| Summary of Accounting Policies | 1. Summary of Accounting Policies
Operations
Calgon Carbon Corporation (the Company) is a global leader in innovative solutions, high quality products and reliable services designed to protect human health and the environment from harmful contaminants in water, and air. As a leading manufacturer of activated carbon, with broad capabilities in ultraviolet light disinfection, the Company provides purification solutions for drinking water, wastewater, pollution abatement, and a variety of industrial and commercial manufacturing processes. The Company’s operations are principally conducted in four business segments: Activated Carbon and Service, Equipment, Consumer, and Other. Each of these segments includes the production, design and marketing of products and services specifically developed for the purification, separation and concentration of liquids and gases and other media. The Activated Carbon and Service segment relies on activated carbon as a base material, while the Equipment segment relies on a variety of methods and materials which involve other products in addition to activated carbon. The Consumer segment supplies activated carbon cloth for use in military, industrial, and medical applications. The Company’s largest markets are in the United States (U.S.), Europe, and Japan. The Company also has markets in Africa, Canada, China, India, Latin America, and in other parts of Asia. On November 2, 2016, the Company completed the acquisition of the wood-based activated carbon, reactivation, and mineral-based filtration media business of CECA, a subsidiary of Arkema Group (New Business). With the complementary New Business located in Europe, the Company becomes an even more global and diverse industry leader in activated carbon, reactivation, and filtration media in the form of diatomaceous earth and perlites. For purposes of reporting the results of its segments in 2016, Other is exclusively comprised of the New Business subsequent to its acquisition. Refer to Notes 18 and 20 for additional information regarding the acquisition.
Principles of Consolidation
The consolidated financial statements include the accounts of majority-owned and controlled subsidiaries. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method. All intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on the Company’s previously reported net income, cash flows, or stockholders’ equity.
Foreign Currency
Substantially all assets and liabilities of the Company’s international operations are translated at year-end exchange rates; income and expenses are translated at average exchange rates prevailing during the year. Translation adjustments represent other comprehensive income or loss and are accumulated in a separate component of stockholders’ equity. Transaction gains and losses are included in Other expense-net.
Revenue Recognition
Revenue and related costs are recognized when goods are shipped or services are rendered to customers provided that ownership and risk of loss have passed to the customer, the price to the customer is fixed or determinable, persuasive evidence of an arrangement exists and collection is reasonably assured. Revenue for major equipment projects is recognized under the percentage of completion method. The Company’s major equipment projects generally have a long project life cycle from bid solicitation to project completion. The nature of the contracts are generally fixed price with milestone billings. The Company recognizes revenue for these projects based on the fixed sales prices multiplied by the percentage of completion. In applying the percentage of completion method, a project’s percent complete as of any balance sheet date is computed as the ratio of total costs incurred to date divided by the total estimated costs at completion. As changes in the estimates of total costs at completion and/or estimated total losses on projects are identified, appropriate earnings adjustments are recorded during the period that the change is identified. The Company has a history of making reasonably dependable estimates of costs at completion on contracts that follow the percentage of completion method; however, due to uncertainties inherent in the estimation process, it is possible that actual project costs at completion could vary from estimates. The principal components of costs include material, direct labor, subcontracts, and allocated indirect costs. Indirect costs primarily consist of administrative labor and associated operating expenses, which are allocated to the respective projects on actual hours charged to the project utilizing a standard hourly rate.
Cash and Cash Equivalents
The Company considers all highly liquid, short-term investments made with an original maturity of three months or less to be cash equivalents. From time to time, the Company could have cash deposited with financial institutions in excess of federally insured limits. As of December 31, 2016 and 2015, the Company had $4.8 million and zero, respectively, of cash deposits with U.S. financial institutions in excess of federally insured limits. The Company’s foreign subsidiaries held cash and cash equivalents of $27.4 million and $45.1 million as of December 31, 2016 and 2015, respectively. Generally, cash and cash equivalents held by foreign subsidiaries are not readily available for use in the U.S. without adverse tax consequences.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and customer receivables. The Company places its cash with financial institutions and invests in low-risk, highly liquid instruments. With respect to customer receivables, the Company believes that it has no significant concentration of credit risk as no single customer accounted for more than 10 percent of gross annual revenues as of December 31, 2016. The Company closely monitors the credit risk associated with its customers and to date has not experienced material losses.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The amount of allowance recorded is primarily based upon a periodic review of specific customer transactions that remain outstanding at least three months beyond their respective due dates.
