Financial
Contents
17
Management's
Discussion
and Analysis
21
Report of
Management
21
Report of Price
Waterhouse LLP
Independent
Accountants
22
Consolidated
Statement
of Income
23
Consolidated
Balance Sheet
24
Consolidated
Statement
of Cash Flows
25
Consolidated
Statement
of Shareholders'
Equity
26
Notes to the
Consolidated
Financial
Statements
40
Six-Year Summary
Selected Financial
and Statistical Data
40
Quarterly
Financial Data--
Unaudited
40
Common Shares
and Market
Information
Management's Discussion and Analysis
Calgon Carbon Corporation
Overview
Industry
Economic conditions continued to be strong in the United States during 1997 and
demand for activated carbon products and services was stable overall. The
European economy started to improve during the year with activated carbon demand
increasing accordingly. In Asia, demand for activated carbon was strong for most
of the year, reflecting robust economic performance until the onset of the
financial crisis during the latter part of the year.
In the United States, capacity utilization of activated carbon was high, and
imports, particularly from the Far East, continued to increase. While price
increases in Europe were marginal, moderate price increases were achieved in the
U.S.
The Company
The Company's business followed the economic patterns established in the
industry with the exception of three noteworthy factors that affected its 1997
results. Revenues include increases from businesses acquired in 1996 and strong
sandwich filter activity in Europe which were partially offset by the non repeat
of prior year initial fills in Europe. The 1996 acquisitions increased the
Company's revenues by approximately 8% while the increase in sandwich filter
performance resulted in an additional 2%.
Excluding the effect of the acquisitions, in the United States volume
increases of approximately 3% were achieved for activated carbon products and
approximately 17% in the equipment business. The service category was flat.
Price increases for activated carbon products represented an increase of 2%.
Also excluding the effect of the acquisitions in Europe, activated carbon
volume decreased slightly due primarily to reduced initial fills, while service
and equipment experienced volume gains of 23% and 33%, respectively.
As a result of these activities, consolidated revenues in 1997 increased by
13% versus 1996.
At the end of 1996, the Company acquired Advanced Separation Technologies
Incorporated (AST). This acquisition did not meet expectations. Three conditions
began to manifest themselves during the second quarter and were magnified as the
year progressed:
. On projects shipped prior to the acquisition, warranty and cost overruns
were encountered, in 1997, due to design and mechanical failures and due to
faulty materials of construction.
. Revenues were lost due to the market's reaction to the above problems.
. The Company also incurred costs to complete projects supposedly completed
before the acquisition.
See Note 2 to the Consolidated Financial Statements for further information
about these problems and the claims made by the Company against the sellers of
AST. The equipment shipped in 1997 does not have the aforementioned problem
design. Actions are currently being taken to resolve the problems and the
Company remains committed to this technology.
The Company continues to focus on achieving its vision, which is to be the
world's leading producer, supplier and designer of innovative technologies,
value-added products and services, specifically developed for the purification,
separation and concentration of liquids and gases.
Beginning in 1997, the Company began using the "Shareholder Value Added"
technique of measuring progress towards its goals. This performance measurement
method compares cash-based operating results to the cost of capital employed to
determine if value is being added to the Company.
Results of Operations
1997 Versus 1996
Consolidated net sales in 1997 increased by $37.3 million or 12.9% versus 1996.
This increase was primarily the combination of increases for carbon, service and
equipment of 2.6%, 12.1% and 99.5%, respectively. Of the total sales increase
for the Company, 61.6% was related to the 1996 acquisition program. By category,
the percentage of the sales increase related to acquisitions was as follows:
carbon (51.2%), service (26.7%) and equipment (76.9%). The remainder of the
increase was the net effect of worldwide volume and price increases partially
offset by the negative effect of the strengthening of the U.S. dollar versus
certain European currencies, which totaled $9.3 million. On a market basis,
sales to the industrial process market increased by $20.8 million or 15.3%. This
increase was related to increases in the food, chemical-pharmaceutical and
original equipment manufacture areas. The improvements in the food and chemical-
pharmaceutical areas were associated with the
17
Company's Advanced Separation Technologies business, which was acquired at the
end of 1996, while the increase within the original equipment manufacture area
resulted from improvements in the United States home water filter, personnel
protection and gasoline vapor recovery areas. Net sales to the environmental
markets increased by $16.9 million or 12.7%. This increase was due to strong
worldwide municipal activity in the carbon and service categories and gains
associated with the Advanced Oxidation group, another 1996 acquisition. The
consumer charcoal area was down $.5 million or 2.3%.
Gross profit before depreciation as a percentage of net sales was 38.1% in
1997 compared to 37.8% in 1996. This improvement was the result of sales
increases for higher margin products and reduced natural gas prices partially
offset by lower margin equipment sales by the Company's recently acquired
businesses.
Depreciation and amortization increased by $1.4 million due to the net effect
of increased amortization of intangibles (primarily goodwill) associated with
the Company's 1996 acquisitions and depreciation decreases due to an increase in
fully depreciated fixed assets.
Selling, general and administration expenses increased by $5.9 million due
primarily to the 1996 acquisitions.
Research and development expenses, as a percentage of net sales, were 2.5% in
1997 versus 2.2% in 1996. This $1.8 million increase was primarily due to
increases associated with the 1996 acquired businesses which have a higher
expense ratio to sales than the existing activities.
During 1997, interest income decreased and interest expense increased versus
1996 resulting in an increase in net interest costs. These changes were related
to the Company's 1996 acquisition program which reduced investable cash and
increased debt by $60.2 million.
The increase in other (expense) during the year was the combined result of net
foreign exchange transaction losses in 1997, versus gains in 1996, which were
partially offset by reduced taxes, other than income, in 1997 versus the prior
year.
The effective income tax rate was 35.3% in 1997 compared to 36.0% in 1996.
This difference was the net effect of increased benefits associated with foreign
income and favorable difference between the 1996 tax return, as filed, versus
the year-end tax provision, partially offset by an increase in state income
taxes.
1996 Versus 1995
Consolidated net sales in 1996 decreased by $1.7 million or .6% versus 1995.
This decrease was the result of decreases for carbon, equipment and charcoal of
3.9%, 10.7% and 4.4%, respectively, partially offset by an 11.7% increase for
service. The net sales decrease was primarily related to declines in the
European markets resulting from the closure of the Brilon-Wald, Germany plant in
1995 and the strengthening of the U.S. dollar relative to the European
currencies which resulted in a negative effect on revenues of $3.9 million. On a
market basis, sales to the industrial process area decreased by $1.0 million or
.7% and sales of charcoal decreased by $.8 million or 4.4%. Sales to the
environmental category were flat. The reduction in the industrial process
category was the result of increases in the worldwide food category (primarily
sweeteners) and in the United States original equipment manufacturers area which
were more than offset by declines in the worldwide chemical-pharmaceutical
category, the European original equipment manufacturer area and in the domestic
cigarette and worldwide energy categories. The consistent results, year-to-year,
in the environmental area were due to decreases in the European municipal market
and reduced equipment sales in the industrial category offset by sales in the
oxidation technologies business, which was acquired in mid 1996. The consumer
charcoal area decrease was due to unfavorable barbecuing weather conditions in
Germany.
Gross profit before depreciation as a percentage of net sales was 37.8% in
1996 versus 36.9% in 1995. The improvement was the result of increased prices,
sales of higher valued products and reduced manufacturing costs, partially
offset by increased natural gas costs and higher costs for coconut-based
products.
Depreciation increased by $.6 million in 1996 due to normal, ongoing capital
spending.
Selling, general and administration expenses increased by $.1 million in 1996.
This increase was due to increases associated with the aforementioned oxidation
technologies business acquisition partially offset by personnel related
decreases, including
18
a $.9 million reduction in the provision for the Employee Growth Sharing Plan.
