Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                         to                        

 

Commission file number:  1-10776

 

CALGON CARBON CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

25-0530110

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

P.O. Box 717, Pittsburgh, PA

 

15230-0717

(Address of principal executive offices)

 

(Zip Code)

 

(412) 787-6700

(Registrant’s telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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  x   No  o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at May 2, 2013

Common Stock, $.01 par value per share

 

54,092,954 shares

 

 

 



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CALGON CARBON CORPORATION

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED March 31, 2013

 

This Quarterly Report on Form 10-Q 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 future growth and profitability, price increases, cost savings, broader product lines, enhanced competitive posture and acquisitions, are included in this Quarterly Report on Form 10-Q and in the Company’s most recent Annual Report on Form 10-K pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. Although our management considers these expectations to be reasonable they involve known and unknown risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any future performance suggested herein. Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company’s control. Some of the factors that could affect future performance of the Company are higher energy and raw material costs, costs of imports and related tariffs, labor relations, availability of capital, environmental requirements as they relate both to our operations and to our customers, changes in foreign currency exchange rates, borrowing restrictions, validity of patents and other intellectual property, and pension costs.  In the context of the forward-looking information provided in this Quarterly Report on Form 10-Q and in other reports, please refer to the discussions of risk factors and other information detailed in, as well as the other information contained in the Company’s most recent Annual Report on Form 10-K. The forward-looking statements included in this Quarterly Report on Form 10-Q are based solely on information currently available to the Company and speak only as of the date of this report.  We do not assume any obligation and do not intend to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the securities laws, and we caution you not to rely on them unduly.

 

I N D E X

 

 

 

Page

 

 

 

PART 1 — CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

Introduction to the Condensed Consolidated Financial Statements

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

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

29

 

 

 

Item 3.

Qualitative and Quantitative Disclosures about Market Risk

48

 

 

 

Item 4.

Controls and Procedures

48

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

49

 

 

 

Item 1A.

Risk Factors

49

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 

 

 

Item 5.

Other Information

49

 

 

 

Item 6.

Exhibits

50

 

 

 

SIGNATURES

 

51

CERTIFICATIONS

EX-31.1

EX-31.2

EX-32.1

EX-32.2

EX-101 INSTANCE DOCUMENT

EX-101 SCHEMA DOCUMENT

EX-101 CALCULATION LINKBASE DOCUMENT

EX-101 LABELS LINKBASE DOCUMENT

EX-101 PRESENTATION LINKBASE DOCUMENT

 

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PART I — CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements

 

INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The unaudited interim condensed consolidated financial statements included herein have been prepared by Calgon Carbon Corporation and subsidiaries (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in audited annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  Management of the Company believes that the disclosures included herein are adequate to make the information presented not misleading when read in conjunction with the Company’s audited consolidated financial statements and the notes included therein for the year ended December 31, 2012, as filed with the Securities and Exchange Commission by the Company on Annual Report on Form 10-K.

 

In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, and which are necessary for a fair presentation, in all material respects, of financial results for the interim periods presented.  Operating results for the first three months of 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

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CALGON CARBON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands Except Share and Per Share Data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Net sales

 

$

135,040

 

$

136,608

 

 

 

 

 

 

 

Cost of products sold (excluding depreciation)

 

92,415

 

93,826

 

Depreciation and amortization

 

6,747

 

6,513

 

Selling, general and administrative expenses

 

19,526

 

22,202

 

Research and development expenses

 

1,402

 

1,744

 

Restructuring (Note 1)

 

(24

)

 

Litigation and other contingencies

 

 

153

 

 

 

120,066

 

124,438

 

 

 

 

 

 

 

Income from operations

 

14,974

 

12,170

 

 

 

 

 

 

 

Interest income

 

124

 

18

 

Interest expense

 

(177

)

(25

)

Other expense — net

 

(828

)

(251

)

 

 

 

 

 

 

Income before income tax provision

 

14,093

 

11,912

 

 

 

 

 

 

 

Income tax provision

 

4,279

 

4,174

 

 

 

 

 

 

 

Net income

 

9,814

 

7,738

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax (Note 5)

 

 

 

 

 

Foreign currency translation

 

(6,288

)

1,994

 

Derivatives

 

574

 

127

 

Employee benefit plans

 

(378

)

(558

)

 

 

 

 

 

 

Comprehensive income

 

$

3,722

 

$

9,301

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.18

 

$

0.14

 

Diluted

 

$

0.18

 

$

0.14

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

Basic

 

53,620,349

 

56,512,227

 

Diluted

 

54,200,210

 

57,124,459

 

 

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

 

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CALGON CARBON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands Except Share and Per Share Data)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

14,554

 

$

18,161

 

Receivables (net of allowance of $1,447 and $1,362)

 

110,864

 

101,918

 

Revenue recognized in excess of billings on uncompleted contracts

 

11,143

 

14,680

 

Inventories

 

105,581

 

107,166

 

Deferred income taxes — current

 

16,169

 

17,317

 

Other current assets

 

12,189

 

13,964

 

Total current assets

 

270,500

 

273,206

 

 

 

 

 

 

 

Property, plant and equipment, net

 

262,078

 

262,993

 

Intangibles, net

 

6,990

 

7,388

 

Goodwill

 

26,354

 

27,030

 

Deferred income taxes — long-term

 

3,579

 

3,558

 

Other assets

 

3,396

 

3,594

 

Total assets

 

$

572,897

 

$

577,769

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

65,231

 

$

76,214

 

Restructuring reserve (Note 1)

 

1,164

 

3,226

 

Billings in excess of revenue recognized on uncompleted contracts

 

5,833

 

3,865

 

Payroll and benefits payable

 

9,259

 

10,114

 

Accrued income taxes

 

1,545

 

2,666

 

Short-term debt

 

16,107

 

19,565

 

Total current liabilities

 

99,139

 

115,650

 

 

 

 

 

 

 

Long-term debt

 

48,053

 

44,408

 

Deferred income taxes — long-term

 

12,306

 

12,379

 

Accrued pension and other liabilities

 

56,050

 

54,035

 

 

 

 

 

 

 

Total liabilities

 

215,548

 

226,472

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, $.01 par value, 100,000,000 shares authorized, 56,644,575 and 56,450,632 shares issued

 

566

 

564

 

Additional paid-in capital

 

171,266

 

168,599

 

Retained earnings

 

280,325

 

270,511

 

Accumulated other comprehensive loss

 

(22,619

)

(16,527

)

 

 

429,538

 

423,147

 

Treasury stock, at cost, 6,435,765 and 6,415,176 shares

 

(72,189

)

(71,850

)

 

 

 

 

 

 

Total shareholders’ equity

 

357,349

 

351,297

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

572,897

 

$

577,769

 

 

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

 

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CALGON CARBON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

9,814

 

$

7,738

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,747

 

6,513

 

Employee benefit plan provisions

 

876

 

936

 

Stock-based compensation

 

946

 

622

 

Deferred income tax expense

 

740

 

1,146

 

Restructuring (Note 1)

 

(24

)

 

Restructuring cash payments (Note 1)

 

(2,616

)

 

Changes in assets and liabilities-net of effects from foreign exchange:

 

 

 

 

 

(Increase) decrease in receivables

 

(13,361

)

2,834

 

Increase in inventories

 

(1,588

)

(5,767

)

Decrease (increase) in revenue in excess of billings on uncompleted contracts and other current assets

 

5,300

 

(4,212

)

Decrease in accounts payable and accrued liabilities

 

(9,845

)

(4,009

)

