CALGON CARBON CORPORATION - 10-Q Quarterly Report

(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 91 days. Yes ¨ No x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). 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 ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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.

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, 2003 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 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

On February 18, 2004, the Company acquired substantially all of the assets of Waterlink, Incorporated’s (“Waterlink”) United States-based subsidiary Barnebey Sutcliffe Corporation, and 100% of the outstanding common shares of Waterlink (UK) Limited, a holding company that owns 100% of the outstanding common shares of Waterlink’s operating subsidiaries in the United Kingdom (collectively “Waterlink Specialty Products”).

Known as Barnebey Sutcliffe in the United States and Sutcliffe Speakman in the United Kingdom, Waterlink Specialty Products is a leading provider of products, equipment, systems and services related to activated carbon and its uses for water and air purification, solvent recovery, odor control and chemical processing. The primary reasons for the Company’s acquisition of Waterlink Specialty Products and the primary reasons that contributed to a purchase price that resulted in recognition of goodwill are to complement the Company’s existing business in terms of (i) expanding its customer base; (ii) diversifying its product mix; (iii) providing access to profitable, niche markets; and (iv) enhancing profitability and cash flow.

The aggregate purchase price, including direct acquisition costs, was $36.6 million, plus the assumption of certain non-working capital liabilities amounting to $15.0 million. The Company funded approximately $33.3 million of the purchase price through borrowings from its refinanced U.S. revolving credit facility (see Note 10).

The recorded purchase price of the net assets acquired in the transaction was approximately $36.6 million. The purchase price was allocated to the net assets acquired as follows:

Allocation of the purchase price to the assets acquired and liabilities assumed has not yet been completed for this acquisition. Final determination of the fair values to be assigned may result in adjustments to the preliminary values assigned at the date of acquisition, and could principally impact goodwill and deferred taxes.

The results of Waterlink have been included in the Company’s consolidated statement of operations for the period from the date of acquisition through September 30, 2004.

The following unaudited pro forma results of operations assume that Waterlink Specialty Products is included in the results of operations for the full periods indicated. Such results are not necessarily indicative of the actual results of operations that would have been achieved nor are they necessarily indicative of future results of operations. There are no material, nonrecurring items included in the reported pro forma results of operations.

Common stock dividends of $.03 per common share were declared and paid during the quarter ended September 30, 2004. Common stock dividends declared and paid during the quarter ended September 30, 2003 were $.03 per common share. Common stock dividends in the amount of $.03 per common share were declared on October 21, 2004.

The only matters contributing to the other comprehensive income during the three and nine months ended September 30, 2004 was the foreign currency translation adjustment of $1.4 million and $0.3 million, respectively, and the changes in the fair value of derivative instruments (see note 7) of $(0.1) million and $(0.1) million, respectively. The only matter contributing to the other comprehensive income during the three and nine months ended September 30, 2003 was the foreign currency translation adjustment.

In the fourth quarter of 2003, management completed a strategic planning process that included reviewing how the Company compiled and reported financial information to the Company’s Chief Operating Decision Maker for its four business segments, Activated Carbon, Service, Engineered Solutions, and Consumer.

Management concluded as part of this review that the Activated Carbon and Service segments were more appropriately reflected on a combined basis, certain equipment related service revenue and associated costs previously reported in the Engineered Solutions segment would instead be better aligned in the newly formed Carbon and Service segment and certain service equipment sales and associated costs previously reported in the Service segment would be aligned better in the Engineered Solutions segment which has been re-named the Equipment segment. As a result of the aforementioned review, beginning in the first quarter of 2004, the Company’s Chief Operating Decision Maker receives and reviews financial information in the new form. The Company’s Consumer segment was not changed and remains in the same form as it did prior to December 31, 2003. The comparative periods have been restated to conform to the change in segments.

The Carbon and Service segment manufactures granular activated carbon for use in applications to remove organic compounds from liquids, gases, water, and air. This segment also consists of services related to activated carbon including reactivation of spent carbon and the leasing, monitoring, and maintenance of carbon fills at customer sites. The service portion of this segment also includes services related to the Company’s ion exchange technologies for treatment of groundwater and process streams. The Equipment segment provides solutions to customers’ air and water process problems through the design, fabrication, and operation of systems that primarily 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, activated carbon for household odors, and charcoal products.

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, 2004, the Company held sixteen derivative instruments at fair value of which fifteen were foreign currency forward exchange contracts and one was a foreign currency swap. The Company applied hedge accounting treatment under SFAS No. 133 for all of the foreign currency exchange contracts and the foreign currency swap.

All foreign currency exchange contracts are treated as foreign exchange cash flow hedges regarding payment for inventory purchases. Accordingly, the change in the fair value of the effective hedge portion of the foreign exchange forward contracts of $22 thousand and $110 thousand, respectively, for the three and nine month periods ended September 30, 2004, respectively, was recorded in other comprehensive income (loss). The balance of the fair value for the effective hedge portion of all foreign exchange contracts recorded in accumulated other comprehensive income was ($4) thousand as of September 30, 2004. It will be released into earnings over the next 12 months based on the timing of the sales of the underlying inventory. The release to earnings will be reflected in cost of products sold.

On April 26, 2004, the Company entered into a ten-year foreign currency swap agreement to fix the foreign exchange rate on a $6.5 million intercompany loan between the Company and its foreign subsidiary, Chemviron Carbon Ltd. Since its inception, the foreign currency swap has been treated as a foreign exchange cash flow hedge. Accordingly, the changes in the fair value of the effective hedge portion of the foreign currency swap of ($80) thousand and ($174) thousand for the three and nine month periods ended September 30, 2004, respectively, was recorded in other comprehensive income (loss). The balance of the effective hedge portion of the foreign currency swap recorded in accumulated other comprehensive income was $174 thousand as of September 30, 2004.

No component of the derivatives gains or losses has been excluded from the assessment of hedge effectiveness. For the three and nine month periods ended September 30, 2004, the net gain or loss recognized due to the amount of hedge ineffectiveness was not material.

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.

The Company is also currently a party in three cases involving alleged infringement of its U.S. Patent No. 6,129,893 and U.S. Patent No. 6,565,803 B1 (“U.S. Patents”) or Canadian Patent No. 2,331,525 (“525 Patent”) for the method of preventing cryptosporidium infection in drinking water. In the first case, Wedeco Ideal Horizons, Inc. (Wedeco) filed suit against the Company seeking a declaratory judgment that it does not infringe the Company’s U.S. Patents and alleging unfair competition by the Company. 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, New York, Trojan Technologies, Inc. (“Trojan”) and Robert Wykle, et al

in the United States District Court for the Western District of New York alleging that the defendant is practicing the method claimed within the U.S. Patents without a license. In the third case, the Company has pending litigation against the City of North Bay, Ontario, Canada (North Bay) and Trojan in the Federal Court of Canada alleging infringement of the 525 Patent by North Bay and inducement of infringement by Trojan. Neither the Company nor its counsel can predict with any certainty the outcome of the three matters.

A settlement of a dispute between the Company and a customer relating to certain agreements between the parties for the engineering, procurement and provision of a perchlorate remediation system at the customer’s facility was settled in October 2004. The customer claimed it was entitled to recover $20 million in damages; the Company contended that it had been denied the right to correct certain deficiencies in the system. Pursuant to the settlement agreement, the customer will be paid $5,250,000 by the Company’s insurer and the Company will make an additional payment of $750,000. The Company also agreed to waive its right to recover the retainage and final payment under the contract and transfer certain equipment to the customer; the Company is released of any further obligation to perform under the contract. The Company fully accrued for the settlement payment of $750,000 in the first quarter of 2004 and no further accruals were required.

The Company is a party in a case filed by the City of DeQuincy, Louisiana. The City seeks to repurchase land sold to the Company by the City as a site for a regeneration facility to be constructed by the Company. The City claims a right to recover title to the land under the terms of the agreement of sale upon repayment of the original purchase price of $20,000; the claim is predicated on its assertion that the Company has not timely commenced construction of the project. The Company believes that the City’s claim is without merit and that it will ultimately prevail although there can be no assurance that an adverse outcome will not occur. If the Company is required to reconvey its interest in the land, it estimates that it would record a charge of approximately $0.7 million relating to unrecoverable development costs associated with the reactivation project. Management continues to evaluate the strategic alternatives regarding this facility as discussed in the Capital Expenditures and Investments section of Item 2 of this report.

The Company has received a demand from the Pennsylvania Department of Environmental Protection (PADEP) that the Company reimburse PADEP for response costs the agency alleges have been taken at a site owned by a third party and located in Allegheny County, Pennsylvania (“Site”). The letter also included an unspecified demand for interest and for any future costs incurred by PADEP at the Site. The Company understands that the response costs are approximately $1.3 million. Based on information provided by the PADEP, the Site is approximately 8 acres and was used from the 1950’s until the 1960’s as a disposal site for coke or carbon sweepings and other industrial wastes. The Company has been in discussions with PADEP regarding the Company’s position that it is not the entity that disposed of materials containing the contaminants identified by PADEP at the Site and that any materials that may have been deposited by the Company’s predecessor did not contain actionable levels of hazardous substances identified by PADEP. PADEP has advised the Company that it is prepared to settle the matter for payment of $475,000. The Company believes PADEP’s position is not meritorious, and the demand is unwarranted. The Company intends to continue to vigorously defend the matter.

