Calgon Carbon 10-Q 2003 Q3 Quarterly report

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, 2003 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 1-10776

CALGON CARBON CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	25-0530110
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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)

(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  ¨

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  ¨

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, 2003
Common Stock, $.01 par value	39,006,425 shares

CALGON CARBON CORPORATION

FORM 10-Q

QUARTER ENDED September 30, 2003

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.

INDEX

PART 1—FINANCIAL INFORMATION
Item 1.	Financial Statements	Page
	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	12
Item 4.	Controls and Procedures	16
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 6.	Exhibits and Reports on Form 8-K	17
SIGNATURES		18

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, 2002 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 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

2

CALGON CARBON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Dollars in Thousands Except Share and Per Share Data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30
	2003			2002			2003			2002
Net sales	$	66,563		$	64,832		$	208,698		$	195,452
Cost of products sold (excluding depreciation)		46,566			45,368			145,535			135,293
Depreciation and amortization		4,745			4,784			14,534			14,027
Selling, general and administrative expenses		12,104			12,037			39,944			34,396
Research and development expenses		982			875			3,006			3,023
		64,397			63,064			203,019			186,739
Income from operations		2,166			1,768			5,679			8,713
Interest income		192			176			508			434
Interest expense		(584	)		(675	)		(1,780	)		(1,973	)
Equity income (loss)—net		(20	)		—			38			—
Other income (expense)—net		(250	)		(445	)		(1,491	)		(1,147	)
Income before income taxes, minority interest and cumulative effect of change in accounting principle		1,504			824			2,954			6,027
Provision for income taxes		331			297			650			2,170
Income before minority interest		1,173			527			2,304			3,857
Minority interest		47			29			148			29
Income before cumulative effect of change in accounting principle		1,220			556			2,452			3,886
Cumulative effect of change in accounting principle (net of tax)		—			—			—			(30,926	)
Net income (loss)		1,220			556			2,452			(27,040	)
Common stock dividends		(1,170	)		(1,169	)		(3,509	)		(3,504	)
Retained earnings, beginning of period		110,688			113,241			111,795			143,172
Retained earnings, end of period	$	110,738		$	112,628		$	110,738		$	112,628
Income per common share before cumulative effect of change in accounting principle
Basic and Diluted	$	.03		$	.01		$	.06		$	.10
Cumulative effect of change in accounting principle per common share
Basic and Diluted	$	—		$	—		$	—		$	(.79	)
Income (loss) per common share
Basic and Diluted	$	.03		$	.01		$	.06		$	(.69	)
Weighted average shares outstanding
Basic		39,006,425			38,962,758			38,998,098			38,930,797
Diluted		39,232,543			39,017,027			39,123,062			39,187,205

The accompanying notes are an integral part of these financial statements.

3

CALGON CARBON CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands except share data)

(Unaudited)

	September 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	6,169		$	4,093
Receivables (net of allowance of $3,731 and $3,014)		46,066			45,490
Revenue recognized in excess of billings on uncompleted contracts		9,460			6,244
Inventories (net of allowance of $570)		49,072			48,665
Deferred income taxes – current		7,711			7,711
Other current assets		3,183			4,214
Total current assets		121,661			116,417
Property, plant and equipment, net		129,000			134,852
Investment in Calgon Mitsubishi Chemical Corporation		6,544			7,035
Intangibles		3,083			3,243
Goodwill		18,104			17,171
Deferred income taxes – long term		8,288			7,733
Other assets		5,254			4,178
Total assets	$	291,934		$	290,629
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	604		$	—
Accounts payable and accrued liabilities		25,138			25,470
Billings in excess of revenue recognized on uncompleted contracts		952			1,047
Restructuring reserve		540			822
Payroll and benefits payable		7,951			8,698
Accrued income taxes		3,300			2,913
Total current liabilities		38,485			38,950
Long-term debt		57,700			57,600
Deferred income taxes – long term		15,501			16,881
Other liabilities		23,643			23,824
Total liabilities		135,329			137,255
Minority interest		33			56
Commitments and contingencies		—			—
Shareholders’ equity:
Common shares, $.01 par value, 100,000,000 shares authorized, 41,793,683 and 41,750,116 shares issued		418			418
Additional paid-in capital		64,669			64,449
Retained earnings		110,738			111,795
Accumulated other comprehensive income		7,876			3,785
		183,701			180,447
Treasury stock, at cost, 2,787,258 and 2,787,358 shares		(27,129	)		(27,129	)
Total shareholders’ equity		156,572			153,318
Total liabilities and shareholders’ equity	$	291,934		$	290,629

The accompanying notes are an integral part of these financial statements.