Research and development expenses, as a percentage of sales, were 2.2% in 1996
compared to 1.9% in 1995. The increase of $.9 million resulted from personnel
additions and the new oxidation technologies business.
Interest income increased by $.1 million in 1996 due to improved rates of
return. Interest expense increased in 1996 by $.1 million due to increased debt
incurred in June 1996 to fund the acquisition of the oxidation technologies
business.
Other (expense)--net reported a favorable variation in 1996 of $1.3 million.
This favorable variation was the result of net foreign currency transaction
gains in 1996 versus net foreign currency transaction losses in 1995.
The effective tax rate in 1996 was 36.0% compared to an effective tax rate of
33.8% in 1995. This 2.2 percentage point increase was primarily due to reduced
state income tax benefits and to reduced research and development credits.
Year 2000
The Company is engaged in a program to modernize and replace its computerized
production control and management information systems. Although not the primary
purpose of the program, the new systems are scheduled to be in place by mid-1999
and are expected to be Year 2000 ready. A task force has been established to
identify all other potential areas of risk and to make required modifications as
they relate to business computer systems, technical infrastructure, end user
computing, suppliers and customers and manufacturing systems. Based on
information available at this time, management believes that the incremental
costs associated with achieving Year 2000 compliance will not be material to the
operating results.
Discussion of the Company's efforts and management's expectations relating to
Year 2000 compliance are forward-looking statements. The Company's ability to
achieve Year 2000 compliance and the level of incremental costs associated with
compliance could be adversely impacted by, among other matters, the availability
and cost of programming and testing resources, vendors' ability to modify
software and unanticipated problems identified in the ongoing compliance review.
The Company has little or no control over the actions of the proprietary
software vendors and other entities with which it interacts. Therefore, Year
2000 compliance problems experienced by these entities could adversely affect
the operating results of the Company.
Working Capital and Liquidity
The Company's 1997 operating activities generated $37.5 million in net cash
flows primarily from net earnings before non-cash charges of depreciation and
amortization offset by increased investment in working capital.
During 1997, the Company added a $50.0 million five-year bank credit facility
to provide longer term financing for its 1996 acquisition of Advanced
Separation Technologies Incorporated. This facility was fully utilized at
December 31, 1997. Additionally, $3.0 million of tax exempt industrial revenue
bonds were obtained to finance certain equipment additions at the Company's
Pearl River, Mississippi plant. The Company maintains two 364-day United States
bank credit lines totaling $50.0 million. At December 31, 1997, $44.9 million
was available under these lines. The Company maintains a $14.0 million (25
million deutsche mark) credit facility with a German bank with a duration of
"until further notice." This facility was unused at December 31, 1997. Total
debt as of December 31, 1997 was $81.9 million, reflecting an increase of $11.6
million. As a result of the consolidation of the financial statements of Calgon
Far East Co., Ltd. (CFE) with those of the Company, an additional $7.9 million
of CFE's indebtedness is shown on the Company's consolidated balance sheet. This
consolidation was effective July 1, 1997 upon the Company's increase in
ownership from 50% to 60%.
Net working capital excluding cash and cash equivalents remained unchanged at
$53.2 million at December 31, 1997. Increases in accounts receivable, inventory
and other current assets were offset by increases in accounts payable, accrued
liabilities and currently maturing long-term debt. The impact of foreign
currency translation resulting from the strengthening of the U.S. dollar reduced
working capital by $2.1 million.
It is the intention of the Company to declare and pay quarterly cash dividends
on its common stock. The Company has paid cash dividends
since the third quarter of 1987, the quarter succeeding the one in which the
Company went public. The
19
declaration and payment of dividends is at the discretion of the Board of
Directors of the Company. Future dividends will depend on the Company's
operating results, financial condition, cash requirements of its business,
future prospects and other factors considered relevant by the Board of
Directors. At the February 1998 Board of Directors meeting, the regular dividend
of $.08 per common share was declared and will be paid on April 1, 1998.
The Company expects that cash from operating activities plus cash balances and
available external financing will be sufficient to fund its operating, dividend
and capital requirements.
Capital Expenditures and Investments
Capital expenditures were $34.4 million in 1997, $14.4 million in 1996 and $12.7
million in 1995. Included in the 1997 spending amount were capacity expansion
and cost reduction projects at the Big Sandy, Kentucky; Pearl River,
Mississippi; and Feluy, Belgium plants in the amounts of $13.2 million, $2.8
million and $3.6 million, respectively, and an improved coal handling system at
the Big Sandy, Kentucky plant in the amount of $7.0 million. The major 1996
spending was associated with capacity expansions at the Big Sandy, Kentucky
plant ($6.0 million) and at the Feluy, Belgium facility ($1.2 million) and for
domestic service customer capital ($2.9 million). Significant 1995 expenditures
were for improvements to one of the Big Sandy, Kentucky production lines ($6.7
million) and for domestic service customer capital ($1.1 million). Capital
expenditures for 1998 are projected to be approximately $28.0 million and are to
include carbon production capacity increases at the Big Sandy, Kentucky and
Feluy, Belgium plants, domestic service customer capital and new computer
hardware and software to operate the Company's corporate-wide business system.
The 1997 purchase of businesses amount of $4.5 million includes an increase to
the purchase price for Advanced Separation Technologies Incorporated (a 1996
acquisition) of $.5 million, cash expended for AST project failures for projects
completed before the acquisition (see Note 2 to the Consolidated Financial
Statements) of $2.7 million, payments of accruals related to the 1996
acquisitions of $.8 million and a net expenditure of $.6 million which increased
the Company's ownership percentage in Calgon Far East Co., Ltd., its Japanese
joint venture. The increased purchase price for AST was due to a higher level of
"Adjusted Closing Net Current Assets" than stated in the purchase agreement. The
increased investment in Calgon Far East Co., Ltd. was effective July 1, 1997 and
increased the Company's ownership of that entity from 50% to 60% giving it a
controlling interest. Cash expended for this increase in ownership was $1.1
million and was partially offset by cash on this entity's July 1, 1997 balance
sheet of $.5 million resulting in a net purchase of business amount of $.6
million.
Prior to the Calgon Far East Co., Ltd. ownership change, the balance sheet and
income statement of this entity were included in the Company's financial
statements under the equity method of accounting. Now, the financial statements
are consolidated into the Company's financial statements recognizing minority
interest on both the balance sheet and income statement.
The information on the 1996 purchase of businesses amount can be found in
Note 2 to the Consolidated Financial Statements.
Market Risk
Commodity Price Risk
In the normal course of its business, the Company is exposed to market risk or
price fluctuations related to the purchase and production of carbon products and
its inventories of carbon products as well as the cost of natural gas used in
the production of its products. The Company obtains competitive prices for its
products and allows operating results to reflect market price movements dictated
by supply and demand where regulated prices do not exist. The Company uses fixed
price contracts to manage a portion of its coal and natural gas commodity price
risk.
Interest Rate Risk
Substantially all current and long-term debt is based on rates that float with
prime rates and the carrying value approximates fair value.
Foreign Currency Exchange Risk
The Company is subject to risk of price fluctuations related to anticipated
revenues and operating costs, firm commitments for capital expenditures and
existing assets or liabilities denominated in currencies
20
other than U.S. dollars. The Company has made limited use of forward currency
contracts to manage these exposures. At December 31, 1997, the fair value of
forward contracts, all of which mature in four months or less, were not
material. These contracts hedge exposures to currency price fluctuations
primarily related to intercompany transactions. Non-derivative financial
instruments subject to foreign exchange exposure are limited to a foreign
currency denominated loan of 14.0 million Canadian dollars as described in Note
7 to the Consolidated Financial Statements.
- -------------------------------------------------------------------------------
Report of
Management
The consolidated financial statements and related notes have been prepared by
management, who are responsible for their integrity and objectivity. The
statements have been prepared in accordance with generally accepted accounting
principles and include amounts based on management judgments and estimates. All
other financial information in this annual report is consistent with that in the
financial statements.
