changed since last report)
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 X No____________
-----------
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes___________ No____________
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2002
- ---------------------------------- ------------------------------------
Common Stock, $.01 par value 38,962,758 shares
CALGON CARBON CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 30, 2002
The Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause the Company's actual results in the future to
differ from performance suggested herein. A specific example of such
uncertainties includes references to reductions in working capital. In the
context of forward-looking information provided in this Form 10-Q and in other
reports, please refer to the discussion of risk factors detailed in, as well as
the other information contained in the Company's filings with the Securities and
Exchange Commission.
I N D E X
PART 1 - FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements Page
------ ----
Introduction to the Financial Statements ...................... 2
Consolidated Statements of Income (Loss) and
Retained Earnings ............................................. 3
Consolidated Balance Sheets ................................... 5
Consolidated Statements of Cash Flows ......................... 6
Selected Notes to Financial Statements ........................ 7
Item 2. Management's Discussion and Analysis of Results
------ -----------------------------------------------
of Operations and Financial Condition ............................ 13
-------------------------------------
Item 4. Controls and Procedures ............................................. 18
------ -----------------------
PART II - OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings ................................................... 19
------ -----------------
Item 6. Exhibits and Reports on Form 8-K .................................... 19
------ --------------------------------
SIGNATURES .......................................................................... 20
- ----------
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTION TO THE FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements included herein
have been prepared by Calgon Carbon Corporation (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. Management of the Company believes that the
disclosures are adequate to make the information presented not misleading when
read in conjunction with the Company's audited consolidated financial statements
and the notes included therein for the year ended December 31, 2001 filed with
the Securities and Exchange Commission by the Company in Form 10-K.
In management's opinion, the unaudited interim consolidated financial
statements reflect all adjustments, which are of a normal and recurring nature,
which are necessary for a fair presentation, in all material respects, of
financial results for the interim periods presented. Operating results for the
first nine months of 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
2
CALGON CARBON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
(Dollars in Thousands Except Share and Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Net sales ...................................................... $ 64,832 $ 64,743 $195,452 $206,560
---------- --------- --------- ---------
Cost of products sold
(excluding depreciation) ..................................... 45,368 44,429 135,293 137,610
Depreciation and amortization .................................. 4,784 5,023 14,027 14,997
Selling, general and
administrative expenses ...................................... 12,037 10,648 34,396 33,938
Research and development
expenses ..................................................... 875 1,369 3,023 4,242
--------- --------- --------- ---------
63,064 61,469 186,739 190,787
--------- --------- --------- ---------
Income from operations ......................................... 1,768 3,274 8,713 15,773
Interest income ................................................ 176 119 434 169
Interest expense ............................................... (675) (746) (1,973) (2,837)
Other income (expense)--net .................................... (445) (231) (1,147) (922)
--------- --------- --------- ---------
Income before income taxes, minority interest
and cumulative effect of change in accounting
principle .................................................... 824 2,416 6,027 12,183
Provision for income taxes ..................................... 297 870 2,170 4,386
--------- --------- --------- ---------
Income before minority
interest ..................................................... 527 1,546 3,857 7,797
Minority interest .............................................. 29 -- 29 (53)
--------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle ............................... 556 1,546 3,886 7,744
Cumulative effect of change in accounting
principle (net of tax) ....................................... -- -- (30,926) --
--------- --------- --------- ---------
Net income (loss) .............................................. 556 1,546 (27,040) 7,744
Common stock dividends ......................................... (1,169) (1,940) (3,504) (5,820)
Retained earnings, beginning
of period .................................................... 113,241 145,277 143,172 142,959
--------- --------- --------- ---------
Retained earnings, end of
period ....................................................... $ 112,628 $ 144,883 $ 112,628 $ 144,883
========= ========= ========= =========
Net income per common share before cumulative
effect of change in accounting principle
Basic and diluted .......................................... $ .01 $ .04 $ .10 $ .20
========= ========= ========= =========
3
Cumulative effect of change in accounting
principle per common share
Basic and Diluted .......................... -- -- ($.79) --
Net income (loss) per common share
Basic and Diluted .......................... $ .01 $ .04 ($.69) $ .20
Weighted average shares outstanding