4

CALGON CARBON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2003			2002
Cash flows from operating activities
Net income (loss)	$	2,452		($	27,040	)
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		14,534			14,027
Equity in (earnings) loss of Calgon Mitsubishi Chemical Corporation		(38	)		—
Employee benefit plan provisions		3,384			2,311
Changes in assets and liabilities—net of effects from purchase of businesses, foreign exchange and non-cash restructuring:
Decrease in receivables		777			885
Decrease (increase) in inventories		1,039			(5,003	)
Decrease (increase) in other current assets		(1,993	)		3,503
(Decrease) in restructuring reserve		(347	)		(702	)
(Decrease) in accounts payable and accruals		(1,760	)		(739	)
(Decrease) in long-term deferred income taxes (net)		(1,936	)		(255	)
Other items—net		(4,693	)		485
Net cash provided by operating activities		11,419			18,398
Cash flows from investing activities
Property, plant and equipment expenditures		(6,292	)		(9,815	)
Proceeds from disposals of property, plant and equipment		453			725
Net cash used in investing activities		(5,839	)		(9,090	)
Cash flows from financing activities
Proceeds from borrowings		90,604			52,272
Repayments of borrowings		(89,900	)		(56,992	)
Common stock dividends		(3,509	)		(3,504	)
Net cash used in financing activities		(2,805	)		(8,224	)
Effect of exchange rate changes on cash		(699	)		(1,082	)
Increase in cash and cash equivalents		2,076			2
Cash and cash equivalents, beginning of period		4,093			3,567
Cash and cash equivalents, end of period	$	6,169		$	3,569

The accompanying notes are an integral part of these financial statements.

5

CALGON CARBON CORPORATION

SELECTED NOTES TO FINANCIAL STATEMENTS

(Dollars in Thousands)

(Unaudited)

1. Inventories:

	September 30, 2003		December 31, 2002
Raw materials	$	13,093	$	9,061
Finished goods		35,979		39,604
	$	49,072	$	48,665

2. Supplemental Cash Flow Information:

	Nine Months Ended September 30,
	2003			2002
Cash paid during the period for:
Interest	$	(1,762	)	$	(1,888	)
Income taxes (paid) refunded – net	$	(1,180	)	$	(49	)

3. Common stock dividends of $.03 per common share were declared and paid during the quarter ended September 30, 2003. Common stock dividends declared and paid during the quarter ended September 30, 2002 were $.03 per common share. Common stock dividends in the amount of $.03 per common share were declared on October 21, 2003.

4. Comprehensive income (loss):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003		2002
Net income (loss)	$	1,220	$	556		$	2,452	$	(27,040	)
Other comprehensive income (loss) net of tax provision (benefit) of $0, ($30), $0, and $141, respectively		501		(100	)		4,091		3,415
Comprehensive income (loss)	$	1,721	$	456		$	6,543	$	(23,625	)

The only matter contributing to the other comprehensive income (loss) during the three and nine months ended September 30, 2003 and 2002 was the foreign currency translation adjustment.

5. Segment Information:

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 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.