In September 2004, a customer of one of the Company’s distributors demanded payment by the Company of approximately $340,000 as reimbursement for losses allegedly caused by activated carbon produced by the Company and sold by the distributor. The claimant contends that the activated carbon contained contamination which adversely impacted its production process. The Company is in the process of evaluating the claim, and at this time, cannot predict with any certainty the outcome of this matter.

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 of operations, cash flows or financial position of the Company.

In conjunction with the purchase of substantially all of Waterlink’s operating assets and the stock of Waterlink’s U.K. subsidiary, several environmental studies were performed on the Columbus, Ohio property by environmental consulting firms which identified and characterized areas of contamination. In addition, these firms identified alternative methods of remediating the property, identified feasible alternatives and prepared cost evaluations of the cost of the various alternatives. Liability estimates are based on an evaluation of, among other factors, currently available facts, existing technology, presently enacted laws and regulations, and the remediation experience of other companies. The Company has concluded from the information in the studies that a loss at this property is probable and has included an estimate of such loss of $5.6 million, which was recorded as an undiscounted liability on the opening balance sheet at the date of the acquisition and is presented as a component of noncurrent other liabilities in the Company’s September 30, 2004 consolidated balance sheet. As of September 30, 2004, the Company had an accrual of $5.5 million recorded. It is reasonably possible that a change in the estimate of this obligation will occur as additional investigative work is performed and the remediation activity commences. The ultimate remediation costs are dependent upon the extent and types of contamination, which may change as a result of more detailed information developed through upcoming investigations and experience gained through remediation activities. The accrued amounts are expected to be paid out over the course of several years. The environmental remediation expense that the Company has incurred for the three and nine month periods ended September 30, 2004 was $0.1 million.

The Company owns a 49% interest in a joint venture, Calgon Mitsubishi Chemical Corporation, which was formed on October 1, 2002. At September 30, 2004, Calgon Mitsubishi Chemical Corporation has $14.2 million in borrowings from an affiliate of the majority owner of the joint venture. The Company has agreed with the joint venture and the lender that, upon request by the lender, the Company will execute a guarantee for up to 49% of such borrowings. At September 30, 2004, the lender has not requested, and the Company has not provided, such guarantee. If such guarantee were requested in the future, the Company would review the details of the guarantee before executing to ensure that the Company remains in compliance with all existing credit agreements.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This standard requires that goodwill and intangible assets with indefinite useful lives not be amortized but should be tested for impairment at least annually. Management has elected to do the annual impairment test on December 31 of each year. As required by SFAS No. 142, management has allocated goodwill to the Company’s reporting units.

The Company used a combination of methods to determine the fair value of the intangible assets of the acquired Waterlink Specialty Products, (see Note 1), including the cost approach, the market approach, and the income approach. The acquired intangible assets consist primarily of customer contracts, customer relationships, and large equipment contract backlog and are recognized apart from goodwill. The acquired intangible assets’ useful lives are based on the expected future cash flows the Company is expected to realize and the amortization will be recognized to match the expected cash flows.

The following is the categorization of the Company’s intangible assets as of September 30, 2004 and December 31, 2003 respectively:

For the three and nine months ended September 30, 2004, the Company recognized $0.6 million and $1.5 million, respectively, of amortization expense. For the three and nine months ended September 30, 2003, the Company recognized $67 thousand and $0.2 million, respectively, of amortization expense. The Company estimates amortization expense to be recognized during the next five years as follows:

The changes in the carrying amounts of goodwill by segment for the nine months ended September 30, 2004 are as follows:

rate is based upon Euro based rates with other interest rate options available. The applicable Euro Dollar margin ranges from 0.80% to 1.85% and the annual facility fee ranges from 0.20% to 0.40% of the committed amount and is based upon the Company’s ratio of debt to earnings before interest, income tax, depreciation and amortization (EBITDA). At the close of the new credit facility, the applicable Euro Dollar margin was 1.53% in addition to a facility fee of 0.35%. At September 30, 2004, borrowings under the facility were being charged a weighted average interest of 3.39%. The credit facility’s covenants impose financial restrictions on the Company, including maintaining certain ratios of debt to EBITDA, operating income to net interest expense and operating assets to debt and net worth. In addition, the facility imposes gross spending restrictions on capital expenditures, dividends, treasury share repurchases, acquisitions and investments in non-controlled subsidiaries. The facility contains mandatory prepayment provisions for proceeds in excess of pre-established amounts of certain events as defined within the loan agreement.

