10-K 1 ccc-20171231x10k.htm 10-K ccc_Current_Folio_10K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the fiscal year ended December 31, 2017

 

or

 

Transition Report Pursuant to Section 12 or 15(d) of the Securities Exchange Act of 1934.

 

For the transition period from              to              .

 

Commission file number 1-10776

 

Calgon Carbon Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

    

25-0530110

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3000 GSK Drive

 

 

Moon Township, Pennsylvania

 

15108

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (412) 787-6700

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

    

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.              Yes ☒ No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒

    

Accelerated filer ☐

Non-accelerated filer ☐(Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes ☐ No ☒

 

As of February 5, 2018, there were outstanding 50,812,679 shares of Common Stock, par value of $0.01 per share.

 

The aggregate market value of the voting stock held by non-affiliates as of June 30, 2017 was $750,784,306.50.  The closing price of the Company’s common stock on June 30, 2017, as reported on the New York Stock Exchange was $15.10.

 

The following documents have been incorporated by reference:

 

Document

    

Form 10-K Part Number

None

 

 

 

 

 

 

 

 

 

 


 

INDEX

 

PART I 

 

 

 

 

 

Item 1. 

Business

4

 

 

 

Item 1A. 

Risk Factors

11

 

 

 

Item 1B. 

Unresolved Staff Comments

18

 

 

 

Item 2. 

Properties

19

 

 

 

Item 3. 

Legal Proceedings

21

 

 

 

Item 4. 

Mine Safety Disclosures

21

 

 

 

PART II 

 

 

 

 

 

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities

22

 

 

 

Item 6. 

Selected Financial Data

24

 

 

 

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

Item 7A. 

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

Item 8. 

Financial Statements and Supplementary Data

39

 

 

 

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

92

 

 

 

Item 9A. 

Controls and Procedures

92

 

 

 

Item 9B. 

Other Information

92

 

 

 

PART III 

 

 

 

 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

93

 

 

 

Item 11. 

Executive Compensation

97

 

 

 

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

131

 

 

 

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

136

 

 

 

Item 14. 

Principal Accountant Fees and Services

136

 

 

 

PART IV 

 

 

 

 

 

Item 15. 

Exhibits and Financial Statement Schedule

140

 

 

 

Signatures 

 

147

 

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Forward-Looking Information Safe Harbor

 

This Annual Report on Form 10-K contains historical information and forward-looking statements.  Forward-looking statements typically contain words such as “expect,” “believe,” “estimate,” “anticipate,” or similar words indicating that future outcomes are uncertain.  Statements looking forward in time, including statements regarding the proposed merger (Pending Merger) between Calgon Carbon Corporation (the Company) and a subsidiary of Kuraray Co., Ltd. (Kuraray), future growth and profitability, price increases, cost savings, broader product lines, enhanced competitive posture and acquisitions, are included in this Annual Report on Form 10-K pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements 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.  Factors that could affect future outcomes, including the future performance of the Company, include, without limitation: the failure to obtain governmental approval of the Pending Merger on the proposed terms and schedule, and any conditions imposed on the Company, Kuraray or the combined company in connection with consummation of the Pending Merger; and the failure to satisfy various other conditions to the closing of the Pending Merger contemplated by the merger agreement; disruption from the potential Pending Merger making it more difficult to maintain relationships with customers, employees or suppliers; the Company’s ability to successfully integrate the November 2, 2016 acquisition of the assets and business of the wood-based activated carbon, reactivation, and mineral-based filtration media of CECA, (New Business) and achieve the expected results of the acquisition, including any expected synergies and the expected future accretion to earnings; changes in, or delays in the implementation of, regulations that cause a market for the Company’s products; the Company’s ability to successfully type approve or qualify its products to meet customer and end market requirements; changes in competitor prices for products similar to the Company’s; higher energy and raw material costs; costs of imports and related tariffs; unfavorable weather conditions and changes in market prices of natural gas relative to prices of coal; changes in foreign currency exchange rates and interest rates; changes in corporate income and cross-border tax policies of the United States and other countries; labor relations; the availability of capital and environmental requirements as they relate to the Company’s operations and to those of its customers; borrowing restrictions; the validity of and licensing restrictions on the use of patents, trademarks and other intellectual property; pension costs; and the results of litigation involving the Company, including any challenges to the Pending Merger.  In the context of the forward-looking information provided in this Annual Report on Form 10-K, please refer to the discussions of risk factors and other information detailed in, as well as the other information contained in this Annual Report.  Any forward-looking statement speaks only as of the date on which such statement is made and the Company does not intend to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by the Federal securities laws of the United States.

 

In reviewing any agreements incorporated by reference in this Form 10-K, please remember such agreements are included to provide information regarding the terms of such agreements and are not intended to provide any other factual or disclosure information about the Company.  The agreements may contain representations and warranties by the Company, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties should those statements prove to be inaccurate.  The representation and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments.  Accordingly, these representations and warranties alone may not describe the actual state of affairs as of the date they were made or at any other time.

 

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PART I

 

Item 1. Business:

 

The Company

 

Calgon Carbon Corporation (the Company) is a global leader in innovative solutions, high quality products and reliable services designed to protect human health and the environment from harmful contaminants in water and air.  As a leading manufacturer of activated carbon, with broad capabilities in ultraviolet light disinfection, the Company provides purification solutions for drinking water, wastewater, pollution abatement, and a variety of industrial and commercial manufacturing processes.

 

On September 21, 2017, the Company entered into a definitive merger agreement under which a subsidiary of the Japanese chemical manufacturer Kuraray Co., Ltd. (Kuraray) agreed to acquire the Company, by way of a reverse triangular merger (Pending Merger).  Following the consummation of the Pending Merger, the Company would become a wholly owned subsidiary of Kuraray.  Refer to Note 21 to the consolidated financial statements in Item 8 of this Annual Report for additional information regarding the Pending Merger.

 

On November 2, 2016, the Company completed the acquisition of the wood-based activated carbon, reactivation and mineral-based filtration media business of CECA, a subsidiary of Arkema Group (New Business).  Due to the complementary nature of the New Business’ products and market applications to those of the Company, and its significant exposure to less regulated, more traditional end markets, the addition of the New Business to the Company created a more balanced global platform from which the Company can continue to grow by leveraging its now expanded capabilities in the global activated carbon and adjacent filtration media market areas.

 

Beginning January 1, 2017, the Company realigned its internal management reporting structure to incorporate the New Business into the existing business, and reorganized its current reportable segments.  The Company is reporting its results using the new reportable segment structure and has restated prior periods to conform to the change in reportable segments.

 

The Company was organized as a Delaware corporation in 1967.

 

Products and Services

 

The Company offers a diverse range of products, services, and equipment specifically developed for the purification, separation, concentration, and filtration of liquids, gases, and other media through its reportable business segments:  Activated Carbon, Alternative Materials, and Advanced Water Purification.

·

The Activated Carbon segment manufactures and/or markets granular and powdered coal-based, wood-based, and coconut shell-based activated carbon for use in many distinct market applications that remove organic compounds from water, air, and other liquids and gases.  This segment also includes the reactivation of spent carbon and the sale or leasing of related carbon adsorption equipment, and maintenance at customer sites.

·

The Alternative Materials segment supplies diatomaceous earth and perlite filtration media for decolorization, purification, decontamination, and filtration of liquids in various applications including the manufacture and processing of food and beverage, industrial and pharmaceutical products.  This segment also consists of activities related to carbon cloth for use in military, industrial and medical applications.

·

The Advanced Water Purification segment provides solutions to customer water process problems through the design, fabrication, and operation of systems, as well as the sale of materials and services that utilize the Company’s enabling technologies: ultraviolet light and advanced ion exchange separation.

 

For further information, refer to Note 18 to the consolidated financial statements in Item 8 of this Annual Report.

 

Activated Carbon.  The sale of activated carbon is the principal component of the Activated Carbon business segment.  The Company is recognized as the leading manufacturer of bituminous coal-based granular activated carbon.  Activated carbon is a porous material that removes organic compounds from liquids and gases by a process known as “adsorption.”  In adsorption, undesirable organic molecules contained in a liquid or gas are attracted and bound to the surface of the pores of the activated carbon as the liquid or gas is passed through.

 

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The primary raw material used in the production of the Company’s activated carbons is bituminous coal, which is crushed, sized and then processed in rotary kilns followed by high temperature furnaces.  This heating process is known as “activation” and develops the pore structure of the carbon.  Through adjustments in the activation process, pores of the required size and number are developed for a particular purification application.  The Company’s technological expertise in adjusting the pore structure in the activation process has been one of a number of factors enabling the Company to develop many special types of activated carbon available in several particle sizes.  The manufacturing and marketing of wood-based activated carbon and reactivation of coal-based activated carbon are also are included in the Activated Carbon business segment.  The Company also markets activated carbons produced by other manufacturers, as well as activated carbon produced from other raw materials, including coconut shells.

 

With primary manufacturing facilities located in Catlettsburg, Kentucky, Pearlington, Mississippi, and Parentis-en-born, France, the Activated Carbon business segment produces and sells a broad range of activated, impregnated or acid washed carbons in granular, powdered or pellet form.  Granular Activated Carbon (GAC) particles are irregular in shape and generally used in fixed filter beds for continuous flow purification processes.  Powdered Activated Carbon (PAC) is carbon that has been pulverized into powder and is often used in batch purification processes, in municipal water treatment applications and for flue gas emissions control.  Pelletized activated carbons are extruded particles, cylindrical in shape, and are typically used for gas phase applications due to the low pressure drop, high mechanical strength, and low dust content of the product.

 

Another important component of the Activated Carbon business segment is the optional services that the Company makes available to purchasers of its products and systems.  It offers a variety of treatment services for customers including carbon supply, equipment leasing, installation and demobilization, transportation, and spent carbon reactivation.  Other services include feasibility testing, process design, performance monitoring, and major maintenance of Company-owned adsorption equipment.

 

Along with providing activated carbon products, the Company has developed a portfolio of standardized, pre-engineered, activated carbon adsorption systems—for both liquid and vapor applications—which can be quickly delivered and easily installed at treatment sites.  Liquid phase equipment systems are used for potable water treatment, process purification, wastewater treatment, groundwater remediation, and de-chlorination.  Vapor phase equipment systems are used to control volatile organic compound (VOC) emissions, off gases from air strippers, and landfill gas production.

 

Spent carbon reactivation and re-supply is a key focus of the Company’s service business.  In the reactivation process, the spent GAC is subjected to high temperature remanufacturing conditions that destroy the adsorbed organics and ensure that the activated carbon is returned to usable quality.  The Company is permitted to handle and reactivate spent carbons containing hazardous and non-hazardous organic compounds.

 

Granular carbon reactivation is conducted at numerous locations throughout the world.  It is valuable to customers for both environmental and economic reasons, allowing them to reuse carbon cost-effectively without purchasing more expensive new carbon, and, at the same time, protecting natural resources.  The Company provides reactivation services in packages ranging from a thirty pound bag to truckload quantities.

 

The Company’s custom reactivation process for United States (U.S.) municipal drinking water treatment plants is specially tailored to meet the unique demands of the drinking water industry.  Activated carbon reactivation for use in drinking water treatment facilities in the U.S. must adhere to requirements of the American Water Works Association (AWWA) standard B605.  Perhaps the most important requirement of this standard is that the reactivator must return to the municipality/water provider its own activated carbon that has been reactivated.  Unlike industrial activated carbon reactivation practiced by a number of carbon companies, where carbons from different customers can be co-mingled and reactivated as a pooled material, drinking water carbons are carefully segregated.  This means that a drinking water provider’s activated carbon is kept separate not only from industrial customers’ carbons, but also from the activated carbon of other providers’ activated carbon as well, to avoid any potential cross-contamination.  The Company maintains the integrity of each drinking water provider’s carbon, and its potable reactivation facilities and procedures strictly adhere to AWWA B605.  The Company’s Columbus, Ohio, North Tonawanda, New York, and Gila Bend, Arizona plants have received certification from the National Sanitation Foundation International (NSF) under NSF/ANSI Standard 61: Drinking Water System Components - Health Effects for custom reactivated carbon for potable water applications.  NSF International is an independent, not-for-profit organization committed to protecting and improving public health and the environment.

5


 

 

European custom reactivation process maintains the segregation of drinking water provider’s activated carbon and ensures returned product fulfills the requirements of European Standard EN12915 as well as specific additional requirements as found in the United Kingdom Drinking Water Inspectorate (DWI) approval list of products and in the KIWA-ATA certification.  Custom reactivation for European municipal drinking water treatment plants is performed in reactivation facilities in Belgium, the United Kingdom, and Italy.  The site in Feluy, Belgium, which is accredited ISO9001 and ISO14001 for Quality and Environmental management systems, is the only carbon reactivation facility in the world with ISO22000 accreditation for Food Safety Management System (FSMS).

 

Transportation services are offered via bulk activated carbon deliveries and spent carbon returns through the Company’s private fleet of trailers, capable of transporting both hazardous and non-hazardous material.  The Company will arrange transportation for packaged and smaller volumes of activated carbon in appropriate containers and small returnable equipment through a network of commercial and less-than-truckload carriers.

 

Sales for the Activated Carbon segment were $547.0 million, $476.8 million, and $496.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.

 

Alternative Materials.  The primary products offered in the Alternative Materials segment are diatomaceous earth (DE) and perlite filtration media.  These products, which are primarily used as filter aids in beverage, food, and industrial applications, are marketed and distributed across the European region in relatively close proximity to their manufacturing locations.  The Alternative Materials segment also includes carbon cloth, which is activated carbon in cloth form.  Carbon cloth is manufactured in the United Kingdom (UK) and sold to the medical, military, and specialty markets.

 

For the production of DE products, the Alternative Materials business segment is vertically integrated from the raw material source to the final product, as the Company owns two mineral deposit quarry sources which provide raw materials for the DE manufacturing processes.  DE is manufactured from diatomite, which is a lightweight and porous rock formed over many years by the successive accumulation and fossilization of the skeletal remains of single-cell algae – or diatoms – that lived in lakes, and were able to fix soluble silica on their shells.  These owned quarries each have 20 or more years of raw material reserves available.  The Company’s DE products, which are manufactured through a multi-step process that includes crushing, milling, calcination, and packaging, are sold throughout the European region under the broadly recognized Clarcel® brand name.

 

Perlite products, widely known in Europe as Randalite® and Randafil™, are manufactured from perlite ore, which is a silica rock of volcanic origin that contains fine water droplets.  In the Company’s manufacturing process, raw materials, which are procured from mines located in the Mediterranean region, are expanded at high temperature then crushed and grated into final product form.

 

First developed in the 1970’s, activated carbon cloth was originally used in military clothing and masks to protect wearers against nuclear, biological and chemical agents.  Today, activated carbon cloth can be used in numerous additional applications, including sensor protection, filters for ostomy bags, wound dressings, conservation of artifacts, and respiratory masks.

 

Sales for the Alternative Materials segment were $56.4 million, $14.4 million, and $9.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.