Basic ....................................... 38,962,758 38,810,934 38,930,797 38,804,885
=========== =========== ========== ===========
Diluted ..................................... 39,017,027 39,174,758 39,187,205 39,090,855
=========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
4
CALGON CARBON CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except share data)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 3,569 $ 3,567
Receivables (net of allowance of $3,089 and $2,624) .............. 44,856 44,233
Revenue recognized in excess of billings on uncompleted
contracts ..................................................... 6,044 10,623
Inventories (net of allowance of $445 and $453) .................. 48,659 42,104
Other current assets ............................................. 5,294 4,008
------------- ------------
Total current assets .......................................... 108,422 104,535
Property, plant and equipment, net ................................. 141,894 143,661
Intangibles ........................................................ 3,304 3,491
Goodwill ........................................................... 19,163 70,124
Other assets ....................................................... 10,116 9,903
------------- ------------
Total assets .................................................. $ 282,899 $ 331,714
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt .................................................. $ -- $ 8,762
Long-term debt due within one year ............................... 2,785 1,275
Accounts payable and accrued liabilities ......................... 25,207 24,976
Billings in excess of revenue recognized on uncompleted
contracts ..................................................... 1,185 2,370
Restructuring reserve ............................................ 866 1,480
Payroll and benefits payable ..................................... 7,002 6,989
Accrued income taxes ............................................. 3,199 1,890
------------- ------------
Total current liabilities ..................................... 40,244 47,742
Long-term debt ..................................................... 56,842 54,360
Deferred income taxes .............................................. 12,086 32,021
Other liabilities .................................................. 16,267 13,782
------------- ------------
Total liabilities ............................................. 125,439 147,905
------------- ------------
Minority interest .................................................. 141 --
------------- ------------
Commitments and contingencies ...................................... -- --
------------- ------------
Shareholders' equity:
Common shares, $.01 par value, 100,000,000 shares
authorized, 41,750,116 and 41,643,492 shares issued ........... 418 416
Additional paid-in capital ....................................... 64,449 63,813
Retained earnings ................................................ 112,628 143,172
Accumulated other comprehensive income ........................... 6,953 3,538
------------- ------------
184,448 210,939
Treasury stock, at cost, 2,787,358 and 2,787,458 shares .......... (27,129) (27,130)
------------- ------------
Total shareholders' equity .................................... 157,319 183,809
------------- ------------
Total liabilities and shareholders' equity .................... $ 282,899 $ 331,714
============= ============
The accompanying notes are an integral part
of these financial statements.
5
CALGON CARBON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------
2002 2001
-------- --------
Cash flows from operating activities
Net income (loss) ................................................... ($27,040) $ 7,744
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of change in accounting principle ............... 30,926 --
Depreciation and amortization ..................................... 14,027 14,997
Employee benefit plan provisions .................................. 2,311 1,447
Changes in assets and liabilities - net of
effects from purchase of the minority interest in Calgon
Far East Co. Ltd. and exchange rate:
Decrease in receivables ..................................... 885 2,617
Increase in inventories ...................................... (5,003) (4,445)
(Increase) decrease in other current assets .................. 3,503 (2,695)
Decrease in restructuring reserve ............................ (702) (1,552)
Decrease in accounts payable
and accruals ................................................ (739) (2,194)
Increase (decrease) in long-term deferred income
taxes (net) ................................................. (255) 202
Other items - net ................................................. 485 467
-------- --------
Net cash provided by operating activities ....................... 18,398 16,588
-------- --------
Cash flows from investing activities
Purchase of the minority interest in Calgon Far East Co. Ltd. ..... -- (3,400)
Property, plant and equipment expenditures ........................ (9,815) (8,407)
Proceeds from disposals of equipment .............................. 725 551
-------- --------
Net cash used in investing activities ........................... (9,090) (11,256)
-------- --------
Cash flows from financing activities
Net proceeds from (repayments of) borrowings ...................... (4,720) 96
Common stock dividends ............................................ (3,504) (5,820)
-------- --------
Net cash used in financing activities ......................... (8,224) (5,724)
-------- --------
Effect of exchange rate changes on cash ............................. (1,082) (387)
-------- --------
Increase (decrease) in cash and cash equivalents .................... 2 (779)
Cash and cash equivalents, beginning
of period ......................................................... 3,567 4,334
-------- --------
Cash and cash equivalents, end of period ............................ $ 3,569 $ 3,555
======== ========
The accompanying notes are an integral part
of these financial statements.