Inventories
Inventories are carried at the lower of cost or market. Inventory costs are primarily determined using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Repair and maintenance costs are expensed as incurred. Depreciation for financial reporting purposes is computed on the straight-line method over the estimated service lives of the assets, which are from 15 to 30 years for land improvements and buildings, 5 to 15 years for furniture, machinery and equipment, 5 to 10 years for customer capital, 5 years for vehicles, and 5 to 10 years for computer hardware and software. Expenditures for new facilities and improvements that substantially extend the capacity or useful life of an asset are capitalized.
Mineral rights were acquired as part of the acquisition of the New Business. Mineral rights include diatomite ore deposits, and are stated at cost, less accumulated depletion. Depletion is computed for mineral rights using the units-of-production method and is included in the Company’s depreciation expense.
Asset Retirement Obligations
As a result of the acquisition of the New Business, the Company has recognized asset retirement obligations (AROs) related to reclamation obligations associated with the normal operation of the diatomite mining facilities. These AROs consist primarily of costs associated with mine reclamation and landfill closures. The fair values of these AROs are recorded on a discounted basis at the time the obligation is incurred, and accreted over time for the change in present value. Additionally, the Company capitalizes asset retirement costs by increasing the carrying amount of the related long-lived assets and depreciating these assets over the remaining life of the active mining facilities. The Company reviews, on an annual basis, unless otherwise deemed necessary, the reclamation obligation at each active mine site in accordance with accounting guidance for reclamation obligations.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. In accordance with guidance within Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350 “Intangibles - Goodwill and Other” goodwill and identifiable intangible assets with indefinite lives are not subject to amortization but must be evaluated for impairment.
As a result of the acquisition of the New Business, the Company has recorded various intangible assets, including trade names and trademarks, unpatented technology, and customer relationships. The trade names and trademarks acquired have indefinite lives and will be tested for impairment annually. All remaining acquired identifiable intangible assets have finite lives.
The Company evaluates goodwill and indefinite-lived intangible assets for impairment annually, or when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. The Company has elected to perform the annual impairment test of its goodwill and indefinite-lived intangible assets, as required, on December 31 of each year by initially comparing the fair value of each of the Company’s reporting units to their related carrying values. If the fair value of the reporting unit is less than its carrying value, the Company performs an additional step to determine the implied fair value of the goodwill. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all of the assets and liabilities of the unit and then computing the excess of the unit’s fair value over the amounts assigned to the assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment, and the Company recognizes such impairment accordingly. Fair values are estimated using discounted cash flows and other valuation methodologies that are based on projections of the amounts and timing of future revenues and cash flows, assumed discount rates and other assumptions as deemed appropriate. The Company also considers such factors as historical performance, anticipated market conditions, operating expense trends and capital expenditure requirements.
The Company’s identifiable intangible assets other than goodwill and trade names and trademarks have finite lives. Certain of these intangible assets, such as customer relationships, are amortized using an accelerated methodology while others, such as patents, are amortized on a straight-line basis over their estimated useful lives. In addition, intangible assets with finite lives are evaluated for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable, as prescribed by guidance within ASC 360 “Property, Plant, and Equipment.”
Long-Lived Assets
The Company evaluates long-lived assets under the provisions of ASC 360 “Property, Plant, and Equipment” which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. For assets to be held and used, the Company groups a long-lived asset or assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment loss for an asset group reduces only the carrying amounts of a long-lived asset or assets of the group being evaluated. The loss is allocated to the long-lived assets of the group on a pro-rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group does not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort. Estimates of future cash flows to test the recoverability of a long-lived asset group include only the future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group. The future cash flow estimates used by the Company exclude interest charges.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
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Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;
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Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
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Level 3 — Unobservable inputs that reflect the reporting entity’s own assumptions.
The Company’s financial instruments, excluding derivative instruments, consist primarily of cash and cash equivalents, short and long-term debt as well as accounts receivable and accounts payable. The fair value of accounts receivable and accounts payable approximates their carrying value because of the short-term maturity of the instruments.