 

Advanced Water Purification.  Through its UV Technologies LLC subsidiary, the Company also manufactures and sells a broad line of UV (ultraviolet) light disinfection equipment.  Following the Company’s introduction of an advanced UV oxidation process to remediate contaminated groundwater, in 1998, its scientists invented a UV disinfection process used to inactivate Cryptosporidium, Giardia and other similar pathogens in surface water, rendering them harmless to humans.  In combination with hydrogen peroxide, UV light is effective in destroying many contaminants common in groundwater remediation applications.  The Company participates in the marketplace for innovative UV technologies with its Sentinel® line designed to protect municipal drinking water supplies from pathogens, the C3 Series™ open-channel wastewater disinfection product line for municipal wastewater disinfection, and Rayox® UV advanced oxidation equipment for treatment of contaminants in groundwater, process water, and industrial wastewater.    UV oxidation equipment can also be combined with activated carbon to provide effective solutions for taste and odor removal in municipal drinking water and for water reuse.

6


 

 

Under the trade name Hyde Marine, which was acquired in 2010, the Company also manufactures and sells UV ballast water treatment systems (BWTS) that combine filtration and UV disinfection to treat and disinfect the ballast water taken in by a ship in one location, and discharged in another, to prevent the spread of non-indigenous aquatic organisms.  Invasion of non-native species via ballast water is considered to be one of the greatest threats to the world’s waterways and marine environment.    The Company competes in this market with its Hyde GUARDIAN® BWTS – an easy-to-use, cost-effective, and chemical-free ballast water management solution.  The Company assembles its equipment using parts that are both manufactured internally as well as purchased from other suppliers.  The International Maritime Organization (IMO) type approved system meets the needs of ship owners committed to operating their vessels in a responsible, sustainable, and economic way through its proven reliability, flexible and compact design, and low operating costs.  In 2018, the Company is planning to complete the testing of its BWTS in order to apply to become type approved by the U.S. Coast Guard (USCG) for treating ballast water discharged in U.S. waterways.

 

The Company also manufactures and sells fixed bed and continuous ion exchange equipment.  The proprietary continuous ISEP® (Ionic Separator) and CSEP® (Chromatographic Separator) units are used for the purification, separation and recovery of many products in the food and beverage, pharmaceutical, mining, chemical, and biotechnology industries.  The ISEP® and CSEP® systems are currently used in installations worldwide for a variety of applications in industrial settings, as well as in selected environmental applications including perchlorate and nitrate removal from drinking water.  The core technology of these systems is the proprietary rotary distribution valve.  This valve technology is offered in combination with a turntable for movement of media vessels, or with static media vessels where vessel-movement is simulated by recent advances in valve technology.

 

Sales for the Advanced Water Purification segment were $16.4 million, $23.1 million, and $28.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.

 

Markets

 

The Company participates in six primary markets:  Potable Water, Industrial Process, Environmental Water, Environmental Air, Food and Beverage, and Specialty markets, which are described in more detail below.

 

Potable Water Market.  The Company sells activated carbons, equipment, custom reactivation services, ion exchange technology, and UV technologies to municipalities for the treatment of potable water.  The activated carbon adsorption technology is used to remove both regulated and non-regulated contaminants of concern, including disinfection by-products and their precursors, perfluorinated compounds, pesticides, carcinogenic VOCs, algal toxins, other dissolved organic materials, and taste and odor compounds to meet regulated limits or to make the water quality acceptable to the public.  The Company also sells to original equipment manufacturers (OEMs) of home water purification systems.  Granular and powdered activated carbon products are sold in this market and in many cases the granular activated carbon functions both as the primary filtration media as well as an adsorption media to remove contaminants from the water.  Ion exchange resins are sold for use in both fixed beds and continuous counter-current operations to meet strict regulatory guidelines for perchlorate and nitrate in water.  UV advanced oxidation systems are sold for the destruction of waterborne contaminants, and UV disinfection systems are sold for the inactivation of pathogens in surface water.

 

Industrial Process Market.  In industrial processing, the Company’s activated carbon and DE filtration media products are used either for purification, separation or concentration of customers’ products in the manufacturing process.  The Company sells a wide range of activated carbons to the chemical, petroleum refining, and process industries for the purification of organic and inorganic chemicals, amines and vitamins.  Further, activated carbon is used in treatment of natural gas, biogas and other high purity gases to remove unwanted contamination.  The liquefied natural gas industry uses activated carbons to remove mercury compounds that would otherwise corrode process equipment.  Activated carbons are also sold for gasoline vapor recovery equipment.  The Company has a range of high purity activated carbons that are ideally suited as catalyst carriers and for use in the fine chemicals and pharmaceutical industries.  The Company’s advanced ion exchange technology is used for a variety of industrial processes including separation and recovery in hydrometallurgy applications, decolorization in pulp and paper, the production of organic and inorganic chemicals, and the purification of brine.

 

Environmental Water and Air Markets.  The Company offers its products and services to assist various industries in meeting the stringent environmental requirements imposed by various government entities.  Products used for wastewater and ballast water treatment, the cleanup of contaminated groundwater, surface impoundments, and accidental

7


 

spills comprise a significant need in this market.  The Company provides products and services employing both activated carbon adsorption and UV technologies for emergency and temporary cleanup services as well as for permanent installations.

 

The Company’s reactivation service is an especially important element if the customer has contaminants that are hazardous organic chemicals.  Reactivation of spent carbon protects the environment and eliminates the customers’ expense, potential liability, and difficulty in securing disposal options (such as landfills) for hazardous organic chemicals.

 

Activated carbon is also used in the chemical, pharmaceutical, and refining industries for purification of air discharge to remove contaminants such as benzene, toluene, and other volatile organics.  In addition, reduction of mercury emissions from coal-fired power plants in the U.S. and Canada is a significant market, and is served by the Company with its broad line of FLUEPAC® powdered activated carbons.

 

The Company’s Rayox® UV System is an industry staple for the destruction of groundwater pollutants, as well as for the removal of alcohol, phenol and acetone in process water and total organic compound (TOC) reduction in wastewater treatment.

 

The Company’s Hyde GUARDIAN® BWTS is a fully automated system that can be integrated into a ship’s ballast control system.  The compact design can be skid mounted for new construction or can be made modular for easy installation in crowded machinery spaces on existing vessels.  It is capable of providing complete ballast water management solutions for a variety of vessels including cruise ships, cargo and container ships, offshore supply vessels, and military vessels.

 

Food and Beverage Market.  In this market, sweetener manufacturers are principal purchasers of the Company’s activated carbon and filtration media products.  The Company’s wood-based and coal-based activated carbon products are used in the purification of dextrose and high fructose corn syrup.  Activated carbons are also sold for use in the purification of cane sugar.  The Company’s DE and perlite filtration media and high performing activated carbons are used in applications such as the wine, beer, and flavoring markets.  Other food and beverage processing applications include de-colorization and purification of many different foods and beverages and for purifying water, liquids and gases prior to usage in brewing and bottling.  Continuous ion-exchange systems are also used in this market for the production of lysine and vitamin E as well as purification of dextrose, high fructose corn syrup and sugar cane.

 

Specialty Market.  The Company is a major supplier of specialty activated carbons to manufacturers of gas masks for the U.S. and European militaries as well as protective respirators and collective filters for first responders and private industry.  The markets for collective filters for U.S. and European military equipment, indoor air quality, and air containment in incineration and nuclear applications are also serviced.

 

Additional industries using activated carbons include precious metals producers to recover gold and silver from low-grade ore.  The Company’s activated carbon cloth product is used in medical and other specialty applications.

 

Sales and Marketing

 

In the U.S., the Company operates primarily through a direct sales force.  In some markets and regions, the Company also sells through agents and distributors.  In Latin America and Canada, the Company maintains a sales office in Sao Paulo, Brazil, and sells through agent/distributor relationships.

 

In the Asia Pacific Region, the Company maintains sales offices in Suzhou, Jiangsu Province, China; Hong Kong; Osaka, Japan; Tokyo, Japan; Singapore; and Taipei, Taiwan, and uses direct selling as well as agents and distributors.

 

In Europe, the Company maintains sales offices in Feluy, Belgium; Kolding, Denmark; Paris, France; Beverungen, Germany; Milan, Italy; Ashton-in-Makerfield, United Kingdom; Houghton-le-Spring, United Kingdom; and Gothenburg, Sweden, and operates through a direct sales force.  The Company also has a network of agents and distributors that conduct sales in certain countries in Europe, the Middle East, and Africa.

 

8


 

Many offices can play a role in sales of products or services from each of the Company’s segments.  Geographic sales information can be found in Note 18 to the consolidated financial statements in Item 8 of this Annual Report.  Also refer to Risk Factors in Item 1A.

 

Over the past three years, no single customer accounted for more than 10% of the total sales of the Company in any year.

 

Backlog

 

The Company had a sales backlog of $11.6 million and $10.9 million as of December 31, 2017 and 2016, respectively.

 

Competition

 

With respect to the production and sale of activated carbon related products, the Company has a major global presence, and has several competitors in the worldwide market.  Norit, a subsidiary of U.S. company Cabot Corporation; Ingevity Corporation, formerly the Specialty Chemicals Division of WestRock Company, a U.S. company; Jacobi Carbons, a Swedish company and a wholly-owned subsidiary of Osaka Gas Chemicals Co., Ltd., of Japan; and Evoqua Water Technologies (formerly Siemens Water Technologies), a U.S. company, are the primary competitors.  Chinese producers of coal-based activated carbon and certain East Asian producers of coconut-based activated carbon participate in the market on a worldwide basis and sell principally through numerous resellers.  Competition in activated carbons, carbon equipment and services is based on quality, performance, and/or price.  Other sources of competition for the Company’s activated carbon services and systems are alternative technologies for purification, filtration, and extraction processes that do not employ activated carbons.

 

A number of other smaller competitors engage in the production and sale of activated carbons and in local markets, but do not compete with the Company on a global basis.  These companies compete with the Company in the sale of specific types of activated carbons, but do not generally compete with a broad range of products in the worldwide activated carbon business.  For example, ADA Carbon Solutions, owned by Energy Capital Partners, competes with the Company in the America’s market for the removal of mercury from coal-fired power plant flue gas.

 

With respect to the Company’s DE and perlite filtration media products, due to their low weight, low density physical properties, the Company primarily distributes these products throughout the European region.  Competitors in the region include EP Minerals, Imerys and Dicalite.  Similar to activated carbon, competition for these products is primarily based on quality, performance and/or price.

 

The Company competes with several small regional companies for the sale of its reactivation services and carbon equipment in the U.S., Europe, Japan, and China.

 

The Company’s UV technologies product line has primary competition from Trojan Technologies, Inc., a Canadian company owned by Danaher Corporation, a U.S. company; and Xylem Inc., headquartered in White Plains, N.Y., a U.S. company.

 

Competition for the Company’s UV technologies Hyde Marine ballast water treatment systems utilizing UV and filtration includes Panasia of Busan, Korea, Alfa Laval of Sweden and Optimarin of Norway.  As of December 31, 2017, more than 60 treatment systems have been granted IMO Type Approval, while six systems have been granted USCG Type Approval.

 

Raw Materials

 

The principal raw material purchased by the Company for its Activated Carbon segment is bituminous coal from mines primarily in the U.S. purchased under supply contracts, as well as spot purchases.  The Company purchases wood from a local forest in Europe. 

 

The Company owns two mineral deposit quarry sources, which provide raw materials for its DE manufacturing processes.  These quarries each have 20 or more years of raw material reserves available.  The Company obtains its crude perlite ore raw material from mines located in the Mediterranean region.

 

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The Company purchases natural gas from various suppliers for use in its production facilities.  In both the U.S. and Europe, natural gas is purchased pursuant to various contracts, as well as spot purchases.  The Company buys various metals, acids and other additives that are used within the production processes to enhance the performance of certain products.  These materials are bought under contracts, as well as on a spot basis.

 

The purchase of key equipment components and fabrications are coordinated through agreements with various suppliers for UV, ISEP® and the carbon equipment markets.

 

The Company does not presently anticipate any significant problems in obtaining adequate supplies of its raw materials or equipment components.

 

Research and Development

 

The Company’s primary research and development (R&D) activities are conducted at an innovation center in Pittsburgh, Pennsylvania.  The facility is used for the evaluation of experimental activated carbon and equipment and application development.  Experimental systems are also designed and evaluated at this location.

 

The principal goals of the R&D’s research program are to improve the Company’s position as a technological leader in solving customers’ problems with its products, services and equipment; develop new products and services; and provide technical support to customers and operations of the Company.    Research programs include new and improved methods for manufacturing and utilizing new and enhanced activated carbons.

 

The Company performs R&D to continuously advance the application of UV technologies to pathogens as well as new and emerging contaminants.  Additionally, R&D is devoted to continual product advancement for reduction of life cycle cost to the customer and to ensure compliance with U.S. and international regulations.  This includes R&D work on Advanced Oxidation for treatment of taste and odor compounds (MIB and Geosmin), nitrosamines, pesticide/herbicides and pharmaceutical/personal care products.

 

For ballast water treatment, Hyde Marine has active R&D for continued ballast treatment efficacy testing in multiple marine environments and new product development to extend the range, usability and end application.

 

Research and development expenses were $5.4 million, $5.4 million, and $6.4 million for the years ended December 31, 2017, 2016, and 2015, respectively.

 

Patents and Trade Secrets

 

The Company possesses a substantial body of technical knowledge and trade secrets and owns 46 U.S. patent applications and/or patents as well as 184 patent applications and/or patents in other countries.  The issued patents expire in various years from 2018 through 2036.

 

The technology embodied in these patents, trade secrets, and technical knowledge applies to all phases of the Company’s business including production processes, product formulations, and application engineering.  The Company considers this body of technology important to the conduct of its business.

 

Regulatory Matters

 

The Company is subject to various environmental health and safety laws and regulations of a nature considered normal to its business.  It is the Company’s policy to accrue for amounts related to these matters when it is probable that a liability has been incurred and the loss amount is reasonably estimable.  Refer to Note 16 to the consolidated financial statements in Item 8 of this Annual Report, which is incorporated herein by reference, for further details.

 

Employee Relations

 

As of December 31, 2017, the Company employed 1,268 persons on a full-time basis, 658 of whom were salaried and non-union hourly production, office, supervisory and sales personnel.  The United Steelworkers represent 236 hourly personnel in the U.S.  The current contracts with the United Steelworkers expire on July 31, 2018, at the Pittsburgh, Pennsylvania facility, February 17, 2019 at the Columbus, Ohio facility and June 17, 2021 at the Company’s

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Catlettsburg, Kentucky facility.  The 63 hourly personnel at the Company’s Belgian facility are represented by two national labor organizations with contracts that expire on December 31, 2018.  The 59 hourly personnel at the Company’s facilities in Italy are represented by two national labor organizations with one contract that expired on December 31, 2017 and is in the process of being renegotiated and one that will expire on December 31, 2019.  The 252 hourly personnel at the Company’s facilities in France are represented by multiple national labor organizations with contracts that will expire on December 31, 2018.

 

Copies of Reports

 

The periodic and current reports of the Company filed with the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 are available free of charge, as soon as reasonably practicable after the same are filed with or furnished to the SEC, at the Company’s website at www.calgoncarbon.com.  All other filings with the SEC are available on the SEC’s website at www.sec.gov.

 

Copies of Corporate Governance Documents

 

The following Company corporate governance documents are available free of charge at the Company’s website at www.calgoncarbon.com and such information is available in print to any stockholder who requests it by contacting the Secretary of the Company at 3000 GSK Drive, Moon Township, PA 15108.

 

·

Corporate Governance Guidelines

·

Audit Committee Charter

·

Compensation Committee Charter

·

Governance Committee Charter

·

Investment Committee Charter

·

Code of Business Conduct and Ethics

·

Code of Ethical Business Conduct Supplement for Chief Executive and Senior Financial Officers

·

Related Party Transaction Policy

 

 

Item 1A. Risk Factors

 

Risks relating to our business

 

Increases in U.S. and European imports of Chinese or other foreign manufactured activated carbon could have an adverse effect on our financial results.

 

We face pressure and competition in our U.S. and European markets from brokers of low cost imported activated carbon products, primarily from China.  We believe we offer the market technically superior products and related customer support.  However, in some applications, low cost imports have become accepted as viable alternatives to our products because they have been frequently sold at less than fair value in the market.  If the markets in which we compete experience an increase in these imported low cost carbons, especially if sold at less than fair value, we could see declines in net sales.  In addition, the sales of these low cost activated carbons may make it more difficult for us to pass through raw material price increases to our customers.

 

In response to a petition from the U.S. activated carbon industry filed in March 2006, the U.S. Department of Commerce (Commerce Department) announced the imposition of anti-dumping duties starting in October 2006.  The Commerce Department announcement was based on extensive economic analysis of the operations and pricing practices of the Chinese producers and exporters.  The Commerce Department announcement required U.S. Customs and Border Protection to require importers of steam activated carbon from China to post a provisional bond or cash deposit in the amount of the duties.  The anti-dumping duties are intended to offset the amount by which the steam activated carbon from China is sold at less than fair value in the U.S.

 

Annual reviews of duties begin to occur in April of the year following the twelve month period then completed.  The significant anti-dumping duties originally imposed by the Commerce Department, and the affirmative decision by the International Trade Commission (ITC), has had an adverse impact on the cost of Chinese manufactured activated carbon imported into the U.S.  Furthermore, such anti-dumping duties are subject to a sunset review every five years.  The

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duties were renewed during the first such sunset review.  The second sunset review will occur in 2018.  There can be no assurance that these duties will again be renewed or that the rates of these duties will not be further reduced, which could adversely affect demand or pricing of our product.

 

We have operations in multiple foreign countries and, as a result, are subject to foreign exchange translation risk, which could have an adverse effect on our financial results.

 

We conduct significant business operations in several foreign countries.  Of our 2017 net sales, approximately 53% were sales to customers outside of the U.S., and 2017 net sales denominated in non-U.S. dollars represented approximately 42% of our overall net sales.  We conduct business in the local currencies of each of our foreign subsidiaries or affiliates.  Those local currencies are then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements.  The exchange rates between some of these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future.  Changes in exchange rates, particularly the strengthening of the U.S. dollar, could significantly reduce our sales and profitability from foreign subsidiaries or affiliates from one period to the next as local currency amounts are translated into fewer U.S. dollars.

 

Our European and Japanese activated carbon businesses are sourced from both the U.S. and China, which subjects these businesses to foreign exchange transaction risk.

 

Our virgin activated carbon is produced primarily in the U.S.  We also source significant quantities of activated carbon in China.  Produced and sourced activated carbons are provisioned to all of our global operations.  Purchases of these carbons are typically denominated in U.S. dollars yet are ultimately sold in other currencies thereby creating foreign currency exchange transaction risk.  We generally execute foreign currency derivative contracts of not more than eighteen months in duration to cover a portion of our known or projected foreign currency exposure.  However, those contracts do not protect us from longer-term trends of a strengthening U.S. dollar, which could significantly increase our cost of activated carbon delivered to our European and Japanese markets, and we may not be able to offset these costs by increasing our prices.

 

Our financial results could be adversely affected by an interruption of supply or an increase in the price of raw materials we use, such as coal and wood.

 

We use bituminous coal as the main raw material in our activated carbon production process.  Based upon our current projected usage and price, we estimate that our 2018 coal costs in the U.S. will be approximately $26.7 million excluding the cost of transportation to our carbon manufacturing facilities.  We have various annual and multi-year contracts in place for the supply of our coal that expire at various intervals in 2018 and cover approximately 83% of our expected 2018 tonnage.  Interruptions in coal supply caused by mine accidents, labor disputes, transportation delays, breach of supplier contractual obligations, floods or other events for other than a temporary period could have an adverse effect on our ability to meet customer demand.  We use very specific high quality metallurgical coals for many of our products.  Our inability to obtain these high-quality coals at competitive prices in a timely manner due to changing market conditions with limited high-quality suppliers could also have an adverse effect on our financial results.  In addition, increases in the prices we pay for coal under our supply contracts could adversely affect our financial results by significantly increasing production costs.  Based upon the current estimated usage and price of coal in 2018, a hypothetical 10% increase in the price of coal, excluding transportation costs, that is not covered by our supply contracts, would result in $0.3 million of additional pre-tax expense to us.  We may not be able to pass through raw material price increases to our customers.

 

Additionally, as a result of our acquisition of the New Business in late 2016, wood has become an important raw material for us.  We have various contracts in place to secure approximately half of our wood requirement through 2018.  Since we require a certain quality of wood, our inability to secure this product could affect our ability to meet customer demand for our products.  Our inability to obtain this quality at a reasonable price in a timely manner could affect our operations or financial position.  We may not be able to pass through these raw material price increases to our customers.

 

A planned or unplanned shutdown at one of our production facilities could have an adverse effect on our financial results.

 

We operate multiple facilities and source product from strategic partners who operate facilities which are close to water or in areas susceptible to floods, hurricanes, and earthquakes.  An unplanned shutdown at any of our or our strategic

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partners’ facilities for more than a temporary period as a result of a hurricane, typhoon, earthquake, flood or other natural disaster, or as a result of fire, explosions, war, terrorist activities, political conflict or other hostilities, or as a result of unforeseen mechanical problems, could significantly affect our ability to meet our demand requirements, thereby resulting in lost sales and profitability in the short-term or eventual loss of customers in the long term.  In addition, a prolonged planned shutdown of any of our production facilities due to a change in the business conditions could result in impairment charges that could have an adverse impact on our financial results.

 

Delays in enactment of new state or federal regulations could restrict our ability to reach our strategic growth targets and lower our return on invested capital.

 

Our strategic growth initiatives are reliant upon more restrictive environmental regulations being enacted for the purpose of making water and air cleaner and safer.  Examples include regulation of mercury emissions, drinking water disinfection by-products, and ship ballast water.  If stricter regulations are delayed or are not enacted or enacted but subsequently repealed or amended to be less strict, or enacted with prolonged phase-in periods, our sales growth targets could be adversely affected and our return on invested capital could be reduced.

 

For example, our Hyde GUARDIAN® ballast water treatment system received type approval from the IMO in April 2009.  However, the IMO Ballast Water Management Convention, which mandates the use of IMO approved ballast water treatment systems for ships in international traffic, was not ratified until September 2016 and was not scheduled to go into force until September 2017.  Until the July 2017 meeting of the Marine Environment Protection Committee (MEPC) of the IMO, the Company expected to see higher BWTS sales beginning in late 2017 due to the IMO Convention entering into force for all ships on September 8, 2017.  At this MEPC meeting, the compliance implementation schedule was amended to delay compliance with standards of the IMO Convention requiring currently in-service vessels to treat their ballast water until September 8, 2019.  The Company expects this amendment to the Convention implementation schedule to dampen the pace of near-term market development and demand growth for ballast water treatment systems.  The timing and pace of change in the Company’s BWTS sales beyond 2017 and prior to September 2019 will be dependent upon a number of variables including the Company’s level of success in completing its USCG testing.  The pace of change in the Company’s BWTS sales beyond September 2019 will be dependent upon the amended IMO Convention compliance schedule for currently in-service vessels to begin treating their ballast water remaining in place.  Similarly, the USCG regulates ballast water in U.S. waters, and will not follow the IMO convention.  We, along with several other ballast water treatment system manufacturers have received Alternate Management System designation from the USCG, but this is a temporary designation while full USCG type approval is pursued.  In December 2015, the USCG decided it would not allow us, and several other manufacturers of ultraviolet light-based ballast water treatment systems, to use the Most Probable Number (MPN) test method for purposes of testing the Company’s system to apply for type approval under USCG regulations.  Consequently, we have redesigned our Hyde GUARDIAN® system under USCG testing protocols and are embarking on testing to support our application for USCG Type Approval in the second quarter of 2018.  The first USCG type approvals were granted to competitors in December 2016 and two of these approvals were for UV light-based systems.  While we remain confident in our product’s capabilities, there can be no assurance that we will receive USCG type approval or that additional approval of competing systems will not have an adverse effect on the Company’s ability to compete in the market for ballast water treatment systems for vessels discharging ballast water in U.S. waterways and ports.

 

Our required capital expenditures may exceed estimates.

 

Our capital expenditures were $57.4 million in 2017 and are forecasted to be approximately $35 million to $45 million in 2018.   Future capital expenditures may be significantly higher and may vary substantially if we are required to undertake certain actions to comply with new regulatory requirements or compete with new technologies.  We may not have the capital to undertake the capital investments.  If we are unable to do so, we may not be able to effectively compete.

 

Encroachment into our markets by competitive technologies could adversely affect our financial results.

 

Activated carbon is utilized in various applications as a cost-effective solution to solve customer problems.  If other competitive technologies, such as membranes, ozone and UV, are advanced to the stage in which such technologies could cost effectively compete with activated carbon technologies, we could experience a decline in net sales, which could adversely affect our financial results.

 

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Our industry is highly competitive.  If we are unable to compete effectively with competitors having greater resources than we do, our financial results could be adversely affected.

 

Our activated carbon and service business faces significant competition principally from Cabot Norit, the MWV (MeadWestvaco) Specialty Chemicals Division of WestRock Company and Evoqua Water Technologies, as well as from Chinese and European activated carbon producers and East Asian producers of coconut-based activated carbon.  Our UV technology products face significant competition principally from Trojan Technologies, Inc., which is owned by Danaher Corporation, and Xylem.  Our competitors include major manufacturers and diversified companies, a number of which have revenues and capital resources exceeding ours, which they may use to develop more advanced or more cost-effective technologies, increase market share or leverage their distribution networks.  We could experience reduced net sales as a result of having fewer resources than these competitors.

 

Our international operations are subject to political and economic risks for conducting business in corrupt environments.

 

We conduct business in developing countries, and we are focusing on increasing our sales in regions such as South America, Southeast Asia, India, China and the Middle East, which are less developed, have less stability in legal systems and financial markets, and are generally recognized as potentially more corrupt business environments than the U.S. and therefore, present greater political, economic and operational risks.  We emphasize compliance with the law and have policies in place, procedures and certain ongoing training of employees with regard to business ethics and key legal requirements such as the U.S. Foreign Corrupt Practices Act (FCPA), the United Kingdom Bribery Act (UKBA) and all applicable export control laws and regulations of the U.S. and other countries (the Export Regulations); however, there can be no assurances that our employees will adhere to our code of business conduct, other Company policies, the FCPA, the UKBA or the Export Regulations.  If we fail to enforce our policies and procedures properly or maintain internal accounting practices to accurately record our international transactions or if we violate any of these laws or regulations, we may be subject to severe criminal or civil sanctions and penalties, including fines, debarment from export privileges and loss of authorizations needed to conduct aspects of our international business.  We could incur significant costs for investigation, litigation, fees, settlements and judgments which, in turn, could negatively affect our business, financial condition and results of operations.

 

Significant stockholders or potential stockholders may attempt to effect changes at the Company or acquire control over the Company, which could adversely affect the Company’s results of operations and financial condition.

 

Stockholders of the Company may from time to time engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes or acquire control over the Company.  Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company.  Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting the Company’s operations and diverting the attention of the Company’s Board of Directors and senior management from the pursuit of business strategies.  As a result, stockholder campaigns could adversely affect the Company’s results of operations and financial condition.

 

Failure to innovate new products or applications could adversely affect our ability to meet our strategic growth targets.

 

Part of our strategic growth and profitability plans involve the development of new products or new applications for our current products in order to replace more mature products or markets that have seen increased competition.  If we are unable to develop new products or applications, our financial results could be adversely affected.

 

Our inability to successfully negotiate new collective bargaining agreements upon expiration of the existing agreements could have an adverse effect on our financial results.

 

We have collective bargaining agreements in place at various production facilities covering approximately 48% of our full-time workforce as of December 31, 2017.  Those collective bargaining agreements expire through 2021.  Any work stoppages as a result of disagreements with any of the labor unions or our failure to renegotiate any of the contracts as

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they expire could disrupt production and significantly increase product costs as a result of less efficient operations caused by the resulting need to rely on temporary labor.

 

Our business is subject to a number of global economic risks.

 

Financial markets in the U.S., Europe, and Asia continue to experience disruption, including, among other things, volatility in security prices, diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others.  Governments have taken actions intending to address these market conditions that include restricted credit and declines in values of certain assets.

 

An economic downturn in the businesses or geographic areas in which we sell our products could reduce demand for our products and result in a decrease in sales volume that could have a negative impact on our results of operations.  Continued volatility and disruption of financial markets in the U.S., Europe and Asia could limit our customers’ ability to obtain adequate financing or credit to purchase our products or to maintain operations, and result in a decrease in sales volumes that could have a negative impact on our results of operations.

 

Our international operations expose us to political and economic uncertainties and risks from abroad, which could negatively affect our results of operations.

 

We have manufacturing facilities and sales offices throughout the world which are subject to economic conditions and political factors within the respective countries which, if changed in a manner adverse to us, could negatively affect our results of operations and cash flow.  Political risk factors include, but are not limited to, taxation, nationalization, inflation, currency fluctuations, foreign exchange restrictions, increased regulation and quotas, tariffs and other protectionist measures.  Approximately 81% of our sales in 2017 were generated by products sold in the U.S., Canada, and Western Europe while the remaining sales were generated in other areas of the world, such as Asia, Eastern Europe, and Latin America.

 

Environmental compliance and remediation and potential climate change could result in substantially increased capital requirements and operating costs.

 

Our production facilities are subject to environmental laws and regulations in the jurisdictions in which they operate or maintain properties.  Costs may be incurred in complying with such laws and regulations.  Each of our domestic production facilities require permits and licenses issued by local, state and federal regulators which regulate air emissions, water discharges, and solid waste handling.  These permits are subject to renewal and, in some circumstances, revocation.  International environmental requirements vary and could have substantially lesser requirements that may give competitors a competitive advantage.  Additional costs may be incurred if environmental remediation measures are required.  In addition, the discovery of contamination at any of our current or former sites or at locations at which we dispose of waste may expose us to cleanup obligations and other damages.  In addition, there is currently vigorous debate over the effect of CO² gas releases and the effect on climate change.  Many of our activities create CO² gases.  Should legislation or regulation be enacted, it could have a material adverse effect upon our ability to expand our operations or perhaps continue to operate as we currently do.

 

Our financial results could be adversely affected by shortages in energy supply or increases in energy costs.

 

The price for and availability of energy resources could be volatile as it is affected by political and economic conditions that are outside our control.  We utilize natural gas as a key component in our activated carbon reactivation manufacturing process at many of our facilities.  If shortages of, or restrictions on the delivery of natural gas occur, production at our activated carbon reactivation facilities would be reduced, which could result in missed deliveries or lost sales.  We also have exposure to fluctuations in energy costs as they relate to the transportation and distribution of our products.  We may not be able to pass through natural gas and other fuel price increases to our customers.

 

Our products could infringe the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages or prevent us from selling our products.

 

Although it is our intention to avoid infringing or otherwise violating the intellectual property rights of others, our products may infringe or otherwise violate the intellectual property rights of others.  We may be subject to legal proceedings and claims, including claims of alleged infringement by us of the patents and other intellectual property

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rights of third parties.  Intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim.

 

If we were to discover or be notified that our products potentially infringe or otherwise violate the intellectual property rights of others, we may need to obtain licenses from these parties or substantially re-engineer our products in order to avoid infringement.  We might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully.  Moreover, if we are sued for infringement and lose the suit, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products.  Any of the foregoing could cause us to incur significant costs and prevent us from selling our products.

 

Declines in the operating performance of one of our business segments could result in an impairment of the segment’s goodwill.

 

As of December 31, 2017, we had consolidated goodwill of approximately $77.8 million recorded in our business segments.  We test our goodwill on an annual basis or when an indication of possible impairment exists in order to determine whether the carrying value of our assets is still supported by the fair value of the underlying business.  To the extent that it is not, we are required to record an impairment charge to reduce the asset to fair value.  A decline in the operating performance of any of our business segments could result in a goodwill impairment charge which could have a material effect on our financial results.

 

Our pension plans are currently underfunded, and we could be subject to increases in pension contributions to our defined benefit pension plans, thereby restricting our cash flow.

 

We sponsor various pension plans in the U.S. and Europe that are underfunded and may require significant cash payments.  We contributed $0.8 million and $0.7 million to our U.S. pension plans and $2.1 million and $1.7 million to our European pension plans in 2017 and 2016, respectively.  We currently expect to contribute in 2018 approximately $2.1 million to our U.S. plans and $2.0 million to our European plans to meet minimum funding requirements, in accordance with our funding policy. 

 

The funding status of our pension plans is determined using many assumptions, such as inflation, rates of return on investments, mortality, turnover and interest rates, any of which could prove to be different than projected.  If the performance of the assets in our pension plans does not meet our expectations, or if other actuarial assumptions are modified, or not realized, we may be required to contribute more to our pension plans than we currently expect.  For example, an approximate 25-basis point decline in the funding target interest rate under Section 430 of the Internal Revenue Code, as added by the Pension Protection Act of 2006 for minimum funding requirements, would increase our minimum required funding policy contributions to our U.S. pension plans by approximately $1 million to $3 million over the next three fiscal years.  This amount reflects the provisions of Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HAFTA), both of which affect pension plan funding.

 

Our pension plans are underfunded in the aggregate by approximately $38 million as of December 31, 2017 based on comparing the projected benefit obligation, calculated using actuarial assumptions in accordance with Accounting Standards Codification (ASC) 715 “Compensation — Retirement Benefits,” to the fair value of plan assets.  Our U.S. pension plans, which were underfunded by approximately $22 million as of December 31, 2017, are subject to ERISA.  In the event our U.S. pension plans are terminated for any reason while the plans are less than fully funded, we will incur a liability to the Pension Benefit Guaranty Corporation that may be equal to the entire amount of the underfunding at the time of the termination.  In addition, changes in required pension funding rules that were affected by the enactment of the Pension Protection Act of 2006 have significantly increased funding requirements, which could have an adverse effect on our cash flows.  If cash flows from operations are insufficient to fund our worldwide pension liability, we may be required to reduce or delay capital expenditures, or to seek additional capital.  Refer to Note 9 to the consolidated financial statements in Item 8 of this Annual Report.

 

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We previously identified a material weakness in our internal control over financial reporting, which has now been remediated.  Any future failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline.

 

We previously identified a material weakness in our internal control over financial reporting related to the recognition of revenue for a subset of transactions within the U.S. potable water market.  As a result of such weakness, our management concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2016.

 

The material weakness concerned a subset of transactions within the U.S. potable water market where certain contracts were inappropriately bifurcated and revenue was recognized prior to the completion of the revenue recognition criteria.  The Company addressed the material weakness through, among other things, adding new and/or enhanced existing controls surrounding the assessment of the revenue recognition criteria to ensure all such criteria were considered and met prior to the recording of revenue.

 

Although we have remediated this material weakness in our internal control over financial reporting, any failure to improve our disclosure controls and procedures or internal control over financial reporting to address any identified weaknesses in the future, if they were to occur, could prevent us from maintaining accurate accounting records and discovering material accounting errors.  Any of these results could adversely affect our business and the value of our common stock.

 

Existing and future laws, regulations and other legal requirements relating to our business may increase our costs of doing business and may expose us to liability.

 

We are subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local authorities, as well as foreign authorities relating to various matters, including the protection of our workers, our consumers and the environment.  Complying with these requirements has had, and will continue to have an effect on our costs of operations and competitive position.  In addition, there is the possibility that we could incur substantial costs as a result of violations under these laws or be subject to governmental orders which cause us to alter our operations or expend substantial resources to comply with such orders.  Any additional laws, regulations and other legal requirements enacted or adopted by federal, state and local authorities, as well as foreign authorities or new interpretations of existing legal requirements by regulatory bodies could further affect our costs of operations and competitive position.  For example, as a result of our acquisition of the New Business in late 2016, we may be subject to additional regulations currently under consideration related to the effects of crystalline silica.  If such regulations are ultimately adopted, we may need to expend substantial resources to comply with these regulations and if we fail to comply with these new regulations we could be subject to fines, penalties and other liabilities.

 

Our future success may be dependent upon the successful integration of our acquisitions and reaping the anticipated benefits from those acquisitions.

 

We may make acquisitions of businesses that complement or expand our current business.  No assurance can be given that we will be able to identify suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire the identified targets.  The success of any completed acquisition will depend on our ability to effectively integrate the acquired business into our existing operations and obtain the benefits contemplated at the time we made the acquisition.  The process of integrating and operating any acquired business may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources.  Our failure to successfully integrate the acquired businesses and assets into our existing operations and achieve the anticipated benefits from those acquisitions could have a material adverse effect on our financial condition and results of operations.

 

Our certificate of incorporation and bylaws and Delaware law contain provisions that may delay or prevent an otherwise beneficial takeover attempt of our Company.

 

Certain provisions of our certificate of incorporation and bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.  These include provisions:

 

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·

providing for a board of directors with staggered, three-year terms;

·

requiring super-majority voting to affect certain amendments to our certificate of incorporation and bylaws;

·

limiting the persons who may call special stockholders’ meetings;

·

limiting stockholder action by written consent;

·

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholders’ meetings; and

·

allowing our board of directors to issue shares of preferred stock without stockholder approval.

 

These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock, or could limit the ability of our stockholders to approve transactions that they may deem to be in their best interest.

 

The security of our information technology systems could be compromised, which could adversely affect our ability to operate.

 

Increased global information technology security requirements, threats and sophisticated and targeted computer crime pose a risk to the security of our systems, networks and the confidentiality, availability and integrity of our data.  Despite our efforts to protect sensitive information and confidential and personal data, our facilities and systems may be vulnerable to security breaches.  This could lead to negative publicity, theft, modification or destruction of proprietary information or key information, manufacture of defective products, production downtimes and operational disruptions, which could adversely affect our reputation, competitiveness and results of operations.

 

Risks relating to our previously announced merger with a subsidiary of Kuraray Co., Ltd.

 

Delisting and Deregistration of our common stock

 

Following the successful completion of the merger, shares of our common stock currently listed on the New York Stock Exchange (NYSE) will be converted into the right to receive $21.50 per share and will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended.  Therefore, there will no longer be a public trading market for our common stock.

 

The required regulatory approvals may not be obtained or may contain materially burdensome conditions.

 

Completion of the Merger remains conditioned upon the receipt of clearance by the U.S. Committee on Foreign Investment in the United States (CFIUS).  There can be no assurance that this approval will be obtained.  In addition, CFIUS may impose conditions on the completion of the merger or require changes to the terms of the merger.  Such conditions or changes could have the effect of jeopardizing or delaying completion of the merger.

 

Failure to complete the Merger could negatively impact our stock price and future business and financial results.

 

If the merger is not completed, our stock price and our ongoing business may be adversely affected.  In addition, we may be required to pay Kuraray a termination fee of $33.2 million if the merger agreement is terminated because the merger has not been consummated on or before April 30, 2018, unless we mutually agree with Kuraray to extend this date.  Furthermore, matters relating to the merger have required and may continue to require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to our Company.

 

 

Item 1B. Unresolved Staff Comments:

 

None

 

18


 

Item 2. Properties:

 

The Company believes that the production facilities, warehouses, service centers, sales offices, and quarries are adequate and suitable for its current operating needs.  The following table sets forth the locations utilized by the Company:

 

 

 

 

 

 

 

Description

    

Location

    

Property Interest

 

Carbon Manufacturing Plant

 

Catlettsburg, Kentucky

 

Owned

 

Carbon Manufacturing Plant

 

Pearlington, Mississippi

 

Owned

 

Carbon Manufacturing Plant

 

Parentis-en-Born, France

 

Owned

 

Carbon Reactivation Plant

 

Pittsburgh, Pennsylvania

 

Owned

 

Carbon Reactivation Plant

 

Blue Lake, California

 

Owned

 

Carbon Reactivation Plant

 

Feluy, Seneffe, Belgium

 

Owned

 

Carbon Reactivation Plant

 

Gila Bend, Arizona

 

Owned

 

Carbon Reactivation Plant

 

Columbus, Ohio

 

Owned

 

Carbon Reactivation Plant

 

Tipton, Dudley, United Kingdom

 

Owned

 

Carbon Reactivation Plant

 

San Pietro di Legnago, Italy

 

Owned

 

Carbon Reactivation Plant

 

Fukui, Japan

 

Owned

 

Carbon Reactivation Plant

 

Suzhou, China

 

Owned

 

Carbon Reactivation Plant

 

North Tonawanda, New York

 

Leased

 

Carbon Reactivation Plant

 

Ashton-in-Makerfield, United Kingdom

 

Leased

 

Carbon Cloth Fabrication Plant

 

Houghton-le-Spring, United Kingdom

 

Leased

 

Diatomaceous Earth Plant

 

Riom-ès-Montagnes, France

 

Owned

 

Diatomaceous Earth Plant

 

Saint Bauzile, Chomerac, France

 

Owned

 

Perlite Plant

 

Foggia, Italy

 

Owned

 

Equipment & Assembly Plant

 

Pittsburgh, Pennsylvania

 

Owned

 

UV Manufacturing & Fabrication Plant

 

Coraopolis, Pennsylvania

 

Leased

 

Diatomite Quarry

 

Virargues, France

 

Owned

 

Diatomite Quarry

 

Saint-Bauzile, France

 

Owned

 

Corporate Headquarters & Innovation Center

 

Moon Township, Pennsylvania

 

Leased

 

Field Service Center

 

Joliet, Illinois

 

Leased

 

Field Service Center

 

Tempe, Arizona

 

Leased

 

Field Service Center

 

Westlake, Louisiana

 

Leased

 

Field Service Center

 

Douglasville, Georgia

 

Leased

 

Service Center

 

Downingtown, Pennsylvania

 

Leased

 

Service Center

 

Rutland, Massachusetts

 

Leased

 

Sales Office

 

São Paulo, Brazil

 

Leased

 

Sales Office

 

Beverungen, Germany

 

Leased

 

Sales Office

 

Gothenburg, Sweden

 

Leased

 

Sales Office

 

Paris, France

 

Leased

 

Sales Office

 

Singapore, Singapore

 

Leased

 

Sales Office

 

Taipei, Taiwan

 

Leased

 

Operational Office

 

Malmaison, France

 

Leased

 

Operational Office

 

Milan, Italy

 

Leased

 

Operational Office

 

Tokyo, Japan

 

Leased

 

Office & Warehouse

 

Tianjin, China

 

Leased

 

Office & Warehouse

 

Ashton-in Makerfield, United Kingdom

 

Leased

 

Warehouse & Maintenance Facility

 

Abidos, France

 

Leased

 

Warehouse, Service Center & Office

 

Kolding, Denmark

 

Leased

 

Warehouses

 

Huntington (4), Kenova (1), Nitro (1), West Virginia

 

Leased

 

Warehouses

 

Pittsburgh (2), Pennsylvania

 

Owned

 

Warehouses

 

North Tonawanda (2), New York

 

Leased

 

Warehouses

 

Santa Fe Springs (1), Stockton (1), California

 

Leased

 

Warehouse

 

Coraopolis, Pennsylvania

 

Leased

 

Warehouse

 

Phoenix, Arizona

 

Leased

 

Warehouse

 

South Point, Ohio

 

Leased

 

Warehouse

 

Singapore, Singapore

 

Leased

 

 

19


 

The following properties all serve the Activated Carbon segment:

 

The Catlettsburg, Kentucky plant is the Company’s largest facility, with plant operations occupying approximately 50 acres of a 226-acre site.  This plant produces granular and powdered activated carbons and acid washed granular activated carbons and reactivates spent granular activated carbons.

 

The Pearlington, Mississippi plant occupies a site of approximately 100 acres.  The plant has one production line that produces granular and powdered activated carbons.

 

The Parentis-en-Born plant occupies approximately 59 acres and is located near Landes Forest in Southwestern France.  The plant is approximately 860,000 square feet and it is a virgin wood-based activation carbon plant utilizing both steam and chemical activation processes.

 

The Pittsburgh, Pennsylvania carbon production plant occupies a 15-acre site.  Operations at the plant include the reactivation of spent granular activated carbons, the impregnation of granular activated carbons and the grinding of granular activated carbons into powdered activated carbons.  The plant also has the capacity to finish coal-based or coconut-based specialty activated carbons.  The plant is now partially idle while a 24,000 square foot warehouse is being constructed.  Construction is scheduled to be completed in 2018, with the plant expected to return to full production.

 

The Blue Lake plant, located near the city of Eureka, California, occupies approximately 2 acres.  The primary operation at the plant includes the reactivation of spent granular activated carbons, but is currently idled.

 

The Feluy, Seneffe plant occupies a site of approximately 38 acres located 30 miles south of Brussels, Belgium.  Operations at the plant include both the reactivation of spent granular activated carbons and the grinding of granular activated carbons into powdered activated carbons.

 

The Gila Bend, Arizona facility occupies a 20-acre site.  Operations at the plant include the reactivation of spent granular activated carbons.

 

The Columbus, Ohio plant occupies approximately 27 acres.  Operations at the plant include the reactivation of spent granular activated carbons, impregnation of activated carbon, crushing activated carbon to fine mesh, acid and water washing, filter-filling, and various other value added processes to granular activated carbon.

 

The Tipton plant, located near the city of Dudley, United Kingdom, occupies approximately 4 acres and became operational in 2016 after several years undergoing operational upgrades.  It is a reactivation plant of spent granular activated carbon.

 

The San Pietro di Legnago plant, located in northern Italy, occupies approximately 5 acres.  The primary operation at the plant, which consists of approximately 54,000 square feet, includes the reactivation of spent granular activated carbons.

 

The Fukui, Fukui Prefecture, Japan plant occupies a site of approximately 6 acres and has two production lines for carbon reactivation.  The plant is currently idled.

 

The Suzhou, China plant occupies approximately 11 acres and is licensed to export activated carbon products.  This plant is a reactivation facility.

 

The North Tonawanda, New York plant consists of 12,500 square feet.  The facility houses a dry feed system, screening tower, reactivation furnace, storage tanks, and packaging system.

 

The Ashton-in-Makerfield plant occupies a 1.6-acre site, 20 miles west of Manchester, United Kingdom.  Operations at the plant include the impregnation of granular activated carbons.  The plant also has the capacity to finish coal-based or coconut-based activated carbons.

 

20


 

The following properties all service the Alternative Materials segment:

 

The Houghton le-Spring plant, located near the city of Newcastle, United Kingdom, occupies approximately 2 acres.  Operations at the plant include the manufacture of woven and knitted activated carbon textiles and their impregnation and lamination.

 

The Riom-ès-Montagnes plant occupies approximately 3 acres and is located in south-central France.  The plant produces Clarcel® brand diatomaceous earth which is mined from the diatomite quarry which is located in Virargues, France, approximately 23 miles from Riom-ès-Montagnes.  The plant is approximately 30,000 square feet and occupies a 2.5 acre site, while the quarry is approximately 118 acres.

 

The Saint Bauzile plant, located in Chomerac, France produces Clarcel® brand diatomaceous earth which is mined from the diatomite quarry which is located in Saint-Bauzile, France.  The plant is approximately 163,000 square feet and occupies a 17 acre site, while the quarry is approximately 348 acres.

 

The Foggia, Italy plant produces Randalite® and Randafil™ brands perlite filtration media and it is located in southern Italy.  The plant occupies 8 acres and consists of approximately 353,000 square feet.

 

The Company has these additional properties that serve its other segments as follows:

 

The Pittsburgh, Pennsylvania Equipment and Assembly plant is located on Neville Island and is situated within a 16-acre site that includes a 300,000 square foot building.  The Equipment and Assembly plant occupies 85,000 square feet with the remaining space used as a centralized warehouse for carbon inventory.  The plant, which serves both the Activated Carbon and Advanced Water Purification segments, manufactures and assembles fully engineered carbon and ISEP® equipment for purification, concentration and separation systems.  This plant also serves as the East Coast staging and refurbishment point for carbon service equipment.

 

The Coraopolis, Pennsylvania Equipment plants consist of a 44,000-square foot production facility and a 16,691-square foot production facility located near Pittsburgh, Pennsylvania.  The facilities are adjacent properties and the primary focus is the manufacture of UV and Hyde GUARDIAN® equipment, including mechanical and electrical assembly, controls systems integration and validation testing of equipment.  This location also serves as the Pilot Testing facility for Process Development, as well as the spare parts distribution center for UV and Hyde GUARDIAN® systems.  These facilities serve the Advanced Water Purification segment.

 

Item 3. Legal Proceedings:

 

The Company is involved in various legal proceedings, lawsuits and claims, including employment, product warranty and environmental matters of a nature considered normal to its business.  It is the Company’s policy to accrue for amounts related to the legal matters when it is probable that a liability has been incurred and the loss amount is reasonably estimable.

 

Refer to Note 16 to the consolidated financial statements in Item 8 of this Annual Report, which is incorporated herein by reference.

 

Item 4. Mine Safety Disclosures:

 

Not applicable.

21


 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Repurchases of Equity Securities:

 

Common Shares and Market Information

 

Common shares are traded on the New York Stock Exchange under the trading symbol CCC.  There were 937 registered stockholders as of December 31, 2017.

 

Quarterly Common Stock Price Ranges and Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

Fiscal Quarter

    

High

    

Low

    

Dividend

    

High

    

Low

    

Dividend

 

First

 

$

17.80

 

$

13.10

 

$

0.05

 

$

17.53

 

$

13.67

 

$

0.05

 

Second

 

$

15.60

 

$

13.40

 

$

0.05

 

$

16.59

 

$

12.75

 

$

0.05

 

Third

 

$

21.45

 

$

12.00

 

$

0.05

 

$

15.77

 

$

12.70

 

$

0.05

 

Fourth

 

$

22.10

 

$

21.23

 

$

0.05

 

$

18.80

 

$

14.45

 

$

0.05

 

 

Quarterly dividends of $0.05 per share were declared in each of the four quarters for the years ended December 31, 2017 and 2016.  Dividend declaration and payout are at the discretion of the Board of Directors.  Future dividends will depend on the Company’s earnings, cash flows, and capital investment plans to pursue long-term growth opportunities.

 

The information appearing in Item 12 of Part III below regarding common stock issuable under the Company’s equity compensation plan is incorporated herein by reference.

 

Stockholder Return Performance Graph

 

The following performance graph and related information shall not be deemed “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

The graph below compares the yearly change in cumulative total stockholder return of the Company’s common stock with the cumulative total return of the Standard & Poor’s (S&P) 500 Stock Composite Index, the New Peer Group and the Old Peer Group.  The Company believes that its core business consists of purifying air, water and other products.  As such, the Company’s selected peer group consists of companies that are involved in lines of business that are similar to the Company’s core business.

 

The New Peer Group is comprised of seven companies: Cabot Corporation, CLARCOR, Inc., Donaldson Company, Inc., ESCO Technologies Inc., Imerys SA, Ingevity Corporation, and Lydall, Inc.  The Old Peer Group consisted of five of the seven companies included in the New Peer Group.  In consideration of the Company’s acquisition of the New Business in late 2016, the New Peer Group reflects the inclusion of filtration media and wood-based activated carbon manufacturers, Imerys SA and Ingevity Corporation, respectively.

 

22


 

Comparison of Five-Year Cumulative Total Return*

 

Among Calgon Carbon’s Common Stock, S&P 500 Composite Index, and Peer Groups

 

Picture 1

 

Issuer Repurchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

    

(d) Maximum Number

 

 

 

 

 

 

 

 

(c) Total Number of

 

(or Approximate

 

 

 

 

 

 

 

 

Shares Purchased

 

Dollar Value)

 

 

 

(a) Total

 

 

 

 

as Part of Publicly

 

of Shares that May

 

 

 

Number

 

(b) Average

 

Announced

 

Yet be Purchased

 

 

 

of  Shares

 

Price Paid

 

Repurchase Plans

 

Under the Plans or

 

Period

 

Purchased

 

Per Share

 

or Programs (1)

 

Programs

 

October 1 — October 31, 2017

 

 —

 

$

 —

 

 —

 

$

64,131,013

 

November 1 — November 30, 2017

 

 —

 

$

 —

 

 —

 

$

64,131,013

 

December 1 — December 31, 2017

 

 —

 

$

 —

 

 —

 

$

64,131,013

 

 

(1)

In December 2013, the Company’s Board of Directors authorized the repurchase of additional common stock, resulting in a total remaining availability of $64.1 million.  There is no expiration date for this program.  In April 2016, the Company announced that it would suspend the activities of the share repurchase program.

 

 

23


 

Item 6. Selected Financial Data:

 

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

Calgon Carbon Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

    

2017

    

2016 (1) 

    

2015

    

2014

    

2013

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

619,811

 

$

514,246

 

$

535,004

 

$

555,103

 

$

547,939

 

Net income

 

$

21,101

 

$

13,797

 

$

43,463

 

$

49,370

 

$

45,713

 

Net income per common share, basic

 

$

0.42

 

$

0.27

 

$

0.84

 

$

0.93

 

$

0.85

 

Net income per common share, diluted

 

$

0.42

 

$

0.27

 

$

0.82

 

$

0.92

 

$

0.84

 

Cash dividends declared per common share

 

$

0.20

 

$

0.20

 

$

0.20

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (as of year end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

854,584

 

$

775,218

 

$

656,518

 

$

621,661

 

$

590,078

 

Long-term debt (2)

 

$

228,500

  

$

220,000

  

$

103,941

  

$

70,448

  

$

32,114

  

 

(1)

Includes $15.7 million of costs related to the acquisition of the New Business, consisting primarily of $14.0 million of transaction costs.  Total assets and long-term debt increased in 2016 as a result of the acquisition of the New Business.  Refer to Note 20 to the consolidated financial statements in Item 8 of this Annual Report for further information.

(2)

Excludes $5.0 million and $5.0 million of debt which is classified as the current portion of long-term debt as of December 31, 2017 and 2016, respectively.  Refer to Note 8 to the consolidated financial statements in Item 8 of this Annual Report for further information.  Excludes $7.5 million, $0.8 million, and $2.2 million of debt which was classified as a current liability as of December 31, 2015, 2014, and 2013, respectively.

 

24


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:

 

Overview

 

On September 21, 2017, the Company entered into a definitive merger agreement under which a subsidiary of the Japanese chemical manufacturer Kuraray Co., Ltd. (Kuraray) agreed to acquire the Company, by way of a reverse triangular merger (Pending Merger).  Following the consummation of the Pending Merger, the Company would become a wholly owned subsidiary of Kuraray.  Refer to Note 21 to the consolidated financial statements in Item 8 of this Annual Report for additional information regarding the Pending Merger.

 

On November 2, 2016, the Company completed the acquisition of the wood-based activated carbon, reactivation and mineral-based filtration media business of CECA, a subsidiary of Arkema Group (New Business).  Due to the complementary nature of the New Business’ products and market applications to those of the Company, and its significant exposure to less regulated, more traditional end markets, the addition of the New Business to the Company creates a more balanced global platform from which the Company can continue to grow by leveraging its now expanded capabilities in the global activated carbon and adjacent filtration media market areas. 

 

Beginning January 1, 2017, the Company realigned its internal management reporting structure to incorporate the New Business into the existing business, and reorganized its current reportable segments.  The Company is reporting its results using the new reportable segment structure and has restated prior periods to conform to the change in reportable segments.  Refer to Notes 18 and 20 to the consolidated financial statements in Item 8 of this Annual Report for additional information regarding the reportable segments and the acquisition.

 

The Company reported net income of $21.1 million or $0.42 per diluted share for 2017, as compared to net income of $13.8 million or $0.27 per diluted share for 2016.  Consolidated net sales increased $105.6 million or 20.5% in 2017 as compared to 2016.  Included in the change was the incremental net sales of $91.9 million from the New Business.  For the year to date period, foreign currency translation had a positive impact of $0.2 million.

 

Results of Operations

 

2017 Versus 2016

 

Net sales for the Activated Carbon segment increased $70.2 million or 14.7% from 2016.  Of this increase, the New Business contributed $48.6 million of additional net sales in 2017 as compared to the prior year, primarily in the Food and Beverage and Industrial markets.  Foreign currency translation effects for the segment were not significant.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Net Sales

 

 

 

 

 

    

Foreign

    

Net of Foreign

 

(Dollars in millions)

 

As Reported

 

Currency Impact

 

Currency Impact

 

Environmental Air market

 

$

12.3

 

$

0.2

 

$

12.5

 

Environmental Water market

 

 

0.9

 

 

(0.2)

 

 

0.7

 

Food and Beverage market

 

 

20.7

 

 

(0.5)

 

 

20.2

 

Industrial market

 

 

17.4

 

 

(0.4)

 

 

17.0

 

Potable Water market

 

 

12.7

 

 

0.5

 

 

13.2

 

Specialty Carbon market

 

 

7.8

 

 

0.3

 

 

8.1

 

Other

 

 

(1.6)

 

 

0.1

 

 

(1.5)

 

Total Activated Carbon

 

$

70.2

 

$

 —

 

$

70.2

 

 

Excluding the New Business, net sales in the Activated Carbon segment increased in 2017 as compared to 2016.  The increased sales were attributed to higher demand for Environmental Air market mercury removal products as well as respirator products and metal recovery in the Specialty market in the Americas.  In addition, the Potable Water market experienced higher demand for the removal of 1,2,3-trichloropropane (1,2,3-TPC) and perfluorinated compounds (PFCs) contaminants from drinking water.  These increases were partially offset by lower activated carbon pellet sales for treating sulfur and nitrogen oxide emissions in the Asia Environmental Air market as a certain customer order in 2016 did not repeat in 2017.

 

25


 

Net sales for the Alternative Materials segment increased $42.0 million for the year ended December 31, 2017 as compared to the same period in 2016 as a result of $43.3 million of additional sales of diatomaceous earth and perlite filtration media products related to the New Business.  These sales were partially offset by lower demand for defense and medical application products.  Foreign currency translation had a positive impact of $0.2 million for the year ended December 31, 2017, as a stronger Euro offset the weaker British pound sterling.

 

Net sales for the Advanced Water Purification segment declined $6.7 million when compared to 2016.  Foreign currency translation effects in the Advanced Water Purification segment were not significant.

 

 

 

 

 

 

 

 

Increase (Decrease)

 

(Dollars in millions)

 

in Net Sales

 

Ballast water treatment

 

$

(1.5)

 

Traditional ultraviolet light

 

 

(1.2)

 

Ion exchange

 

 

(4.0)

 

Total Advanced Water Purification

 

$

(6.7)

 

 

Net sales for ballast water treatment were lower due to a lack of market demand driven by ship owners requesting extensions to compliance dates and a delay in the IMO implementation schedule from the initial 2017 date to 2019.  Ion exchange and traditional ultraviolet light sales were lower due to several large projects that were completed in 2016 that did not repeat in 2017. 

 

Net sales less cost of products sold (excluding depreciation and amortization), as a percentage of net sales, was 30.5% for 2017 compared to 32.6% for the comparable 2016 period, a 2.1 percentage point or $13.0 million decrease.  Contributing to the decline was the inclusion in 2017 of the historically lower margins of the New Business which caused an approximate $9.3 million decline, impacting both the Activated Carbon and Alternative Materials segments.  In addition, a $0.9 million business interruption insurance settlement benefited the Activated Carbon segment in 2016.  The remaining decline occurred within the legacy business, primarily in the Activated Carbon segment, due to a less favorable product mix and timing of scheduled major maintenance at the coal-based virgin activated carbon manufacturing facilities.  The Company’s cost of products sold excludes depreciation and amortization; therefore it may not be comparable to that of other companies.

 

Depreciation and amortization increased $8.6 million in 2017 as compared to 2016, primarily as a result of $8.7 million of expense related to the New Business, for which the impact was split relatively evenly between the Activated Carbon and Alternative Materials segments.

 

Selling, general and administrative expenses decreased $1.0 million or 1.0% in 2017 as compared to 2016.  The decline included lower acquisition and integration related costs of $11.2 million and outside consulting costs of $1.5 million, impacting both the Activated Carbon and Alternative Materials segments, and lower pension settlement charges of $0.5 million in the Activated Carbon segment.  Partially offsetting these amounts were $7.9 million of expenses incurred by the New Business, for which the impact was split relatively evenly between the Activated Carbon and Alternative Materials segments.  The 2017 period also included $4.6 million of costs related to the Pending Merger with Kuraray, which were not allocated to a reportable segment. 

 

Research and development expenses were comparable to 2016

 

Other operating income for 2017 included the $4.1 million gain on the sale of an idled plant in the UK.

 

Interest income in 2017 was comparable to 2016.

 

Interest expense increased $5.5 million in 2017 as compared to 2016 due to an increase in the average outstanding debt balance, primarily resulting from the Company’s purchase of the New Business, coupled with higher interest rates in 2017.

 

The additional income of $1.3 million in other income (expense) — net for 2017 as compared to 2016 was largely related to favorable foreign exchange when compared to the prior year.

 

26


 

The income tax provision for 2017 was $12.5 million compared to $6.3 million in 2016.  The income tax provision increased $4.7 million  as a result of higher pre-tax earnings in 2017 as compared to 2016.  In addition, the incorporation of the Company’s U.S. Belgium branch in 2017, which was part of an overall single integrated plan of reorganization that included the Company’s acquisition of the New Business, increased the 2017 income tax provision by $3.1 million as compared to 2016.  Partially offsetting these increases was a $2.0 million decrease in the income tax provision as a result of higher foreign earnings in 2017, since the income tax rates applicable to foreign taxing jurisdictions are lower than those in the U.S.

 

The effective tax rate for 2017 was 37.1% compared to 31.3% for 2016.  The implementation of the overall single integrated plan of reorganization which included the incorporation of the Company’s U.S. Belgium branch in 2017 resulted in a 9.4% increase in the effective tax rate for 2017.  As discussed in further detail in Note 14 to the consolidated financial statements in Item 8 of this Annual Report, on December 22, 2017 the U.S. enacted the Tax Cuts and Jobs Act (the Act).  The Act, which is also commonly referred to as “U.S. tax reform,” significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries.  The net impact of the Act increased the Company’s tax rate by approximately 1.8% over the 2017 statutory rate.  The effective tax rate for 2016 included the 2.7% benefit realized from the enactment of the U.S. Internal Revenue Code Section 987 Treasury Regulations, which were finalized and issued in 2016.  As discussed above, the Company had higher foreign earnings in 2017, which decreased the effective tax rate 3.3% as compared to 2016.

 

The effective tax rate for 2017 of 37.1% was higher than the U.S. statutory rate of 35% primarily due to the 9.4% increase as a result of the overall single integrated plan of reorganization, which was offset by the 9.8% decrease as a result of foreign earnings, which are taxed at lower income tax rates, both of which are described above.  The effective tax rate for 2017 was 1.8% higher as a result of the Act which was enacted in 2017, which is also described above.  U.S state income taxes caused a 1.9% increase in the effective tax rate, but were partially offset by a 1.3% decrease related to permanent tax differences, primarily related to non-taxable manufacturing income in the U.S. along with other non-taxable income in the UK and Singapore.

 

2016 Versus 2015

 

Net sales for the Activated Carbon segment decreased $20.2 million from 2015.  Included in this change was the negative impact of foreign currency translation which totaled $1.8 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Net Sales

 

 

 

 

 

    

Foreign

    

Net of Foreign

 

(Dollars in millions)

 

As Reported

 

Currency Impact

 

Currency Impact

 

Environmental Air market

 

$

(9.0)

 

$

(0.6)

 

$

(9.6)

 

Environmental Water market

 

 

(12.8)

 

 

(0.6)

 

 

(13.4)

 

Food and Beverage market

 

 

(0.9)

 

 

 —

 

 

(0.9)

 

Industrial market

 

 

(2.1)

 

 

 —

 

 

(2.1)

 

Potable Water market

 

 

(0.4)

 

 

1.9

 

 

(1.5)

 

Specialty Carbon market

 

 

6.6

 

 

1.0

 

 

7.6

 

Other

 

 

(1.6)

 

 

0.1

 

 

1.5

 

Total Activated Carbon

 

$

(20.2)

 

$

1.8

 

$

(18.4)

 

 

Contributing to the year over year decline was lower demand in the Environmental Air market resulting from a legacy customer that was using standard product and switched suppliers in 2016 as well as a number of coal-fired electric generation units permanently changing over to gas fired units due to very low natural gas prices.  In addition, the unseasonably warmer winter weather conditions in the early part of the year coupled with the low natural gas prices reduced the operational requirements of certain customers’ coal-fired electric generating units in 2016.  This decline was partially offset by an increase in demand for activated carbon pellets for treating sulfur and nitrogen oxide emissions.  The Environmental Water market was negatively impacted by a customer plant closure in Asia, along with a decline in industrial environmental activity due to a slow economy and large orders in 2015 that did not repeat in 2016.  Lower demand in the Industrial and the Food and Beverage markets was largely due to soft economic conditions, customers optimizing their processes resulting in a rationalization of carbon usage, and a general slowness in project related activity.  An increase in the Specialty Carbon market for metal recovery carbon products in the Americas and for respirator carbon products in Asia partially offset the decline in the other markets.  In addition, 2016 included net sales

27


 

of $6.4 million related to the New Business primarily in the Food and Beverage and Industrial markets, along with several large projects for carbon adsorption equipment, including $3.3 million related to treatment of perfluorinated compounds in drinking water, recorded in 2016 as compared to the prior year.

 

Net sales for the Alternative Materials segment increased $5.2 million from 2015 largely due to net sales of $5.7 million related to the New Business subsequent to the acquisition in November 2016.  Higher demand for defense application cloth products was more than offset by the negative impact of foreign currency translation which totaled $0.9 million due to the weaker British Pound Sterling. 

 

Net sales for the Advanced Water Purification segment declined $5.8 million as compared to 2015.  Foreign currency translation effects in the Advanced Water Purification segment were not significant.

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease)

 

(Dollars in millions)

 

in Net Sales

 

Ballast water treatment

 

 

(4.7)

 

Traditional ultraviolet light

 

 

(0.3)

 

Ion exchange

 

 

(0.8)

 

Total Advanced Water Purification

 

$

(5.8)

 

 

Net sales for ballast water treatment were lower due to continued regulatory delays and a decline in sales of equipment to offshore service vessels, the demand from which has been impacted by ongoing low oil prices.  In addition, sales of ion exchange equipment were lower due to several large projects in 2015 that did not repeat in 2016. 

 

Net sales less cost of products sold (excluding depreciation and amortization), as a percentage of net sales, was 32.6% for 2016 compared to 35.8% for the comparable 2015 period, a 3.2 percentage point or $16.5 million decrease.  Approximately $11.3 million of this decrease resulted from a decline in the volume of higher margin products, including FLUEPAC® products for mercury removal coupled with an increase in volume of lower margin products compared to the prior year.  Also contributing to the decline was $1.5 million of additional costs related to the inventory fair value step up, and $1.0 million in costs related to scheduled plant maintenance outages at certain of the New Business’ production facilities.  The Company incurred higher post retirement costs of approximately $0.9 million for the U.S. plans in 2016 as compared to 2015.  In 2015, the Company benefited from refunds for import duties paid of $1.3 million which did not repeat in the 2016 period.  A business interruption insurance settlement of $0.9 million received in 2016 provided a partial offset to the aforementioned items, all of which primarily impacted the Activated Carbon segment.  In addition, the Advanced Water Purification segment incurred higher warranty costs of approximately $1.2 million in 2016 as compared to the prior year.  The Company’s cost of products sold excludes depreciation and amortization; therefore it may not be comparable to that of other companies. 

 

Depreciation and amortization increased $2.6 million in 2016 as compared to 2015.  The increase was primarily due to higher depreciation expense related to the completion of several large projects such as the improvement and upgrades to the Company’s manufacturing facilities, the new headquarters facility, and the SAP re-implementation project and $1.4 million incurred by the New Business for the two month period ended December 31, 2016.

 

Selling, general and administrative expenses increased $15.0 million or 17.7% in 2016 as compared to 2015.  During 2016, $13.4 million of additional transaction costs related to the acquisition of the New Business had been incurred.  The Company experienced higher employee related costs of $0.8 million, of which $0.7 million was a result of higher pension settlement costs in 2016 versus the comparable period in 2015, primarily impacting the Activated Carbon segment.  These increases were partially offset by outside consulting services incurred in 2015, largely related to the SAP re-implementation project, which did not repeat, but were partially offset by other project costs in 2016.  In addition, 2016 expenses included $1.7 million incurred by the New Business for the two month period ended December 31, 2016 reported in the Activated Carbon and Alternative Materials segments.

 

Research and development expenses decreased $1.0 million in 2016 versus the comparable 2015 period.  This decrease was largely due to expenses related to the Company’s new research and development innovation center that were incurred in 2015 but did not repeat in 2016.

 

Interest income in 2016 was comparable to 2015.

 

28


 

Interest expense increased $1.6 million in 2016 as compared to 2015 due to an increase in the average outstanding borrowings under the Company’s debt agreements resulting from the Company’s purchase of the New Business, coupled with slightly higher interest rates in 2016.

 

The additional expense of $1.5 million in other income (expense) — net for 2016 as compared to 2015 was largely related to foreign exchange and income reported in 2015 for a decline in the earn-out liability related to a 2010 acquisition that did not repeat in 2016.

 

The income tax provision for 2016 was $6.3 million as compared to $19.9 million in 2015.  The income tax provision decreased $13.6 million in 2016 as compared to 2015 predominately due to a decline in pre-tax earnings. 

 

The effective tax rate for 2016 was 31.3% compared to 31.4% for the similar 2015 period.  The 2016 effective rate was lower than the U.S. statutory rate mainly due to the mix of income throughout foreign jurisdictions, the majority of which was related to China, the UK and Singapore, which reduced the rate by 6.5%.  The decrease of the 2016 rate was partially offset by state income taxes which increased the overall 2016 tax rate by 2.9%.  In addition, the 2016 rate was increased by 3.2% for permanent items including non-deductible transaction costs in the U.S.  This increase was partially offset by the benefit realized from the enactment of the U.S. Internal Revenue Code Section 987 Treasury Regulations, which were finalized and issued on December 7, 2016.  The benefit realized from the issuance of the final regulations reduced the 2016 rate by 2.7%.

 

Liquidity and Capital Resources

 

The Company has had sufficient financial resources to meet its operating requirements and to fund capital spending, the acquisition, dividend payments, share repurchases and pension plans.

 

Cash flows provided by operating activities were $64.6 million in 2017, as compared to $69.0 million in 2016.  Net cash flow was slightly lower between the two periods as a net unfavorable working capital change offset the higher operating results in 2017.  Cash flows provided by operating activities were $69.0 million in 2016 as compared to $69.9 million.  Net cash flow was comparable between the two periods as a net favorable working capital change offset the lower operating results in 2016.

 

Cash flows used in investing activities decreased in 2017 as 2016 included the acquisition of the New Business for $153.6 million, net of cash acquired.  During 2017, the Company finalized the purchase price of the New Business, resulting in an additional payment of $1.2 million.  Refer to Note 20 to the consolidated financial statements in Item 8 of this Annual Report for further information.

 

Capital expenditures were $57.4 million, $31.9 million, and $62.3 million, in 2017, 2016 and 2015, respectively.  Expenditures for 2017 and 2016 were primarily for improvements to manufacturing facilities, including the upgrade of the Company’s Pennsylvania reactivation plant and debottlenecking of its plant in France in 2017.  Expenditures for 2015 included $19.3 million for improvements to the Company’s Catlettsburg, Kentucky manufacturing facility, $5.8 million of upgrades to the Tipton plant in the UK, expenditures of $11.3 million related to the Company’s new headquarters facility, which includes the research and development innovation center; and $4.1 million for a SAP re-implementation project.  Capital expenditures for 2018 are currently projected to be approximately $35 million to $45 million.  The aforementioned expenditures are expected to be funded by operating cash flows, cash on hand, and borrowings.

 

Proceeds for sales of property, plant and equipment were $5.1 million in 2017, $1.2 million in 2016, and not significant in 2015.  The majority of 2017 proceeds were from the sale of an idled plant in the UK, which resulted in a gain of $4.1 million.

 

Cash flows for financing activities increased significantly in 2016 as compared to 2017 and 2015 as a result of the incremental borrowings required under the Company's debt arrangements to fund the acquisition of the New Business.  Other financing includes the settlement of derivative contracts pertaining to an intercompany loan related to the acquisition of the New Business.

 

On October 4, 2016, the Company entered into the First Amended and Restated Credit Agreement (Credit Agreement) which provides for total borrowing capacity of $400 million, comprised of a $300 million revolving credit facility

29


 

(Revolver) that expires on October 4, 2021 and a $100 million term loan facility (Term Loan) that expires on October 4, 2023. 

 

The Company borrowed the full $100 million under the Term Loan on October 4, 2016.  During the fourth quarter of 2016, the Company borrowed $160 million under the Revolver to finance the acquisition of the New Business, and is available for working capital requirements and general corporate purposes.  The total debt outstanding increased $8.5 million in 2017.  Total availability under the Amended Credit Agreement was $159.2 million as of December 31, 2017.

 

Required quarterly payments under the Term Loan began January 1, 2017, and are equal to 1.25% of the original outstanding balance of the Term Loan until January 1, 2019, at which time the quarterly repayments will increase to 2.0% until the remaining balance is due on the October 4, 2023 maturity date.

 

Certain domestic subsidiaries of the Company unconditionally guarantee all indebtedness and obligations related to borrowings under the Credit Agreement.  The Company’s obligations under the Credit Agreement are unsecured.  The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.  As a result of an amendment signed in February 2017, the Company is permitted to pay annual dividends of up to $14 million, so long as the sum of availability under the Credit Agreement and the amount of U.S. cash on hand is at least $50 million.  The Company must comply with certain financial covenants including minimum interest coverage ratio and a maximum leverage ratio as defined within the Credit Agreement.  The Company was in compliance with all such covenants as of December 31, 2017.

 

In 2016, Calgon Carbon Japan (CCJ) entered into a 2.0 billion Japanese Yen unsecured revolving loan facility agreement (Japanese Credit Agreement) which was scheduled to expire on March 24, 2019.  The Company was jointly and severally liable as the guarantor of CCJ’s obligations under the Japanese Credit Agreement.  Total availability under the Japanese Credit Agreement was 2.0 billion Japanese Yen as of December 31, 2017.  In January 2018, the Company canceled the Japanese Credit Agreement.

 

Refer to Note 8 to the consolidated financial statements in Item 8 of this Annual Report, which is incorporated herein by reference, for further details on the Company’s borrowing arrangements.

 

In December 2013, the Company’s Board of Directors approved a share repurchase program with a total of $150 million of purchases authorized.  As of December 31, 2017, the Company had repurchased a total of 4,598,661 shares at an average price of $18.67 per share under this program.  All of the above mentioned repurchases were funded from operating cash flows, cash on hand, and borrowings and the shares are held as treasury stock.  Subsequent to these repurchases, the Company’s remaining authorization to repurchase its common stock is approximately $64.1 million.  In April 2016, the Company suspended the activities of the share repurchase program.

 

On February 18, 2015, the Company’s Board of Directors reinstated its common stock dividend program.  Quarterly dividends of $0.05 per share were declared and paid in each of the four quarters for the years ended December 31, 2017, 2016, and 2015.  In addition, in February 2018, a common stock dividend of $0.05 per share was declared.  Dividend declaration and payout are at the discretion of the Board of Directors.  Future dividends will depend on the Company’s earnings, cash flows, capital investment plans to pursue long-term growth opportunities, and share repurchases, if any.

 

The Company currently expects that cash from operating activities plus cash balances and available external financing will be sufficient to meet its cash requirements for the next twelve months.  The cash needs of each of the Company’s reporting segments are principally covered by the segment’s operating cash flow on a standalone basis.  Any additional needs will be funded by cash on hand or borrowings under the Company’s credit facilities.  The Advanced Water Purification segment historically has not required extensive capital expenditures.  The Company believes that operating cash flows, cash on hand and borrowings will adequately support each of the segments cash needs.