6

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net Sales
Activated Carbon	$	26,429		$	24,218		$	83,069		$	74,723
Service		24,677			24,275			71,016			71,073
Engineered Solutions		8,461			10,875			28,428			30,710
Consumer		6,996			5,464			26,185			18,946
	$	66,563		$	64,832		$	208,698		$	195,452
Income (loss) from operations before depreciation and amortization
Activated Carbon	$	3,412		$	3,768		$	10,442		$	12,192
Service		3,779			5,225			8,805			14,496
Engineered Solutions		(284	)		(1,840	)		(390	)		(3,546	)
Consumer		4			(601	)		1,356			(402	)
		6,911			6,552			20,213			22,740
Depreciation and amortization
Activated Carbon		2,253			2,303			7,210			7,069
Service		1,903			1,903			5,540			5,361
Engineered Solutions		202			207			565			609
Consumer		387			344			1,219			988
		4,745			4,784			14,534			14,027
Income from operations after depreciation and amortization	$	2,166		$	1,768		$	5,679		$	8,713
Reconciling items:
Interest income		192			176			508			434
Interest expense		(584	)		(675	)		(1,780	)		(1,973	)
Equity income (loss) – net		(20	)		—			38			—
Other income (expense) – net		(250	)		(445	)		(1,491	)		(1,147	)
Consolidated income before income taxes, minority interest and cumulative effect of change in accounting principle	$	1,504		$	824		$	2,954		$	6,027

	September 30, 2003		December 31, 2002
Total Assets
Activated Carbon	$	126,011	$	125,204
Service		90,731		93,593
Engineered Solutions		52,051		48,345
Consumer		23,141		23,487
	$	291,934	$	290,629

7

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, 2003, the Company held no derivative instruments.

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.

The Company is also currently a party in three cases involving alleged infringement of its U.S. patent No. 6,129,893 (“893 patent”) 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 “893 patent” 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 filed suit against the Town of Ontario, New York 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 “893 patent” without a license. In the third case, the Company filed suit against the City of North Bay, Ontario, Canada (North Bay) and Trojan Technologies, Inc. (Trojan) in the Federal court of Canada alleging patent infringement 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 dispute has arisen between the Company and a customer relating to certain agreements between the parties for the engineering, procurement and system provision of a perchlorate remediation system at the customer’s facility. During start-up operations, certain problems were discovered that prevented the system from reaching steady state operation and completion of performance testing. In accordance with the agreements, the Company has the right to remedy and correct any alleged deficiencies in the system and did formulate a remedial plan with notice to the customer that the Company would commence and diligently proceed with the plan. The customer refused to allow the Company to proceed with the plan and terminated the system provision agreement for alleged material breach. The Company believes that the system provision agreement was improperly terminated and that it is entitled to recover retainage and final payment of amounts due the Company from the customer as a result of this breach. The customer has withheld the retainage and final payment and has claimed that it is entitled to recover in excess of $20 million. No litigation has yet been instituted. The parties have scheduled a non-binding mediation for January 2004 in an attempt to resolve this dispute. If litigation ensues, the Company intends to vigorously defend its position and seek to recover the retainage and other moneys owed as a result of the improper termination by the customer. The Company is unable to predict with certainty the outcome of the above described disputes. There can be no assurance that the outcome of this dispute will not have a material adverse effect on the business, financial condition, cash flows or results of operations of the Company. No provision for possible loss relating to amounts previously collected has been recorded.

8

The Company is involved in various other 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 other lawsuits and claims will not materially affect the consolidated results of operations, cash flows or financial position of the Company.

The Company owns a 49% interest in a joint venture, Calgon Mitsubishi Chemical Corporation which was formed on October 1, 2002. At September 30, 2003 Calgon Mitsubishi Chemical Corporation has $30.3 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, 2003, 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 and such guarantee’s impact on compliance with all existing credit agreements.

8. Goodwill & Intangible Assets

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. As required by SFAS No. 142, management has allocated goodwill to the Company’s reporting units. Management completed the initial goodwill impairment test required by SFAS No. 142 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 assist the Company in estimating the fair value of this reporting unit. The Company’s valuation 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 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. Prior to the adoption of SFAS No. 142, the Company evaluated the realizability of this goodwill by comparing the expected undiscounted future cash flows to the carrying value.