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock issued to Employees,” and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for these plans. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, the Company’s net income and net income per common share would have been as follows:

At the time of the acquisition of substantially all of Waterlink’s U.S. operating assets and the stock of Waterlink’s U.K. subsidiary, the Company had begun to formulate a plan for eliminating redundant activities and reviewing substantially all employment positions at the acquired companies. Subsequent to the acquisition, the

preliminary plan was communicated to all affected employees and the Company began execution of the plan. Management has finalized the plan and substantially all of the separations resulting from the Company’s integration plan are expected to be completed and benefits paid by June 30, 2005 with the remainder to be paid by December 31, 2005.

The Company has currently estimated an obligation for termination and relocation benefits of $1.1 million related to sales, administrative, engineering, and production positions of the acquired companies which was recorded on the opening balance sheet as of the date of acquisition and is presented as a component of accounts payable and accrued liabilities in the Company’s consolidated balance sheet. As of September 30, 2004, the amounts that the Company has paid and charged against the termination and relocation reserve were $0.1 million.

Significant changes in the number of employee separations are not expected. Any change to the Company’s original estimate of termination and relocation benefits for employees of the acquired companies as a result of the finalization of the integration plan will be recorded as an adjustment to goodwill.

For U.S. plans, the following table provides the components of net periodic pension costs of the plans for the three and nine months ended September 30, 2004 and 2003:

The expected long-term rate of return on plan assets is 8.75% in 2004. The net periodic pension cost for the three and nine months ended September 30, 2004 includes $0.1 million and $0.3 million, respectively, for the acquired Waterlink Specialty Products.

Subsequent to the February 18, 2004 acquisition of Waterlink Specialty Products, the Company disclosed in its second quarter 2004 10-Q filing, a revised estimate of expected contributions to its U.S. pension plans in 2004 of $1.3 million which matched the Company’s minimum required regulatory funding requirements. In September 2004, after assessing its short-term cash requirements, the Company elected to increase its pension funding level by making a $3.6 million contribution to its U.S. pension plans, which brought its total U.S. pension contributions in 2004 to $3.9 million. As a result of the additional funding, the Company does not plan to make any further contributions in 2004 and expects its 2005 contributions to be $0.3 million versus a previously expected $3.7 million.

For European plans, the following table provides the components of net periodic pension costs of the plans for the three and nine months ended September 30, 2004 and 2003:

The expected long-term rate of return on plan assets ranges from 5.50% to 8.00 % in 2004. The net periodic pension cost for the three and nine months ended September 30, 2004 includes $0.1 million and $0.3 million, respectively, for the acquired Waterlink Specialty Products.

In its 2003 financial statements, the Company disclosed that it expected to contribute $0.8 million to its European pension plans in 2004. As of September 30, 2004, the Company has contributed $0.5 million to its European pension plans. Because of the Company’s February 18, 2004 acquisition of Waterlink Specialty Products, the 2004 expected pension contribution is now $1.2 million.

The Company also sponsors a U.S. defined contribution pension plan for certain employees that permits employee contributions of up to 10% of eligible compensation. The Company makes matching contributions on behalf of each participant in an amount equal to 25% of the employee contribution up to a maximum of 4% of employee compensation. Employer contributions vest immediately. Total expenses related to this U.S. defined contribution plan were $37 thousand and $34 thousand, respectively, for the three months ended September 30, 2004 and 2003 and $57 thousand and $155 thousand, respectively, for the nine months ended September 30, 2004 and 2003. There were no expenses relating to the acquired Waterlink Specialty Products during the periods presented.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (revised in December 2003). Interpretation No. 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risk and rewards of ownership among their owners and other parties involved. The provisions of Interpretation No. 46 are effective immediately to all variable interest entities created after January 1, 2003 and variable interest entities in which an enterprise obtains an interest after that date, and for variable interest entities created before this date, the provisions are effective March 15, 2004. The Company has no variable interest entities, and, as a result, the adoption of Interpretation No. 46 had no impact on the financial statements.

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” to require additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company has adopted these additional disclosure requirements and included such disclosures in the footnotes to the financial statements.

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.

On February 18, 2004, the Company completed the acquisition of the Specialty Products Division of Waterlink, Incorporated (WSP). The results of the acquired entity for the first quarter of 2004 are included from the date of acquisition.