6
CALGON CARBON CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
1. Inventories:
September 30, 2002 December 31, 2001
------------------ -----------------
Raw materials $ 9,254 $ 7,575
Finished goods 39,405 34,529
------- --------
$48,659 $ 42,104
======= ========
2. Supplemental Cash Flow Information:
Nine Months Ended September 30,
-------------------------------
2002 2001
---------- -----------
Cash (paid) received during the period for:
Interest $ (1,888) $ (2,889)
========== ===========
Income taxes (paid) refunded - net $ (49) $ 1,113
========== ===========
Bank debt:
Borrowings $ 52,272 $ 20,921
Repayments (56,992) (20,825)
---------- -----------
Net (repayments of) proceeds from bank debt $ (4,720) $ 96
========== ===========
3. Common stock dividends of $.03 per common share were declared and paid
during the quarter ended September 30, 2002. Common stock dividends
declared during the quarter ended September 30, 2001 were $.05 per common
share. Common stock dividends in the amount of $.03 per common share were
declared on October 23, 2002.
4. Comprehensive income:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Net income (loss) $ 556 $ 1,546 ($27,040) $ 7,744
Other comprehensive
income (loss) net of
tax provision (benefit) of
($30), $82, $141 and
$132, respectively (100) 1,890 3,415 (1,138)
---------- ---------- ----------- -----------
Comprehensive income (loss) $ 456 $ 3,436 ($ 23,625) $ 6,606
========== ========== =========== ===========
The only matter contributing to the other comprehensive income (loss) was
the foreign currency translation adjustment.
5. Segment Information:
7
The Company has four reportable segments: Activated Carbon, Service,
Engineered Solutions and Consumer. These reportable segments are strategic
business units which offer different products and services. The Company
evaluates segment performance based primarily on economic profit (as
defined by the Company) and operating income.
The Activated Carbon segment manufactures granular activated carbon for use
in applications to remove organic compounds from liquids, gases, water and
air. The Service segment consists of reactivation of spent carbon and the
leasing, monitoring and maintenance of mobile carbon adsorption equipment.
The Engineered Solutions segment provides solutions to customers' air and
water process problems through the design, fabrication and operation of
systems that utilize the Company's enabling technologies: carbon
adsorption, ultraviolet light and advanced ion exchange separation. The
Consumer segment brings the Company's industrial purification technologies
directly to the consumer in the form of products and services including
carbon cloth and charcoal products.
An improvement in the Company's information reporting system in the second
quarter of 2002 has allowed the Company to directly attribute, rather than
allocate, certain inventory cost variances, distribution costs and assets,
such as accounts receivable, to segments. As a result, the second quarter
and June year-to-date results for 2001 have been restated to conform with
the 2002 presentation.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net Sales
Activated Carbon ....................... $ 24,218 $ 25,074 $ 74,723 $ 81,915
Service ................................ 24,275 23,476 71,073 71,000
Engineered Solutions ................... 10,875 11,305 30,710 37,034
Consumer ............................... 5,464 4,888 18,946 16,611
--------- --------- --------- ---------
$ 64,832 $ 64,743 $ 195,452 $ 206,560
========= ========= ========= =========
Income (loss) from operations
before depreciation and amortization
Activated Carbon ....................... $ 3,768 $ 4,234 $ 12,192 $ 14,316
Service ................................ 5,225 4,466 14,496 14,783
Engineered Solutions ................... (1,840) 57 (3,546) 1,817
Consumer ............................... (601) (460) (402) (146)
--------- --------- --------- ---------
6,552 8,297 $ 22,740 $ 30,770
Depreciation and amortization
Activated Carbon ....................... 2,303 2,319 7,069 7,177
Service ................................ 1,930 1,712 5,361 4,856
Engineered Solutions ................... 207 726 609 2,151
Consumer ............................... 344 266 988 813
--------- --------- --------- ---------
4,784 5,023 14,027 14,997
--------- --------- --------- ---------
Income from operations after
depreciation and amortization .......... $ 1,768 $ 3,274 $ 8,713 $ 15,773
========= ========= ========= =========
8
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2002 2001 2002 2001
-------- -------- ------- --------
Reconciling items
Interest income 176 119 434 169
Interest expense (675) (746) (1,973) (2,837)
Other income (expense) - net (445) (231) (1,147) (922)
---------- --------- -------- ---------
Consolidated income before
income taxes, minority interest and
cumulative effect of change in accounting
principle $ 824 $ 2,416 $ 6,027 $ 12,183
========= ========= ======= =========
September 30, 2002 December 31, 2001
------------------ -----------------
Total Assets
Activated Carbon $121,859 $124,125
Service 96,058 89,202
Engineered Solutions 42,300 99,610
Consumer 22,682 18,777
-------- --------
$282,899 $331,714
======== ========
6. Derivative Instruments
The Company accounts for its derivative instruments under Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. This standard requires
recognition of all derivatives as either assets or liabilities at fair
value and may result in additional volatility in both current period
earnings and other comprehensive income as a result of recording recognized
and unrecognized gains and losses from changes in the fair value of
derivative instruments. As of September 30, 2002, the Company held five
derivative instruments, four foreign exchange contracts and an interest
rate swap agreement. None of the five derivatives received hedge accounting
treatment under SFAS No. 133 and were marked to market through the
Company's earnings for the nine months ended September 30, 2002.