The Company maintains internal accounting control systems that are designed to
provide reasonable assurance that assets are safeguarded, that transactions are
executed in accordance with management's authorization and are properly recorded
and that accounting records are adequate for preparation of financial
statements and other financial information. The design, monitoring and revision
of internal accounting control systems involve management's judgments with
respect to the relative cost and expected benefits of specific control measures.
In addition to the system of internal accounting controls, the Company
maintains guidelines of Company policy emphasizing proper overall business
conduct, possible conflicts of interest, compliance with laws and
confidentiality of proprietary information.
The financial statements have been audited by Price Waterhouse LLP,
independent accountants. Their responsibility is to examine the Company's
financial statements in accordance with generally accepted auditing standards
and to express their opinion with respect to the fairness of presentation of the
statements.
The members of the audit committee of the Board of Directors, none of whom are
employees of the Company, review the services performed by the independent
accountants and receive and review the reports submitted by them. The audit
committee meets several times during the year with management and the
independent accountants to discuss audit activities, internal controls and
financial reporting matters. The independent accountants have full and free
access to the committee.
- -------------------------------------------------------------------------------
Report of Price
Waterhouse LLP
Independent
Accountants
To the Board of Directors and Shareholders of Calgon Carbon Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Calgon
Carbon Corporation (the Company) and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Pittsburgh, Pennsylvania
February 3, 1998
21
Consolidated Statement of Income
Calgon Carbon Corporation
Year Ended December 31
-------------------------------------
(Dollars in thousands except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Net Sales $327,500 $290,196 $291,898
- -----------------------------------------------------------------------------------------------------------------
Cost of products sold (excluding depreciation) 202,629 180,600 184,219
Depreciation and amortization 20,436 19,049 18,450
Selling, general and administrative expenses 56,211 50,277 50,195
Research and development expenses 8,331 6,518 5,593
Restructuring charges 1,532 -- --
- -----------------------------------------------------------------------------------------------------------------
289,139 256,444 258,457
- -----------------------------------------------------------------------------------------------------------------
Income from operations 38,361 33,752 33,441
Interest income 325 1,551 1,474
Interest expense (4,057) (752) (620)
Other (expense)--net (1,440) (742) (2,041)
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 33,189 33,809 32,254
Provision for income taxes 11,716 12,171 10,909
- -----------------------------------------------------------------------------------------------------------------
Income before minority interest 21,473 21,638 21,345
Minority interest 105 -- --
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 21,578 $ 21,638 $ 21,345
- -----------------------------------------------------------------------------------------------------------------
Net income per common share (basic and diluted) $ .54 $ .54 $ .53
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares, in thousands 39,696 40,267 40,419
=================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
22
Consolidated Balance Sheet
Calgon Carbon Corporation
December 31
----------------------------
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,982 $ 15,439
Receivables 67,888 59,355
Inventories 50,954 46,471
Other current assets 16,731 13,654
- ----------------------------------------------------------------------------------------
Total current assets 143,555 134,919
Property, plant and equipment, net 188,082 173,564
Intangibles 80,971 72,658
Other assets 10,849 16,110
- ----------------------------------------------------------------------------------------
Total assets $423,457 $397,251
- ----------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt due within one year $ 9,617 $ 4,451
Accounts payable and accrued liabilities 47,563 35,846
Restructuring reserve 6,282 7,847
Payroll and benefits payable 14,252 12,903
Accrued income taxes 4,625 5,202
- ----------------------------------------------------------------------------------------
Total current liabilities 82,339 66,249
Long-term debt 72,297 65,837
Deferred income taxes 38,900 40,522
Other liabilities 6,463 7,748
- ----------------------------------------------------------------------------------------
Total liabilities 199,999 180,356
- ----------------------------------------------------------------------------------------
Minority interest 1,378 --
- ----------------------------------------------------------------------------------------
Commitments and contingencies (Note 17) -- --
- ----------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, $.01 par value, 100,000,000 shares
authorized, 41,503,960 and 41,435,960 shares issued 415 414
Additional paid-in capital 62,868 62,102
Retained earnings 170,974 162,098
Cumulative translation adjustments 7,889 12,347
- ----------------------------------------------------------------------------------------
242,146 236,961
Treasury stock, at cost, 1,761,300 shares (20,066) (20,066)
- ----------------------------------------------------------------------------------------
Total shareholders' equity 222,080 216,895
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 423,457 $397,251
========================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
23
Consolidated Statement of Cash Flows
Calgon Carbon Corporation
Year Ended December 31
-------------------------------------
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 21,578 $ 21,638 $ 21,345
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,436 19,334 18,527
Employee benefit plan provisions 488 523 448
Changes in assets and liabilities--net of
effects from purchase of businesses and exchange:
(Increase) decrease in receivables (3,264) 3,957 (3,957)
(Increase) in inventories (6,949) (966) (205)
(Increase) decrease in other current assets (2,801) (240) 2,761
(Decrease) in restructuring reserve (544) (3,006) (12,850)
Increase in accounts payable and accruals 6,366 4,933 3,362
Increase in long-term deferred income taxes (net) 3,581 1,919 7,226
Other items--net (1,421) (1,723) (1,051)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,470 46,369 35,606
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of businesses (4,546) (92,633) --
Property, plant and equipment expenditures (34,411) (14,358) (12,676)
Proceeds from disposals of equipment 1,607 1,006 698
- ----------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (37,350) (105,985) (11,978)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from borrowings 5,202 56,071 3,999
Treasury stock purchases -- (7,738) --
Common stock dividends (12,697) (12,733) (32,335)
Other 767 116 --
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (6,728) 35,716 (28,336)
- ----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (849) (750) (579)
- ----------------------------------------------------------------------------------------------------
(Decrease) in cash and cash equivalents (7,457) (24,650) (5,287)
Cash and cash equivalents, beginning of period 15,439 40,089 45,376
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,982 $ 15,439 $ 40,089
====================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
24
Consolidated Statement of Shareholders' Equity
Calgon Carbon Corporation
Common Additional Cumulative
Shares Common Paid-in Retained Translation
(Dollars in thousands) Issued Shares Capital Earnings Adjustments Sub-Total
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 41,424,960 $ 414 $ 61,986 $164,325 $12,750 $239,475
1995
Net income -- -- -- 21,345 -- 21,345
Common stock dividends
Cash ($.80 per share) -- -- -- (32,335) -- (32,335)
Translation adjustments -- -- -- -- 2,030 2,030
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 41,424,960 414 61,986 153,335 14,780 230,515
- -------------------------------------------------------------------------------------------------------------
1996
Net income -- -- -- 21,638 -- 21,638
Employee stock plans 11,000 -- 116 -- -- 116
Common stock dividends
Cash ($.32 per share) -- -- -- (12,875) -- (12,875)
Translation adjustments -- -- -- -- (2,433) (2,433)
Treasury stock purchased -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 41,435,960 414 62,102 162,098 12,347 236,961
- -------------------------------------------------------------------------------------------------------------
1997
Net income -- -- -- 21,578 -- 21,578
Employee stock plans 68,000 1 766 -- -- 767
Common stock dividends
Cash ($.32 per share) -- -- -- (12,702) -- (12,702)
Translation adjustments -- -- -- -- (4,458) (4,458)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 41,503,960 $ 415 $ 62,868 $170,974 $ 7,889 $242,146
=============================================================================================================
Treasury Stock
------------------
(Dollars in thousands) Shares Amount Total
- ----------------------------------------------------------------------
Balance, December 31, 1994 1,006,100 $(12,328) $227,147
1995
Net income -- -- 21,345
Common stock dividends
Cash ($.80 per share) -- -- (32,335)
Translation adjustments -- -- 2,030
- ----------------------------------------------------------------------
Balance, December 31, 1995 1,006,100 (12,328) 218,187
- ----------------------------------------------------------------------
1996
Net income -- -- 21,638
Employee stock plans -- -- 116
Common stock dividends
Cash ($.32 per share) -- -- (12,875)
Translation adjustments -- -- (2,433)
Treasury stock purchased 755,200 (7,738) (7,738)
- ----------------------------------------------------------------------
Balance, December 31, 1996 1,761,300 (20,066) 216,895
- ----------------------------------------------------------------------
1997
Net income -- -- 21,578
Employee stock plans -- -- 767
Common stock dividends
Cash ($.32 per share) -- -- (12,702)
Translation adjustments -- -- (4,458)
- ----------------------------------------------------------------------
Balance, December 31, 1997 1,761,300 $(20,066) $222,080
======================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
25
Notes to the Consolidated Financial Statements
Calgon Carbon Corporation
- --------------------------------------------------------------------------------
1. Statement
of Accounting
Policies
Operations
The Company's operations are principally conducted in one business segment, the
production, design and marketing of products and services specifically developed
for the purification, separation and concentration of liquids and gases. The
Company's markets are primarily in the United States and in Europe.