Consolidated net sales increased $16.4 million or 24.7% and $42.7 million or 20.4% for the quarter and year-to-date periods ended September 30, 2004, respectively, versus the quarter and year-to-date periods ended September 30, 2003. Net sales for the Carbon and Service segment increased by $8.1 million or 15.5% versus the quarter ended September 30, 2003 and $23.5 million or 14.7% versus the year-to-date period September 30, 2003. Waterlink Specialty Products (WSP) contributed $11.0 million and $30.3 million, respectively, for the quarter and year-to-date periods ended September 30, 2004. Foreign currency translation had a positive impact of $1.8 million and $5.6 million, respectively, versus the quarter and year-to-date periods ended September 30, 2003. Partially offsetting this favorability were a number of large municipal fills in Europe and Asia that took place during the quarter and year-to-date periods ended September 30, 2003 which did not reoccur as well as a large non-repeating service contract in the U.S. during the comparable 2003 period. Net sales for the Equipment segment increased $8.0 million or 110% versus the quarter ended September 30, 2003 and $17.7 million or 79.9% versus the year-to-date period September 30, 2003. The increase was primarily due to stronger sales for solvent recovery and ion exchange systems versus the quarter and year-to-date periods ended September 30, 2003. WSP sales contributed $3.1 million and $6.8 million, respectively, for the quarter and year-to-date periods ended September 30, 2004. Net sales for the Consumer segment increased $0.4 million or 5.3% versus the quarter ended September 30, 2003 and $1.4 million or 5.3% versus the year-to-date period September 30, 2003. The increase in both periods was primarily due to the positive impact of foreign currency translation of $0.6 million and $2.2 million, respectively. Partially offsetting this favorability for the quarter were decreased sales of activated carbon cloth for medical applications versus the similar 2003 period. Partially offsetting the favorability for the year-to-date period were decreased sales of PreZerve^™ storage products of $0.8 million versus the similar 2003 period. The total positive impact of foreign currency translation on consolidated sales for the quarter and year-to-date periods ended September 30, 2004 was $2.7 million and $8.4 million, respectively.

Gross profit, before depreciation, as a percentage of net sales for the quarter ended September 30, 2004 was 27.4% as compared to 30.0% for the similar 2003 period, a 2.6 percentage point decrease. This decrease was mainly due to product mix, the addition of WSP’s lower margin business, and competitive pricing pressures in the carbon and service segment. For the year-to-date period, gross profit, before depreciation, as a percentage of

net sales was 28.5% as compared to 30.3% for the similar 2003 period, a 1.8 percentage point decrease. Higher raw material costs of $0.5 million, the addition of WSP’s lower margin business, product mix, and competitive pricing pressures in the carbon and service segment adversely impacted the year-to-date 2004 results.

Depreciation and amortization increased $0.9 million and $2.3 million, respectively, versus the quarter and year-to-date periods ended September 30, 2003 primarily due to the intangible amortization and additional depreciation charges resulting from the acquisition of WSP.

Selling, general and administrative expenses for the quarter ended September 30, 2004 were higher than the comparable 2003 period by $1.2 million or 10.0%. The increase was mainly due to the addition of WSP’s selling, general and administrative expenses of $1.8 million, $0.1 million of foreign currency translation, and $0.2 million of expenses related to the integration of WSP partially offset by a $0.6 million decrease in employee related costs. For the year-to-date period, selling, general and administrative expenses increased $3.1 million or 7.7% versus the comparable 2003 period. Excluding costs associated with the CEO severance of $1.9 million in 2003, this represents a $5.0 million increase. The increase was primarily related to the addition of WSP’s operating expenses of $5.4 million, $0.8 million of foreign currency translation and $0.8 million of expenses related to the integration of WSP. Partially offsetting this increase was a decrease in employee related costs of $1.1 million and a decrease in bad debt expense of $0.4 million.

Research and development expenses for the quarter and year-to-date periods ended September 30, 2004 were comparable with the similar 2003 periods.

Equity income (loss) in Calgon Mitsubishi Chemical Corporation for the quarter ended September 30, 2004 was comparable with the similar 2003 period and increased $0.8 million versus the year-to-date period ended September 30, 2003. The year-to-date increase is primarily due to the favorable settlement with a raw material vendor and a large municipal fill that occurred in early 2004.

Other expense for the quarter ended September 30, 2004 increased $0.6 million due to the disposition of certain fixed assets of $0.3 million and foreign currency transaction losses of $0.2 million. For the year-to-date period, other expense increased $1.1 million versus the similar 2003 period primarily due to a foreign exchange loss which is related to an intercompany loan between the Company and its subsidiary, Chemviron Carbon Ltd., with respect to the purchase of 100% of the outstanding common shares of Waterlink (UK) Limited of $0.6 million as well as the aforementioned disposition of certain fixed assets of $0.3 million.

Interest expense, net of interest income, for the quarter and year-to-date periods ended September 30, 2004 increased $0.4 million and $0.6 million, respectively, as a result of the increased debt from the acquisition of WSP and increased borrowing rates compared to the similar 2003 periods.

Cash flows generated from operating activities were $15.0 million for the nine month period ended September 30, 2004 compared to cash generated from operating activities of $11.4 million for the comparable 2003 period. The $3.6 million increase represents a combination of improved earnings and a decrease in operating working capital (exclusive of debt) in 2004 versus the comparable 2003 period.

Common stock dividends paid during the quarter ended September 30, 2004 represented $.03 per common share which was consistent with the quarter ended September 30, 2003.

Total debt at September 30, 2004 was $85.5 million, an increase of $31.3 million from December 31, 2003. The additional borrowings were used primarily to fund the acquisition of Waterlink Specialty Products.

The Company expects that current cash from operating activities plus cash balances and available external financing will be sufficient to meet its future requirements.

On February 18, 2004, the Company refinanced its United States Credit Facility and closed on a three-year $125.0 million unsecured revolving credit facility that expires in February 2007. Proceeds from the new credit facility of $83.9 million were used to repay in full the outstanding balance of $50.6 million on the Company’s previous revolving credit facility and to fund $33.3 million of the purchase price for the acquisition described in Note 1 to the Company’s financial statements. Included in the agreement is a letter of credit sub-facility that may not exceed $30.0 million. The interest rate is tied to Euro based rates with other interest rate options available. The applicable Euro Dollar margin ranges from 0.80% to 1.85% and the annual facility fee ranges from 0.20% to 0.40% of the committed amount and is based upon the Company’s ratio of debt to earnings before interest, income tax, depreciation and amortization (EBITDA). At the close of the new credit facility, the applicable Euro Dollar margin was 1.53% in addition to a facility fee of 0.35%. At September 30, 2004 borrowings under the facility were being charged a weighted average interest of 3.39%. The credit facility’s covenants impose financial restrictions on the Company, including maintaining certain ratios of debt to EBITDA, operating income to net interest expense and operating assets to debt and net worth. In addition, the facility imposes gross spending restrictions on capital expenditures, dividends, treasury share repurchases, acquisitions and investments in non-controlled subsidiaries. The facility contains mandatory prepayment provisions for proceeds in excess of pre-established amounts of certain events as defined within the loan agreement.

Capital expenditures for property, plant and equipment totaled $11.4 million for the nine months ended September 30, 2004 compared to expenditures of $6.3 million for the same period in 2003. The increase is primarily the result of improvements to manufacturing facilities in the amount of $2.1 million, customer capital in the amount of $2.3 million, and information systems for the integration of WSP in the amount of $0.5 million. Capital expenditures for 2004 are projected to be approximately $15.0 million.

In 2003, the Company temporarily suspended construction of a new facility in the Gulf Coast region of the United States as it evaluates strategic alternatives. The Company has spent $2.0 million on this project as of September 30, 2004. If management concludes that the suspension of the project is warranted, current operating results may be adversely affected by impairment charges.

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 May 2003, the Company partially discontinued operation of one of its three activated carbon lines at its Catlettsburg, Kentucky facility. The Company will need to install pollution abatement equipment estimated to cost approximately $7.0 million in order to remain in compliance with state requirements regulating air emissions before resuming full operation of this line. The activated carbon line and associated equipment has a net book value of approximately $2.0 million, while the affected equipment has a net book value of approximately $0.1 million. Management has not concluded its plan of action for compliance related to this activated carbon line.

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-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), at the end of the period covered by 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 provide reasonable assurance 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.

On February 18, 2004, the Company acquired Waterlink Specialty Products which was comprised of the following operating units: Waterlink, Incorporated’s U.S. subsidiary, Barnebey Sutcliffe Corporation (“Barnebey”) and Waterlink (UK) Limited, a holding company that owns the stock of Waterlink, Incorporated’s operating subsidiaries in the United Kingdom.

During the third quarter of 2004, an integration effort was performed to transfer the transactional processing used by Barnebey prior to the acquisition, to the systems and processes used by the Company. Pursuant to Exchange Act Rule 13a-15(d), this effort constituted a material change to the internal control structure. This effort involved the transfer of historical data to the systems utilized by the Company and changes in procedures to match the procedures in place at the Company. As of September 30, 2004, the integration has been completed for all transactional cycles with the exception of transactions within the human resources and payroll cycle.

Integration for the Barnebey payroll cycle, which includes activities related to pay rate authorization, benefits withholding and management, and issuance of pay, is anticipated to be completed during the fourth quarter of 2004.