 

Cash and cash equivalents include $33.1 million and $27.4 million held by the Company’s foreign subsidiaries as of December 31, 2017 and 2016, respectively.  Generally, cash and cash equivalents held by foreign subsidiaries are not readily available for use in the U.S. without adverse tax consequences.  The Company’s principal sources of liquidity are its cash flows from its operating activities or borrowings directly from its credit facilities.  The Company does not believe the level of its non-U.S. cash position will have an adverse effect on working capital needs, planned growth, repayment of maturing debt, or benefit plan funding.

 

30


 

Contractual Obligations

 

The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements, and unconditional purchase obligations.  The following table represents the significant contractual cash obligations and other commercial commitments of the Company as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

(Dollars in thousands)

    

Total

    

Less than 1 year

    

1-3 years

    

3-5 years

    

More than 5 years

 

Long-term debt, including current portion

 

$

233,500

 

$

5,000

 

$

16,000

 

$

154,500

 

$

58,000

 

Interest (1)

 

 

35,546

 

 

8,463

 

 

16,166

 

 

9,069

 

 

1,848

 

Transition tax payable

 

 

6,780

 

 

542

 

 

1,085

 

 

1,085

 

 

4,068

 

Operating leases

 

 

41,462

 

 

8,579

 

 

10,153

 

 

6,211

 

 

16,519

 

Unconditional purchase obligations (2)

 

 

6,249

 

 

3,066

 

 

2,362

 

 

821

 

 

 —

 

Total contractual cash obligations

 

$

323,537

 

$

25,650

 

$

45,766

 

$

171,686

 

$

80,435

 

 

(1) The Company’s debt carries variable interest rates.  During 2017, the Company entered into a $50 million interest rate swap to manage its exposure to its variable rate borrowings.  The interest amounts have been estimated based on the applicable interest rate per annum as of December 31, 2017, including the effect of the interest rate swap, which was 3.66% and the outstanding debt balances as of December 31, 2017, adjusted for the future required repayments shown above.

(2)

Primarily for the purchase of information systems and services and raw materials.

 

As a result of the previously described Tax Cuts and Jobs Act, the Company is required to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.  The Company will elect to pay for this transition tax payable over an eight year period, and has reflected the expected payments in the above table.  The long-term tax payable of $0.9 million, related to the accounting for uncertainty in income taxes, has been excluded as the Company is unable to determine the period in which the liability will be resolved.

 

The Company does not have any special-purpose entities.

 

The Company maintains qualified defined benefit pension plans, which cover certain non-union and union employees in the U.S. and Europe.  The fair value of the Company’s pension plan assets has increased to $126.9 million as of December 31, 2017 from $116.2 million as of December 31, 2016.  During 2017 and 2016, the Company made lump sum payments of $4.2 million and $5.2 million, respectively, to certain eligible terminated vested participants.  The Pension Protection Act, passed into law in August 2006, prescribes the methodology for determining the minimum amount that must be contributed to U.S. defined benefit pension plans which began in 2008.  During the years ended December 31, 2017 and 2016, respectively, the Company funded its pension plans with $2.9 million and $2.4 million in cash contributions.  The Company expects that it will be required, in accordance with its funding policy, to fund the plans with approximately $4.1 million in contributions for the year ending December 31, 2018.  The Company may make additional contributions to the plans in 2018 beyond the required funding.  Additional voluntary contributions would be dependent upon, among other things, the Company’s ongoing operating results and liquidity.

 

Off-Balance Sheet Arrangements

 

The Company’s off-balance sheet arrangements include the operating leases and unconditional purchase obligations disclosed above as well as letters of credit and guarantees as discussed in Note 8 to the consolidated financial statements in Item 8 of this Annual Report.

 

Contingencies

 

The Company is involved in various legal proceedings, lawsuits and claims, including employment, product warranty and environmental matters of a nature considered normal to its business.  It is the Company’s policy to accrue for amounts related to these legal matters when it is probable that a liability has been incurred and the loss amount is reasonably estimable.  Refer to Note 16 to the consolidated financial statements in Item 8 of this Annual Report, which is incorporated herein by reference, for further details.

 

31


 

Critical Accounting Policies

 

Management of the Company has evaluated the accounting policies used in the preparation of the financial statements and related footnotes and believes the policies to be reasonable and appropriate.  The preparation of the financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make judgments, estimates, and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses.  Management uses historical experience and all available information to make these judgments and estimates, and actual results will inevitably differ from those estimates and assumptions that are used to prepare the Company’s financial statements at any given time.  Despite these inherent limitations, management believes that Management’s Discussion and Analysis (MD&A) and the financial statements and related footnotes provide a meaningful and fair perspective of the Company.

 

The following are the Company’s critical accounting policies impacted by management’s judgments, assumptions, and estimates.  Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

 

Revenue Recognition

 

The Company recognizes revenue and related costs when goods are shipped or services are rendered to customers provided that persuasive evidence of an arrangement exists, ownership and risk of loss have passed to the customer, the price to the customer is fixed or determinable, and collection is reasonably assured.  Revenue for major equipment projects is recognized under the percentage of completion method.  The Company’s major equipment projects generally have a long project life cycle from bid solicitation to project completion.  The nature of the contracts are generally fixed price with milestone billings.  The Company recognizes revenue for these projects based on the fixed sales prices multiplied by the percentage of completion.  In applying the percentage of completion method, a project’s percent complete as of any balance sheet date is computed as the ratio of total costs incurred to date divided by the total estimated costs at completion.  As changes in the estimates of total costs at completion and/or estimated total losses on projects are identified, appropriate earnings adjustments are recorded during the period that the change is identified.  The Company has a history of making reasonably dependable estimates of costs at completion on contracts that follow the percentage of completion method; however, due to uncertainties inherent in the estimation process, it is possible that actual project costs at completion could vary from their estimates.  The principal components of costs include material, direct labor, subcontracts, and allocated indirect costs.  Indirect costs primarily consist of administrative labor and associated operating expenses, which are allocated to the respective projects on actual hours charged to the project utilizing a standard hourly rate.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination.  Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition.  In accordance with guidance within ASC 350 “Intangibles — Goodwill and Other” goodwill and identifiable intangible assets with indefinite lives are not subject to amortization but must be evaluated for impairment.

 

The Company evaluates goodwill and indefinite-lived intangible assets for impairment annually, or when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount.  The Company has elected to perform the annual impairment test of its goodwill and indefinite-lived intangible assets, as required, on December 31 of each year by initially comparing the fair value of each of the Company’s reporting units or indefinite-lived assets to its related carrying value.  If the carrying amount of the intangible asset exceeds its fair value, the Company recognizes an impairment loss in the amount of the excess.  If the fair value of the reporting unit is less than its carrying value, the Company performs an additional step to determine the implied fair value of the goodwill.  The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all of the assets and liabilities of the unit and then computing the excess of the unit’s fair value over the amounts assigned to the assets and liabilities.  If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment, and the Company recognizes such impairment accordingly.  Fair values are estimated using discounted cash flows and other valuation methodologies that are based on projections of the amounts and timing of future revenues and cash flows, assumed discount rates and other assumptions as deemed appropriate.  The Company also considers such

32


 

factors as historical performance, anticipated market conditions, operating expense trends and capital expenditure requirements.  Each reporting unit periodically prepares discrete operating forecasts and uses these forecasts as the basis for assumptions used in the discounted cash flow analysis and guideline public company method.  The Company has consistently used a discount rate commensurate with its cost of capital which ranges 10.5% to 14.0%, adjusted for inherent business risks within its respective reporting units and has consistently used a terminal growth factor of 3.0%.  The Company also reconciles the estimated aggregate fair value of its reporting units as derived from the discounted cash flow analysis and guideline public company method to the Company’s overall market capitalization.  The Company has five reporting units for purposes of goodwill evaluation.  These reporting units include (a) the Activated Carbon segment, the Advanced Water Purification segment which includes (b) ultraviolet light and (c) ion exchange separation technologies, and the Alternative Materials segment which includes the (d) filtration media and (e) cloth reporting units.  The Company continually monitors its reporting units for impairment indicators and updates assumptions used in the most recent calculation of the fair value of a reporting unit as appropriate.  The fair value of the Company’s reporting units substantially exceeds the carrying value as of December 31, 2017.

 

The Company’s identifiable intangible assets other than goodwill and trade names and trademarks have finite lives.  Certain of these intangible assets are amortized using an accelerated methodology, while the majority are amortized on a straight-line basis over their estimated useful lives.  In addition, intangible assets with finite lives are evaluated for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable, as prescribed by guidance within ASC 360 “Property, Plant, and Equipment.”

 

Pensions

 

The Company maintains defined benefit pension plans covering certain union and non-union employees in the U.S. and Europe.  As of December 31, 2017, all of the U.S. plans are closed to new hires.  In addition, future benefit accruals are frozen for a number of the plans.  Some of the Company’s defined benefit plans allow for lump sum payments, which may trigger settlement accounting.  The Company made lump sum payments from the U.S. and European plans totaling $4.2 million, $5.2 million and $3.8 million during the years ended December 31, 2017, 2016, and 2015, respectively.  As a result of these lump sum payments, the Company incurred settlement charges in the U.S. and European plans totaling $1.0 million, $1.5 million, and $0.8 million, during the years ended December 31, 2017, 2016, and 2015, respectively.

 

Net periodic pension cost, which totaled $4.1 million, $4.4 million, and $2.0 million in 2017, 2016, and 2015, respectively, is calculated based upon a number of actuarial assumptions.  These assumptions include the long-term rate of return on the defined benefit plans’ assets, funding levels, discount rates, and various other factors related to employees and retirees participating in the defined benefit plans, including retirement age, salary increases, and mortality assumptions.

 

In 2017 and 2016, the Company assumed an expected weighted average long-term rate of return on the Company’s defined benefit plans’ assets ranging from 4.46% to 6.87% and 5.28% to 7.00%, respectively.  For 2018, the expected weighted average rate of return on assets will range from 4.45% to 6.44%.  In developing the expected long-term rate of return assumption, the Company evaluated input from its investment advisors, including their review of asset class return expectations as well as long-term inflation assumptions.  The Company also considered historical returns on asset classes and the investment mix.  The expected long-term return on the U.S. defined benefit plans’ assets is based on a targeted asset allocation assumption of approximately 40%-50% with equity securities, 45%-55% with fixed-income securities, and 5% with other investments.  The European defined benefit plans’ assets are based on a targeted asset allocation assumption of approximately 25%-35% with equity securities, 40%-50% with fixed-income securities, and 20%-30% with other investments.  The Company regularly reviews its asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.

 

During 2017, the Company funded its defined benefit plans with $2.9 million in cash contributions.  The Company expects that it will be required, in accordance with its funding policy, to fund its defined benefit plans with approximately $4.1 million in contributions in 2018.

 

The discount rate that the Company utilizes for its defined benefit plans to determine pension obligations is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency.  The weighted average discount rate determined on this basis has decreased from a range of 2.11% to 4.09% as of December 31, 2016 to a range of 2.02% to 3.63% as of December 31, 2017.

 

33


 

For the U.S. plans, the Company has used the same mortality tables, RP-2014 and a modified version of the projection scale MP-2014 since 2014.  For the European defined benefit plans, the Company utilizes country-specific mortality tables and has used the same tables for the majority of its European plans since 2014.  In 2016, the Company updated the mortality tables used for the UK plans which did not cause a significant increase to the projected benefit obligations for those plans.  For the European defined benefit plans, the Company utilizes country-specific mortality tables and has used the same tables for the majority of its European plans since 2014.  In 2016, the Company updated the mortality tables used for the UK plans which did not cause a significant increase to the projected benefit obligations for those plans.

 

Amortization of the actuarial net gain or loss as a result of experience differing from that assumed and from changes in assumptions is included as a component of net periodic pension cost for the year.  The Company uses a 10% corridor such that if, as of the beginning of the year, the net gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets, the amortization is that excess divided by the average future working lifetime of participating employees expected to receive benefits under the plan or the average remaining life expectancy of the plan’s participants if the percentage of actives is less than 10% of the total population.  As only the excess actuarial gain or loss is amortized, this approach will not fully amortize the net actuarial gain or loss.  The Company considers participants whose benefits are frozen to be active participants, and considers the plan population to be “all or almost all” inactive when at least 90% of the population is inactive.  Under this methodology, the accumulated net actuarial gain/loss amounts recognized in accumulated other comprehensive income (loss) are not expected to be fully recognized in net periodic pension cost until the plan is terminated (or an earlier event, like a settlement, triggers recognition) because the average expected remaining service of active participants expected to benefit under the plan or the average expected remaining lifetime of inactive participants over which the amounts are amortized is re-determined each year and actuarial gains or losses that fall within the corridor described above are not amortized.

 

The Company estimates that it will record net periodic pension cost for the defined benefit pension plans that will approximate $2.6 million in 2018.  The Company recorded net periodic pension cost of $4.1 million in 2017, which included a $1.0 million settlement charge.  Thus, the 2018 expected net periodic pension cost is relatively consistent with the 2017 expense, absent the 2017 settlement charge.  Future actual net periodic pension cost will depend on future investment performance, funding levels, changes in discount rates and various other factors related to the populations participating in its defined benefit plans, including lump sum payouts, which could result in the recognition of additional settlement charges.  The Company will continue to evaluate its actuarial assumptions at least annually, and will adjust as necessary.

 

34


 

A sensitivity analysis of the projected incremental effect of a hypothetical one percent change in the significant assumptions used in the pension calculations is provided in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hypothetical Rate Increase (Decrease)

 

 

 

U.S. Plans

 

European Plans

 

(Dollars in thousands)

    

(1%)  

    

1%

    

(1%)  

    

1%

 

Discount rate

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liabilities as of December 31, 2017

 

$

16,561

 

$

(14,506)

 

$

9,099

 

$

(7,129)

 

Pension costs for the year ended December 31, 2017

 

$

1,110

 

$

(965)

 

$

270

 

$

(197)

 

Indexation (1) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liabilities as of December 31, 2017

 

$

 —

 

$

 —

 

$

(4,035)

 

$

4,980

 

Pension costs for the year ended December 31, 2017

 

$

 

$

 

$

(312)

 

$

388

 

Expected return on plan assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension costs for the year ended December 31, 2017

 

$

852

 

$

(852)

 

$

281

 

$

(281)

 

Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liabilities as of December 31, 2017

 

$

(996)

 

$

1,012

 

$

(1,433)

 

$

1,911

 

Pension costs for the year ended December 31, 2017

 

$

(177)

 

$

201

 

$

(168)

 

$

234

 

 

(1) Pension indexation related to the Company’s German Qualified Plan is regulated by German pension law.  The law dictates that a pension that is already in payment must be adjusted for inflation every 3 years which is measured by the published German price index for the same time interval.  Pension indexation related to the Company’s UK Chemviron Plan is based on the Consumer Price Index in the UK.  For this plan, the index is capped at 5% per annum for pensions accrued between April 6, 1997 and January 1, 2008 and is capped at 2.5% per annum for pensions accrued after December 31, 2007.  For service accrued prior to April 6, 1997, indexation is subject to Trustee discretion, other than the statutory increases applicable to the Guaranteed Minimum Pension elements.  For purposes of the Company’s UK Sutcliffe Speakman plan, the indexation is fixed at 3% per annum for pensions accrued prior to April 6, 1997.  For those pensions accrued from April 6, 1997 to July 31, 2005, the index is based on the Retail Prices Index (RPI) in the UK, subject to a minimum of 3% per annum and a maximum of 5% per annum.  For those pensions accrued after July 31, 2005, the index is based on the RPI in the UK, capped at 2.5% per annum.