Principles of Consolidation
The consolidated financial statements include the accounts of Calgon Carbon
Corporation and its wholly owned subsidiaries, Chemviron Carbon GmbH, Calgon
Carbon Canada, Inc., Chemviron Carbon Ltd., Calgon Carbon Investments Inc.,
Solarchem Environmental Systems Inc., Charcoal Cloth (International) Limited,
Charcoal Cloth Limited, Advanced Separation Technologies Incorporated and the
Company's foreign sales corporation. A portion of the Company's international
operations in Europe are owned directly by the Company and are operated as
branches. During 1997, the Company increased its investment in Calgon Far East
Co., Ltd. from 50% to 60% and accordingly changed its accounting treatment from
the equity method to the consolidation method. Consolidation of less than 100%
owned entities results in recording and presentation of minority interest.
Intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
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 are accumulated in a separate component of shareholders' equity, net
of tax effects. Transaction gains and losses are included in income.
Revenue Recognition
Revenue and related costs are recognized when goods are shipped or services are
rendered to customers except for major equipment projects where revenues are
recognized under the percentage of completion method.
Inventories
Inventories are carried at the lower of cost or market. Inventory costs are
primarily determined using the last in, first out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment expenditures are recorded at cost. Repair and
maintenance costs are expensed as incurred. Depreciation for financial statement
purposes is computed on the straight-line method over the estimated service
lives of the assets, which are from twenty to thirty years for buildings and
land improvements, fifteen years for machinery and equipment and seven years for
furniture and vehicles.
Intangibles Resulting from Business Acquisitions
Intangible assets resulting from business acquisitions principally consist of
the excess of the acquisition cost over the fair value of the net assets of
businesses acquired (goodwill). Goodwill is amortized on a straight-line basis
over 40 years. Other intangible assets are amortized on a straight-line basis
over their estimated useful lives.
Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets, including goodwill, be reviewed for impairment
and written down to fair value whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company adopted this statement upon its issuance and determined that no
impairment loss need be recognized for applicable assets of continuing
operations.
Reclassification
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
Pensions
Substantially all U.S. employees of the Company are covered by one of three non-
contributory defined benefit pension plans. It is the Company's policy to
annually fund net pension cost accrued to these plans, subject to minimum and
maximum amounts specified by regulations. In Europe, employees are also covered
by various defined benefit pension plans or government sponsored defined
contribution plans. The Company funds these plans according to local laws and
practices.
26
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 dilutive potential common
shares outstanding during the period. Dilutive common shares are determined
using the treasury stock method. Under the treasury stock method, exercise of
options are 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 dilutive potential
common shares outstanding.
Statement of Cash Flows
For the purpose of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
- --------------------------------------------------------------------------------
2. Acquisitions
In February 1996, the Company acquired the business and operating assets of the
perox-pure(TM) operations of Vulcan Peroxidation Systems, Inc. The purchase
provided the Company with entry into the oxidative water treatment market. The
technology is complementary to the Company's existing carbon adsorption service.
The business had equipment assembly and office facilities in Tucson, Arizona.
(During the latter part of 1997, this location was closed and its activities
were consolidated at the Markham, Ontario, Canada location).
The acquisition was accounted for by the purchase method and is included in
the consolidated financial statements from February 20, 1996, the effective date
of the acquisition. The cost was approximately $7,528,000 in cash.
In June 1996, Calgon Carbon Canada, Inc. acquired the common stock of
Solarchem Enterprises Inc. This purchase, along with the perox-pure(TM)
purchase, broadened the Company's coverage in the oxidative water treatment
market. This business has assembly, research and office space in Markham,
Ontario, Canada.
The acquisition was accounted for by the purchase method and is included in
the consolidated financial statements from June 3, 1996, the effective date of
the acquisition. The cost was $10,998,000 in cash.
In December 1996, Chemviron Carbon Ltd. acquired the common stock of Charcoal
Cloth (International) Limited and Charcoal Cloth Limited from CCL Holdings
Limited. The acquired companies, with manufacturing and office facilities, are
near Newcastle, England and produce activated carbon in cloth form for odor
control in medical and industrial applications. The textile properties are
suitable for applications where granular activated carbon is not feasible.
The acquisition was accounted for by the purchase method and is included in
the consolidated financial statements effective December 30, 1996. The cost was
approximately $4,114,000 in cash.
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. AST is headquartered in Lakeland,
Florida, where there are equipment assembly, research and office facilities. AST
designs and assembles proprietary separation equipment that employs continuous
ion exchange and continuous chromatography technologies. AST serves both the
industrial process and environmental markets worldwide and is a leader in
supplying separation systems to the lysine and corn syrup industries.
The acquisition was accounted for by the purchase method and is included in
the consolidated financial statements effective December 31, 1996. The cost was
$71,262,000 in cash.
27
Application of purchase accounting to the acquisitions at December 31, 1997
resulted in recognization of goodwill of $69,313,000 and other intangible
assets of $3,907,000.
During 1997, at AST, the Company recognized additional costs, primarily
related to design and mechanical failures on projects which were represented to
be substantially complete as of December 31, 1996. A significant portion of
these costs were related to design and/or other defects on critical components
which the Company believes were known to the AST management and its owners as of
December 31, 1996. The net additional estimated cost incurred and accrued as of
December 31, 1997 on these projects of $9.7 million has been considered as
additional acquisition costs and accordingly goodwill has been increased to
reflect these costs.
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 throughout 1997, the Company believes that it has a
reasonable basis for this claim and intends to vigorously pursue reimbursement
for damages sustained. Neither the Company nor its counsel can predict with
certainty the amount, if any, of recovery that will be obtained from the
defendants in this matter. Accordingly, the Company has not recorded a
receivable for this gain contingency pending further developments in the
litigation.
Except for the acquisition of AST, the results of operations on a pro forma
basis for the Company's other acquisitions are not presented as the effects are
not material to the consolidated financial statements individually or in the
aggregate.
Unaudited pro forma results of operations for the years ended December 31,
1996 and 1995 included in the 1996 Notes to the Consolidated Financial
Statements of the Company reflected net income of $21,411,000 or $.53 per share
(on net sales of $317,514,000) and $19,796,000 or $.49 per share (on net sales
of $313,374,000), respectively. These amounts assumed the AST acquisition
occurred on January 1, 1995. Assuming that the entire $9,700,000 referred to
above should have been reflected in the 1996 AST historical financial statements
(which has not yet been finally determined), pro forma net income for the year
ended December 31, 1996 would have been approximately $15,100,000.
The pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations had been combined
during the entire period presented and is not intended to be a projection of
future results.