9

The following is the categorization of the Company’s intangible assets as of September 30, 2003 and December 31, 2002, respectively:

	September 30, 2003					December 31, 2002
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized Intangible Assets:
Patents	$	1,349	$	(488	)	$	1,319	$	(424	)
Unpatented Technology		2,875		(653	)		2,875		(527	)
Total	$	4,224	$	(1,141	)		4,194	$	(951	)

For the three and nine month periods ended September 30, 2003, the Company recognized amortization expense of $67 and $190 thousand, respectively. For the comparative periods ended September 30, 2002, the Company recognized amortization expense of $62 and $187 thousand, respectively. The Company estimates amortization expense to be recognized during the next five years as follows:

For the year ended 12/31/03	$	255
For the year ended 12/31/04	$	264
For the year ended 12/31/05	$	249
For the year ended 12/31/06	$	246
For the year ended 12/31/07	$	246

The changes in the carrying amounts of goodwill by segment for the nine months ended September 30, 2003 are as follows:

	Activated Carbon Segment		Service Segment		Engineered Solutions Segment		Consumer Segment		Total
Balance as of January 1, 2003	$	—	$	—	$	17,111	$	60	$	17,171
Foreign exchange		—		—		933		—		933
Balance as of September 30, 2003	$	—	$	—	$	18,044	$	60	$	18,104

9. Borrowing Arrangements

During the quarter ended March 31, 2003, the Company refinanced its United States Credit Facility. On March 21, 2003, the Company closed on a three-year $100 million unsecured revolving credit facility that expires in March 2006. Included in the agreement is a letter of credit sub-facility that may not exceed $30 million. The Company has the option at any point during the term of the facility to request an expansion of the facility at its original terms and conditions by an amount not to exceed $25 million. The participating lenders are not required to participate in the facility expansion, but do retain the right of first refusal before the Company can negotiate with other lenders. The interest rate is based upon Euro-based rates with other interest rate options available. The applicable Euro Dollar margin ranges from 0.80% to 1.40% and the annual facility fee ranges from 0.20% to 0.35% of the committed amount and is based upon the Company’s ratio of debt to earnings before interest, tax, depreciation and amortization (EBITDA). At September 30, 2003, borrowings under the facility were being charged a weighted average interest of 2.55%. 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 minimum 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 if certain events as defined within the loan agreement occur.

10

On September 15, 2003, the Company redeemed 100% of the City of Ashland, Kentucky Floating Rate Pollution Control Bonds, 1983 Series A in the amount of $5.1 million. The Company redeemed the bonds with proceeds from its variable rate credit facility and incurred no additional fees or losses as a result of the prepayment.

10. Stock Compensation Plans

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 (loss) and net income (loss) per common share would have been as follows:

		Three Months Ended September 30						Nine Months Ended September. 30
(Dollars in thousands except per share data)			2003			2002			2003			2002
Net income (loss)
	As reported	$	1,220		$	556		$	2,452		$	(27,040	)
Stock-based compensation, net of tax effect		$	(73	)	$	(153	)	$	(245	)	$	(457	)
	Pro forma	$	1,147		$	403		$	2,207		$	(27,497	)
Net income (loss) per common share
Basic	As reported	$	.03		$	.01		$	.06		$	(.69	)
	Pro forma	$	.03		$	.01		$	.06		$	(.71	)
Diluted	As reported	$	.03		$	.01		$	.06		$	(.69	)
	Pro forma	$	.03		$	.01		$	.06		$	(.70	)

11. 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. The Company has adopted SFAS No. 143 as of January 1, 2003 as required with no resulting impact on the Company’s financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” 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 for variable interest entities created before this date, the provisions are effective July 31, 2003. The Company presently has no variable interest entities and adopted the requirements of Interpretation No. 46 on July 31, 2003 as required with no resulting impact on the Companies financial statements.