 

Income Taxes

 

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain.  Significant judgment is required in determining the Company’s annual effective tax rate and in evaluating tax positions.  The Company utilizes guidance within ASC 740 “Income Taxes” regarding the accounting for uncertainty in income taxes.  This guidance contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

 

Although the Company believes it has adequately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different.  The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate, or a lapse of a tax statute.  To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.  The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related penalties and net interest.

 

The Company is subject to varying statutory tax rates in the countries where it conducts business.  Fluctuations in the mix of the Company’s income between countries will result in changes to the Company’s overall effective tax rate.

 

As described in Note 14 to the consolidated financial statements in Item 8 of this Annual Report, the Company continues to analyze the Tax Cuts and Jobs Act enacted in December 2017 and refine its calculations, which could potentially impact the measurement of its tax balances.  However, as of December 31, 2017, the Company has estimated the impacts on the ending deferred tax balances and the one-time transition tax.

 

35


 

The Company recognizes benefits associated with foreign and domestic net operating loss and credit carryforwards when the Company believes that it is more likely than not that its future taxable income in the relevant tax jurisdictions will be sufficient to enable the realization of the tax benefits.  As of December 31, 2017, the Company had recorded total deferred tax assets of $32.7 million, of which $6.2 million represents tax benefits resulting from net operating losses and credit carryovers including $4.4 million of net operating losses and $1.8 million of state tax credits.  State operating loss carryforwards of $0.5 million, net, expire from 2018 to 2037, of which approximately 98% will begin to expire after 2024, if not utilized.

 

The Company periodically reviews the need for a valuation allowance against deferred tax assets and recognizes these deferred tax assets to the extent that realization is more likely than not.  Based upon a review of earnings history and trends, forecasted earnings and the relevant expiration of carryforwards, the Company believes that the valuation allowances provided are appropriate.  As of December 31, 2017, the Company has recorded a valuation allowance of approximately $2.1 million related to foreign and state net operating losses, U.S. passive foreign tax credits, and state tax credits.

 

Approximately 87% of the Company’s deferred tax assets, or $28.5 million, represent temporary differences associated with pensions, accruals, and inventories.  Approximately 63% of the Company’s deferred tax liabilities or $25.9 million as of December 31, 2017 relate to temporary differences associated with property, plant and equipment.  These temporary differences will reverse in the future due to the realization of temporary differences between annual book and tax reporting.  The Company believes that the deferred tax liabilities generally will impact taxable income of the same character (ordinary income), timing, and jurisdiction as the deferred tax assets.

 

Contingencies

 

The Company is involved in various asserted and unasserted legal claims.  An estimate is made to accrue for a loss contingency relating to any of these legal claims if it is probable that a liability was incurred at the date of the financial statements and the amount of loss can be reasonably estimated.  Because of the subjective nature inherent in assessing the outcome of legal claims and because the potential that an adverse outcome in a legal claim could have a material impact on the Company’s legal position or results of operations, such estimates are considered to be critical accounting estimates.  Legal fees associated with defending these various lawsuits and claims are expensed when incurred.  The Company will continue to evaluate all legal matters as additional information becomes available.  Reference is made to Note 16 to the consolidated financial statements in Item 8 of this Annual Report for a discussion of litigation and contingencies.

 

Long-Lived Assets

 

The Company evaluates long-lived assets under the provisions of ASC 360 “Property, Plant, and Equipment” which addresses financial accounting and reporting for the impairment of long-lived assets, and for disposal of long-lived assets.  For assets to be held and used, the Company groups a long-lived asset or assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.  An impairment loss for an asset group reduces only the carrying amounts of a long-lived asset or assets of the group being evaluated.  The loss is allocated to the long-lived assets of the group on a pro-rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group does not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort.  Estimates of future cash flows used to test the recoverability of a long-lived asset group include only the future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group.

 

New Accounting Pronouncements

 

Refer to Note 1 to the consolidated financial statements in Item 8 of this Annual Report, which is incorporated herein by reference, for details on recently issued accounting guidance.

 

36


 

Outlook

 

Over 85% of the Company’s current revenues are derived from activities in its Activated Carbon segment.  According to the Company and independent market research estimates, demand for activated carbon is forecasted to increase into the future.  This forecasted growth in the usage of activated carbon is expected to be driven by increasing global demand for clean air and drinking water as a result of expected economic growth generally, heightened public and consumer awareness of the harmful impacts to human health of contaminants in air and water supplies, and new and continuing government regulations.  In addition, expected long-term growth of the economies of both mature and developing countries around the world are expected to increase the demand for activated carbon for use in industrial and food and beverage production processes and related wastewater treatment applications.

 

Ultimately, this expected increase in the future use of activated carbon – as well as the pace and timing of such expected increase – will be dependent upon many factors.  These include: the pace of global economic growth; short or prolonged economic slowdowns in any one or several geographic regions; the impact and timing of potential new air and water regulations as well as the possibility for changes to, or the elimination of existing regulations, including the potential impact of environmental policies of the new Presidential administration installed in the U.S. in January 2017;  changes in corporate income tax policies in the U.S. and other countries; and, potential impacts from changes in the value of the U.S. dollar versus other global currencies.

 

As a result of the Company’s demonstrated ability to effectively meet market requirements through its provisioning of high performing virgin activated carbon and reactivated carbon, as well as its highly-regarded and value-added field and technical support services and carbon adsorption equipment offerings – either individually or in combination, the Company expects demand for its activated carbon products and services to increase over the longer term.  Backlog for carbon adsorption equipment was $6.2 million as of December 31, 2017 as compared to $7.2 million as of December 31, 2016.

 

Nearly 10% of the Company’s current revenues are derived from its Alternative Materials segment.  Over the longer term, the Company expects increased demand for its carbon cloth products in wound care applications due to the demonstrated benefits of these products in the wound healing process and for controlling wound odor as well as the Company’s recent and increased focus on marketing these products to wound care end market customers.  In addition the Company anticipates a continuation of steady demand for its diatomaceous earth and perlite filtration media products, particularly in Europe in food and beverage and industrial end market applications.

 

Less than 5% of the Company’s current revenues are derived from its Advanced Water Purification segment.  Similar to the Activated Carbon segment, the potential for the future growth of activities in this segment are dependent upon environmental regulations – including those related to regulating the discharge of ballast water from ships.  Over the longer term, the Company expects steady demand for its ion exchange and traditional ultraviolet light water treatment products and services, to be complemented by a period of significant growth in demand for its ballast water treatment systems (BWTS).  This expected increase in demand is expected to coincide with, and be driven by, the commencement of the compliance implementation schedule of the International Maritime Organization’s ballast water management regulation (the IMO Convention) on September 8, 2019.  The ultimate timing and pace of change in the demand for the Company’s BWTS will be dependent upon a number of variables including: the September 8, 2019 IMO Convention compliance implementation schedule date remaining in place, and the Company’s level of success in completing the testing of its BWTS to gain type approval for compliance with a separate United States Coast Guard ballast water regulation that is already in effect.  Equipment backlog for the Advanced Water Purification segment was $5.4 million as of December 31, 2017 as compared to $3.7 million as of December 31, 2016.

37


 

Item 7A. Quantitative and Qualitative Disclosures About 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 production of its products.  Coal, natural gas, and wood, which are significant to the manufacturing process, have market prices that fluctuate regularly.  Based on the estimated 2018 usage and price of these items not under a fixed price contract as of January 1, 2018, a hypothetical 10% increase (or decrease) in the price of coal, natural gas, and wood would result in the pre-tax loss (or gain) of $0.3 million, $0.6 million, and $0.7 million, respectively.

 

To mitigate the risk of fluctuating prices, the Company has entered into long-term contracts or derivative contracts to hedge the purchase of a percentage of the estimated need of coal, natural gas and wood at fixed prices.  The fair value of the cash-flow hedges for natural gas is disclosed in Note 6 to the consolidated financial statements in Item 8 of this Annual Report.

 

Interest Rate Risk

 

The Company’s net exposure to interest rate risk consists of borrowings under its U.S. Credit Agreement described within Note 8 to the consolidated financial statements in Item 8 of this Annual Report.  The Company’s U.S. Credit Agreement bears interest at rates that are based off of the prime rate, LIBOR, or Fed Funds rate, plus a margin rate based on the Company’s leverage ratio.  As of December 31, 2017, the Company had $233.5 million of borrowings under the U.S. Credit Agreement.  During 2017, the Company entered into a $50 million interest rate swap to manage its exposure to its variable rate borrowings.  A hypothetical one percentage point increase in the interest rates on the December 31, 2017 outstanding balances under the Company’s variable rate borrowing arrangements would cause annual interest costs to increase by approximately $1.8 million.

 

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 and liabilities denominated in currencies other than U.S. dollars.  The Company enters into foreign currency forward exchange contracts and purchases options to manage these exposures.  A hypothetical 10% strengthening (or weakening) of the U.S. dollar against the British Pound Sterling, Canadian Dollar, Mexican Peso, Brazilian Real, Chinese Yuan, Japanese Yen, Singapore Dollar, Danish Krone, Swedish Krona, and Euro as of December 31, 2017 would result in a pre-tax loss (or gain) of approximately $2.6 million.  The foreign currency forward exchange contracts purchased during 2017 have been accounted for according to ASC 815 “Derivatives and Hedging.”

38


 

Item 8. Financial Statements and Supplementary Data:

 

REPORT OF MANAGEMENT

 

Responsibility for Financial Statements

 

Management is responsible for the preparation of the financial statements included in this Annual Report.  The Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal controls over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934.  The Company’s internal control system is designed to provide reasonable assurance concerning the reliability of the financial data used in the preparation of the Company’s financial statements, as well as reasonable assurance with respect to safeguarding the Company’s assets from unauthorized use or disposition.  However, no matter how well designed and operated, an internal control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.  In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).  Management’s evaluation included reviewing the documentation of our controls, evaluating the design effectiveness of controls, and testing their operating effectiveness.  Based on this evaluation, management believes that, as of December 31, 2017, the Company’s internal controls over financial reporting were effective.

 

The effectiveness of internal control over financial reporting as of December 31, 2017, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, who also audited our consolidated financial statements.  Deloitte & Touche LLP’s attestation report on the effectiveness of our internal control over financial reporting appears after this Report of Management.

 

Remediation of Prior Year Material Weakness in Internal Control

 

A material weakness is defined as a significant deficiency or combination of significant deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in the annual or interim financial statements will not be prevented or detected on a timely basis.  In connection with management’s assessment of our internal control over financial reporting in the prior year, management concluded there was a material weakness in the design of our internal control over financial reporting as of December 31, 2016 related to the recognition of revenue for a subset of transactions within the U.S. potable water market.  In these instances, certain contracts were inappropriately bifurcated between product delivery and installation and revenue was recognized prior to the completion of the revenue recognition criteria.  Management determined the Company’s controls were not designed to properly identify and assess revenue recognition criteria ensuring all such criteria were considered and met prior to the recording of revenue. 

 

Given this material weakness, management concluded the Company did not maintain effective internal control over financial reporting as of December 31, 2016.

 

The following actions were taken by the Company to remediate the material weakness:

 

·

The Company’s revenue recognition policy was modified with additional detailed guidance on the identification and application of revenue recognition criteria, specifically as it relates to contracts within the U.S. potable water market.

·

Training was conducted within the appropriate areas of the business regarding the Company’s revenue recognition policy.

·

The newly created Compliance function worked with the business units and corporate accounting to assess business processes and enhance internal controls, including those internal controls over the assessment of revenue recognition criteria as it relates to the contracts impacted by the material weakness described above. 

39


 

Additional internal controls were designed and implemented to specifically address revenue recognition in the U.S. potable water market.

 

The Company monitored the effectiveness of these remediation actions.  Management concluded, through testing of the operating effectiveness of the Company’s implemented controls related to revenue recognition, that the material weakness has been fully remediated as of December 31, 2017.

 

Changes in Internal Control

 

During fiscal year 2016, the Company acquired the wood-based activated carbon, reactivation and mineral-based filtration media business of CECA, a subsidiary of Arkema Group (New Business).  For purposes of Management’s evaluation of the Company’s internal control over financial reporting as of December 31, 2016, we had elected to exclude the New Business from the scope of management’s assessment as permitted by guidance provided by the U.S. Securities and Exchange Commission.  As of December 31, 2017, Management has evaluated the New Business and implemented controls consistent with the Company’s internal control framework. 

 

As a result of the Company’s material weakness in the design of its internal control over financial reporting as of December 31, 2016 related to the recognition of revenue for a subset of transactions within the U.S. potable water market, controls were implemented to address proper revenue recognition.  Management evaluated the effectiveness of these controls as of December 31, 2017.  Management’s evaluation included reviewing the documentation of our controls, evaluating the design effectiveness of controls, and testing their operating effectiveness.  In addition, the evaluation included reviewing the documentation of our existing and new controls, evaluating the design effectiveness of controls, and testing their operating effectiveness.  As a result of the evaluation, Management has determined that the controls described above are operating effectively as of December 31, 2017.

40


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the stockholders and the Board of Directors of Calgon Carbon Corporation

 

Opinion on Internal Control over Financial Reporting

 

We have audited the internal control over financial reporting of Calgon Carbon Corporation and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated March 1, 2018, expressed an unqualified opinion on those financial statements.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ DELOITTE & TOUCHE LLP

 

Pittsburgh, Pennsylvania

March 1, 2018

41


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the stockholders and the Board of Directors of Calgon Carbon Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Calgon Carbon Corporation and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ DELOITTE & TOUCHE LLP

 

Pittsburgh, Pennsylvania

March 1, 2018

 

We have served as the Company’s auditor since 2000.

42


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Calgon Carbon Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

(Dollars in thousands, except per share amounts)

 

2017

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

619,811

 

$

514,246

 

$

535,004

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold (excluding depreciation and amortization)

 

 

430,896

 

 

346,398

 

 

343,522

 

Depreciation and amortization

 

 

46,667

 

 

38,070

 

 

35,453

 

Selling, general and administrative expenses

 

 

98,806

 

 

99,815

 

 

84,810

 

Research and development expenses

 

 

5,416

 

 

5,441

 

 

6,425

 

Other operating income

 

 

(4,148)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

577,637

 

 

489,724

 

 

470,210

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

42,174

 

 

24,522

 

 

64,794

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

49

 

 

99

 

 

58

 

Interest expense

 

 

(7,842)

 

 

(2,385)

 

 

(773)

 

Other income (expense) — net

 

 

(818)

 

 

(2,163)

 

 

(693)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax provision

 

 

33,563

 

 

20,073

 

 

63,386

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (Note 14)

 

 

12,462

 

 

6,276

 

 

19,923

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

21,101

 

 

13,797

 

 

43,463

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax (Note 12)

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

27,989

 

 

(10,956)

 

 

(13,013)

 

Defined benefit pension plans

 

 

1,292

 

 

(1,899)

 

 

(116)

 

Derivatives

 

 

(1,323)

 

 

886

 

 

(991)

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

27,958

 

 

(11,969)

 

 

(14,120)

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

49,059

 

$

1,828

 

$

29,343