- --------------------------------------------------------------------------------
3. Restructuring
Charges
During the fourth quarter of 1997, the Company initiated a plan to consolidate
the manufacturing operations and research activities of its Advanced Oxidation
Technologies unit in Tucson, Arizona to its Markham, Ontario, Canada site. The
Company recorded a restructuring charge of $1,532,000. This charge included
writeoffs of fixed assets and inventory, closing of a facility and employee
termination costs.
In 1994, the Company recorded a restructuring charge which included costs
associated with the closing of the Brilon-Wald, Germany plant. As of December
31, 1997, the only incomplete aspect of that plan is the demolition of that
plant as discussions continue with parties interested in purchasing the plant.
The reserve balance for demolition, disposition and environmental costs totaled
$6,282,000 at December 31, 1997 and $7,847,000 at December 31, 1996.
28
- ------------------------------------------------------------------------------
4. Inventories
December 31
-----------------
(Thousands) 1997 1996
- ------------------------------------------------------------------------------
Raw materials $12,566 $16,122
Finished goods 38,388 30,349
- ------------------------------------------------------------------------------
Total $50,954 $46,471
==============================================================================
Approximately 76% and 74% of total inventories at December 31, 1997 and 1996,
respectively, are valued using the LIFO method. The LIFO carrying value of
inventories exceeded the related current cost by $4,401,000 and $3,473,000 at
December 31, 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
5. Property, Plant
and Equipment
December 31
----------------------
(Thousands) 1997 1996
- ------------------------------------------------------------------------------
Land and improvements $ 13,074 $ 12,744
Buildings 22,324 21,823
Machinery and equipment 292,906 266,748
Furniture and vehicles 11,016 8,592
- ------------------------------------------------------------------------------
$ 339,320 $ 309,907
Less accumulated depreciation (151,238) (136,343)
- ------------------------------------------------------------------------------
Net $ 188,082 $ 173,564
==============================================================================
- ------------------------------------------------------------------------------
6. Intangibles
The following summarizes intangible assets, net of accumulated amortization of
$2,360,000 and $250,000 at December 31, 1997 and 1996, respectively:
December 31
--------------------
(Thousands) 1997 1996
- ------------------------------------------------------------------------------
Goodwill $77,122 $68,663
Other 3,849 3,995
- ------------------------------------------------------------------------------
Total $80,971 $72,658
==============================================================================
- ------------------------------------------------------------------------------
7. Long-Term
Debt
December 31
--------------------
(Thousands) 1997 1996
- ------------------------------------------------------------------------------
United States credit facilities $55,100 $50,000
Term loan 9,789 10,220
Pollution control debt and Industrial revenue bonds 8,342 5,569
German credit facility -- 3,862
Other 8,683 637
- ------------------------------------------------------------------------------
Total $81,914 $70,288
Less current maturities of long-term debt (9,617) (4,451)
- ------------------------------------------------------------------------------
Net $72,297 $65,837
==============================================================================
United States Credit Facilities
The United States credit facilities, which total $100 million, are comprised of
a five-year unsecured $50-million, multi-bank credit facility expiring March
2002 and two 364-day unsecured credit lines totaling $50 million expiring April
and May 1998. Annual facility fees are paid on each of the lines. Availability
under these credit facilities at
29
December 31, 1997 was $44.9 million. Interest rates are based upon the bank's
prime rate with other interest rate options available. The weighted average
interest rate on the loans outstanding was 6.0%.
Term Loan
In June 1996, the Company entered into a five-year unsecured $9,789,000 (14
million Canadian dollars) term loan with a Canadian bank. Interest rates are
based upon the bank's Prime Rate or a Bankers Acceptance Rate. As of December
31, 1997, the interest rate was 5.1%.
Pollution Control Debt and Industrial Revenue Bonds
The City of Ashland, Kentucky Floating Rate Pollution Control Revenue bonds
totaling $5.1 million bear interest at a defined floating rate and are due
October 1, 2006. As of December 31, 1997, the interest rate was 4.4%. These
pollution control bonds are secured by certain pollution control assets located
at the Company's Big Sandy, Kentucky plant.
In June 1997, the Company obtained $3.0 million of tax-exempt Industrial
Revenue Bonds to finance certain equipment acquisitions at the Company's Pearl
River, Mississippi plant. The bonds bear interest at a floating rate and mature
in May 2009. The interest rate as of December 31, 1997 was 4.4%.
The German pollution control loans consist of two loans, due in 1998 through
2000 and have fixed interest rates of up to 6.5%.
German Credit Facility
The Company maintains a bank credit facility in Germany which provides for
borrowings up to $14 million (25 million deutsche mark). The facility has no set
maturity date and is made available on an "until further notice" basis. No
commitment fee is required on the unused portion of the credit line. Loans bear
interest at the German Bank Rate with other interest options available.
Other
Other consists of foreign borrowings at various interest rates of up to 10.3%
and maturities through 2007. The weighted average interest rate was 2.9% at
December 31, 1997.
Restrictive Covenants
The United States credit facilities' covenants impose financial restrictions on
the Company, including maintaining certain ratios of debt to capital and
operating income to interest expense. At December 31, 1997, the Company was in
compliance with all financial covenants relating to the credit facilities in the
United States.
The German credit facility and the term loan have no financial covenants.
Fair Value of Long-Term Debt
Substantially all long-term debt is based on rates that float with prime rates
and the carrying value approximates fair value.
Maturities of Debt
The Company is obligated to make principal payments on debt outstanding at
December 31, 1997 of $9,617,000 in 1998, $903,000 in 1999, $788,000 in 2000,
$10,535,000 in 2001 and $50,826,000 in 2002.
- -------------------------------------------------------------------------------
8. Lease
Commitments
The Company has entered into leases covering principally office, research and
warehouse space, office equipment and vehicles.
Future minimum rental payments required under all operating leases that have
remaining noncancelable lease terms in excess of one year are $7,166,000 in
1998, $6,219,000 in 1999, $4,999,000 in 2000, $4,219,000 in 2001, $3,840,000 in
2002 and $13,601,000 thereafter.
Total rental expenses on all operating leases were $7,195,000, $7,136,000 and
$6,829,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
- -------------------------------------------------------------------------------
9. Shareholders'
Equity
On July 13, 1993, the Board of Directors authorized the Company to purchase up
to two million shares, or approximately 5% of its common stock. Purchases have
been made from time to time and the repurchased shares are held as treasury
stock. No shares were purchased during 1997. During 1996, 755,200 shares were
purchased at a cost of $7,738,000. As of December 31, 1997, the Company had
purchased 1,761,300 shares of its common stock at an aggregate cost of
$20,066,000.
30
The Board of Directors adopted a Stockholder Rights Plan in January 1995
designed to guard against (1) coercive and abusive tactics that might be used in
an attempt to gain control of the Company without paying all stockholders a fair
price for their shares or (2) the accumulation of a substantial block of stock
without Board approval. The Rights Plan will not prevent takeovers, but is
designed to encourage anyone attempting to acquire the Company to first
negotiate with the Board. The Plan awards one Right for each outstanding share
of common stock held by stockholders of record on February 14, 1995 and
thereafter. Each right entitles the holder to purchase from the Company one one-
hundredth of a share of Calgon Carbon common stock at a purchase price of $50
per share. The Rights will be exercisable only if a person or group acquires
beneficial ownership of 20% or more of the Company's outstanding common stock.
If one of those events occurs, each stockholder (with the exception of the
person or group who owns 20% or more of the outstanding stock) can exchange the
rights for shares with a market value equal to the then-current exercise price
or three shares, whichever has the greater value.
- -------------------------------------------------------------------------------
10. Stock
Compensation
Plans
At December 31, 1997, the Company has two stock-based compensation plans that
are described below.
Fixed Stock Option Plan
The Company has an Employee Stock Option Plan for officers and other key
employees of the Company. Stock options may be "nonstatutory," with a purchase
price not less than 80% of fair market value on the date of the grant, or
"incentive" with a purchase price of not less than 100% of the fair market value
on that date. Stock appreciation rights may be granted at date of option grant
or at any later date during the term of the option.
"Incentive" stock options granted since 1986 become exercisable no less than
six months after the date of grant primarily in five equal annual installments
and are no longer exercisable after the expiration of eight years from the date
of grant.
A summary of the Plan activity for the years ended December 31, 1997, 1996
and 1995 is presented below:
1997 1996 1995
------------------------ -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 764,000 $11.45 767,000 $ 11.36 62,000 $20.24
Granted 60,000 13.69 68,000 12.06 755,000 10.57
Exercised (68,000) 11.27 (11,000) 10.50 -- --
Canceled (49,500) 18.13 (60,000) 11.05 (50,000) 10.50
Outstanding at end of year 706,500 11.19 764,000 11.45 767,000 11.36
Options exercisable at year end 251,600 185,500 43,600
Weighted-average fair value of
options granted during the year $2.49 $ 3.41 $ 3.42
===================================================================================================================================
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12-31-97 Contractual Life Exercise Price at 12-31-97 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
$10.50 to $21.88 706,500 5.2 Years $ 11.19 251,600 $ 11.29
===================================================================================================================================
31
Performance Based Stock Option Plan
The Company also has a Non-Employee Directors' Stock Option Plan for outside
directors. The aggregate number of shares that may be issued under the plan is
100,000. If the Company's "Income From Operations" in the applicable fiscal year
is greater than the "Income From Operations" of the previous year, options
granted in the current year vest. These stock options are no longer exercisable
after expiration of ten years from the date of grant.
A summary of the Plan activity for the years ended December 31, 1997, 1996
and 1995 is presented below:
1997 1996 1995
------------------------ -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 16,100 $15.50 8,000 $ 15.50 6,500 $15.50
Granted 8,400 15.50 8,100 15.50 8,000 15.50
Canceled (1,300) 15.50 -- -- (6,500) 15.50
Outstanding at end of year 23,200 15.50 16,100 15.50 8,000 15.50
Options exercisable at year end 14,800 8,000 --
Weighted-average fair value of
options granted during the year $2.25 $ 2.82 $ 2.86
===================================================================================================================================
No options were vested for 1997.
The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Exercise Price at 12-31-97 Contractual Life Exercise Price at 12-31-97 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
$15.50 23,200 6.1 Years $ 15.50 14,800 $ 15.50
===================================================================================================================================
The Company applies Accounting Principles Board Opinion 25 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
reduced to the pro forma amounts indicated below:
Year Ended December 31
--------------------------------
(Dollars in thousands except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Net income As reported $21,578 $21,638 $21,345
Pro forma $21,311 $21,317 $21,084
Net income per common share
(basic and diluted) As reported $ .54 $ .54 $ .53
Pro forma $ .54 $ .53 $ .52
========================================================================================================
32
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
1997 1996 1995
- --------------------------------------------------------------------------------
Dividend yield 2.98% 2.67% 2.67%
Risk-free interest rates 6.13%-6.81% 5.10%-6.60% 6.10%-6.80%
Expected volatility 23%-27% 29%-32% 35%
Expected lives of options 3-5 years 5 years 3-5 years
- --------------------------------------------------------------------------------
11. Employee
Growth
Sharing Plan
Under the Plan, an employee growth sharing plan pool is calculated as a
percentage of the increase in year-to-year pre-tax income. All full-time
employees not included in any other incentive compensation plan of the Company
are eligible. This plan pool may be adjusted by the Board of Directors at its
sole discretion in any plan year in order to reflect any material events that
would impact the calculation in either a positive or negative manner. No awards
were made under the plan for 1997. The pools for distribution for the years
ended December 31, 1996 and December 31, 1995 were $143,000 and $1,009,000,
respectively.
- --------------------------------------------------------------------------------
12. Pensions
The Company has three non-contributory defined benefit pension plans for its
U.S. employees which provide benefits based upon the greater of a fixed rate per
month or a percentage of average compensation. Prior service and compensation of
employees formerly covered by pension plans of the previous owners of the
Company's operations are considered in the determination of benefits payable
under Company plans. By agreement with previous owners, benefits payable under
Company plans are reduced by the benefit amounts attributable to the previous
owners which are computed utilizing a 2.5% compensation increase assumption.
Domestic plan assets are invested primarily in commingled equity and bond
trust funds administered by a bank. Prior service cost for all plans is
amortized on a straight-line basis over the remaining average service period of
employees expected to receive benefits under the plans. For U.S. plans, net
pension costs, amounts recognized in the balance sheet and significant
assumptions are as follows:
Year Ended December 31
--------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 2,192 $ 1,939 $ 1,332
Interest cost on projected benefit obligation 2,821 2,442 1,822
Net amortization 239 242 222
- -------------------------------------------------------------------------------------------------------
5,252 4,623 3,376
- -------------------------------------------------------------------------------------------------------
Return on plan assets:
Actual (return) (7,115) (4,291) (5,126)
Amount deferred 4,462 2,049 3,688
- -------------------------------------------------------------------------------------------------------
Recognized return on plan assets (2,653) (2,242) (1,438)
- -------------------------------------------------------------------------------------------------------
Net pension cost for the period $ 2,599 $ 2,381 $ 1,938
=======================================================================================================
Discount rate 7.75% 7.25% 8.25%
Long-term rate of return on assets 9.00% 9.00% 8.50%
- -------------------------------------------------------------------------------------------------------
33
December 31
-----------------------------
(Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation
Vested benefits $ 20,397 $ 14,422
Nonvested benefits 4,593 3,832
- -------------------------------------------------------------------------------------------------------
Accumulated benefit obligations $ 24,990 $18,254
=======================================================================================================
Projected benefit obligation $ 43,258 $ 32,584
Plan assets at fair value (37,112) (29,271)
- -------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets $ 6,146 $ 3,313
Unrecognized net (loss) gain from past experience
different from assumed (262) 1,462
Prior service cost not yet recognized in net periodic pension cost (2,719) (2,958)
- -------------------------------------------------------------------------------------------------------
Pension liability included in the balance sheet $ 3,165 $ 1,817
=======================================================================================================
Discount rate 7.25% 7.75%
Rate of increase in compensation levels 4.00% 4.00%
- -------------------------------------------------------------------------------------------------------
There are several defined benefit plans covering certain employees of Chemviron
Carbon GmbH for which the obligations are accrued but not funded in accordance
with local practice. Benefits under these plans are generally based on a
percentage of average compensation.
The European employees in the branches and United Kingdom subsidiary
participate in certain contributory defined benefit pension plans which
guarantee a pension over the state pension level. These plans are funded by
employee contributions calculated as a percentage of their compensation with the
balance of the plan funding provided by Company contributions. Funds are managed
by an insurance company under a deposit administration contract. Benefits under
these plans are generally based upon a percentage of final earnings subject to
an upper earnings limit.
For European plans, net pension costs, amounts recognized in the balance sheet
and significant assumptions are as follows:
Year Ended December 31
--------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 621 $ 639 $ 678
Interest cost on projected benefit obligation 895 905 937
Net amortization 10 -- 36
- -------------------------------------------------------------------------------------------------------
1,526 1,544 1,651
- -------------------------------------------------------------------------------------------------------
Return on plan assets:
Actual (return) (562) (321) (282)
Amount deferred 224 3 (33)
- -------------------------------------------------------------------------------------------------------
Recognized return on plan assets (338) (318) (315)
- -------------------------------------------------------------------------------------------------------
Net pension cost for the period $ 1,188 $ 1,226 $ 1,336
- -------------------------------------------------------------------------------------------------------
Discount rate 6.5-7.8% 7.0-7.8% 7.5-9.0%
Long-term rate of return on assets 6.5-8.3% 7.0-7.8% 7.0-7.8%
- -------------------------------------------------------------------------------------------------------
34
In addition to the above pension cost for the year ended December 31, 1995,
the Company recognized $268,000 for pension curtailment gains associated with
employee terminations in Germany related to the Brilon-Wald plant shut down in
1995.
December 31
-----------------------------
(Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation
Vested benefits $10,385 $ 9,902
Nonvested benefits 493 397
- -------------------------------------------------------------------------------------------------------
Accumulated benefit obligations $10,878 $10,299
=======================================================================================================
Projected benefit obligation $13,789 $13,698
Plan assets at fair value (5,548) (4,842)
- -------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets $ 8,241 $ 8,856
Unrecognized net (loss) gain from past
experience different from assumed (25) 214
Unrecognized net transition obligation,
net of amortization (575) (694)
- -------------------------------------------------------------------------------------------------------
Pension liability included in the balance sheet $ 7,641 $ 8,376
=======================================================================================================
Discount rate 6.0-6.5% 6.5-7.8%
Rate of increase in compensation levels 3.0-4.0% 4.0-5.0%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
13. Provision for
Income Taxes
The components of the provision for income taxes were as follows:
Year Ended December 31
--------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Current
Federal $ 5,773 $ 8,376 $ 3,004
State and local 972 442 (58)
Foreign 1,824 2,252 54
- -------------------------------------------------------------------------------------------------------
8,569 11,070 3,000
- -------------------------------------------------------------------------------------------------------
Deferred
Federal 818 445 6,880
State and local 175 (972) (948)
Foreign 2,154 1,628 1,977
- -------------------------------------------------------------------------------------------------------
3,147 1,101 7,909
- -------------------------------------------------------------------------------------------------------
Provision for income taxes $11,716 $12,171 $10,909
=======================================================================================================
35
Income before income taxes for 1997, 1996 and 1995 includes $9,532,000,
$9,559,000 and $7,846,000, respectively, generated by operations outside the
United States.
The difference between the U.S. federal statutory tax rate and the Company's
effective income tax rate is as follows:
Year Ended December 31
-----------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 2.2 (1.0) (2.0)
Higher tax (benefit) rate on foreign income (loss) (.9) 2.4 3.9
Other--net (1.0) (.4) (3.1)
- ------------------------------------------------------------------------------------------
Effective income tax rate 35.3% 36.0% 33.8%
==========================================================================================
The Company has the following operating loss and tax credit carryforwards
as of December 31, 1997 (in thousands):
Type Amount Expiration Date
- -------------------------------------------------------------------------------
Operating loss carryforwards--foreign $25,755 None
Operating loss carryforwards--foreign $ 343 2002-2004
Tax credit carryforwards $ 584 1998-2007
===============================================================================
The Company's U.S. income tax returns have been examined by the Internal Revenue
Service through 1993. Management believes that adequate provisions for taxes
have been made through December 31, 1997.
The components of deferred taxes are comprised of the following:
Year Ended December 31
---------------------------
(Thousands) 1997 1996
- -------------------------------------------------------------------------------
Deferred tax assets
Foreign tax loss and credit carryforwards $11,520 $13,979
U.S. tax benefits on deferred foreign income 1,134 2,252
Accruals 6,795 7,089
Intangibles -- 1,156
Pensions 951 1,513
Organization costs 664 663
Other 203 106
- -------------------------------------------------------------------------------
Total deferred tax assets $21,267 $26,758
===============================================================================
Deferred tax liabilities
Property, plant and equipment $37,060 $37,560
U.S. liability on German deferred tax assets 7,438 9,348
Cumulative translation adjustment 4,249 6,649
Inventories 1,061 1,761
Intangibles 472 --
Other 1,024 295
- -------------------------------------------------------------------------------
Total deferred tax liabilities $51,304 $55,613
===============================================================================
36
- -------------------------------------------------------------------------------
14. Other
Information
Repair and maintenance expenses were $19,778,000, $19,695,000 and $19,330,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Other (expense)--net includes net foreign currency transaction losses of
($238,000) and ($358,000) for the years ended December 31, 1997 and 1995,
respectively, and gains of $1,002,000 for the year ended December 31, 1996. Also
included are taxes other than on income of ($691,000), ($1,152,000) and
($1,162,000) for the years ended December 31, 1997, 1996 and 1995, respectively.
Deferred taxes included in the translation adjustments for 1997, 1996 and
1995 were ($2,449,000), ($1,309,000) and $1,093,000, respectively.
- -------------------------------------------------------------------------------
15. Supplemental
Cash Flow
Information
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Cash paid during the year for
Interest $ 3,768 $ 768 $ 918
Income taxes (net of refunds) $ 9,267 $ 5,290 $ 802
- ------------------------------------------------------------------------------
Bank debt
Borrowings $ 19,584 $ 79,660 $ 38,300
Repayments (14,382) (23,589) (34,301)
- ------------------------------------------------------------------------------
Net proceeds from borrowings $ 5,202 $ 56,071 $ 3,999
===============================================================================
- -------------------------------------------------------------------------------
16. Geographic
Information
Net sales by the Company's operations in certain geographic areas, transfers
between geographic areas and income from operations for 1997, 1996 and 1995 and
identifiable assets, at the end of each year, classified by major geographic
areas in which the Company operates, were as follows:
(Thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
Sales to unaffiliated customers
U.S. $227,230 $192,817 $182,414
Europe 100,270 97,379 109,484
- ----------------------------------------------------------------------------------
$327,500 $290,196 $291,898
==================================================================================
Transfers between areas
U.S. $ 12,867 $ 11,231 $ 9,340
Europe 8,225 10,394 6,958
- ----------------------------------------------------------------------------------
$ 21,092 $ 21,625 $ 16,298
==================================================================================
Income from operations
U.S. $ 32,170 $ 29,709 $ 27,714
Europe 7,979 6,024 7,011
Eliminations (1,788) (1,981) (1,284)
- ----------------------------------------------------------------------------------
$ 38,361 $ 33,752 $ 33,441
==================================================================================
Identifiable assets, end of year
U.S. $331,668 $294,368 $229,740
Europe 93,275 104,587 109,234
Eliminations (1,486) (1,704) (973)
- ----------------------------------------------------------------------------------
$423,457 $397,251 $338,001
==================================================================================
Transfers between geographic areas are at prices in excess of cost and the
resultant income is assigned to the geographic area of manufacture. Interarea
income remaining in inventories is eliminated in consolidation.
37
17. Litigation
The Company is a party to an action, Powell Duffryn Terminals, Inc. et al. v.
Calgon Carbon Corporation and Rayonier, Inc. CV 497-080 (U.S.D.C. S.D. Ga.),
filed in April 1997, by Powell Duffryn Terminals, Inc. ("Powell Duffryn") and
sixteen of its insurance carriers. Plaintiffs seek indemnity, contribution and
damages as a result of a fire and explosion that occurred on April 10, 1995 at
Powell Duffryn's Savannah, Georgia chemical storage facility. Plaintiffs seek to
recover all or part of an amount in excess of $57 million paid to resolve claims
by third parties and to remediate Powell Duffryn's property and adjoining lands
as a result of the fire and approximately $5.5 million allegedly paid by Powell
Duffryn's first-party insurer Industrial Risk Insurers ("IRI") for Powell
Duffryn's property damage and business interruption claims.
Plaintiffs contend that the fire was caused as a result of an exothermic
reaction occurring in a Calgon Carbon Corporation VentSorb containing BPL
activated carbon that Powell Duffryn had connected to three tanks containing
flammable Crude Sulfate Turpentine ("CST") in order to control odors. Plaintiffs
contend that the Company failed to warn of the potential for a fire from the use
of VentSorbs containing activated carbon. Plaintiffs also seek to hold the
Company liable for alleged negligent misrepresentation or negligent
dissemination of business information.