7. Contingencies
On December 31, 1996, the Company purchased the common stock of Advanced
Separation Technologies Incorporated (AST) from Progress Capital Holdings,
Inc. and Potomac Capital Investment Corporation.
On January 12, 1998, the Company filed a claim for unspecified damages in
the United States District Court in the Western District of Pennsylvania
alleging among other things that Progress Capital Holdings and Potomac
Capital Investment Corporation materially breached various AST financial
and operational representations and warranties included in the Stock
Purchase Agreement. Based upon information obtained since the acquisition
and corroborated in the course of pre-trial discovery, the Company believes
that it has a reasonable basis for this claim and intends to vigorously
pursue reimbursement for damages sustained. Neither the Company nor its
counsel can predict with certainty the amount, if any, of recovery that
will be obtained from the defendants in this matter. Accordingly, the
Company has not recorded a receivable for this gain contingency pending
further developments in the litigation.
The Company is also currently a party in two cases involving alleged
infringement of its U.S. patent No. 6,129,893 ("893 patent") and one case
involving alleged infringment of its Canadian patent No. 2,331,525 ("525
patent"). Both patents are for the method of preventing cryptosporidium
infection in drinking water. In the first case, Wedeco Ideal Horizons, Inc.
(Wedeco) has filed suit against the Company seeking a declaratory judgment
that it does not infringe the Company's "893 patent". This matter is
currently pending in the United States District Court for the District of
New Jersey. In the second case, the Company has pending litigation against
the Town of Ontario, NY and Robert Wykle, et al. in the United
9
States District Court for the Western District of New York alleging that
the defendant is practicing the method claimed within the "893 patent"
without a license. The third case the Company has pending is against The
Corporation of the City of North Bay and Trojan Technologies Inc. in
Federal Court of Canada - Trial Division. The claim alleges that the
defendants are practicing a method claimed in the "525 patent". Neither the
Company nor its counsel can predict with any certainty the outcome of the
three matters.
The Company is involved in various legal proceedings, lawsuits, and claims,
including employment, product warranty, and environmental matters of a
nature considered normal to its business. It is the Company's policy to
accrue for amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably estimable.
Management believes, after consulting with counsel, that the ultimate
liabilities, if any, resulting from such lawsuits and claims will not
materially affect the consolidated results, liquidity or financial position
of the Company.
8. Goodwill & Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets." This standard requires
that goodwill and intangible assets with indefinite useful lives should not
be amortized but should be tested for impairment at least annually. This
new standard also prescribes guidelines for new disclosure requirements.
The Company has adopted SFAS No. 142 as of January 1, 2002, as required.
In accordance with SFAS No. 142, the Company assessed the useful lives of
its intangible assets during the first quarter of 2002 and concluded that
it holds no indefinite lived intangibles. As a result, no impairment test
was required and no transition adjustment was recorded for indefinite lived
intangibles.