There have not been any other changes in the Company’s internal controls over financial reporting that occurred during the period ended September 30, 2004 that have significantly affected, or are reasonably likely to significantly affect, the Company’s internal controls over financial reporting.

See Note 8 to the unaudited interim Consolidated Financial Statements contained herein.

Exhibit 31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

A report on Form 8-K, dated July 26, 2004 which furnished information under Item 12. Results of Operations and Financial Condition announcing the Company’s second quarter 2004 results.

A report on Form 8-K, dated September 30, 2004 which furnished information under Item 8.01. Other Events announcing the selection of the Company to provide activated carbon for drinking water treatment.

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)

/s/ LEROY M. BALL

Leroy M. Ball

Vice President, Chief Financial Officer


Class		Outstanding at September 30, 2004
Common Stock, $.01 par value		39,072,175 shares


			Page
PART 1—FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Introduction to the Financial Statements	2

		Consolidated Statements of Operations and Retained Earnings	3

		Consolidated Balance Sheets	4

		Consolidated Statements of Cash Flows	5

		Selected Notes to Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	17

	Item 4.	Controls and Procedures	19

PART II—OTHER INFORMATION

	Item 1.	Legal Proceedings	21

	Item 6.	Exhibits and Reports on Form 8-K	21

SIGNATURES			22

CERTIFICATIONS


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net sales	$	82,997		$	66,563		$	251,366		$	208,698

Cost of products sold (excluding depreciation)		60,234			46,566			179,623			145,535
Depreciation and amortization		5,656			4,745			16,812			14,534
Selling, general and administrative expenses		13,310			12,104			43,001			39,944
Research and development expenses		927			982			2,828			3,006

		80,127			64,397			242,264			203,019

Income from operations		2,870			2,166			9,102			5,679

Interest income		160			192			529			508
Interest expense		(930	)		(584	)		(2,432	)		(1,780	)
Equity in income (loss) of Calgon Mitsubishi Chemical Corporation		(69	)		(20	)		848			38
Other expense—net		(895	)		(250	)		(2,583	)		(1,491	)

Income before income taxes and minority interest		1,136			1,504			5,464			2,954

Income tax (benefit) provision		(103	)		331			546			650

Income before minority interest		1,239			1,173			4,918			2,304

Minority interest		27			47			48			148

Net income		1,266			1,220			4,966			2,452

Common stock dividends		(1,171	)		(1,170	)		(3,512	)		(3,509	)
Retained earnings, beginning of period		112,960			110,688			111,601			111,795

Retained earnings, end of period	$	113,055		$	110,738		$	113,055		$	110,738

Net income per common share
Basic and diluted	$	.03		$	.03		$	.13		$	.06

Weighted average shares outstanding
Basic		39,054,207			39,006,425			39,038,017			38,998,098

Diluted		39,366,805			39,232,543			39,351,604			39,123,062


	September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	4,948		$	8,954
Receivables (net of allowance of $4,613 and $3,736)		60,098			46,133
Revenue recognized in excess of billings on uncompleted contracts		11,438			10,697
Inventories (net of allowance of $1,534 and $694)		60,044			51,811
Deferred income taxes—current		10,172			9,056
Other current assets		6,041			4,457

Total current assets		152,741			131,108

Property, plant and equipment, net		131,084			128,956
Investment in Calgon Mitsubishi Chemical Corporation		8,016			6,798
Intangibles		12,781			3,510
Goodwill		36,753			18,366
Deferred income taxes—long term		8,434			9,976
Other assets		3,695			3,481

Total assets	$	353,504		$	302,195

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	604		$	604
Accounts payable and accrued liabilities		36,271			31,568
Billings in excess of revenue recognized on uncompleted contracts		1,629			1,339
Restructuring reserve		695			1,195
Payroll and benefits payable		9,195			8,022
Accrued income taxes		9,479			9,727

Total current liabilities		57,873			52,455

Long-term debt		84,900			53,600
Deferred income taxes—long term		11,481			11,817
Other liabilities		35,103			22,171

Total liabilities		189,357			140,043

Minority interest		346			279

Commitments and contingencies		—			—

Shareholders’ equity:
Common shares, $.01 par value, 100,000,000 shares authorized, 41,859,433 and 41,793,683 shares issued		418			418
Additional paid-in capital		64,958			64,669
Retained earnings		113,055			111,601
Accumulated other comprehensive income		12,499			12,314

		190,930			189,002
Treasury stock, at cost, 2,787,258 shares		(27,129	)		(27,129	)