The Company denies Plaintiffs' allegations. The Company intends to defend
this matter vigorously. The Company is not able to predict at this time the
likelihood of, or range of, any adverse outcome or the amount of damages which
may be awarded against the Company.
On August 26, 1997, Plaintiffs' counsel made a demand for damages under
O.C.G.A. (S) 51-12-14 for $35 million which encompassed all claims raised by
Plaintiffs in the action. The Company rejected this demand.
The Company has $40 million in excess third-party insurance coverage. The
Company and its insurers are currently discussing whether certain "pollution"
exclusion clauses in the Company's policies are applicable to all of the claims
raised by Plaintiffs. To date, the Company has been unable to ascertain specific
damages claimed for "pollution" related damages and "non-pollution" related
damages. The Company is also presently investigating whether it has a right of
recovery from other parties for any damages it may incur in the action brought
against it. At this time, the Company is not able to predict the likelihood of,
or range of, a favorable outcome with regard to any insurance coverage or other
claims which the Company may have in the event that it is found liable for
damages.
38
- -------------------------------------------------------------------------------
18. Basic and
Diluted
Net Income
Per Common
Share
Computation of basic and diluted net income per common share is performed as
follows:
For the Year Ended 1997 For the Year Ended 1996 For the Year Ended 1995
------------------------ ------------------------ ------------------------
Income Shares Income Shares Income Shares
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Net Income
Per Common Share
Income available to
common stockholders $21,578 39,696,008 $21,638 40,266,971 $21,345 40,418,860
Effect of Dilutive Securities
Options 88,911 71,616 62,447
Diluted Net Income
Per Common Share
Income available to common
stockholders plus
assumed conversion $21,578 39,784,919 $21,638 40,338,587 $21,345 40,481,307
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Net Income
Per Common Share $ .54 $ .54 $ .53
Diluted Net Income
Per Common Share $ .54 $ .54 $ .53
====================================================================================================================================
As of December 31, 1997, there were 729,700 options outstanding with exercise
prices ranging from $10.50 to $21.88 per share. The diluted earnings per share
calculation only included those with an exercise price range of between $10.50
and $13.13 depending on the average stock prices during the period. For the year
ended December 31, 1996, options outstanding of 780,100 had an exercise price
range from $10.50 to $23.13 per share. The diluted earnings per share
calculation included those with an exercise price range of between $10.50 and
$11.38. For the year ended December 31, 1995, there were 775,000 options
outstanding with an exercise price range of between $10.50 and $23.13 per share.
The diluted earnings per share calculation included those with an exercise price
range of between $10.50 and $11.38 per share.
- --------------------------------------------------------------------------------
Forward-Looking
Information Safe
Harbor
This Annual Report contains historical information and forward-looking
statements. Statements looking forward in time, including statements regarding
future growth and profitability, price increases, cost savings, broader product
lines, enhanced competitive posture and acquisitions, are included in this
Annual Report pursuant to the "safe harbor" provision 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 future periods to
be materially different from any future performance suggested herein. Further,
the Company operates in an industry sector where securities values may be
volatile and may be influenced by economic and other factors beyond the
Company's control. In the context of the forward-looking information provided in
this Annual Report, please refer to the discussions of risk factors detailed in,
as well as the other information contained in, this Annual Report and the
Company's filings with the Securities and Exchange Commission.
39
Six-Year Summary Selected Financial and Statistical Data
Year Ended December 31
------------------------------------------------------------------------
(Thousands except per share data) 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Net sales $327,500 $290,196 $291,898 $274,244 $269,424 $298,371
Income (loss) from operations $ 38,361 $ 33,752 $ 33,441 $(16,727) $ 33,015 $ 46,653
Interest expense $ 4,057 $ 752 $ 620 $ 752 $ 984 $ 1,347
Net income (loss) (a)(b) $ 21,578 $ 21,638 $ 21,345 $ (8,609) $ 19,153 $ 17,983
Percent of pre-tax income (loss) to sales 10.1% 11.7% 11.0% (6.8)% 11.4% 14.7%
Net income (loss) per common share--basic (a)(b) $ .54 $ .54 $ .53 $ (.21) $ .47 $ .44
Net income (loss) per common share--diluted (a)(b) $ .54 $ .54 $ .53 $ (.21) $ .46 $ .43
Dividends declared per common share $ .32 $ .32 $ .80 $ .16 $ .16 $ .16
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at year end):
Working capital $ 61,216 $ 68,670 $ 84,584 $ 83,279 $ 94,664 $ 74,659
Total assets $423,457 $397,251 $338,001 $343,484 $337,329 $334,518
Long-term debt $ 72,297 $ 65,837 $ 5,608 $ 6,401 $ 6,477 $ 6,797
Treasury stock, at cost $ 20,066 $ 20,066 $ 12,328 $ 12,328 $ 1,615 --
- ------------------------------------------------------------------------------------------------------------------------------------
Other Selected Data (at year end):
Return (loss) on average shareholders' equity 10% 10% 10% (4)% 8% 8%
Ratio of total debt to total capitalization 27% 24% 6% 4 % 4% 5%
Current ratio 174% 204% 233% 226 % 347% 266%
Effective tax rate 35.3% 36.0% 33.8% (53.7)% 37.8% 34.9%
Treasury stock 1,761 1,761 1,006 1,006 154 --
Shares outstanding 39,743 39,675 40,419 40,419 40,949 40,904
Book value per outstanding common share $ 5.59 $ 5.47 $ 5.40 $ 5.62 $ 6.03 $ 5.84
Market value of common stock $ 10.75 $ 12.25 $ 12.00 $ 10.00 $ 13.00 $ 17.63
Price earnings ratio of stock prices 19.9 22.7 22.6 -- 27.7 40.1
Capital expenditures $ 34,411 $ 14,358 $ 12,676 $ 7,113 $ 15,114 $ 24,046
Number of registered shareholders 866 984 1,102 1,306 1,470 1,503
Number of employees 1,341 1,297 1,097 1,267 1,320 1,480
- ------------------------------------------------------------------------------------------------------------------------------------
(a) After a charge in 1992 of $10.65 million or $.26 per share resulting from
the cumulative effect of a change in accounting principle for income taxes.
(b) After a charge in 1994 of $24.25 million or $.59 per share resulting from a
restructuring of operations.
Quarterly Financial Data--Unaudited
1997 1996
---------------------------------------------------- ----------------------------------------
(Thousands except per 1st 2nd 3rd 4th 1st 2nd 3rd 4th
share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $79,892 $88,803 $78,382 $80,423 $68,989 $74,945 $69,451 $76,811
Gross profit $30,873 $34,123 $30,618 $29,257 $25,760 $27,751 $26,239 $29,846
Net income $ 5,432 $ 7,250 $ 5,438 $ 3,458 $ 4,782 $ 6,085 $ 4,406 $ 6,365
===================================================================================================================================
Common Stock Data:
Net income per common
share (basic and diluted) $ .14 $ .18 $ .14 $ .09 $ .12 $ .15 $ .11 $ .16
===================================================================================================================================
Average common shares
outstanding 39,675 39,677 39,690 39,741 40,419 40,419 40,417 39,816
Common Shares and Market Information
Common shares are traded on the New York Stock Exchange under the trading symbol
CCC. There were 866 registered shareholders at year end.
Quarterly Common Stock Price Ranges and Dividends
1997 1996
---------------------------------- -------------------------------------
Fiscal Quarter High Low Dividend High Low Dividend
- --------------------------------------------------------------------------------------------------------------------------------
First 12 7/8 10 5/8 $.080 13 10 3/4 $.080
Second 14 1/4 10 7/8 $.080 14 5/8 11 1/2 $.080
Third 15 12 $.080 14 9 1/2 $.080
Fourth 13 7/16 10 1/2 $.080 12 1/2 9 3/4 $.080
- ---------------------------------------------------------------------------------------------------------------------------------
40