As required by SFAS No. 142, management has allocated goodwill to its
reporting units. During the three months ended June 30, 2002, management
completed the initial goodwill impairment test required as of January 1,
2002 for each of its reporting units. The initial goodwill impairment test
included determining the fair value of each reporting unit that is
allocated goodwill and comparing that fair value to the reporting unit's
carrying value. The Company, in its initial goodwill impairment test,
identified one reporting unit whose carrying value exceeded its estimated
fair value.
The Company engaged an independent valuation specialist to estimate the
fair value of this reporting unit. The report of the independent valuation
specialist used a combination of methods to determine the fair value of the
reporting unit including prices of comparable businesses, a present value
technique and a technique using recent transactions involving businesses
similar to the reporting unit. The reporting unit consists primarily of the
Company's AST subsidiary that is included in the Company's Engineered
Solutions Segment.
As a result of the reporting unit's excess carrying value, the Company was
required, for this reporting unit, to assign the estimated fair value to
the reporting unit's identifiable assets (including those intangible assets
not recorded on the reporting unit's balance sheet) and liabilities to
determine the implied fair value of the reporting unit's goodwill and the
amount of impairment loss as of the date of implementation, January 1,
2002. The Company recorded a cumulative effect of change in accounting
principle of $30.9 million (net of the tax effect of $20.1 million) at
January 1, 2002 for its implementation of SFAS No. 142. The effect of
adopting this change in accounting principle effective for the first
quarter of 2002 reduced previously reported net income for the quarter
ended March 31, 2002 by $30.9 million to a net loss of $29.6 million, basic
net income per share by $0.80 to a basic net loss per share of $0.76, and
diluted net income per share by $0.79 to a diluted net loss per share of
$0.75.
10
The following is the categorization of the Company's intangible assets as
of September 30, 2002 and December 31, 2001, respectively:
September 30, 2002 December 31, 2001
-------------------------------- --------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized Intangible Assets:
Patents $ 1,319 $ (405) $ 1,319 $ (344)
Unpatented Technology 2,875 (485) 2,875 (359)
-------------- ------------ --------------- ------------
Total $ 4,194 $ (890) $ 4,194 $ (703)
============== ============ =============== ============
For the three and nine month periods ended September 30, 2002 the Company
recognized $62 and $187 thousand, respectively, of amortization expense.
The Company estimates amortization expense to be recognized during the next
five years as follows:
For the year ended 12/31/02 $ 248
For the year ended 12/31/03 $ 246
For the year ended 12/31/04 $ 246
For the year ended 12/31/05 $ 246
For the year ended 12/31/06 $ 246
The changes in the carrying amounts of goodwill by segment for the nine
months ended September 30, 2002 are as follows:
Activated Engineered
Carbon Service Solutions Consumer
Segment Segment Segment Segment Total
------- ------- ------- ------- -----
Balance as of January 1, 2002 $ 2,015 $ - $ 68,049 $60 $ 70,124
Cumulative effect of change
in accounting principle - - (51,000) - (51,000)
Foreign exchange - - 39 - 39
-------- ---------- --------- ----- ---------
Balance as of September 30, 2002 $ 2,015 $ - $ 17,088 $60 $ 19,163
======== ========== ========= ===== =========
11
The following is the Company's net income adjusted to exclude goodwill
amortization expense (net of tax) for the three months and nine months ended
September 30, 2002 and 2001, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
2002 2001 2002 2001
-------- -------- ------ ------
NET INCOME:
Reported net income (loss) $ 556 $1,546 $(27,040) $7,744
Add back goodwill amortization, net of tax - 336 - 975
------- -------- --------- ------
Adjusted net income (loss) $ 556 $1,882 $(27,040) $8,719
======= ======== ========= ======
BASIC AND DILUTED EARNINGS PER SHARE:
Reported net income (loss) $ 0.01 $ 0.04 $ (.69) $ .20
Goodwill amortization, net of tax - 0.01 - .02
------- -------- --------- ------
Adjusted net income (loss) $ 0.01 $ 0.05 $ (.69) $ .22
======= ======== ========= ======
9. New Accounting Pronouncements
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. Management has not yet evaluated
the impact of the adoption of SFAS No. 143 on the Company's financial
statements. The Company plans to adopt SFAS No. 143 on January 1, 2003 as
required.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. The Company has adopted SFAS No. 144 as of January 1,
2002 as required with no resulting impact on the Company's financial
statements.