Total shareholders’ equity		163,801			161,873

Total liabilities and shareholders’ equity	$	353,504		$	302,195


	Nine Months Ended September 30,
	2004			2003
Cash flows from operating activities
Net income	$	4,966		$	2,452
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,812			14,534
Equity in income of Calgon Mitsubishi Chemical Corporation		(848	)		(38	)
Employee benefit plan provisions		2,971			3,384
Changes in assets and liabilities—net of effects from purchase of business, foreign exchange and non-cash restructuring:
(Increase) decrease in receivables		(3,438	)		777
Decrease in inventories		2,254			1,039
Increase in other current assets		(2,618	)		(1,993	)
Decrease in restructuring reserve		(471	)		(347	)
Increase (decrease) in accounts payable and accruals		4,396			(1,760	)
Decrease in long-term deferred income taxes (net)		(5,466	)		(1,936	)
Decrease in accrued pensions		(4,279	)		(6,415	)
Other items—net		742			1,722

Net cash provided by operating activities		15,021			11,419

Cash flows from investing activities
Purchase of business (net of cash acquired)		(35,422	)		—
Purchase of intangible assets		(667	)		—
Property, plant and equipment expenditures		(11,442	)		(6,292	)
Proceeds from disposals of property, plant and equipment		437			453

Net cash used in investing activities		(47,094	)		(5,839	)

Cash flows from financing activities
Proceeds from borrowings		142,700			90,604
Repayments of borrowings		(111,457	)		(89,900	)
Common stock dividends		(3,512	)		(3,509	)

Net cash provided by (used in) financing activities		27,731			(2,805	)

Effect of exchange rate changes on cash		336			(699	)

(Decrease) increase in cash and cash equivalents		(4,006	)		2,076
Cash and cash equivalents, beginning of period		8,954			4,093

Cash and cash equivalents, end of period	$	4,948		$	6,169


(in thousands)
Current assets	$	22,705
Non-current assets		6,772
Intangible assets		10,153
Goodwill		18,478
Liabilities assumed		(21,546	)

Total purchase price	$	36,562


	September 30, 2004		December 31, 2003
Raw materials	$	15,195	$	12,590
Finished goods		44,849		39,221

	$	60,044	$	51,811


	Weighted Average Amortization Period	September 30, 2004					December 31, 2003
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized Intangible Assets:
Patents	15.6 Years	$	1,349	$	(583	)	$	1,349	$	(513	)
Customer Relationships	17.0 Years		9,323		(837	)		—		—
Customer Contracts	2.0 Years		664		(245	)		—		—
Large Equipment Contract Backlog	1.0 Years		166		(79	)		—		—
License Agreement	5.0 Years		500		(91	)		—		—
Other	10.0 Years		665		(103	)		498		(4	)
Unpatented Technology	20.0 Years		2,875		(823	)		2,875		(695	)

Total	16.0 Years	$	15,542	$	(2,761	)		4,722	$	(1,212	)


For the year ended 12/31/04	$	2,049
For the year ended 12/31/05	$	1,926
For the year ended 12/31/06	$	1,731
For the year ended 12/31/07	$	1,499
For the year ended 12/31/08	$	1,257


	Carbon & Service Segment			Equipment Segment		Consumer Segment		Total
Balance as of January 1, 2004	$	—		$	18,306	$	60	$	18,366
Acquisition of Waterlink Specialty Products		17,478			1,000		—		18,478
Foreign exchange		(281	)		190		—		(91	)

Balance as of September 30, 2004	$	17,197		$	19,496	$	60	$	36,753


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands except per share data)	2004			2003			2004			2003
Net income
As reported	$	1,266		$	1,220		$	4,966		$	2,452
Stock-based compensation, net of tax effect	$	(463	)	$	(73	)	$	(1,198	)	$	(245	)

Pro forma	$	803		$	1,147		$	3,768		$	2,207

Weighted average shares outstanding
Basic		39,054,207			39,006,425			39,038,017			38,998,098
Effect of dilutive securities		312,598			226,118			305,903			124,964

Diluted		39,366,805			39,232,543			39,351,604			39,123,062

Net income per common share
Basic
As reported	$	.03		$	.03		$	.13		$	.06
Pro forma	$	.02		$	.03		$	.10		$	.06
Diluted
As reported	$	.03		$	.03		$	.13		$	.06
Pro forma	$	.02		$	.03		$	.10		$	.06


	Three Months Ended September 30,						Nine Months Ended September 30,
Pension Benefits (in thousands)	2004			2003			2004			2003
Service cost	$	707		$	401		$	2,091		$	1,683
Interest cost		1,110			720			3,310			3,026
Expected return on plan assets		(947	)		(522	)		(2,787	)		(2,192	)
Amortization of prior service cost		118			91			354			381
Net amortization		80			60			273			252

Net periodic pension cost	$	1,068		$	750		$	3,241		$	3,150