Derivative Instruments
The Company applies ASC 815 “Derivatives and Hedging” which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Derivative financial instruments are utilized by the Company to manage risk exposure to movements in foreign exchange rates or the prices of natural gas. The Company enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties. In addition, various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts. The Company does not net its derivative positions by counterparty for purposes of balance sheet presentation and disclosure. Changes in the value of the derivative financial instruments are measured at the balance sheet date and recognized in current earnings or other comprehensive income depending on whether the derivative is designated as part of a hedge transaction and meets certain other criteria. The Company does not hold derivative financial instruments for trading purposes.
Pensions
The Company accounts for its pensions in accordance with ASC 715 “Compensation – Retirement Benefits.” Accounting for pensions involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover and discount rates. These assumptions are reviewed annually. In determining the expected return on plan assets, the Company evaluates long-term actual return information, the mix of investments that comprise plan assets and future estimates of long-term investment returns. The Company uses country specific mortality tables and updates them periodically as better information becomes available. In determining the discount rates for pension obligations, the Company evaluates long-term corporate bonds that receive one of the two highest ratings given by a recognized rating agency.
Amortization of the actuarial net gain or loss as a result of experience differing from that assumed and from changes in assumptions is included as a component of net periodic pension cost for the year. The Company uses a 10% corridor such that if, as of the beginning of the year, the net gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets, the amortization is that excess divided by the average future working lifetime of participating employees expected to receive benefits under the plan or the average remaining life expectancy of the plan’s participants if the percentage of actives is less than 10% of the total population. As only the excess actuarial gain or loss is amortized, this approach will not fully amortize the net actuarial gain or loss.
Stock-Based Compensation
The Company applies ASC 718 “Compensation — Stock Compensation.” In accordance with guidance within ASC 718, compensation expense for stock options is recorded over the vesting period using the fair value on the date of grant, as calculated by the Company using the Black-Scholes model. For time vested restricted stock awards, the nonvested restricted stock grant date fair value, which is the market price of the underlying common stock, is expensed over the vesting period. For certain performance based stock awards, the initial grant date fair value of the performance stock awards that vest subject to a market condition is determined using a Monte Carlo simulation model and is expensed on a straight-line basis over the performance period. For certain performance based stock awards that vest subject to a performance condition, the initial grant date fair value is the market price of the underlying common stock. This fair value is expensed on a straight-line basis over the performance period when it is probable that the performance condition will be achieved. The Company’s stock-based compensation plans are more fully described in Note 10.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding plus all potential dilutive common shares outstanding during the period. Potential dilutive common shares are determined using the treasury stock method. Under the treasury stock method, exercise of options is assumed at the beginning of the period when the average stock price during the period exceeds the exercise price of outstanding options and common shares are assumed issued. The proceeds from exercise are assumed to be used to purchase common stock at the average market price during the period. The incremental shares to be issued are considered to be the potential dilutive common shares outstanding.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The Company assesses its ability to realize deferred tax assets based on normalized historical performance and on projections of future taxable income in the relevant tax jurisdictions. Normalized historical performance for purposes of this assessment includes adjustments for those income and expense items that are unusual and non-recurring in nature and are not expected to affect results in future periods. Such unusual and non-recurring items include the effects of legal fees or settlements associated with specific litigation matters, acquisition and restructuring costs. The Company’s projections of future taxable income considers known events, such as the passage of legislation or expected occurrences, and do not reflect a general growth assumption. The Company’s estimates of future taxable income are reviewed annually or whenever events or changes in circumstances indicate that such projections should be modified.
The Company utilizes guidance within ASC 740 “Income Taxes” regarding the accounting for uncertainty in income taxes. This guidance prescribes recognition and measurement standards for a tax position taken or expected to be taken in a tax return. According to this guidance, the evaluation of a tax position is a two step process. The first step is the determination of whether a tax position should be recognized in the financial statements. The benefit of a tax position taken or expected to be taken in a tax return is to be recognized only if the Company determines that it is more likely than not that the tax position will be sustained upon examination by the tax authorities based upon the technical merits of the position. In step two, for those tax positions which should be recognized, the measurement of a tax position is determined as being the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
No provision is made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries because these earnings are intended to be indefinitely reinvested outside the U.S. These earnings would become subject to income tax if they were remitted as dividends, were loaned to the Company or a U.S. affiliate, or if the Company were to sell its ownership interest in the subsidiaries.