11

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 increased by $1.7 million or 2.7% and $13.2 million or 6.8% for the quarter and year-to-date periods ended September 30, 2003 respectively, versus the quarter and year-to-date periods ended September 30, 2002. Net sales for the Activated Carbon segment increased by $2.2 million or 9.1% versus the quarter ended September 30, 2002 and $8.3 million or 11.2% versus the year-to-date period September 30, 2002. The increase can be attributed to the higher sales in the specialty carbon markets combined with the positive impact of foreign currency translation. Net sales for the Service segment slightly increased versus the quarter ended September 30, 2002 and was consistent versus the year-to-date period September 30, 2002. The increase was due to the positive impact of foreign currency translation partially offset by the economic slowdown in Europe. Revenues associated with the Engineered Solutions segment decreased for the quarter ended September 30, 2003 by $2.4 million or 22.2% and by $2.3 million or 7.4% for the year-to-date period ended September 30, 2003 versus the similar 2002 periods due to the lack of new orders received during the first six months of 2003. Sales in the Consumer segment for the quarter ended September 30, 2003 increased by $1.5 million or 28.0% compared to the quarter ended September 30, 2002 and $7.2 million or 38.2% for the year-to-date period ended September 30, 2003 versus the similar 2002 period. The reasons for the increase in both periods can be attributed to higher sales of charcoal due to the favorable weather conditions in Germany as well as higher sales in carbon cloth for medical and military applications combined with the positive impact of foreign currency translation. The total positive impact of foreign currency translation on consolidated net sales for the quarter and year-to-date periods ended September 30, 2003 was $2.4 million and $10.9 million, respectively.

Gross profit, before depreciation, as a percentage of net sales was 30.0% for both the quarters ended September 30, 2003 and September 30, 2002. For the year-to-date period, gross profit, before depreciation, as a percentage of net sales was 30.3% in 2003 versus 30.8% in the 2002 period representing a 0.5 percentage point decline. Higher raw material costs related to the Company’s Chinese operations, higher benefit costs, and competitive pricing pressures adversely impacted 2003 results for both periods. These costs were partially offset in both periods by the 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 2003 versus the comparable 2002 periods.

Depreciation and amortization was comparable for the quarter ended September 30, 2003 and increased by $0.5 million for the year-to-date period ended September 30, 2003 versus the similar 2002 period which related primarily to depreciation for the Company’s new carbon facility in the People’s Republic of China and the effect of foreign exchange translation due to the stronger Euro during the 2003 periods.

Selling, general and administrative expenses for the quarter ended September 30, 2003 were consistent with the comparable 2002 quarter. For the year-to-date period, selling, general and administrative expenses were higher than the comparable 2002 year-to-date period by $5.5 million or 16.1% due to the severance related payments for the Company’s former chief executive officer as well as higher employee benefits and business insurance costs. Research and development expenses for the quarter increased by $0.1 million versus 2002’s third quarter while the year-to-date comparison was consistent for the period ended September 30, 2003, versus the comparable 2002 period.

Equity (loss) income was essentially breakeven for the quarter and the year-to-date period ended September 30, 2003. This represents the Company’s share of income from its non-consolidated Japanese joint venture that commenced operations in the fourth quarter of 2002.

Other expense for the quarter ended September 30, 2003 decreased by $0.2 million compared to the quarter ended September 30, 2002. The decrease in expense was primarily due to an increase in royalty income. Other expense for the year-to-date period ended September 30, 2003 increased by $0.3 million versus the similar 2002 period. The year-to-date increase in expense is due to increased foreign currency transaction

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losses and the write-off of bank fees associated with the Company’s old credit facility partially offset by the aforementioned increase in royalty income.

Interest expense, net of interest income, for the quarter and year-to-date periods ended September 30, 2003 was lower by $0.1 million and $0.3 million, respectively as compared to the quarter and year-to-date periods ended September 30, 2002. The decrease in interest expense was primarily the result of the combination of lower interest rates and a lower average level of borrowings.

Financial Condition

Working Capital and Liquidity

Cash flows generated from operating activities were $11.4 million for the nine month period ended September 30, 2003 compared to cash generated from operations of $18.4 million for the comparable 2002 period. The $7.0 million decrease represents lower earnings, excluding the cumulative effect of change in accounting principle, as well as a $5.5 million pension contribution made in the third quarter of 2003 and a decrease in operating working capital (exclusive of debt) in 2003 versus the comparable 2002 period.

Common stock dividends paid during the quarter ended September 30, 2003 represented $.03 per common share which was consistent with the quarter ended September 30, 2002.

Total debt at September 30, 2003 was $58.3 million, an increase of $0.7 million from December 31, 2002. The increase was primarily due to the above mentioned pension contribution offset by reduced capital expenditures.

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 March 21, 2003, the Company closed on a three-year $100.0 million unsecured revolving credit facility that expires in March 2006. The facility replaced the then existing $113.4 million credit facility. Included in the agreement is a letter of credit sub-facility that may not exceed $30.0 million. The Company has the option at any point during the term of the facility to request an expansion of the facility at its original terms and conditions by an amount not to exceed $25.0 million. The participating lenders are not required to participate in the facility expansion, but do retain the right of first refusal before the Company can negotiate with other lenders. The interest rate is based upon Euro-based rates with other interest rate options available. The applicable Euro Dollar margin ranges from 0.80% to 1.40% and the annual facility fee ranges from 0.20% to 0.35% of the committed amount and is based upon the Company’s ratio of debt to earnings before interest, tax, depreciation and amortization (EBITDA). At September 30, 2003, borrowings under the facility were being charged a weighted average interest of 2.55%. 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 minimum 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 if certain events as defined by the loan agreement occur.

On September 15, 2003, the Company redeemed 100% of the City of Ashland, Kentucky Floating Rate Pollution Control Bonds, 1983 Series A in the amount of $5.1 million. The Company redeemed the bonds with proceeds from its variable rate credit facility and incurred no additional fees or losses as a result of the prepayment. This redemption does not impact the Company’s borrowing availability under the credit facility or the calculation of financial covenants as the face amount of the bonds was already included in said calculations.

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Restructuring of Operations

The Company currently has two separate restructuring plans requiring continued cash outlays as of the period ended September 30, 2003. 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 restructuring reserve activity for the nine months ended September 30, 2003 was:

	Balance 1-1-03		Payments			Balance 9-30-03
($000)
Employee severance and termination benefit costs	$	109	$	(9	)	$	100
Other costs		713		(273	)		440
Total reserves	$	822	$	(282	)	$	540

Management believes the reserve balances are adequate.

Capital Expenditures and Investments

Capital expenditures for property, plant and equipment totaled $6.3 million for the nine months ended September 30, 2003 compared to expenditures of $9.8 million for the same period in 2002. The decrease is primarily the result of the Company’s investment in the construction of a carbon facility in the People’s Republic of China that took place in 2002. Capital expenditures for 2003 are projected to be approximately $8.0 million, reduced from an originally budgeted amount of $25.0 million for 2003, due to the Company’s decision to temporarily suspend construction of a new facility in the Gulf Coast region of the United States as it evaluates strategic alternatives. The Company has spent $1.9 million on this project as of September 30, 2003. If management concludes that the suspension of the project for other than a temporary period is warranted, current operating results may be adversely affected by increased depreciation or impairment charges.

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 temporarily discontinued operations of one of its three activated carbon lines at its Catlettsburg, Kentucky facility which was required by May 2003. The Company will need to install control equipment estimated at approximately $7.0 million in order to remain in compliance with state requirements regulating air emissions before resuming operation of certain equipment on this line. The activated carbon line and associated equipment has a net book value of approximately $3.0 million while the affected equipment has a net book value of approximately $0.2 million. Management has not concluded its plan of action for compliance related to this activated carbon line, however, if it is determined that a shutdown of the activated carbon line for other than a temporary period is warranted, current operating results may be adversely affected by increased depreciation or impairment charges.

New Accounting Pronouncements

The FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses

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financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company has adopted SFAS No. 143 as of January 1, 2003 as required with no resulting impact on the Company’s financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” 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 created before this date, the provisions are effective July 31, 2003. The Company presently has no variable interest entities and adopted the requirements of Interpretation No. 46 on July 31, 2003 as required with no resulting impact on the Companies financial statements.

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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-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.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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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 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.

(d) Reports on Form 8-K

A report on Form 8-K, dated July 31, 2003 which furnished information filed under Item 9. Regulation FD Disclosure detailing the Company’s second quarter 2003 results.

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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 10, 2003	/s/ LEROY M. BALL
	Leroy M. Ball Vice President, Chief Financial Officer

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