In July 2002, the FASB has issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, plant closing, or other exit
or disposal activity. Previous accounting guidance, amended by SFAS No.
146, was provided by EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after
December 31, 2002.
12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Selected Notes to
Financial Statements.
Results of Operations
Consolidated net sales were consistent for the quarter ended September
30, 2002 versus the quarter ended September 30, 2001. Consolidated net sales for
the year-to-date period ended September 30, 2002 decreased by $11.1 million or
5.4% versus the year-to-date period ended September 30, 2001 (an analysis of
sales by segment can be found in Note 5 of Selected Notes to Financial
Statements). Net sales for the activated carbon segment decreased by $0.9
million or 3.4% versus the quarter ended September 30, 2001 and $7.2 million or
8.8% versus the year-to-date period ended September 30, 2001. The decline for
both periods was primarily the result of lower sales volume in North America due
to the economic downturn that began in the latter part of 2001 and that has
continued through the end of the third quarter of 2002. Net sales for the
service segment increased by $0.8 million or 3.4% for the quarter ended
September 30, 2002 as compared to the quarter ended September 30, 2001. Service
segment sales for the year-to-date period ended September 30, 2002 were
consistent with the similar 2001 period. For both periods of comparison, slower
sales in North America were more than offset by increased sales in Europe and
the positive impact of foreign currency translation which was $0.7 million for
both the quarter and year-to-date periods. Revenues associated with the
engineered solutions segment decreased by $0.4 million or 3.8% for the quarter
ended September 30, 2002 versus the quarter ended September 30, 2001 and $6.3
million or 17.1% for the year-to-date period ended September 30, 2002 versus the
comparable 2001 period primarily due to lower revenues in 2002 associated with a
major project secured and substantially recorded in 2001. Sales to the consumer
segment for the quarter ended September 30, 2002 increased by $0.6 million or
11.8% compared to the quarter ended September 30, 2001 and $2.3 million or 14.1%
for the year-to-date period ended September 30, 2002 versus the similar 2001
period. The sales increase for the quarter is primarily due to increased sales
of new consumer products. The reason for the increase during the year-to-date
period of comparison was due to higher sales of charcoal, carbon cloth and new
consumer products. The total positive impact of foreign currency translation on
consolidated net sales for the quarter and year-to-date periods ended September
30, 2002 was $1.8 million and $1.5 million respectively.
Gross profit, before depreciation, as a percentage of net sales was 30.2% for
the quarter ended September 30, 2002 compared to 31.4% for the similar 2001
period, a 1.2 percentage point decline. For the year-to-date period, gross
profit, before depreciation, as a percentage of net sales was 30.8% in 2002
versus 33.4% in the 2001 period representing a 2.6 percentage point decline. The
decline for the quarter and year-to-date was primarily due to a combination of
costs associated with a major Engineered Solutions project and increased
charcoal production costs. Those cost increases were partially offset by lower
energy costs and lower cost of U.S. sourced carbon products shipped to the
Company's Belgian branch as a result of the strengthening of the Euro in 2002
versus the comparable 2001 periods in addition to higher production costs
realized in the third quarter of 2001 due to the labor strike at the Company's
Catlettsburg, Kentucky facility that was resolved in the first quarter of 2002.
The depreciation and amortization decreases of $0.2 million and $1.0 million
during the quarter and year-to-date periods ended September 30, 2002 versus the
quarter and year-to-date periods ended September 30, 2001 were related primarily
to the Company ceasing to amortize goodwill due to the implementation of
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" as of January 1, 2002 partially offset by higher
depreciation.
Combined, selling, general and administrative expenses and research and
development expenses for the quarter ended September 30, 2002 were higher than
the comparable 2001 quarter by $0.9 million or 7.4%. The increase is the result
of a positive revision of the Company's pension expense estimate in the third
quarter of 2001 coupled with additional expense incurred due to the new carbon
facility in The People's Republic of China being operational for the entire
third quarter of 2002. Combined, selling, general and administrative expenses
and research and development expenses for the year-to-date period ended
September 30, 2002 were $0.8 million or 2.0% lower than the comparable 2001
period. The decrease represents the Company's commitment to aggressively control
spending during periods of lower sales demand.
13
Other expense for the quarter and year-to-date periods ended September 30, 2002
increased by $0.2 million versus both comparable periods. The primary reason for
the increase in both periods presented is a small foreign exchange loss
recognized during the quarter and year-to-date periods in 2002 versus a small
foreign exchange gain recognized in the similar 2001 periods.
Interest expense, net of interest income, for the quarter and year-to-date
periods ended September 30, 2002 was below the quarter and year-to-date periods
ended September 30, 2001 by $0.1 million or 20.4% and $1.1 million or 42.3%,
respectively. The decrease in interest expense for both periods was primarily
the result of the combination of lower interest rates and a lower average level
of borrowings during the comparable periods.
Net income decreased by $1.0 million and $34.8 million for the quarter and
year-to-date periods ended September 30, 2002 versus the quarter and
year-to-date periods ended September 30, 2001 primarily for the reasons
discussed above and, for the year-to-date period, as a result of the $30.9
million after tax effect of the cumulative effect of change in accounting
principle related to the implementation of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (see note 8 to the
Selected Notes to Financial Statements.)
Financial Condition
Working Capital and Liquidity
Cash flows generated from operating activities were $18.4 million for
the nine month period ended September 30, 2002 versus cash generated from
operations of $16.6 million for the comparable 2001 period. The $1.8 million
increase represents a decrease in operating working capital (exclusive of debt)
in 2002 versus the comparable period in 2001 partially offset by lower earnings
and depreciation and amortization in 2002.
Common stock dividends paid during the quarter ended September 30, 2002
represented $.03 per common share versus dividends paid of $.05 per common share
for the quarter ended September 30, 2001.
Total debt at September 30, 2002 was $59.6 million, a decrease of $4.8 million
from December 31, 2001. The decline in debt was primarily the result of cash
generated by net operating cash flows greater than the Company's capital
expenditure and dividend requirements and those cash flows being used to repay
debt.
The Company expects that current cash from operating activities plus cash
balances and available external financing will be sufficient to meet its future
requirements.
The Company has a $113.4 million credit facility consisting of an $86.8 million
five-year revolving credit facility expiring in May 2004 and a $26.6 million
364-day revolving credit facility expiring in May 2004. The commitment under the
364-day revolving credit facility expired in May 2002 and was not renewed.
However, in order to preserve the full $113.4 million commitment of the credit
facility, the Company exercised its contractual option of borrowing the total
commitment of $26.6 million under the 364-day line before its May 2002
expiration. The $26.6 million of outstanding borrowings mature in May 2004 which
coincides with the expiration of the long-term portion of the credit facility.
Included in this facility is a letter of credit subfacility which may not exceed
$30.0 million. At September 30, 2002 there were $26.6 million of borrowings
under the 364-day revolving credit agreement. The weighted average interest rate
on the outstanding balance under this credit facility was 3.12% at September 30,
2002.
The Company is currently in compliance with all of the financial covenants in
the $113.4 million credit facility. One of those covenants is an interest
coverage ratio that requires the Company to maintain a trailing four quarters
earnings before interest and tax (EBIT) level greater than three times its
interest expense. Due to the Company's recent operating performance, the
potential exists that the Company could violate that interest coverage covenant
should future quarterly EBIT cause the trailing four quarters EBIT to fall below
its current level. Management intends to negotiate a waiver and an amendment to
its facility prior to any violation. Such waiver would require the consent of
the banks included in the credit facility.
14
In January 2001, the Company entered into an interest rate swap that fixes $10.0
million of its outstanding variable rate U.S. credit facility at 5.48%. The
arrangement expires in January 2003.
Restructuring of Operations
The Company currently has two separate restructuring plans requiring
continued cash outlays as of the period ended September 30, 2002. The latter of
the two initiatives was undertaken during the fourth quarter of 1999 while the
former commenced in the third quarter of 1998. The details of both restructuring
plans are outlined below.
During the fourth quarter of 1999, the Company adopted a strategy aimed at
lowering costs to serve the activated carbon markets, investing to grow its
service and solutions businesses and repositioning its proven technologies to
bring more value to consumers. In order to achieve these goals, the Company has
been reorganized as a globally integrated business with emphasis on providing
services and solutions to customer problems. The implementation began in
December 1999 and is essentially complete except for contractual cash outlays
for employee severance payments to be made in 2002 and other contractual cash
outlays, primarily lease obligations, through the second quarter of 2006.
In the third quarter of 1998, the Company initiated a worldwide plan to reduce
costs and realign the organization structure. The implementation began in
September 1998 and is essentially completed with the exception of some minor
contractual cash outlays that will continue through 2002.
15
The restructuring reserve activity for the nine months ended September 30, 2002
was:
Balance Balance
1-1-02 Payments 9-30-02
--------- -------- -------
($000)
1999 Plan
Employee severance and
termination benefit costs $ 247 $ (228) $ 19
Other costs 1,101 (278) 823
---------- ----------- -----------
1,348 (506) 842
---------- ----------- -----------
1998 Plan
Employee severance and
termination benefit costs 95 (95) -
Other costs 37 (13) 24
---------- ----------- -----------
132 (108) 24
---------- ----------- -----------
Total reserves $ 1,480 $ 614) $ 866
========== =========== ===========
Management believes the reserve balances are adequate.
Capital Expenditures and Investments
Capital expenditures for property, plant and equipment totaled $9.8
million for the year-to-date period ended September 30, 2002 compared to
expenditures of $8.4 million for the same period in 2001. The increase is
primarily the result of the Company's investment in the construction of a carbon
facility in the People's Republic of China. Capital expenditures for 2002 are
projected to be approximately $13.0 million.
Regulatory Matters
Each of the Company's domestic production facilities has permits and licenses
regulating air emissions and water discharges. All of the Company's domestic
production facilities are controlled under permits issued by local, state and
federal air pollution control entities. The Company is presently in compliance
with these permits. Continued compliance will require administrative control and
will be subject to any new or additional standards. In this regard, the Company
has agreed with the state of Kentucky that it will either begin installation of
additional control equipment on one of its three activated carbon lines at its
Catlettsburg, Kentucky facility by November 2003 or cease operations of this one
activated carbon line in May 2003. The Company has not started installation and
does not expect to have the additional control equipment installed by May 2003.
The activated carbon line has a net book value, including the coal handling
servicing equipment related to this line, of approximately $3,000,000.
Management has not concluded its plan of action for compliance related to this
activated carbon line, however, if it is ultimately determined that a shutdown
of the activated carbon line is warranted, operating results may be adversely
effected by increased depreciation or impairment charges on this line. The total
cost of the control equipment required for compliance, if installed, is
estimated at approximately $7.0 million. The Company is evaluating its
production capacity and related alternatives, including considering current
market demands. The Company believes that the cessation of production of the
activated carbon line, if temporary or other than temporary, will not have a
material impact upon the Company's ability to service the demands of its
customers.
New Accounting Pronouncements
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. Management has not yet evaluated the impact of the
adoption of SFAS No. 143 on the Company's financial statements. The Company
plans to adopt SFAS No. 143 on January 1, 2003 as required.
16
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The Company
has adopted SFAS No. 144 as of January 1, 2002 as required with no resulting
impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. Previous
accounting guidance, amended by SFAS No. 146, was provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.
17
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-14(c) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") within 90 days of the
filing date of this Quarterly Report on Form 10-Q. Based upon their evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports filed or
submitted by it under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
include controls and procedures designed to ensure that information required to
be disclosed by the Company in such reports is accumulated and communicated to
the Company's management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 to the unaudited interim Consolidated Financial Statements
contained herein.
Item 6. Exhibits and Reports on Form 8-K
(c) Exhibits
Exhibit 10.8 Employment Agreement between Calgon Carbon Corporation
and Gail A. Gerono.
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(d) Reports on Form 8-K
A report on Form 8-K, dated August 13, 2002 which furnished
information filed under Item 9. Regulation FD Disclosure detailing
the Company's restatement of its previously reported segment
financial data.
19
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.
CALGON CARBON CORPORATION
-------------------------
(REGISTRANT)
Date: November 14, 2002 /s/William E. Cann
-----------------------------
William E. Cann
Senior Vice President,
Chief Financial Officer
20
CERTIFICATION
I, James A. Cederna, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calgon Carbon
Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ James A. Cederna
- ---------------------------------------
Name: James A. Cederna
Title: Chief Executive Officer
21
CERTIFICATION
I, William E. Cann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calgon Carbon
Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ William E. Cann
- --------------------------------------
Name: William E. Cann
Title: Chief Financial Officer
22