In November 2015, the FASB issued Accounting Standards Update (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes” which requires that all deferred tax assets (DTAs) and deferred tax liabilities (DTLs), along with any related valuation allowance, be classified as noncurrent in a classified balance sheet. Netting of DTAs and DTLs by tax jurisdiction is still required under the new guidance. The Company adopted ASU 2015-17 effective December 31, 2016 on a prospective basis. Adoption of this ASU resulted in an initial reclassification of $18.1 million of the Company’s net current deferred income tax asset to the long-term deferred income tax asset in its consolidated balance sheet as of December 31, 2016. Due to required netting by tax jurisdiction, a large portion of this amount was netted against the long-term deferred income tax liability. No prior periods were retrospectively adjusted.
Leases
The Company leases certain facilities, equipment and vehicles. Certain of the Company’s leases contain renewal options, rent escalation clauses and landlord incentives. Renewal terms generally reflect market rates at the time of renewal. Rent expense for noncancelable operating leases with scheduled rent increases or landlord incentives is recognized on a straight-line basis over the lease term, including any applicable rent holidays, beginning with the lease commencement date. The excess of straight-line rent expense over scheduled payment amounts and landlord incentives is recorded as a deferred liability.
Contingencies
The Company from time to time is subject to various legal proceedings, lawsuits and claims, including employment, product warranty and environmental matters of the nature considered normal to its business. It is the Company’s policy to accrue for amounts related to legal matters when it is probable that a liability has been incurred and the loss amount is reasonably estimable. Estimates are developed through consultation with legal counsel involved in the defense and are based upon an analysis of probable results, assuming a combination of litigation and settlement strategies. Legal fees associated with defending these various lawsuits and claims are expensed when incurred.
Government Grants
The Company’s policy for accounting for government grants, including non-monetary grants at fair value, is to recognize them only when there is reasonable assurance that (a) the Company will comply with the conditions attached to the grants and (b) the grants will be received. A grant will be recognized over the period necessary to match it to the related costs, for which it is intended to compensate, on a systematic basis. A grant related to assets is presented by deducting it from the asset’s carrying amount and is reported within cash flows from investing activities. A grant related to income will be deducted from the related expense and reported within cash flows from operating activities.
Labor Agreements
Collective bargaining agreements cover approximately 46% of the Company’s full-time labor force as of December 31, 2016 that expire at various dates through 2019. Approximately 6% of the Company’s labor force is operating under contracts that expired on December 31, 2016, which are in the process of being renegotiated.
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue (Topic 606): Revenue from Contracts with Customers” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services by applying five steps listed in the guidance. ASU 2014-09 also requires disclosure of both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” which amends the principal-versus agent implementation guidance and illustrations in FASB’s new revenue standard ASU 2014-09. The new guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing” which amends certain aspects of the guidance in ASU 2014-09. For identifying performance obligations, the amendments include: immaterial promised goods and services, shipping and handling activities, and identifying when promises represent performance obligations. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” This clarifies the collectability assessment, sales tax presentation and the treatment of contract modifications and completed contracts at transition. In May 2016, the FASB issued ASU 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Update 2014-09” which rescinds certain SEC guidance upon adoption including those related to freight services in process and shipping and handling fees. All of the new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently determining the potential impacts of the new standard on its contract portfolio. The approach includes performing a detailed review of key contracts representative of its different businesses and comparing historical accounting policies and practices to the new standard. The Company will continue to evaluate the provisions of this ASU to assess the impact it may have on its consolidated financial statements and related disclosures. The Company is planning to adopt the provisions of the ASU and its subsequent amendments using the modified retrospective transition method for existing transactions that may result in a cumulative effect adjustment as of January 1, 2018.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory” which requires entities to measure most inventory at the lower of cost and net realizable value. This simplifies the current guidance under which an entity measures inventory at the lower of cost or market. Market in this context is defined as one of three different measures, one of which is net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance will be applied prospectively, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” which introduces a lessee model that brings most leases on the balance sheet, requiring lessees to recognize the right to use assets and lease obligations that arise from lease arrangements exceeding a twelve month term. Lessees will also need to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Entities are required to use a modified retrospective transition for existing leases. The Company is evaluating the provisions of this ASU and assessing the impact it may have on the Company’s consolidated financial statements and related disclosures. At a minimum, total assets and total liabilities will increase in the period the ASU is adopted. As of December 31, 2016, the Company’s undiscounted future minimum payments outstanding for lease obligations were approximately $41 million.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company is planning to adopt the provisions of this ASU using the modified retrospective transition method for existing share-based payment transactions, effective January 1, 2017. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument |
