MANAGEMENT'S DISCUSSION AND ANALYSIS
Calgon Carbon Corporation
OVERVIEW
Industry
Although overall economic conditions in the United States continued to be strong
in 1998, demand for the Company's products for the purification, separation and
concentration of liquids and gases declined in most domestic market segments.
The European economy overall exhibited a pattern of continued moderate recovery
which was reflected in the demand for selected Company products. The
continuation of the Asian financial and economic crisis adversely affected sales
of both Activated Carbon products and Engineered Systems in that region.
In both the United States and in Europe, capacity utilization of activated
carbon declined due to reduced demand and increased imports, particularly from
the Far East. This caused increased pressure on activated carbon pricing
resulting in lower prices, both in the United States and in other regions.
The Company
In general, the Company's business reflected the economic patterns in the
industry. However, the Company's Activated Carbon business was adversely
affected by a number of additional factors. In 1997, the Company completed
several large municipal installations in Europe. These installations benefited
1997 sales, but as they were not repeated in 1998, the comparison of 1998 with
1997 suffered. Also, sales in the United States municipal market were weak both
because of unusually low seasonal usage, due to fewer severe taste and odor
problems, and non-repeat of initial fills. Decreased demand in certain
applications in the food market and in industrial environmental applications
produced additional negative variances.
Sales for the Activated Carbon segment decreased by 7.1% versus the prior
year. This decrease included volume losses of 5.9%, price decreases of .8% and
the negative effect of foreign currency rate changes versus the U.S. dollar of
.4%.
In the Engineered Systems segment, sales of the Company's Advanced Oxidation
Technologies (AOT) unit exhibited moderate growth due to new product
introductions in the municipal market, offsetting the decline in the traditional
remediation market. Revenues of the Company's Advanced Separation Technologies
(AST) unit were adversely affected by the Asian financial and economic downturn.
In addition, a considerable amount of resources were diverted from new business
to perform required warranty work on equipment units which experienced
performance and reliability problems. These units were in fabrication or shipped
prior to the Company's acquisition of AST. This warranty related effort included
activities that should result in the elimination of these problems on new units.
These actions included reorganization of personnel and manufacturing processes.
This effort is largely completed and sales are reviving with little or no loss
of customer acceptance. There were no effects from price or foreign exchange
changes in this segment.
Over the course of 1998, the Company took steps to increase emphasis on new
products and the enhancement of performance of businesses acquired in 1996.
Also, in the third quarter of 1998, the Company initiated a restructuring plan
to reduce costs and realign the organization structure. Once the plan is fully
implemented, the Company expects to reduce costs by approximately $10.0 million
on an annualized basis.
In February 1998, the Board of Directors approved $11.7 million for the
purchase and implementation of Enterprise Resource Planning (ERP) software and
new computer hardware that will run the Company's corporate-wide business system
from one computer center in Pittsburgh, Pennsylvania. The system, which has been
named "Maestro," began operation in the third quarter of 1998 and is scheduled
to be completed in mid-1999. The new system will address potential Year 2000
issues, enhance customer service and reduce costs by permitting more efficient
utilization of the Company's resources and will provide "real-time" data for
planning, management, financial analysis and reporting.
RESULTS OF OPERATIONS
1998 Versus 1997
Consolidated net sales in 1998 decreased by $26.5 million or 8.1% versus 1997.
This decrease was the combination of reduced sales in the Activated Carbon
segment of $21.2 million or 7.1% and underruns in the Engineered Systems segment
of $5.3 million or 18.9%. The overall sales decrease can primarily be attributed
to lower volume associated with both segments and the negative effect of foreign
exchange within the Activated Carbon segment. The unfavorable effect of foreign
exchange of $1.1 million is related to the strengthening of the U.S. dollar
versus the Belgian franc, German deutsche mark and Japanese yen and its
weakening versus the British pound sterling compared to 1997. The volume
decrease within the Activated Carbon segment can primarily be associated with
initial fills both in the United States (corn sweetener and municipal
categories) and in Japan (municipal) that occurred in 1997 but did not repeat in
1998. Carbon equipment sales declines, primarily in the cane sugar industry,
were also a contributing factor. The decline in the Engineered Systems segment
was primarily related to
13
decreases in the Advanced Separation Technologies area as the Company expended
resources to perform required warranty work on units in fabrication or shipped
prior to the Company's acquisition of this business. Overall, new product sales
(sales of products introduced within the past 5 years) were 12% in 1998,
virtually the same percentage as in 1997.
Gross profit before depreciation as a percentage of net sales was 37.5% in
1998 as compared to 38.1% in 1997. The decline in the Activated Carbon segment
was primarily the result of a less profitable mix of sales of carbon products.
In addition, relatively stable fixed manufacturing costs versus lower sales were
somewhat offset by lower variable manufacturing costs. An increase in the
Engineered Systems segment was primarily associated with improvements in the
Advanced Separation Technologies category due to improved project management and
cost control.
Depreciation and amortization increased by $1.2 million due to spending
associated with the Company's new business information system and normal ongoing
capital expenditures.
Selling, general and administrative expenses remained stable in 1998 versus
1997. This was the net effect of unusual expenses in 1998 related to
professional fees associated with recent litigations and the Chief Executive
Officer search, employment contract settlement fees related to the resignation
of the previous Chief Executive Officer and expenses related to training
associated with the new business information systems. These expenses were
partially offset by the beginnings of expected savings associated with the
recent restructuring and continued cost control procedures.
Research and development expenses also remained constant in 1998 versus 1997.
These expenses were 2.8% in 1998 versus 2.5% in 1997 based on the sales revenues
in the respective years. This increase was primarily due to reduced sales in
1998.
In the third quarter of 1998, the Company initiated a worldwide plan to reduce
costs and realign the organization structure. Costs associated with this
restructuring were $8.1 million and included employee severance and termination
benefit costs and asset write offs. This plan is expected to reduce costs by
approximately $10.0 million on an annualized basis when fully implemented. These
costs were partially offset by the reversal of the unused restructuring reserve
of $.7 million from the 1994 closing of the Brilon Wald, Germany plant.
Additional information on restructuring charges can be found in Note 3 to the
Consolidated Financial Statements.
Interest expense increased in 1998 by $.7 million due primarily to increased
debt.
The increase in other (expense) during 1998 versus 1997 was primarily due to
an increase in taxes, other than income taxes.
The effective tax rate in 1998 was 36.1% versus 35.3% in 1997. The increase
was due to decreased benefits associated with foreign income, primarily related
to exchange rates, mitigated by overall foreign tax losses.
1997 Versus 1996
Consolidated net sales in 1997 increased by $37.3 million or 12.9% versus 1996.
This increase was the result of increases in both the Activated Carbon and
Engineered Systems segments of $16.1 million or 5.7% and $21.2 million,
respectively. The overall increase can be primarily associated with the 1996
acquisition program but also included worldwide volume and price increases.
These increases were partially offset by the net negative effect of foreign
exchange, in the amount of $9.3 million, due to strengthening of the U.S. dollar
versus the Belgian franc and German deutsche mark and its weakening against the
British pound sterling. The increases associated with the Activated Carbon
segment were related to gains in the U.S. home water filter and personnel
protection areas and improvements in the worldwide municipal category. The
increase in the Engineered Systems segment was related to the 1996 acquisition
of the Advanced Separation Technologies business.
Gross profit before depreciation as a percentage of net sales was 38.1% in
1997 compared to 37.4% in 1996. This improvement was the result of Activated
Carbon segment sales increases for higher margin products and reduced natural
gas prices at its manufacturing facilities and improved margins for the
Company's Advanced Oxidation Technologies category, which was all of the
Engineered Systems segment in 1996.
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.
14
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.
YEAR 2000
The Company has continued to address the Year 2000 issues related to both
information technology and non-information technology aspects. The following
discussion is a description of activities, results and expectations on each of
these fronts.
General Comments
A task force was established in 1997 to identify all potential areas of material
risk and to make required modifications as they relate to business computer
systems, technical infrastructure, end user computing, suppliers, customers and
manufacturing systems.
All key suppliers of material, services and equipment have been surveyed
regarding their Year 2000 compliance and their responses are being analyzed.
Sixty percent of the surveys have been returned and of those, 89% indicate that
they are now compliant.
Further, all purchase orders for new software and/or hardware include a
statement, that by acceptance of the purchase order, the vendor is certifying
compliance.
Business contingency plans are being developed for all locations to mitigate
risks associated with potential loss of utilities, wide-area networks, etc.
These plans will be finalized by the third quarter of 1999.
Information Technology
To ensure Year 2000 compliance, the Company is engaged in a program to modernize
and replace its computerized production control and management information
systems with SAP. SAP is an enterprise-wide business system that was installed
to replace the previous legacy system. Although Year 2000 compliance is not the
primary purpose of the program, the new system is scheduled to be in place, in
the U.S. and Europe, by the second quarter of 1999 and is expected to be Year
2000 ready. The installation of SAP at a majority of locations was completed as
of October 1, 1998, and the system is currently performing as expected. The two
remaining locations will begin to use SAP in the second quarter of 1999. Final
testing of SAP's Year 2000 compliance is scheduled to occur between now and
April 1, 1999.
Included in the above activity is the replacement of the existing human
resource system. This task is expected to be completed during the second quarter
of 1999. No known supplier issues are involved.
Year 2000 compliance audit of the Company's personal computers and related
software is 71% complete. This audit is targeted to be completed during the
first quarter of 1999. Results thus far indicate that approximately 30% are non-
compliant. The majority of these non-compliant personal computers are scheduled
to come off lease in 1999 and will therefore be replaced via the Company's
existing lease program. The remainder will be remediated by June 30, 1999.
Other than expenditures discussed elsewhere in this report related to
replacement of its worldwide information systems, additional costs for Year 2000
compliance are not expected to be material to the operating results.
Non-Information Technology
The Company has established a task team to identify and resolve the millennium
date rollover issues in its manufacturing processes worldwide. This focus is on
process related technology and other devices with embedded microprocessors which
are used to control the manufacturing processes or operate security,
communication or building services. The initial phase of planning and awareness
was completed in early 1998. The inventory phase was completed during the second
quarter of 1998 for both the domestic and European manufacturing facilities. The
compliance status of all but 1-2% of devices has been determined. Approximately
95% of all devices are compliant. Most of the undefined devices are laboratory
instruments and none of the unknowns are classified as critical to sustaining
operations. Detailed definition and implementation of solutions is currently
under way and will be completed in the first half of 1999. Necessary corrective
actions have been determined for 50% of the non-complying devices. Live testing
of large manufacturing systems will begin in the first quarter of 1999 at the
Pearl River, Mississippi and Feluy, Belgium plants. The findings of these tests
will help determine the validity of the initial compliance assessment and what
other manufacturing facilities and equipment should be tested. These tests would
be conducted during scheduled plant outages in the second quarter of 1999. With
this plan, the manufacturing control systems are on track to be Year 2000 ready
in the third quarter of 1999.
Compliance of devices has largely been established initially on vendor issued
statements. A third party consultant was employed to assist in organizing the
records and the initial round of vendor compliance checks.
The costs to address the Company's Year 2000 issues in manufacturing have been
estimated in the range of $.5 to $.8 million. Costs through 1998 total about $.2
million.
15
These expense items include third party consultant fees and costs to upgrade or
replace non-compliant devices. None of the components of the estimate were
contemplated for reasons other than Year 2000 readiness.
The task team is making efforts to ensure that all devices will be Year 2000
ready, however, since the assessment process is still under way, it is not
possible to guarantee the results at this point. It is expected that all
manufacturing operations will be ready and operable. However, if a significant
uncertainty arises at any time, a plan will be developed in the third quarter of
1999 to focus efforts on those devices critical to operation of the production
process(es). Devices that are informational only or non-critical to operation
will then be deferred until the operability of the process(es) is ensured.
The Company anticipates that the most likely worst case Year 2000 scenario, if
one were to occur, would be the inability of third party suppliers such as
utility providers, telecommunication companies and other critical suppliers to
continue providing their products and services. This possible scenario could
pose the most significant threat to the operation of the Company's facilities
along with associated environmental and potential financial consequences. If
this would occur, new suppliers would be contacted immediately.
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
Positive cash flow provided by operating activities was $26.9 million for the
year ended December 31, 1998, primarily from net earnings before non-cash
charges of depreciation and amortization and restructuring write downs, which
were offset by increased investment in working capital.
The working capital increase was caused by increased inventory levels and
decreased payables and was partially offset by lower receivables. Inventories
increased $8.3 million to $57.8 million due to higher production output in
connection with manufacturing productivity and softer than expected sales
relative to production. The Company expects to reduce its inventory levels
through higher 1999 sales volumes and use of its new information systems to
better balance product output with expected sales activity. The Company's
restructuring reserve decreased $1.4 million due to the addition of the 1998
restructuring charge offset by cash outlays for employee severance costs and
benefits and the final disposition of the Brilon Wald, Germany property. The
balance in the reserve will be paid during the first half of 1999. Savings under
the 1998 restructuring plan due to staff reductions approximated $1.0 million in
the fourth quarter of 1998. When the Plan is fully implemented during 1999,
annualized savings are expected to be $10.0 million. Cash provided from
decreased accounts receivables was due to lower fourth quarter 1998 sales
compared with the same 1997 period. Additionally, days sales outstanding, a
measure of accounts receivable turnover into cash, improved to 69 days at
December 31, 1998 from 76 days at December 31, 1997. This reduction in average
collection period also contributed to lower accounts receivable at December 31,
1998. Currently maturing debt and short-term borrowings increased $12.5 million
to $22.1 million at December 31, 1998. The net impact of foreign currency
translation increased working capital by $1.6 million reflecting spot foreign
exchange rates at December 31 of 1998 and 1997.
Total debt at December 31, 1998 was $93.2 million, an increase of $11.3
million, primarily to support working capital changes. The Company's unused
credit availability at December 31, 1998 was $31.6 million under its two one-
year United States credit lines and 23.1 million German deutsche mark ($13.8
million) from its German credit facility. The Company expects to refinance or
renew its short-term bank lines prior to their maturity in 1999.
During 1998, the Board of Directors authorized an open market repurchase
program for up to 2,000,000 shares of the Company's common stock. The Company
acquired 1,000,200 shares at a cost of $6.9 million under this program through
year end.
The Company has paid quarterly cash dividends on its common stock since the
third quarter of 1987, the quarter succeeding the one in which the Company went
public. Dividend declaration and payout are at the discretion of the Board of
Directors. Future dividends will depend on the Company's operating results,
financial condition, cash requirements of its businesses, future prospects and
other factors considered relevant by the Board of Directors. During 1998, the
Company paid dividends at a rate of $.32 per share for a total amount of $12.7
million. At the February 2, 1999 Board meeting, the regular dividend of $.08 per
common share was declared and will be paid on April 1, 1999.
The Company expects that cash from operating activities plus cash balances and
available external financing will be sufficient to meet its requirements.
CAPITAL EXPENDITURES AND INVESTMENTS
Capital expenditures were $19.4 million in 1998, $34.5 million in 1997 and $14.4
million in 1996. The 1998 expenditure amount consists primarily of spending
associated with the new
16
business information system in the amount of $8.7 million, capacity expansion
and cost reduction related spending at the Big Sandy, Kentucky and Feluy,
Belgium plants of $3.7 million and $1.8 million, respectively, and domestic
service customer capital of $1.2 million. Included in the 1997 spending amount
were also 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 and Feluy, Belgium plants of $6.0 million and $1.2 million,
respectively, and for domestic service customer capital of $2.9 million. Capital
expenditures for 1999 are projected to be approximately $19.0 million and are to
include carbon production capacity increases for selected products both in the
United States and in Europe, domestic service customer capital and the remainder
of the costs associated with the new computer hardware and software to operate
the Company's corporate-wide business system.
The 1998 purchase of businesses amount represents the continuation of cash
expenditures for Advanced Separations Technologies Incorporated (a 1996
acquisition) project failures for projects completed before the acquisition (see
Note 2 to the Consolidated Financial Statements).
The 1997 purchase of businesses amount of $4.5 million includes an increase to
the purchase price for AST of $.5 million, cash expended for the aforementioned
AST project failures 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
Euro Dollar-based rates or 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 other than U.S.
dollars. The Company has made limited use of forward currency contracts to
manage these exposures. At December 31, 1998, no forward contracts were
outstanding. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No., 133, "Accounting for Derivative Instruments
and Hedging Activities" which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Changes in fair value of the recognized asset or
liability are recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. This pronouncement is required to be adopted in periods beginning after
June 15, 1999. Adoption of this statement would have no impact on the current
year financial statements or results; however, it could impact future periods if
derivative instruments are used to manage the risks of the Company.
17
REPORT OF MANAGEMENT
Calgon Carbon Corporation
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 PricewaterhouseCoopers 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 PRICEWATERHOUSECOOPERS 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, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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.
As explained in Note 1 to the Consolidated Financial Statements, the Company
has given retroactive effect to the change in accounting for its inventories
from the last-in, first-out method to the first-in, first-out method.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 9, 1999
18
CONSOLIDATED STATEMENT OF INCOME
Calgon Carbon Corporation
Year Ended December 31
-----------------------------------------
(Dollars in thousands except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Net Sales $301,040 $327,500 $290,196
- ----------------------------------------------------------------------------------------------------
Cost of products sold (excluding depreciation) 188,126 202,778 181,518
Depreciation and amortization 21,612 20,436 19,049
Selling, general and administrative expenses 56,076 56,211 50,277
Research and development expenses 8,437 8,331 6,518
Restructuring charges 7,349 1,532 --
- ----------------------------------------------------------------------------------------------------
281,600 289,288 257,362
- ----------------------------------------------------------------------------------------------------
Income from operations 19,440 38,212 32,834
Interest income 181 325 1,551
Interest expense (4,771) (4,057) (752)
Other (expense)--net (1,834) (1,440) (742)
- ----------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 13,016 33,040 32,891
Provision for income taxes 4,699 11,661 11,830
- ----------------------------------------------------------------------------------------------------
Income before minority interest 8,317 21,379 21,061
Minority interest (48) 105 --
- ----------------------------------------------------------------------------------------------------
Net income 8,269 21,484 21,061
Other comprehensive income (loss), net of tax (benefit)
of $1,017, ($2,400) and ($1,310), respectively 1,889 (4,458) (2,433)
- ----------------------------------------------------------------------------------------------------
Comprehensive Income $ 10,158 $ 17,026 $ 18,628
- ----------------------------------------------------------------------------------------------------
Net income per common share (basic and diluted) $ .21 $ .54 $ .52
- ----------------------------------------------------------------------------------------------------
Weighted average shares, in thousands 39,504 39,696 40,267
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
19
CONSOLIDATED BALANCE SHEET
Calgon Carbon Corporation
December 31
---------------------------
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,325 $ 7,982
Receivables 56,463 67,888
Inventories 57,816 49,560
Other current assets 14,236 14,161
- ------------------------------------------------------------------------------------------------
Total current assets 129,840 139,591
Property, plant and equipment, net 189,250 187,629
Intangibles 78,342 80,971
Other assets 9,562 10,849
- ------------------------------------------------------------------------------------------------
Total assets $406,994 $419,040
- ------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt due within one year $ 22,131 $ 9,617
Accounts payable and accrued liabilities 33,704 47,563
Restructuring reserve 4,909 6,282
Payroll and benefits payable 10,141 14,252
Accrued income taxes 933 4,625
- ------------------------------------------------------------------------------------------------
Total current liabilities 71,818 82,339
Long-term debt 71,101 72,297
Deferred income taxes 42,641 37,182
Other liabilities 9,826 6,463
- ------------------------------------------------------------------------------------------------
Total liabilities 195,386 198,281
- ------------------------------------------------------------------------------------------------
Minority interest 1,622 1,378
- ------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 16) -- --
- ------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, $.01 par value, 100,000,000 shares authorized,
41,503,960 shares issued 415 415
Additional paid-in capital 62,868 62,868
Retained earnings 163,911 168,275
Accumulated other comprehensive income 9,778 7,889
- ------------------------------------------------------------------------------------------------
236,972 239,447
Treasury stock, at cost, 2,761,500 and 1,761,300 shares (26,986) (20,066)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 209,986 219,381
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $406,994 $419,040
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
20
CONSOLIDATED STATEMENT OF CASH FLOWS
Calgon Carbon Corporation
Year Ended December 31
-------------------------------------------
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 8,269 $ 21,484 $ 21,061
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 21,612 20,436 19,334
Non-cash restructuring asset and liability write downs 434 -- --
Employee benefit plan provisions 423 488 523
Changes in assets and liabilities--net of effects from
purchase of businesses, exchange and non-cash
restructuring asset and liability write downs:
(Increase) decrease in receivables 12,595 (3,264) 3,957
(Increase) in inventories (7,248) (7,316) (363)
(Increase) decrease in other current assets (179) (2,215) 92
(Decrease) in restructuring reserve (1,053) (544) (3,006)
Increase (decrease) in accounts payable and accruals (14,315) 6,366 4,933
Increase in long-term deferred income taxes (net) 5,220 3,526 1,578
Other items--net 1,159 (1,421) (1,723)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,917 37,540 46,386
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of businesses (6,055) (4,546) (92,633)
Property, plant and equipment expenditures (19,375) (34,481) (14,375)
Proceeds from disposals of equipment 830 1,607 1,006
- ----------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (24,600) (37,420) (106,002)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from borrowings 11,183 5,202 56,071
Treasury stock purchases (6,920) -- (7,738)
Common stock dividends (12,708) (12,697) (12,733)
Other -- 767 116
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (8,445) (6,728) 35,716
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (529) (849) (750)
- ----------------------------------------------------------------------------------------------------------------
(Decrease) in cash and cash equivalents (6,657) (7,457) (24,650)
Cash and cash equivalents, beginning of period 7,982 15,439 40,089
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,325 $ 7,982 $ 15,439
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Calgon Carbon Corporation
Accumulated
Common Additional Other Treasury Stock
Shares Common Paid-In Retained Comprehensive ----------------------
(Dollars in thousands) Issued Shares Capital Earnings Income Sub-Total Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 41,424,960 $414 $61,986 $151,307 $14,780 $228,487 1,006,100 $(12,328) $216,159
1996
Net income -- -- -- 21,061 -- 21,061 -- -- 21,061
Employee stock plans 11,000 -- 116 -- -- 116 -- -- 116
Common stock dividends
Cash ($.32 per share) -- -- -- (12,875) -- (12,875) -- -- (12,875)
Translation adjustments -- -- -- -- (2,433) (2,433) -- -- (2,433)
Treasury stock purchased -- -- -- -- -- -- 755,200 (7,738) (7,738)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 41,435,960 414 62,102 159,493 12,347 234,356 1,761,300 (20,066) 214,290
- ------------------------------------------------------------------------------------------------------------------------------------
1997
Net income -- -- -- 21,484 -- 21,484 -- -- 21,484
Employee stock plans 68,000 1 766 -- -- 767 -- -- 767
Common stock dividends
Cash ($.32 per share) -- -- -- (12,702) -- (12,702) -- -- (12,702)
Translation adjustments -- -- -- -- (4,458) (4,458) -- -- (4,458)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 41,503,960 415 62,868 168,275 7,889 239,447 1,761,300 (20,066) 219,381
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Net income -- -- -- 8,269 -- 8,269 -- -- 8,269
Common stock dividends
Cash ($.32 per share) -- -- -- (12,633) -- (12,633) -- -- (12,633)
Translation adjustments -- -- -- -- 1,889 1,889 -- -- 1,889
Treasury stock purchased -- -- -- -- -- -- 1,000,200 (6,920) (6,920)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 41,503,960 $415 $62,868 $163,911 $ 9,778 $236,972 2,761,500 $(26,986) $209,986
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Calgon Carbon Corporation
1. STATEMENT OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Operations
The Company's operations are principally conducted in two business segments.
Both segments include the production, design and marketing of products and
services specifically developed for the purification, separation and
concentration of liquids and gases. One segment, Activated Carbon, relies on
activated carbon as a base material, while, the other, Engineered Systems,
relies on a variety of other methods and materials which do not involve
activated carbon. The Company's largest markets are in the United States, Europe
and Japan. The Company also markets in the Far East and Latin America.
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 represent other comprehensive income and 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 first-in, first-out (FIFO) method (see Change in
Accounting Method section below).
Change in Accounting Method
Effective with the third quarter of 1998, the Company changed its method of
valuing inventory from the last-in, first-out method (LIFO) to the first-in,
first-out (FIFO) method. For a number of years the Company experienced decreases
in the cost of materials used in its production processes. The decreasing cost
environment has resulted in valuation of inventory above current replacement
costs and, if such trends persist, could have led to lower-of-cost or market
adjustments in the future. As a result, the Company believes that the FIFO
method is preferable and will provide more useful information.
The change has been applied to prior periods by retroactively restating the
financial statements as required by generally accepted accounting principles.
The effect of this restatement was to reduce retained earnings as of January 1,
1996 by $2,028,000. The accounting change increased (decreased) net income by
$854,000 or $.02 per share for the six months ended June 30, 1998 (last reported
period before the change) and by ($94,000), with no impact on previously
reported earnings per share for the year ended December 31, 1997 and by
($577,000) or ($.02) per share for the year ended December 31, 1996.
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, ten years for
customer capital, seven to ten years for furniture and vehicles and seven years
for the capitalized portion of the recently implemented enterprise resource
planning system.
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).
23
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 has determined that no
impairment loss need be recognized.
Reclassification
Certain prior year amounts have been reclassified to conform with the 1998
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.
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 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 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.
Segments
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 supersedes SFAS 14, Financial
Reporting for Segments of a Business Enterprise, replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS 131 did not
affect results of operations or financial position but did affect the disclosure
of segment information (see Note 18 to the Consolidated Financial Statements).
Prior to this adoption, the Company reported one business segment.
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.
24
This business has assembly 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
located 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. These
products also exhibit electrical properties which make them useful in
applications other than those in which other forms of activated carbon are
utilized.
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 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 initial
cost was $71,262,000 in cash.
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 the sellers
represented to be substantially complete as of December 31, 1996. A significant
portion of these costs was 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 approximately $9,700,000
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. The
Company continues to believe that it has a reasonable basis for this claim and
intends to vigorously pursue reimbursement for damages sustained. Neither the
Company nor its counsel can predict with certainty the amount, if any, of
recovery that will be obtained from the defendants in this matter. The Company
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 year ended December 31, 1996
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). 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, 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.
25
3. Restructuring Charges
- --------------------------------------------------------------------------------
In the third quarter of 1998, the Company initiated a worldwide plan to reduce
costs and realign the organization structure. The implementation was begun in
September 1998 and is expected to be completed during the second quarter of
1999. With the exception of the asset write offs, these restructuring charges
required cash outlays. The number of planned employee separations for this
restructuring was 131. Separations through December 31, 1998 were 106.
During the fourth quarter of 1998, the Company essentially concluded its 1994
restructuring plan by transferring ownership of the Brilon Wald, Germany plant
to the local community. The plant was shut down in 1995. The transaction
provided that the Company contributed 9,000,000 deutsche mark (approximately
$5,300,000) to the community to be used for demolition and development costs.
These costs had been accrued by the Company through the initial restructuring
plan. An excess accrual in the amount of $744,000 resulted in a favorable
adjustment to 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. This
consolidation was completed during the first quarter of 1998.
The following table sets forth the Company's restructuring charges for the
years ended December 31, 1998 and 1997:
Year Ended December 31
----------------------
(Thousands) 1998 1997
- ----------------------------------------------------------------------------------------
Employee severance and termination benefit costs $6,303 $ 96
Asset write offs 1,178 1,201
Other costs 612 235
- ----------------------------------------------------------------------------------------
$8,093 $1,532
Excess Brilon Wald, Germany accrual (744) --
- ----------------------------------------------------------------------------------------
Total $7,349 $1,532
- ----------------------------------------------------------------------------------------
The restructuring reserve balances at December 31, 1998 and 1997 included:
December 31
---------------------
(Thousands) 1998 1997
- ---------------------------------------------------------------------------------------
1998 Plan
Employee severance and termination benefit costs $4,393 $ --
Other costs 407 --
- ---------------------------------------------------------------------------------------
$4,800 $ --
1994 Plan
Demolition, disposition and environmental costs associated
with the closing of the Brilon Wald, Germany plant 109 6,282
- ---------------------------------------------------------------------------------------
Total $4,909 $6,282
- ---------------------------------------------------------------------------------------
26
4. Inventories
- --------------------------------------------------------------------------------
December 31
-------------------------
(Thousands) 1998 1997
- -------------------------------------------------------------------------------------------
Raw materials $ 12,943 $ 11,524
Finished goods 44,873 38,036
- -------------------------------------------------------------------------------------------
Total $ 57,816 $ 49,560
- -------------------------------------------------------------------------------------------
5. Property, Plant and Equipment
- --------------------------------------------------------------------------------
December 31
-------------------------
(Thousands) 1998 1997
- -------------------------------------------------------------------------------------------
Land and improvements $ 13,524 $ 13,074
Buildings 22,767 22,324
Machinery and equipment 305,278 292,453
Furniture and vehicles 19,450 11,016
- -------------------------------------------------------------------------------------------
$ 361,019 $ 338,867
Less accumulated depreciation (171,769) (151,238)
- -------------------------------------------------------------------------------------------
Net $ 189,250 $ 187,629
- -------------------------------------------------------------------------------------------
6. Intangibles
- --------------------------------------------------------------------------------
The following summarizes intangible assets, net of accumulated amortization of
$4,341,000 and $2,360,000 at December 31, 1998 and 1997, respectively:
December 31
-------------------------
(Thousands) 1998 1997
- -------------------------------------------------------------------------------------------
Goodwill $ 74,638 $ 77,122
Other 3,704 3,849
- -------------------------------------------------------------------------------------------
Total $ 78,342 $ 80,971
- -------------------------------------------------------------------------------------------
7. Long-Term Debt
- --------------------------------------------------------------------------------
December 31
-------------------------
(Thousands) 1998 1997
- -------------------------------------------------------------------------------------------
United States credit facilities $ 68,400 $ 55,100
Term loan 9,044 9,789
Pollution control debt and Industrial revenue bonds 8,234 8,342
German credit facility 1,130 --
Other 6,424 8,683
- -------------------------------------------------------------------------------------------
Total $ 93,232 $ 81,914
Less current maturities of long-term debt (22,131) (9,617)
- -------------------------------------------------------------------------------------------
Net $ 71,101 $ 72,297
- -------------------------------------------------------------------------------------------
27
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 1999. The Company is currently renegotiating the terms of these lines.
Annual facility fees are paid on each of the lines. Availability under these
credit facilities at December 31, 1998 was $31.6 million. The interest rate is
based upon Euro Dollar-based rate with other interest rate options available.
The weighted average interest rate on the loans outstanding was 5.6% at December
31, 1998.
Term Loan
In June 1996, the Company entered into a five-year unsecured $9,044,000 (14
million Canadian dollars) term loan with a Canadian bank. The interest rate is
based upon either the bank's Prime Rate or a Bankers Acceptance Rate. As of
December 31, 1998, the interest rate was 5.6%.
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 floating rate and are due October 1,
2006. As of December 31, 1998, the interest rate was 4.3%. These pollution
control bonds are secured by certain pollution control assets located at the
Company's Big Sandy, Kentucky plant. The German pollution control loan matures
in 2000 and has a fixed interest rate of 6.0%.
The Mississippi Industrial Revenue Bonds totaling $3.0 million bear interest
at a floating rate and mature in May 2009. The interest rate as of December 31,
1998 was 4.2%. These Bonds were issued to finance certain equipment acquisitions
at the Company's Pearl River, Mississippi plant.
German Credit Facility
The Company maintains a bank credit facility in Germany which provides for
borrowings up to $14.9 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.
Availability under this credit facility at December 31, 1998 was $13.8 million
(23.1 million deutsche mark). The weighted average interest rate on the loans
outstanding at December 31, 1998 was 4.4%.
Other
Other consists of borrowings primarily from Japanese banks at various interest
rates ranging from 1.3% to 4.4% and maturities through 2007. The weighted
average interest rate on the loans outstanding was 3.2% at December 31, 1998.
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, 1998, the Company was in
compliance with all covenants relating to the credit facilities in the United
States. The German credit facility and the Canadian term loan have no financial
covenants.
Fair Value of Long-Term Debt
Substantially all long-term debt is based on rates that float with Euro Dollar-
based rates or prime rates and accordingly the carrying value of these
obligations approximate their fair value.
Maturities of Debt
The Company is obligated to make principal payments on debt outstanding at
December 31, 1998 of $22,131,000 in 1999, $914,000 in 2000, $9,913,000 in 2001,
$50,778,000 in 2002 and $626,000 in 2003.
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 $7,048,000 in
1999, $5,706,000 in 2000, $4,514,000 in 2001, $4,089,000 in 2002, $3,967,000 in
2003 and $11,327,000 thereafter.
Total rental expenses on all operating leases were $7,097,000, $7,195,000 and
$7,136,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
28
9. SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
On July 13, 1993, the Board of Directors authorized the Company to purchase up
to 2,000,000 shares, or approximately 5% of its common stock. This authorization
resulted in the purchase of 1,761,300 shares. On August 24, 1998, the Board of
Directors authorized the purchase of an additional 2,000,000 shares. In
conformance with those authorizations, purchases have been made from time to
time and the repurchased shares are held as treasury stock. During 1998,
1,000,200 shares were purchased at a cost of $6,920,000. No shares were
purchased during 1997. During 1996, 755,200 shares were purchased at a cost of
$7,738,000. As of December 31, 1998, the Company had purchased 2,761,500 shares
of its common stock at an aggregate cost of $26,986,000. At December 31, 1997,
the Company had purchased 1,761,300 shares at a cost of $20,066,000.
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. The Rights can be redeemed by
the Board of Directors under certain circumstances, in which case the Rights
will not be exchangeable for shares.
10. Stock Compensation Plans
- --------------------------------------------------------------------------------
At December 31, 1998, the Company had two stock-based compensation plans that
are described below.
Fixed Stock Option Plan
The Company had 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 to ten years from
the date of grant.
A summary of the Plan activity for the years ended December 31, 1998, 1997 and
1996 is presented below:
1998 1997 1996
------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 706,500 $11.19 764,000 $11.45 767,000 $11.36
Granted 60,000 11.75 60,000 13.69 68,000 12.06
Exercised -- -- (68,000) 11.27 (11,000) 10.50
Canceled (75,000) 12.39 (49,500) 18.13 (60,000) 11.05
Outstanding at end of year 691,500 11.11 706,500 11.19 764,000 11.45
Options exercisable at year end 365,100 251,600 185,500
Weighted-average fair value of options
granted during the year $3.32 $2.49 $3.41
- -------------------------------------------------------------------------------------------------------------------------------
29
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12-31-98 Contractual Life Exercise Price at 12-31-98 Exercise Price
- ---------------------------------------------------------------------------------------------------------
$10.50 to $17.88 691,500 4.8 Years $11.11 365,100 $10.95
- ---------------------------------------------------------------------------------------------------------
Non-Employee Directors' Stock Option Plan
The 1993 Non-Employee Directors' Stock Option Plan, as amended in 1997, provides
for an annual grant on the day following the Annual Meeting of Stockholders of
option shares equal to a number of shares which will result in a Black-Scholes
calculated value of $35,000 per Director on the date of grant. The options vest
and become exercisable six months after the date of grant and, in general,
expire ten years after the date of grant. The Board of Directors subsequently
decided not to implement the amended plan. As a result, there were no grants
made under the Non-Employee Directors' Stock Option Plan during 1998. During
1999, the Board of Directors decided to institute the 1993 Non-Employee
Directors' Stock Option Plan as amended. There are previously issued options
that are still outstanding.
A summary of the Plan activity for the years ended December 31, 1998, 1997 and
1996 is presented below:
1998 1997 1996
--------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 23,200 $15.50 16,100 $15.50 8,000 $15.50
Granted -- -- 8,400 15.50 8,100 15.50
Canceled (9,500) 15.50 (1,300) 15.50 -- --
Outstanding at end of year 13,700 15.50 23,200 15.50 16,100 15.50
Options exercisable at year end 13,700 14,800 8,000
Weighted-average fair value of options
granted during the year -- $2.25 $ 2.82
- ----------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Exercise Price at 12-31-98 Contractual Life Exercise Price at 12-31-98 Exercise Price
- ---------------------------------------------------------------------------------------------------------
$15.50 13,700 6.9 Years $15.50 13,700 $15.50
- ---------------------------------------------------------------------------------------------------------
30
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) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Net income As reported $8,269 $21,484 $21,061
Pro forma $8,042 $21,217 $20,740
Net income per common share
Basic As reported $ .21 $ .54 $ .52
Pro forma $ .20 $ .53 $ .52
Diluted As reported $ .21 $ .54 $ .52
Pro forma $ .20 $ .53 $ .51
- ----------------------------------------------------------------------------------------------
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:
1998 1997 1996
- --------------------------------------------------------------------------
Dividend yield 4.27% 2.98% 2.67%
Risk-free interest rates 5.80% 6.13%-6.81% 5.10%-6.60%
Expected volatility 32% 23%-27% 29%-32%
Expected lives of options 10 years 3-5 years 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 1998 or 1997. The pool for distribution for the
year ended December 31, 1996 was $143,000.
31
12. PENSIONS
- --------------------------------------------------------------------------------
The Company sponsors defined benefit plans covering substantially all employees.
For U.S. plans, the following tables provide a reconciliation of changes in the
plans' benefit obligations and fair value of assets over the two-year period
ending December 31, 1998 and a statement of the funded status as of December 31
of both years:
December 31
-------------------
(Thousands) 1998 1997
- --------------------------------------------------------------------------------
Reconciliation of benefit obligation
Benefit obligations at January 1 $43,258 $32,584
Service cost 2,529 2,192
Interest cost 3,148 2,821
Actuarial losses 1,747 6,186
Benefits paid (1,447) (525)
- --------------------------------------------------------------------------------
Benefit obligations at December 31 $49,235 $43,258
- --------------------------------------------------------------------------------
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $37,112 $29,271
Actual return on plan assets 8,113 7,115
Employer contributions 2,017 1,251
Benefits paid (1,447) (525)
- --------------------------------------------------------------------------------
Fair value of plan assets at December 31 $45,795 $37,112
- --------------------------------------------------------------------------------
Funded status of plans at December 31 $(3,440) $(6,146)
Unrecognized net actuarial (gains) losses (2,695) 262
Unrecognized prior service cost 2,480 2,719
- --------------------------------------------------------------------------------
Accrued pension cost at December 31 $(3,655) $(3,165)
- --------------------------------------------------------------------------------
For U.S. plans, the following table provides the components of net periodic
pension costs of the plans for the years ended December 31, 1998, 1997 and 1996:
Year Ended December 31
------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 2,529 $ 2,192 $ 1,939
Interest cost 3,148 2,821 2,442
Expected return on assets (3,409) (2,653) (2,242)
Prior service cost 239 239 239
Net amortization -- -- 3
- --------------------------------------------------------------------------------
Net periodic pension cost $ 2,507 $ 2,599 $ 2,381
- --------------------------------------------------------------------------------
32
For U.S. plans, the assumptions used in the measurement of the benefit
obligations are shown in the following table:
1998 1997
- --------------------------------------------------------------------------------
Weighted average actuarial assumptions at December 31:
Discount rate 6.75% 7.25%
Expected annual return on plan assets 9.00% 9.00%
Rate of increase in compensation levels 4.00% 4.00%
- --------------------------------------------------------------------------------
For European plans, the following tables provide a reconciliation of changes
in the plans' benefit obligations and fair value of assets over the two-year
period ending December 31, 1998 and a statement of the funded status as of
December 31 of both years:
December 31
-----------------------
(Thousands) 1998 1997
- --------------------------------------------------------------------------------
Reconciliation of benefit obligation
Benefit obligations at January 1 $ 13,789 $13,698
Service cost 774 698
Interest cost 873 895
Actuarial losses 2,950 423
Benefits paid (295) (318)
Foreign currency exchange rate changes 855 (1,607)
- --------------------------------------------------------------------------------
Benefit obligations at December 31 $ 18,946 $13,789
- --------------------------------------------------------------------------------
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ 5,548 $ 4,842
Actual return on plan assets 525 498
Employer contributions 1,169 811
Benefits paid (135) (174)
Foreign currency exchange rate changes 227 (429)
- --------------------------------------------------------------------------------
Fair value of plan assets at December 31 $ 7,334 $ 5,548
- --------------------------------------------------------------------------------
Funded status of plans at December 31 $(11,612) $(8,241)
Unrecognized net actuarial losses 3,502 429
Unrecognized prior service cost 159 171
- --------------------------------------------------------------------------------
Accrued pension cost at December 31 $ (7,951) $(7,641)
- --------------------------------------------------------------------------------
33
For European plans, the following table provides the components of net
periodic pension costs of the plans for the years ended December 31, 1998, 1997
and 1996:
Year Ended December 31
----------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 691 $ 621 $ 639
Interest cost 873 895 905
Expected return on assets (429) (338) (318)
Net amortization 14 10 --
- --------------------------------------------------------------------------------
Net periodic pension cost $ 1,149 $ 1,188 $ 1,226
- --------------------------------------------------------------------------------
For European plans, the assumptions used in the measurement of the benefit
obligations are shown in the following table:
1998 1997
- --------------------------------------------------------------------------------
Weighted average actuarial assumptions at December 31:
Discount rate 5.30% 6.20%
Expected annual return on plan assets 6.20% 7.30%
Rate of increase in compensation levels 3.50% 3.60%
- --------------------------------------------------------------------------------
The accumulated benefit obligation and fair value of plan assets for pension
plans with accumulated benefit obligations in excess of plan assets were
$10,776,000 and $3,854,000, respectively as of December 31, 1998 and $8,386,000
and $2,850,000, respectively, as of December 31, 1997.
13. Provision for Income Taxes
- --------------------------------------------------------------------------------
The components of the provision for income taxes were as follows:
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current
Federal $(2,802) $ 5,721 $ 8,055
State and local (327) 969 422
Foreign 2,526 1,824 2,252
- --------------------------------------------------------------------------------
(603) 8,514 10,729
- --------------------------------------------------------------------------------
Deferred
Federal 4,480 818 445
State and local 523 175 (972)
Foreign 299 2,154 1,628
- --------------------------------------------------------------------------------
5,302 3,147 1,101
- --------------------------------------------------------------------------------
Provision for income taxes $ 4,699 $11,661 $11,830
- --------------------------------------------------------------------------------
34
Income before income taxes for 1998, 1997 and 1996 includes $2,925,000,
$8,396,000 and $9,053,000, 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
----------------------
1998 1997 1996
- --------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 1.6 2.2 (1.0)
Higher tax (benefit) rate on foreign income (loss) 2.4 (.9) 2.4
Other--net (2.9) (1.0) (.4)
- --------------------------------------------------------------------------------
Effective income tax rate 36.1% 35.3% 36.0%
- --------------------------------------------------------------------------------
The Company has the following operating loss and tax credit carryforwards as of
December 31, 1998 (in thousands):
Type Amount Expiration Date
- --------------------------------------------------------------------------------
Operating loss carryforwards--foreign $24,306 None
Operating loss carryforwards--foreign $ 343 2002-2004
- --------------------------------------------------------------------------------
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, 1998.
The components of deferred taxes are comprised of the following:
December 31
-------------------
(Thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets
Foreign tax loss and credit carryforwards $10,028 $11,520
U.S. tax benefits on deferred foreign income 759 1,134
Accruals 2,972 6,795
Inventories 1,057 657
Pensions 2,281 951
Organization costs 664 664
Other 123 203
- --------------------------------------------------------------------------------
Total deferred tax assets $17,884 $21,924
- --------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment $36,502 $37,060
U.S. liability on German deferred tax assets 7,275 7,438
Cumulative translation adjustment 6,123 4,249
Inventories 408 --
Intangibles 1,623 472
Other 947 1,024
- --------------------------------------------------------------------------------
Total deferred tax liabilities $52,878 $50,243
- --------------------------------------------------------------------------------
35
14. OTHER INFORMATION
- --------------------------------------------------------------------------------
Repair and maintenance expenses were $21,855,000, $19,778,000 and $19,695,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Other (expense)--net includes net foreign currency transaction losses of
($147,000) and ($238,000) for the years ended December 31, 1998 and 1997,
respectively, and gains of $1,002,000 for the year ended December 31, 1996. Also
included are taxes other than on income of ($1,078,000), ($691,000) and
($1,152,000) for the years ended December 31, 1998, 1997 and 1996, respectively.
Deferred taxes included in the translation adjustments for 1998, 1997 and 1996
were $976,000, ($2,449,000) and ($1,309,000), respectively.
15. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Cash paid during the year for
Interest (net of $142 capitalized in 1998) $ 4,737 $ 3,768 $ 768
Income taxes (net of refunds) $ 7,576 $ 9,267 $ 5,290
- --------------------------------------------------------------------------------
Bank debt
Borrowings $ 29,259 $ 19,584 $ 79,660
Repayments (18,076) (14,382) (23,589)
- --------------------------------------------------------------------------------
Net proceeds from borrowings $ 11,183 $ 5,202 $ 56,071
- --------------------------------------------------------------------------------
16. 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(R) 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.
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.
On April 20, 1998, the United States District Court for the Southern District
of Georgia, Savannah Division, granted Calgon Carbon Corporation's Motion for
Summary Judgment and entered judgment for the Company against Plaintiffs.
On May 4, 1998, the District Court denied Plaintiff's Motion for
Reconsideration. Plaintiffs appealed the grant of the summary judgment and entry
of judgment to the United States Court of Appeals for the Eleventh Circuit.
On March 10, 1999, the United States Court of Appeals for the Eleventh Circuit
issued a PER CURIAM opinion affirming the decision of United States District
Court for the Southern District of Georgia, Savannah Division, which granted the
Company's motion for summary judgment and entered judgment for Company against
plaintiff. The plaintiffs have twenty-one (21) days to file a petition for
reconsideration of the decision of the U.S. Court of Appeals for the Eleventh
Circuit.
36
17. 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 For the Year For the Year
Ended 1998 Ended 1997 Ended 1996
-------------------------- -------------------------- --------------------------
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 $8,269 39,504,292 $21,484 39,696,008 $21,061 40,266,971
Effect of Dilutive Securities
Options 17,117 88,911 71,616
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Net Income Per Common Share
Income available to common stockholders
plus assumed conversion $8,269 39,521,409 $21,484 39,784,919 $21,061 40,338,587
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Net Income Per Common Share $ .21 $ .54 $ .52
Diluted Net Income Per Common Share $ .21 $ .54 $ .52
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998, there were 705,200 options outstanding with exercise
prices ranging from $10.50 to $17.88 per share. The diluted earnings per share
calculation included those with an exercise price range of between $10.50 and
$11.38 depending on the average stock prices during the period. For the year
ended December 31, 1997, options outstanding of 729,700 had an exercise price
range from $10.50 to $21.88 per share. The diluted earnings per share
calculation included those with an exercise price range of between $10.50 and
$13.13. For the year ended December 31, 1996, there were 780,100 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.
37
18. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
In 1998, the Company adopted SFAS No. 131. The prior years' segment information
have been restated to present the Company's two reportable segments: 1.
Activated Carbon and 2. Engineered Systems. Both segments produce, design and
market products and services specifically developed for the purification,
separation and concentration of liquids and gases and both sell to the same
markets. The Activated Carbon segment includes production facilities in
Pittsburgh, Pennsylvania (2 locations); Big Sandy, Kentucky; Pearl River,
Mississippi; Blue Lake, California; Feluy, Belgium; Grays, England; Houghton Le
Spring, England; Bodenfelde, Germany; and Fukui Prefecture, Japan. Office
facilities are located in Pittsburgh, Pennsylvania; Vero Beach, Florida and
Brussels, Belgium. The Engineered Systems segment has manufacturing and office
facilities in Lakeland, Florida and Markham, Ontario, Canada. The following
segment related information is presented for the years ended December 31, 1998,
1997 and 1996:
Year Ended December 31
----------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Net sales
Activated Carbon Segment
Carbon $153,584 $167,512 $163,302
Service 85,475 86,945 80,219
Carbon equipment 20,009 24,875 19,222
Charcoal and liquid 19,387 20,315 20,795
- --------------------------------------------------------------------------------------------------------
278,455 299,647 283,538
- --------------------------------------------------------------------------------------------------------
Engineered Systems Segment
Advanced Oxidation Technologies 8,051 7,631 6,658
Advanced Separation Technologies 14,534 20,222 --
- --------------------------------------------------------------------------------------------------------
22,585 27,853 6,658
- --------------------------------------------------------------------------------------------------------
Consolidated net sales $301,040 $327,500 $290,196
- --------------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Income (loss) from operations before
amortization and restructuring charges
Activated Carbon $ 29,412 $ 43,938 $ 33,604
Engineered Systems (225) (1,783) (472)
- --------------------------------------------------------------------------------------------------------
$ 29,187 $ 42,155 $ 33,132
Reconciling items
Restructuring charges (7,349) (1,532) --
Amortization of intangibles and organization costs (2,398) (2,411) (298)
Interest income 181 325 1,551
Interest expense (4,771) (4,057) (752)
Other expense--net (1,834) (1,440) (742)
- --------------------------------------------------------------------------------------------------------
Consolidated income before income taxes and minority interest $ 13,016 $ 33,040 $ 32,891
- --------------------------------------------------------------------------------------------------------
38
Year Ended December 31
-----------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Depreciation
Activated Carbon $ 18,351 $ 17,114 $ 18,734
Engineered Systems 863 911 315
- ----------------------------------------------------------------------------------------------------
$ 19,214 $ 18,025 $ 19,049
Amortization of intangibles and organization costs 2,398 2,411 --
- ----------------------------------------------------------------------------------------------------
Consolidated depreciation and amortization $ 21,612 $ 20,436 $ 19,049
- ----------------------------------------------------------------------------------------------------
December 31
-----------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Total assets
Activated Carbon $319,736 $323,677 $298,815
Engineered Systems 87,258 95,363 94,168
- ----------------------------------------------------------------------------------------------------
Consolidated total assets $406,994 $419 040 $392,983
- ----------------------------------------------------------------------------------------------------
Year Ended December 31
-----------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Property, plant and equipment expenditures
Activated Carbon $ 18,779 $ 33,650 $ 14,347
Engineered Systems 596 831 28
- ----------------------------------------------------------------------------------------------------
Consolidated property, plant and equipment expenditures $ 19,375 $ 34,481 $ 14,375
- ----------------------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
Year Ended December 31
-----------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Net sales
United States $162,481 $173,858 $165,671
Germany 29,192 30,800 31,315
United Kingdom 20,398 31,158 25,007
Japan 17,486 11,897 5,860
Other 71,483 79,787 62,343
- ----------------------------------------------------------------------------------------------------
Consolidated net sales $301,040 $327,500 $290,196
- ----------------------------------------------------------------------------------------------------
39
December 31
-----------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Long-lived assets
United States $214,570 $215,204 $198,314
Belgium 24,442 24,253 28,055
Germany 9,899 9,867 11,633
Canada 7,386 9,292 7,823
Japan 7,299 7,131 --
United Kingdom 6,354 4,673 4,104
France 151 166 214
- ----------------------------------------------------------------------------------------------------
$270,101 $270,586 $250,143
Deferred taxes 7,053 8,863 11,666
- ----------------------------------------------------------------------------------------------------
Consolidated long-lived assets $277,154 $279,449 $261,809
- ----------------------------------------------------------------------------------------------------
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.
40
SIX-YEAR SUMMARY SELECTED FINANCIAL AND STATISTICAL DATA
Year Ended December 31
------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Net sales $301,040 $327,500 $290,196 $291,898 $274,244 $269,424
Income (loss) from operations $ 19,440 $ 38,212 $ 32,834 $ 32,087 $(16,281) $ 33,118
Interest expense $ 4,771 $ 4,057 $ 752 $ 620 $ 752 $ 984
Net income (loss) (a)(b)(c) $ 8,269 $ 21,484 $ 21,061 $ 20,438 $ (8,319) $ 19,217
Percent of pre-tax income (loss) to sales 4.3% 10.1% 11.3% 10.6% (6.6)% 11.5%
Net income (loss) per common share--
basic (a)(b)(c) $ .21 $ .54 $ .52 $ .51 $ (.20) $ .47
Net income (loss) per common share--
diluted (a)(b)(c) $ .21 $ .54 $ .52 $ .50 $ (.20) $ .46
Dividends declared per common share $ .32 $ .32 $ .32 $ .80 $ .16 $ .16
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at year end):
Working capital $ 58,022 $ 57,252 $ 64,925 $ 81,774 $ 81,828 $ 92,847
Total assets $406,994 $419,040 $392,983 $334,651 $341,488 $334,887
Long-term debt $ 71,101 $ 72,297 $ 65,837 $ 5,608 $ 6,401 $ 6,477
Treasury stock, at cost $ 26,986 $ 20,066 $ 20,066 $ 12,328 $ 12,328 $ 1,615
- ------------------------------------------------------------------------------------------------------------------------------------
Other Selected Data (at year end):
Return (loss) on average
shareholders' equity 4% 10% 10% 9% (4)% 8%
Ratio of total debt to total capitalization 31% 27% 25% 6% 4% 4%
Current ratio 181% 170% 198% 229% 224% 343%
Effective tax rate 36.1% 35.3% 36.0% 33.9% (54.1)% 37.8%
Treasury stock, in thousands 2,762 1,761 1,761 1,006 1,006 154
Shares outstanding, in thousands 38,742 39,743 39,675 40,419 40,419 40,949
Book value per outstanding
common share $ 5.42 $ 5.52 $ 5.40 $ 5.35 $ 5.59 $ 6.00
Market value of common stock $ 7.50 $ 10.75 $ 12.25 $ 12.00 $ 10.00 $ 13.00
Price earnings ratio of stock prices 35.7 19.9 23.6 23.5 -- 27.7
Capital expenditures $ 19,375 $ 34,481 $ 14,375 $ 12,681 $ 7,193 $ 15,184
Number of registered shareholders 803 866 984 1,102 1,306 1,470
Number of employees 1,195 1,341 1,297 1,097 1,267 1,320
- ------------------------------------------------------------------------------------------------------------------------------------
(a) After a charge in 1994 of $24.25 million or $.59 per share resulting from a
restructuring of operations.
(b) After a charge in 1997 of $.95 million or $.03 per share resulting from a
restructuring of operations.
(c) After a charge in 1998 of $4.70 million or $.12 per share resulting from a
restructuring of operations.
41
QUARTERLY FINANCIAL DATA--UNAUDITED
1998 1997
------------------------------------------- --------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
(Thousands except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $69,508 $85,713 $72,636 $73,183 $79,892 $88,803 $78,382 $80,423
Gross profit $28,533 $32,026 $25,380 $26,975 $31,703 $34,021 $29,919 $29,079
Net income $ 3,569 $ 5,217 $(2,931) $ 2,414 $ 5,953 $ 7,186 $ 4,999 $ 3,346
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Data:
Net income per common share
(basic and diluted) $ .09 $ .13 $ (.07) $ .06 $ .15 $ .18 $ .13 $ .08
- ------------------------------------------------------------------------------------------------------------------------------------
Average common
shares outstanding 39,743 39,743 39,640 38,899 39,675 39,677 39,690 39,741
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES AND MARKET INFORMATION
Common shares are traded on the New York Stock Exchange under the trading symbol
CCC. There were 803 registered shareholders at year end.
Quarterly Common Stock Price Ranges and Dividends
1998 1997
----------------------------- -----------------------------
Fiscal Quarter High Low Dividend High Low Dividend
- -------------------------------------------------------------------------------------
First 13 7/8 9 13/16 $.080 12 7/8 10 5/8 $.080
Second 12 1/2 9 3/4 $.080 14 1/4 10 7/8 $.080
Third 11 1/4 5 7/8 $.080 15 12 $.080
Fourth 8 9/16 5 5/16 $.080 13 7/16 10 1/2 $.080
- -------------------------------------------------------------------------------------
42