Pension contributions

 

(456

)

(397

)

Other items — net

 

2,855

 

(238

)

Net cash (used in) provided by operating activities

 

(612

)

5,166

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sale of business (Note 1)

 

642

 

 

Capital expenditures

 

(10,617

)

(11,811

)

Government grants received

 

1,693

 

215

 

Net cash used in investing activities

 

(8,282

)

(11,596

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Japanese Revolving credit facility borrowings — short-term (Note 10)

 

 

1,694

 

Japanese Revolving credit facility repayments — short-term (Note 10)

 

(1,090

)

(7,712

)

U.S. Revolving credit facility borrowings — long term (Note 10)

 

28,200

 

21,600

 

U.S. Revolving credit facility repayments — long term (Note 10)

 

(24,550

)

(9,600

)

Proceeds of debt obligations

 

173

 

 

Reductions of debt obligations

 

(901

)

(776

)

Treasury stock purchased

 

(339

)

(418

)

Common stock issued

 

1,572

 

421

 

Excess tax benefit from stock-based compensation

 

 

(68

)

Net cash provided by financing activities

 

3,065

 

5,141

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

2,222

 

(496

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(3,607

)

(1,785

)

Cash and cash equivalents, beginning of period

 

18,161

 

13,574

 

Cash and cash equivalents, end of period

 

$

14,554

 

$

11,789

 

 

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

 

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CALGON CARBON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands)

(Unaudited)

 

1.              Restructuring

 

During the third quarter of 2012, the Company adopted a worldwide strategy to reduce costs and realign the organization structure in response to the global economic slowdown, rising raw material and maintenance costs, and delays in implementation of environmental regulations, which have created a challenging business environment for the Company.  As a part of this strategy, the Company permanently closed, and later sold, its Datong, China manufacturing facility and reduced headcount.  The Company will also consolidate operations at certain locations, temporarily idle in mid 2013 a reactivation facility in Blue Lake, California, and evaluate non-core businesses for potential divestiture.

 

The Company recorded $0.6 million of restructuring charges for the period ended March 31, 2013 which were all within the Activated Carbon and Service segment.  The Company also recorded a pre-tax gain of $0.6 million for the sale of its activated carbon manufacturing facility in Datong, China for the period ended March 31, 2013 which was in the Activated Carbon and Service segment.  The gain on sale was comprised of the release of foreign currency translation adjustments of $1.0 million which was partially offset by a $0.4 million charge for the write-off of goodwill.  The remaining restructuring cash outlays are expected to be made in 2013.

 

The following table summarizes the activity in the restructuring reserve for the period ended March 31, 2013:

 

(Thousands, except number of employees)

 

Employee
Termination
Benefits

 

Gain on Sale

 

Other

 

Total
Restructuring
Activity

 

Employees

 

Accrual at December 31, 2012

 

$

3,226

 

$

 

$

 

$

3,226

 

67

 

Restructuring charges (income)

 

462

 

(578

)

92

 

(24

)

3

 

Payments

 

(2,524

)

 

(92

)

(2,616

)

(54

)

Non-cash charges

 

 

578

 

 

578

 

 

Accrual at March 31, 2013

 

$

1,164

 

$

 

$

 

$

1,164

 

16

 

 

2.   Inventories

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

 

 

 

 

Raw materials

 

$

30,721

 

$

29,353

 

Finished goods

 

74,860

 

77,813

 

 

 

$

105,581

 

$

107,166

 

 

Inventories are recorded net of reserves of $1.7 million and $1.8 million for obsolete and slow-moving items at March 31, 2013 and December 31, 2012, respectively.

 

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3.   Supplemental Cash Flow Information

 

Cash paid for interest during the three months ended March 31, 2013 and 2012 was $0.3 million and $0.1 million, respectively.  Income taxes paid, net of refunds, for the three months ended March 31, 2013 and 2012, was $2.1 million and $0.8 million, respectively.

 

The Company has reflected $0.1 million and $(0.6) million of its capital expenditures as a non-cash increase and decrease in accounts payable and accrued liabilities for changes in unpaid capital expenditures for the three months ended March 31, 2013 and 2012, respectively.

 

4.              Dividends

 

The Company’s Board of Directors did not declare or pay a dividend for the three months ended March 31, 2013 and 2012.

 

5.              Accumulated Other Comprehensive Loss

 

The following table provides details on the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the period ended March 31, 2013:

 

 

 

Foreign

 

 

 

 

 

Accumulated

 

 

 

Currency

 

Pension

 

 

 

Other

 

 

 

Translation

 

Benefit

 

 

 

Comprehensive

 

(Dollars in thousands)

 

Adjustments

 

Adjustments

 

Derivatives

 

Loss

 

Balance at December 31, 2012

 

$

17,098

 

$

(33,718

)

$

93

 

$

(16,527

)

Other comprehensive income (loss) before reclassifications

 

(7,320

)

181

 

549

 

(6,590

)

Amounts reclassified from other comprehensive income (loss)

 

1,032

 

(559

)

25

 

498

 

Net current-period other comprehensive income (loss)

 

(6,288

)

(378

)

574

 

(6,092

)

Balance at March 31, 2013

 

$

10,810

 

$

(34,096

)

$

667

 

$

(22,619

)

 

The following table provides details on amounts reclassified out of each component of accumulated other comprehensive loss for the period ended March 31, 2013:

 

 

 

Amount Reclassified from

 

 

 

Details about Accumulated Other

 

Accumulated Other

 

Affected Line Item in the Statement

 

Comprehensive Loss Components

 

Comprehensive Loss (1)

 

Where Net Income is Presented

 

Derivatives (Note 7)

 

 

 

 

 

Foreign Exchange Contracts

 

$

(170

)

Cost of products sold (excluding depreciation)

 

Natural Gas Contracts

 

214

 

Cost of products sold (excluding depreciation)

 

 

 

44

 

Total before tax

 

 

 

(19

)

Tax expense

 

 

 

$

25

 

Net of tax

 

 

 

 

 

 

 

Pension Benefit Adjustments (Note 11)

 

 

 

 

 

Prior-service costs

 

$

(19

)

(2)

 

Actuarial losses

 

(885

)

(2)

 

 

 

(904)

 

Total before tax

 

 

 

345

 

Tax benefit

 

 

 

$

(559

)

Net of tax

 

 

 

 

 

 

 

Foreign Currency Translation Adjustments

 

 

 

 

 

Sale of foreign subsidiary (Note 1)

 

$

1,032

 

Restructuring (3)

 

 

 

1,032

 

Total before tax

 

 

 

 

Tax (expense) or benefit

 

 

 

$

1,032

 

Net of tax

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

498

 

Net of tax

 

 

(1)   Amounts in parentheses indicate reductions to income/increases to losses.

(2)   These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.

(3)   The adjustment for 2013 relates to the Company’s sale of its activated carbon manufacturing facility in Datong, China.

 

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Foreign currency translation adjustments exclude income tax expense (benefit) for the earnings of the Company’s non-U.S. subsidiaries as management believes these earnings will be reinvested for an indefinite period of time.  Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable.

 

The income tax expense associated with the Company’s pension benefits included in accumulated other comprehensive loss was $20.3 million and $20.0 million at March 31, 2013 and December 31, 2012, respectively.  The income tax benefit associated with the Company’s derivatives included in accumulated other comprehensive loss was $(0.4) million and $(29) thousand at March 31, 2013 and December 31, 2012, respectively.

 

The income tax expense (benefit) associated with foreign currency translation included in other comprehensive loss was $0.2 million and $(0.1) million, for the three months ended March 31, 2013 and 2012, respectively. The income tax expense (benefit) associated with the Company’s pension benefits included in other comprehensive loss was $(0.3) million and $(0.3) million for the three months ended March 31, 2013 and 2012, respectively. The income tax expense (benefit) associated with the Company’s derivatives included in other comprehensive loss was $0.4 million and $0.1 million for the three months ended March 31, 2013 and 2012, respectively.

 

6.              Segment Information

 

The Company’s management has identified three segments based on the product line and associated services. Those segments include Activated Carbon and Service, Equipment, and Consumer. The Company’s chief operating decision maker, its chief executive officer, receives and reviews financial information in this format. The Activated Carbon and Service segment manufactures granular activated carbon for use in applications to remove organic compounds from liquids, gases, water, and air. This segment also consists of services related to activated carbon including reactivation of spent carbon and the leasing, monitoring, and maintenance of carbon fills at customer sites. The service portion of this segment also includes services related to the Company’s ion exchange technologies for treatment of groundwater and process streams. The Equipment segment provides solutions to customers’ air and water process problems through the design, fabrication, and operation of systems that utilize the Company’s enabling technologies:  ballast water, ultraviolet light, advanced ion exchange separation, and carbon adsorption.  The Consumer segment supplies activated carbon for use in military, industrial, and medical applications.  Intersegment net sales are not material.  The following segment information represents the results of operations:

 

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Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Net sales

 

 

 

 

 

Activated Carbon and Service

 

$

118,897

 

$

117,237

 

Equipment

 

13,908

 

16,118

 

Consumer

 

2,235

 

3,253

 

 

 

$

 135,040

 

$

136,608

 

Income from operations before depreciation, amortization, and restructuring

 

 

 

 

 

Activated Carbon and Service

 

$

20,899

 

$

17,303

 

Equipment

 

393

 

532

 

Consumer

 

405

 

848

 

 

 

21,697

 

18,683

 

Depreciation and amortization

 

 

 

 

 

Activated Carbon and Service

 

5,908

 

5,773

 

Equipment

 

677

 

581

 

Consumer

 

162

 

159

 

 

 

6,747

 

6,513

 

Income from operations before restructuring

 

14,950

 

12,170

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

Restructuring (Note 1)

 

24

 

 

Interest income

 

124

 

18

 

Interest expense

 

(177

)

(25

)

Other expense — net

 

(828

)

(251

)

Income before income tax provision

 

$

14,093

 

$

11,912

 

 

 

 

 

 

 

 

 

March 31, 2013

 

December 31, 2012

 

Total Assets

 

 

 

 

 

Activated Carbon and Service

 

$

508,568

 

$

510,550

 

Equipment

 

58,413

 

60,191

 

Consumer

 

5,916

 

7,028

 

Consolidated total assets

 

$

572,897

 

$

577,769

 

 

7.   Derivative Instruments

 

The Company’s corporate and foreign subsidiaries use foreign currency forward exchange contracts and foreign exchange option contracts to limit the exposure of exchange rate fluctuations on certain foreign currency receivables, payables, and other known and forecasted transactional exposures for periods consistent with the expected cash flow of the underlying transactions.  The foreign currency forward exchange and foreign exchange option contracts generally mature within eighteen months and are designed to limit exposure to exchange rate fluctuations.  The Company also uses cash flow hedges to limit the exposure to changes in natural gas prices.  The natural gas forward contracts generally mature within one to eighteen months.  The Company enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties.  In addition, various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts. The Company does not currently offset derivative positions on these contracts.  The Company accounts for its derivative instruments under Accounting Standards Codification (ASC) 815 “Derivatives and Hedging.”

 

The fair value of outstanding derivative contracts recorded as assets in the accompanying condensed consolidated balance sheets were as follows:

 

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March 31,

 

December 31,

 

Asset Derivatives

 

Balance Sheet Locations

 

2013

 

2012

 

Derivatives designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

1,045

 

$

545

 

Natural gas contracts

 

Other current assets

 

5

 

 

Foreign exchange contracts

 

Other assets

 

132

 

142

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments under ASC 815

 

 

 

1,182

 

687

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

424

 

433

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

$

1,606

 

$

1,120

 

 

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying condensed consolidated balance sheets were as follows:

 

 

 

 

 

March 31,

 

December 31,

 

Liability Derivatives

 

Balance Sheet Locations

 

2013

 

2012

 

Derivatives designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accounts payable and accrued liabilities

 

$

58

 

$

191

 

Natural gas contracts

 

Accounts payable and accrued liabilities

 

83

 

360

 

Foreign exchange contracts

 

Accrued pension and other liabilities

 

9

 

61

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments under ASC 815

 

 

 

150

 

612

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging Instruments under ASC 815:

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accounts payable and accrued liabilities

 

40

 

34

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

$

190

 

$

646

 

 

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the fair value of the Company’s foreign exchange forward contracts, foreign exchange option contracts, and natural gas forward contracts is determined using Level 2 inputs, which are defined as observable inputs.  The inputs used are from market sources that aggregate data based upon market transactions.

 

The use of derivatives exposes the Company to the risk that a counterparty may default on a derivative contract.  The aggregate fair value of the Company’s derivative instruments in asset positions as of March 31, 2013 was $1.6 million, representing the maximum loss that the Company would recognize at that date if all counterparties failed to perform as contracted. The Company has entered into master agreements with counterparties for its foreign exchange contracts that may allow for netting of exposures in the event of default or termination of the counterparty agreement due to breach of contract. The Company does not net its derivative positions by counterparty for purposes of balance sheet presentation and disclosure.

 

The gross and net amounts of derivative assets and liabilities were as follows (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Fair Value
of Assets

 

Fair Value of
Liabilities

 

Fair Value
of Assets

 

Fair Value of
Liabilities

 

Gross derivative amounts recognized in the balance sheet

 

$

1,606

 

$

190

 

$

1,120

 

$

646

 

Gross derivative amounts not offset in the balance sheet that are eligible for offsetting

 

 

 

 

 

 

 

 

 

Derivatives — foreign currency contracts

 

(107

)

(107

)

(286

)

(286

)

Net amount

 

$

1,499

 

$

83

 

$

834

 

$

360

 

 

Cash Flow Hedges

 

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains

 

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and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings and were not material for the three month periods ended March 31, 2013 and 2012, respectively.

 

The following table provides details on the changes in accumulated OCI relating to derivative assets and liabilities that qualified for cash flow hedge accounting.

 

 

 

Three Months Ended

 

 

 

March 31, 2013

 

Accumulated OCI derivative gain January 1, 2013

 

$

(75

)

Effective portion of changes in fair value

 

(1,032

)

Reclassifications from accumulated OCI derivative loss to earnings

 

(44

)

Foreign currency translation

 

87

 

Accumulated OCI derivative gain at March 31, 2013

 

$

(1,064

)

 

 

 

Amount of (Gain) or Loss

 

 

 

Recognized in OCI on Derivatives

 

 

 

(Effective Portion)

 

 

 

Three Months Ended

 

 

 

March 31,

 

Derivatives in ASC 815 Cash Flow Hedging Relationships:

 

2013

 

2012

 

 

 

 

 

 

 

Foreign Exchange Contracts

 

$

(997

)

$

(210

)

Natural Gas Contracts

 

(35

)

433

 

Total

 

$

(1,032

)

$

223

 

 

 

 

 

 

Amount of (Gain) or Loss

 

 

 

 

 

Reclassified from Accumulated

 

 

 

 

 

OCI in Income (Effective Portion) (1)

 

 

 

Location of Gain or

 

Three Months Ended

 

Derivatives in ASC 815 Cash Flow

 

(Loss) Recognized in

 

March 31,

 

Hedging Relationships:

 

Income on Derivatives

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Foreign Exchange Contracts

 

Cost of products sold (excluding depreciation)

 

$

170

 

$

20

 

Natural Gas Contracts

 

Cost of products sold (excluding depreciation)

 

(214

)

(457

)

Total

 

 

 

$

(44

)

$

(437

)

 

 

 

 

 

Amount of (Gain) or Loss

 

 

 

 

 

Recognized in Income on

 

 

 

 

 

Derivatives (Ineffective

 

 

 

 

 

Portion and Amount

 

 

 

 

 

Excluded from

 

 

 

 

 

Effectiveness Testing) (2)

 

 

 

Location of (Gain) or

 

Three Months Ended

 

Derivatives in ASC 815 Cash Flow

 

Loss Recognized in

 

March 31,

 

Hedging Relationships:

 

Income on Derivatives

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Foreign Exchange Contracts

 

Other expense — net

 

$

87

 

$

1

 

Natural Gas Contracts

 

Other expense — net

 

 

 

Total

 

 

 

$

87

 

$

1

 

 

(1)Assuming market rates remain constant with the rates at March 31, 2013, a gain of $0.9 million is expected to be recognized in earnings over the next 12 months.

(2)For the three months ended March 31, 2013 and 2012, the amount of loss recognized in income was all attributable to the ineffective portion of the hedging relationships.

 

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The Company had the following outstanding derivative contracts that were entered into to hedge forecasted transactions:

 

 

 

March 31,

 

December 31,

 

(in thousands except for mmbtu)

 

2013

 

2012

 

Natural gas contracts (mmbtu)

 

70,000

 

235,000

 

Foreign exchange contracts

 

$

41,920

 

$

42,399

 

 

Other

 

The Company has also entered into certain derivatives to minimize its exposure of exchange rate fluctuations on certain foreign currency receivables, payables, and other known and forecasted transactional exposures.  The Company has not qualified these contracts for hedge accounting treatment and therefore, the fair value gains and losses on these contracts are recorded in earnings as follows:

 

 

 

 

 

Amount of (Gain) or Loss

 

 

 

 

 

Recognized in Income on

 

 

 

 

 

Derivatives

 

 

 

Location of (Gain) or

 

Three Months Ended

 

Derivatives Not Designated as

 

Loss Recognized in

 

March 31,

 

Hedging Instruments Under ASC 815:

 

Income on Derivatives

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Foreign Exchange Contracts *

 

Other expense - net

 

$

(581

)

$

(705

)

Total

 

 

 

$

(581

)

$

(705

)

 

*As of March 31, 2013 and 2012, these foreign exchange contracts were entered into and settled during the respective periods.

 

Management’s policy for managing foreign currency risk is to use derivatives to hedge up to 75% of the forecasted intercompany sales to its European, Canadian, and Japanese subsidiaries.  The hedges involving foreign currency derivative instruments do not span a period greater than eighteen months from the contract inception date.  Management uses various hedging instruments including, but not limited to foreign currency forward contracts, foreign currency option contracts and foreign currency swaps.  Management’s policy for managing natural gas exposure is to use derivatives to hedge from zero to 75% of the forecasted natural gas requirements.  These cash flow hedges currently span up to eighteen months from the contract inception date. Hedge effectiveness is measured on a quarterly basis and any portion of ineffectiveness is recorded directly to the Company’s earnings.

 

8.              Commitments and Contingencies

 

Waterlink

 

In conjunction with the February 2004 purchase of substantially all of Waterlink Inc.’s (Waterlink) operating assets and the stock of Waterlink’s U.K. subsidiary, environmental studies were performed on Waterlink’s Columbus, Ohio property by environmental consulting firms that provided an identification and characterization of certain areas of contamination.  In addition, these firms identified alternative methods of remediating the property and prepared cost evaluations of the various alternatives.  The Company concluded from the information in the studies that a loss at this property is probable and recorded the liability. At March 31, 2013 the balance recorded as a component of accounts payable and accrued liabilities and accrued pension and other liabilities was $0.3 million and $1.0 million, respectively.  At December 31, 2012 the balance recorded as a component of accrued pension and other liabilities was $1.4 million.  Liability estimates are based on an evaluation of, among other factors, currently available facts, existing technology, presently enacted laws and regulations, and the remediation experience of experts in

 

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groundwater remediation.  It is possible that a further change in the estimate of this obligation will occur as remediation progresses. The Company incurred $0.1 million and $0.3 million of environmental remediation costs for the periods ended March 31, 2013 and 2012, respectively. Remediation activities are ongoing and are currently expected to be completed by the end of 2014.

 

Carbon Imports

 

General Anti-Dumping Background:  On March 8, 2006, the Company and another U.S. producer of activated carbon (collectively the “Petitioners”) formally requested that the United States Department of Commerce investigate unfair pricing of certain thermally activated carbon imported from the People’s Republic of China.

 

On March 2, 2007, the Commerce Department published its final determination (subsequently amended) finding that imports of the subject merchandise from China were being unfairly priced, or dumped, and that anti-dumping duties should be imposed to offset the amount of the unfair pricing.  The resultant tariff rates ranged from 61.95% ad valorem (i.e., of the entered value of the goods) to 228.11% ad valorem.  Following a finding by the U.S. International Trade Commission that the domestic industry was injured by unfairly traded imports of activated carbon from China, an anti-dumping order imposing these tariffs was issued by the U.S. Department of Commerce and was published in the Federal Register on April 27, 2007.  All imports from China remain subject to the order.  Importers of subject activated carbon from China are required to make cash deposits of estimated anti-dumping duties at the time the goods are entered into the United States’ customs territory.  Final assessment of duties and duty deposits are subject to revision based on annual retrospective reviews conducted by the Commerce Department.

 

The Company is both a domestic producer, exporter from China (through its wholly-owned subsidiary Calgon Carbon (Tianjin) Co., Ltd.), and a U.S. importer of the activated carbon that is subject to the anti-dumping order.  As such, the Company’s involvement in the Commerce Department’s proceedings is both as a domestic producer (a “petitioner”) and as a foreign exporter (a “respondent”).

 

The Company’s role as an importer, which has in the past (and may in the future) required it to pay anti-dumping duties, results in a contingent liability related to the final amount of tariffs that are ultimately assessed on the imported product following the Commerce Department’s periodic review of relevant shipments and calculation of the anti-dumping duties due.  The amount of estimated anti-dumping tariffs payable on goods imported into the United States is subject to review and retroactive adjustment based on the actual amount of dumping that is found on entries made during a given annual period.  As a result of proceedings before the Commerce Department that concluded in November 2011, the Company is currently able to import activated carbon from Calgon Carbon (Tianjin) into the United States without posting a cash deposit.  As noted above, however, anti-dumping duties could be imposed on these shipments in the future, as a result of on-going proceedings before the Commerce Department.

 

As part of its standard process, the Commerce Department conducts annual reviews of sales made to the first unaffiliated U.S. customer, typically over the prior 12-month period.  These reviews will be conducted for at least

 

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five years subsequent to a determination in 2013 finding that the anti-dumping duty order should remain in effect, and can result in changes to the anti-dumping tariff rate (either increasing or reducing the rate) applicable to any foreign exporter.  Revision of tariff rates has two effects.  First, it will alter the actual amount of tariffs that U.S. Customs and Border Protection (“Customs”) will collect for the period reviewed, by either collecting additional duties above those deposited with Customs by the importer at the time of entry or refunding a portion of the duties deposited at the time of importation to reflect a decline in the margin of dumping.  If the actual amount of tariffs owed increases, Customs will require the U.S. importer to pay the difference, plus interest.  Conversely, if the tariff rate decreases, any difference will be refunded by Customs to the U.S. importer with interest.  Second, the revised rate becomes the cash deposit rate applied to future entries, and can either increase or decrease the amount of duty deposits an importer will be required to post at the time of importation.

 

Period of Review I: As an importer of activated carbon from China, and in light of the successful anti-dumping tariff case, the Company was required to pay deposits of estimated anti-dumping duties at the rate of 84.45% ad valorem to Customs on entries made on or after October 11, 2006 through March 1, 2007.  From March 2, 2007 through March 29, 2007, the anti-dumping duty deposit rate was 78.89%.  From March 30, 2007 through April 8, 2007, the anti-dumping duty deposit rate was 69.54%.  Because of limits on the government’s legal authority to impose provisional duties on imports prior to issuance of a final determination, entries made between April 9, 2007 and April 18, 2007 were not subject to anti-dumping duty assessments.  For the period from April 19, 2007 through November 9, 2009, estimated anti-dumping duties were deposited at a rate of 69.54% ad valorem.

 

On November 10, 2009, the Commerce Department announced the final results of its review of the tariff period beginning October 11, 2006 through March 31, 2008 (period of review (“POR”) I).  Based on the POR I results, the Company’s ongoing duty deposit rate was adjusted from 69.54% to 14.51% (as further adjusted by .07% for certain ministerial errors as published in the Federal Register on December 17, 2009) for entries made subsequent to the announcement.  The Department of Commerce determined an assessment rate (final duty to be collected) on the entries made in this period of 31.93% ad valorem, which is substantially lower than the original amounts secured by bonds and cash.  Accordingly, the Company reduced its recorded liability for unpaid deposits in POR I and recorded a receivable of $1.6 million reflecting expected refunds for tariff deposits made during POR I as a result of the announced decrease in the POR I tariff assessment rate. The Company had received the $1.6 million as of December 31, 2012.

 

Period of Review II:  On April 1, 2009, the Commerce Department published a formal notice allowing parties to request a second annual administrative review of the anti-dumping duty order covering the period April 1, 2008 through March 31, 2009 (POR II).  Requests for review were due no later than April 30, 2009.  The Company, in its capacity as a U.S. producer and separately as a Chinese exporter, elected not to participate in this administrative review.  By not participating in the review, the Company’s duty deposits made during POR II became final and are not subject to further adjustment.

 

On November 17, 2010, the Commerce Department announced the results of its review for POR II.  Because the Company was not involved in this review its deposit rates did not change from the rate of 14.51%, which was

 

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established during POR I.  However, for the cooperative respondents involved in POR II that did not receive a company-specific rate, their new deposit rate will be collected on a $0.127 per pound basis.

 

Period of Review III:  On April 1, 2010, the Commerce Department published a formal notice allowing parties to request a third annual administrative review of the anti-dumping duty order covering the period April 1, 2009 through March 31, 2010 (“POR III”).  On October 31, 2011, the Commerce Department published the results of its review of POR III.  Based on the POR III results, the Company’s ongoing duty deposit rate was adjusted to zero.  The Company recorded a receivable of $1.1 million reflecting expected refunds for duty deposits made during POR III as a result of the announced decrease in the POR III assessment rate.  However, for the cooperative respondents involved in POR III, their deposit rate will be collected on a $0.127 per pound basis.  In early December 2011, several separate rate respondents appealed the Commerce Department’s final results of POR III.  The Company does not expect any of the appeals to be successful.  However, in the event the court finds merit in the arguments raised in the appeals, the Company does not expect the revised rates to materially impact the anticipated $1.1 million of expected refunds for tariff deposits it made during POR III.  The main impact that a successful appeal would have is related to the new deposit rates of the cooperative respondents.  An initial decision from the court in the POR III appeal process is expected during the second or third quarter of 2013.

 

Period of Review IV:  On April 1, 2011, the Commerce Department published a formal notice allowing parties to request a fourth annual administrative review of the anti-dumping duty order covering the period April 1, 2010 through March 31, 2011 (“POR IV”).  On November 9, 2012, the Commerce Department published the final results of its review of POR IV.  Specifically, Commerce calculated anti-dumping margins for the mandatory respondents it examined ranging from $0.20 per pound (Jacobi Carbons AB and its affiliates) to $0.96 per pound (Ningxia Guanghua Cherishmet Activated Carbon Co., Ltd. and its affiliates), and it calculated an anti-dumping margin of $0.47 per pound for the separate rate respondents whose shipments of activated carbon to the United States were not individually reviewed.  The Commerce Department also calculated a $0.00 anti-dumping margin for Datong Juqiang Activated Carbon Co., Ltd.   The Company, as a Chinese exporter and a U.S. importer, elected not to participate as a respondent in this administrative review.  By not participating as a respondent in the review, the Company’s tariff deposits made at a rate of 14.51% during POR IV became final and are not subject to further adjustment.  The Company’s ongoing deposit rate continues to be zero which was a result of the rate calculated in POR III.  Appeals challenging the Commerce Department’s final results for POR IV have been commenced before the U.S. Court of International Trade by Jacobi Carbons AB, Ningxia Guanghua Cherishment Activated Carbon Co., Ltd. and its affiliates; Tangshan Solid Carbon Co., Ltd.; Carbon Activated Corporation and Car Go Worldwide, Inc.; and Shanxi Industry Technology Trading Co., Ltd.  The Company does not expect an initial decision from the court concerning these appeals before the end of 2013, and expects that this litigation will not directly impact the Company’s operations.

 

Period of Review V: On April 2, 2012, the Commerce Department published a formal notice allowing parties to request a fifth annual administrative review of the anti-dumping duty order covering the period April 1, 2011 through March 31, 2012 (“POR V”).  Requests for review were due no later than April 30, 2012. On July 11, 2012, the Commerce Department announced its selection of Jacobi Carbons AB and Ningxia Huahui Activated Carbon

 

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Co, Ltd. as the two mandatory respondents for POR V.  Albemarle Corporation has requested a review of Calgon Carbon (Tianjin) for POR V.  The analysis of POR V data began in 2012 and the preliminary results of the Commerce Department’s review of POR V were announced on May 3, 2013. The Commerce Department calculated preliminary anti-dumping margins for the mandatory respondents that it examined ranging from $0.13 per pound (Ningxia Huahui Activated Carbon Co.) to $0.25 per pound (Jacobi Carbons AB and its affiliates), and as a result, it calculated a preliminary anti-dumping margin of $0.19 per pound for the separate rate respondents whose shipments of activated carbon to the United States were not individually reviewed.  These preliminary margins are subject to change by the final determination, which will not be issued until early September 2013, and can be extended until early November 2013.

 

Sunset Review:  :  In March 2012, the Commerce Department and U.S. International Trade Commission (“ITC”) initiated proceedings as part of a five-year “sunset” review to evaluate whether the anti-dumping order should be continued for an additional five years.  Affirmative determinations by both agencies are necessary to continue the order.  The Company, and two other U. S. producers of activated carbon, participated in this review to support continuation of the anti-dumping order for an additional five years.  The Company believes that the continuation of the anti-dumping order is appropriate as the Commerce Department has determined that Chinese producers and exporters have continued — and, absent continuation of the anti-dumping order, will in the future continue — to sell activated carbon in the United States at unfairly low prices.  This is demonstrated by the positive anti-dumping duty margins and deposit rates determined during the various annual reviews conducted by the Commerce Department since the anti-dumping order took effect in April 2007.  The Company believes that the disciplining effect of the order plays an important role in maintaining fair market pricing of the activated carbon market overall.  Without the anti-dumping order in place, the Company believes that Chinese producers and exporters would resume or increase dumping of certain thermally activated carbon in the United States.  Since the anti-dumping order was published, the Company has reduced its imports of covered activated carbon products from China and has increased production of activated carbon in the United States. On June 6, 2012, the Commerce Department published in the Federal Register its final results in an expedited sunset review, and determined that absent continuation of the anti-dumping order dumping of Chinese activated carbon in the United States would be likely to continue or recur.  As a result, it determined the order should be continued for an additional five years.

 

On June 4, 2012 the ITC voted unanimously to conduct a full review of the anti-dumping order.  As a result, the agency utilized a process similar to its original injury investigation, where the agency distributed detailed questionnaires to gather information for its investigation from domestic producers, foreign producers, U.S. importers, and purchasers, and conducted a hearing on December 18, 2012.  The Company and the two other U.S. producers of activated carbon, as well as a U.S. importer of activated carbon, participated in the hearing.  Based on the information gathered by the agency during its review, the ITC reached an affirmative determination on February 8, 2013.  The ITC voted unanimously in favor of this determination.  As a result, the antidumping order will be continued for an additional five years.

 

Period of Review VI: On April 2, 2013, the Commerce Department published a formal notice allowing parties to request a sixth annual administrative review of the anti-dumping duty order covering the period April 1, 2012 through March 31, 2013 (“POR VI”).  Requests for an administrative review were submitted to the Commerce Department in April of 2013.

 

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Continued Dumping and Subsidy Offset Act Distributions:  Pursuant to the Continued Dumping and Subsidy Offset Act (CDSOA) of 2000 (repealed effective February 8, 2006), as an affected domestic producer, the Company is eligible to apply for a share of the distributions of certain tariffs collected on imports of subject merchandise from China that entered the United States from October 11, 2006 to September 30, 2007.  As a result, the Company is eligible to receive a distribution of duties collected on imports of certain activated carbon that entered the United States during a portion of POR I.  In June 2012 and July 2011, 2010, 2009 and 2008, the Company applied for such distributions which are typically made in the fourth quarter.  There were no additional amounts received by the Company for the years ended December 31, 2011 and 2010.  In November 2009 and December 2008, the Company received distributions of approximately $0.8 million and $0.2 million, respectively, which reflected 59.57% of the total amount of duties then available and distributed by Customs in connection with the anti-dumping order on certain activated carbon from China.

 

CDSOA distributions related to POR I imports have been on hold while the POR I final results for certain exporters have been under appeal.  All POR I appeals have been resolved and Customs issued liquidation instructions in October 2011 for activated carbon entries affected by the appeal process involving POR I.  Because the Company imported subject activated carbon during the time period in POR I when the CDSOA was in effect (October 11, 2006 to September 30, 2007), and because these duties were subject to litigation on December 8, 2010, the Company expects to receive 59.57% of the final anti-dumping tariffs collected on its entries returned to the Company as CDSOA distributions The Company received $1.8 million in December 2012 related to the CDSOA distributions of which $1.5 million was reflected within the Company’s consolidated statement of comprehensive income for the year ended December 31, 2012.

 

Big Sandy Plant

 

By letter dated January 22, 2007, the Company received from the United States Environmental Protection Agency (EPA) Region 4 a report of a hazardous waste facility inspection performed by the EPA and the Kentucky Department of Environmental Protection (KYDEP) as part of a Multi Media Compliance Evaluation of the Company’s Big Sandy Plant in Catlettsburg, Kentucky that was conducted on September 20 and 21, 2005. Accompanying the report was a Notice of Violation (NOV) alleging multiple violations of the Federal Resource Conservation and Recovery Act (RCRA) and corresponding EPA and KYDEP hazardous waste regulations.

 

The alleged violations mainly concern the hazardous waste spent activated carbon regeneration facility. The Company met with the EPA on April 17, 2007 to discuss the inspection report and alleged violations, and submitted written responses in May and June 2007. In August 2007, the EPA notified the Company that it believed there were still significant violations of RCRA that were unresolved by the information provided in the Company’s responses, without specifying the particular violations. During a meeting with the EPA on December 10, 2007, the EPA indicated that the agency would not pursue certain other alleged violations. The Company has taken action to address and remediate a number of the alleged violations. The Company now believes, and the EPA has indicated, that the number of unresolved issues as to alleged continuing violations cited in the January 22, 2007 NOV has been reduced substantially. The EPA can take formal enforcement action to require the Company to remediate any or all of the unresolved alleged continuing violations, which could require the Company to incur substantial additional costs.  The EPA can also take formal enforcement action to impose substantial civil penalties with respect to

 

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violations cited in the NOV, including those which have been admitted or resolved.

 

By letter dated January 5, 2010, the EPA determined that certain residues resulting from the treatment of the carbon reactivation furnace off-gas are RCRA listed hazardous wastes and the material dredged from the onsite wastewater treatment lagoons were RCRA listed hazardous wastes and that they need to be managed in accordance with RCRA regulations. The Company believes that the cost to treat and/or dispose of the material dredged from the lagoons as hazardous waste could be substantial. However, by letter dated January 22, 2010, the Company received a determination from the KYDEP Division of Waste Management that the materials were not RCRA listed hazardous wastes when recycled, as had been the Company’s practice. The Company believes that pursuant to EPA regulations, KYDEP is the proper authority to make this determination. Thus, the Company believes that there is no basis for the position set forth in the EPA’s January 5, 2010 letter and the Company will vigorously defend any complaint on the matter.  By letter dated May 12, 2010 from the Department of Justice Environmental and Natural Resources Division (the “DOJ”), the Company was informed that the DOJ was prepared to take appropriate enforcement action against the Company for the NOV and other violations under the Clean Water Act (CWA). The Company met with the DOJ on July 9, 2010 and agreed to permit more comprehensive testing of the lagoons and to share data and analysis already obtained.  On July 19, 2010, the EPA sent the Company a formal information request with respect to such data and analysis, which was answered by the Company.  In September 2010, representatives of the EPA met with Company personnel for two days at the Big Sandy plant.  The visit included an inspection by the EPA and discussion regarding the plan for additional testing of the lagoons and material dredged from the lagoons.

 

The Company, EPA and DOJ have had ongoing meetings and discussions since the September 2010 inspection.  The Company has completed testing of some of the material dredged from the lagoons and of materials in one of the lagoons. The results of this testing have been provided to the EPA and the KYDEP.  The Company believes that the results are favorable.  On March 9, 2012 the KYDEP issued a determination that the material dredged from the lagoons that comes from that portion of the stockpile that has been tested; material currently in the lagoons; and future generated material, no longer contains a hazardous waste.  The determination further states that KYDEP will not regulate the material as a solid waste so long as the material is managed in accordance with certain agreed upon procedures.  On April 2, 2012 the EPA issued a similar determination with respect to the material dredged from the lagoons that comes from that portion of the stockpile that has been tested.

 

On April 11, 2012, the Company met with the EPA to attempt to negotiate a comprehensive settlement including the extent, if any, of additional testing that should be done on any of the remaining material; the long-term plans for the lagoons including possible process modifications and civil penalties. The EPA indicated that such a comprehensive resolution may be possible but that the agency still expects significant civil penalties with respect to the violations cited in the NOV as well as the alleged CWA violations.  The Company believes that the size of any civil penalties, if any, should be reduced since all the alleged violations, except those with respect to the characterization of the certain residues resulting from the treatment of the carbon reactivation furnace off-gas and the material dredged from the onsite wastewater treatment lagoons, have been resolved.  The Company believes that there should be no penalties associated with respect to the characterization of the residues resulting from the

 

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treatment of the carbon reactivation furnace off-gas and the material dredged from the onsite wastewater treatment lagoons as the Company believes that those materials are not RCRA listed hazardous waste as has been determined by the KYDEP and the testing has shown that the material is not hazardous.

 

The Company accrued $2.0 million as its estimate of potential loss related to civil penalties as of December 31, 2010. In the second quarter of 2012, the Company recorded a reduction of $0.2 million to this estimate.  Since April 2012, the Company and the EPA have continued to negotiate the issues. In November 2012 the parties met and agreed in principal to a total civil penalty of $1.6 million.  The EPA is currently drafting a consent decree which the Company expects to sign in 2013.

 

Frontier Chemical Processing Royal Avenue Site

 

In June 2007, the Company received a Notice Letter from the New York State Department of Environmental Conservation (NYSDEC) stating that the NYSDEC had determined that the Company is a Potentially Responsible Party (PRP) at the Frontier Chemical Processing Royal Avenue Site in Niagara Falls, New York (the “Site”).  The Notice Letter requested that the Company and other PRP’s develop, implement and finance a remedial program for Operable Unit #1 at the Site.  Operable Unit #1 consists of overburden soils and overburden and upper bedrock groundwater.  The Company has joined a PRP group (the “PRP Group”) and has executed a Joint Defense Agreement with the group members.  The PRP Group has approximately $7.5 million in a trust account to fund remediation.  In August 2008, the Company and over 100 PRP’s entered into a Consent Order with the NYSDEC for additional site investigation directed toward characterization of the Site to better define the scope of the remedial project.  The Company contributed monies to the PRP Group to help fund the work required under the Consent Order.  The additional site investigation required under the Consent Order was initiated in 2008 and completed in the spring of 2009. A final report of the site investigation was submitted to the NYSDEC in October 2009 and revised in September 2010.  By letter dated October 10, 2010, the NYSDEC approved the report and terminated the Consent Order.  The PRP Group was issued a Significant Industrial User Permit by the Niagara Falls Water Board (NFWB) in November 2010.  The permit allows the shallow ground water flow from the Site to continue to be naturally captured by the adjacent sewer tunnels with subsequent treatment of the ground water at the Niagara Falls Wastewater Treatment Plant.

 

The PRP Group has now proposed and the NYSDEC has agreed to permit onsite thermal treatment of the contaminated soil to achieve the soil clean-up standards.  Estimated costs for thermal treatment of soils are $7.5 million to $8 million. In March 2013, the Company, along with over thirty other PRPs, entered into a consent decree with the NYSDEC pursuant to which the work plan for the remedial program was agreed upon. The Company has not determined what portion of the costs associated with the remedial program it will be obligated to bear and the Company cannot predict with any certainty the outcome of this matter or range of potential loss.

 

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Pearl River Plant

 

In August 2012, the Company’s Pearl River plant, located in Pearlington, Mississippi, was impacted by Hurricane Isaac.  The Company has both property and business interruption insurance coverage for this plant.  In January 2013, management filed a claim with its insurance carrier to recover damages for both property and business interruption related to this event.  In March 2013, the Company settled its insurance claim and received $0.4 million from its insurance carrier and recorded it as a deduction to cost of products sold (excluding depreciation) for the three months ended March 31, 2013.

 

Accelerated Share Repurchase

 

In November 2012, the Company’s Board of Directors authorized an accelerated share repurchase of Company common stock under a share repurchase program (the “Program”).  On November 20, 2012, the Company paid a purchase price of $50 million and received 3,276,002 shares in connection with the inception of the Program. The actual number of shares that the Company will repurchase under the Program will be determined based on a discount to the arithmetic mean of the volume-weighted average prices of the Company’s common stock for each observation date over the course of applicable calculation periods. The calculation period is expected to end no later than the end of September 2013. If the actual number of shares to be repurchased exceeds the number of shares previously delivered, the Company will receive a number of additional shares equal to such excess following the conclusion of the calculation period.  If the actual number of shares to be repurchased is less than the number of shares previously delivered, the Company will deliver shares equal to such excess following the conclusion of the calculation period.  The Company also retains the right to settle any such deficit in cash.  The Company’s outstanding common shares used to calculate earnings per share will be reduced by the number of repurchased shares pursuant to the Program as they are delivered to the Company, and the $50 million purchase price was recorded as a reduction in stockholders’ equity upon its payment.  As of the period ended March 31, 2013, the actual number of shares to be repurchased is estimated to be approximately 68,365 shares less than the shares that were previously delivered.  Accordingly, the Company has increased its number of basic and diluted shares outstanding by these shares.

 

Other

 

In addition to the matters described above, the Company is involved in various other legal proceedings, lawsuits and claims, including employment, product warranty and environmental matters of a nature considered normal to its business.  It is the Company’s policy to accrue for amounts related to these legal matters when it is probable that a liability has been incurred and the loss amount is reasonably estimable.  Management believes that the ultimate liabilities, if any, resulting from such lawsuits and claims will not materially affect the consolidated financial position or liquidity of the Company, but an adverse outcome could be material to the results of operations in a particular period in which a liability is recognized.

 

9.              Goodwill & Other Identifiable Intangible Assets

 

The Company has elected to perform the annual impairment test of its goodwill, as required, on December 31 of each year. For purposes of the test, the Company has identified reporting units, as defined within ASC 350, “Intangibles — Goodwill and Other,” at a regional level for the Activated Carbon and Service segment and at the

 

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technology level for the Equipment segment and has allocated goodwill to these reporting units accordingly. The goodwill associated with the Consumer segment is not material and has not been allocated below the segment level.  The changes in the carrying amounts of goodwill by segment for the three months ended March 31, 2013 are as follows:

 

 

 

Activated

 

 

 

 

 

 

 

 

 

Carbon &

 

 

 

 

 

 

 

 

 

Service

 

Equipment

 

Consumer

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Total

 

Balance as of December 31, 2012

 

$

20,310

 

$

6,660

 

$

60

 

$

27,030

 

Restructuring (Note 1)

 

(419

)

 

 

(419

)

Foreign exchange

 

(221

)

(36

)

 

(257

)

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2013

 

$

19,670

 

$

6,624

 

$

60

 

$

26,354

 

 

The following is a summary of the Company’s identifiable intangible assets as of March 31, 2013 and December 31, 2012, respectively.

 

 

 

 

 

March 31, 2013

 

 

 

Weighted Average

 

Gross Carrying

 

Foreign

 

Accumulated

 

Net Carrying

 

 

 

Amortization Period

 

Amount

 

Exchange

 

Amortization

 

Amount

 

Amortized Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

Patents

 

20.0 Years

 

$

676

 

$

 

$

(559

)

$

117

 

Customer Relationships

 

15.9 Years

 

10,450

 

(253

)

(8,430

)

1,767

 

Product Certification

 

5.4 Years

 

7,603

 

(11

)

(4,224

)

3,368

 

Unpatented Technology

 

18.4 Years

 

3,183

 

 

(2,258

)

925

 

Licenses

 

20.0 Years

 

964

 

41

 

(192

)

813

 

Total

 

13.0 Years

 

$

22,876

 

$

(223

)

$

(15,663

)

$

6,990

 

 

 

 

 

 

December 31, 2012

 

 

 

Weighted Average

 

Gross Carrying

 

Foreign

 

Accumulated

 

Net Carrying

 

 

 

Amortization Period

 

Amount

 

Exchange

 

Amortization

 

Amount

 

Amortized Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

Patents

 

20.0 Years

 

$

676

 

$

 

$

(548

)

$

128

 

Customer Relationships

 

15.9 Years

 

10,450

 

(223

)

(8,311

)

1,916

 

Product Certification

 

5.4 Years

 

7,369

 

(3

)

(3,917

)

3,449

 

Unpatented Technology

 

18.4 Years

 

3,183

 

 

(2,191

)

992

 

Licenses

 

20.0 Years

 

964

 

119

 

(180

)

903

 

Total

 

13.1 Years

 

$

22,642

 

$

(107

)

$

(15,147

)

$

7,388

 

 

For the three months ended March 31, 2013 and 2012, the Company recognized $0.5 million and $0.4 million of amortization expense related to intangible assets, respectively.  As of March 31, 2013, estimated future amortization expense of identifiable intangible assets is $1.5 million for the remaining nine months of 2013. The Company estimates amortization expense to be recognized during the next five years as follows:

 

For the year ending December 31:

 

 

 

2014

 

$

1,948

 

2015

 

1,318

 

2016

 

1,072

 

2017

 

301

 

2018

 

141

 

 

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10.                                            Borrowing Arrangements

 

Short-Term Debt

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Borrowings under Japanese Working Capital Loan

 

$

15,934

 

$

18,611

 

Borrowings under China Credit Facility

 

173

 

 

Borrowings under Japanese Term Loan

 

 

954

 

Total

 

$

16,107

 

$

19,565

 

 

Long-Term Debt

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

U.S. Credit Facility Borrowings

 

$

47,900

 

$

44,250

 

Belgian Loan Borrowings

 

 

153

 

 

158

 

Total

 

$

48,053

 

$

44,408

 

 

U.S. Credit Facility

 

The Company’s U.S. Credit Facility (Credit Facility), which expires on November 17, 2016, contains a revolving credit capacity of $125.0 million with a $30.0 million sublimit for the issuance of letters of credit.  So long as no event of default has occurred and is continuing, the Company from time to time may request one or more increases in the total revolving credit commitment under the Credit Facility of up to $50.0 million in the aggregate.  No assurance can be given, however, that the total revolving credit commitment will be increased above $125.0 million.

 

Availability under the Credit Facility is dependent upon various customary conditions.  A quarterly nonrefundable commitment fee is payable by the Company based on the unused availability under the Amended Credit Agreement and is currently equal to 0.25%. Total availability under the Credit Facility at March 31, 2013 and December 31, 2012 was $74.9 million and $78.6 million, respectively, after considering outstanding letters of credit and borrowings.

 

The interest rate on amounts owed under the Credit Facility will be, at the Company’s option, either (i) a fluctuating base rate based on the highest of (A) the prime rate announced from time to time by the lenders, (B) the rate announced by the Federal Reserve Bank of New York on that day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day plus 3.00% or (C) a daily LIBOR rate plus 2.75%, or (ii) LIBOR-based borrowings in one, two, three, or six month increments at the applicable LIBOR rate plus 1.25%.  A margin may be added to the applicable interest rate based on the Company’s leverage ratio.  The interest rate per annum on outstanding borrowings as of March 31, 2013 ranged from 1.25% to 1.45%.

 

Total outstanding borrowings under the Credit Facility were $47.9 million and $44.3 million as of March 31, 2013 and December 31, 2012, respectively, and are shown as long-term debt within the condensed consolidated balance sheets.  The borrowings and repayments are presented on a gross basis within the Company’s condensed consolidated statements of cash flows.

 

The Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to indebtedness, liens, guaranties, loans and investments, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates.  The

 

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Company must comply with certain financial covenants including a minimum interest coverage ratio, maximum leverage ratio, and minimum net worth, as defined within the Credit Facility. The Credit Facility also provides for customary events of default, including failure to pay principal or interest when due, failure to comply with covenants, the fact that any representation or warranty made by the Company is false or misleading in any material respect, certain insolvency or receivership events affecting the Company and its subsidiaries and a change in control of the Company.  If an event of default occurs, the lenders will be under no further obligation to make loans or issue letters of credit.  Upon the occurrence of certain events of default, all outstanding obligations of the Company automatically become immediately due and payable, and other events of default will allow the lenders to declare all or any portion of the outstanding obligations of the Company to be immediately due and payable.

 

Belgian Loan and Credit Facility

 

On November 30, 2009, the Company entered into a Loan Agreement (the “Belgian Loan”) in order to help finance the expansion of the Company’s Feluy, Belgium facility.  The Belgian Loan provided total borrowings up to 6.0 million Euros, which could be drawn on in 120 thousand Euro bond installments at 25% of the total amount invested in the expansion until December 31, 2011.  Bond options not called by December 31, 2011 were obsolete and the loan was limited to the amount actually called by that date. The maturity date is seven years from the date of the first draw down which occurred on April 13, 2011 and the interest rate is 5.35%.  The Belgian Loan is guaranteed by a mortgage mandate on the Feluy site and is subject to customary reporting requirements, though no financial covenants exist.  The Company had 120 thousand Euros, or $0.2 million, of outstanding borrowings under the Belgian Loan as of March 31, 2013 and December 31, 2012, respectively.  No further bonds can be called on.

 

The Company also maintains an unsecured Belgian credit facility totaling 2.0 million Euros. There are no financial covenants and the Company had no outstanding borrowings under the Belgian credit facility as of March 31, 2013 and December 31, 2012, respectively.  Bank guarantees of 0.9 million Euros and 1.2 million Euros were issued as of March 31, 2013 and December 31, 2012, respectively.

 

United Kingdom Credit Facility

 

The Company maintains a United Kingdom credit facility for the issuance of various letters of credit and guarantees totaling 0.6 million British Pounds Sterling. Bank guarantees of 0.4 million British Pounds Sterling were issued as of March 31, 2013 and December 31, 2012, respectively.

 

Japanese Loans

 

Calgon Carbon Japan (CCJ) maintains a Term Loan Agreement (the “Japanese Term Loan”) and a Working Capital Loan Agreement (the “Japanese Working Capital Loan”).  The Company is jointly and severally liable as the guarantor of CCJ’s obligations and the Company permitted CCJ to grant a security interest and continuing lien in certain of its assets, including inventory and accounts receivable, to secure its obligations under both loan agreements.  The Japanese Term Loan provided for a principal amount of 722.0 million Japanese Yen, or $7.7 million at inception.  This loan matured on March 31, 2013 and was repaid.  At December 31, 2012, CCJ had 82.0 million Japanese Yen or $1.0 million outstanding and recorded as short-term debt within the condensed consolidated balance sheet.  The Japanese Working Capital Loan provides for borrowings up to 2.0 billion Japanese

 

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Yen, and bears interest based on a daily short-term prime rate fixed on the day a borrowing takes place, which was 1.475% per annum at March 31, 2013.  This loan matured on March 31, 2013 and was renewed until March 31, 2014.  Borrowings and repayments under the Japanese Working Capital Loan have generally occurred in short term intervals, as needed, in order to ensure adequate liquidity while minimizing outstanding borrowings.  The borrowings and repayments are presented on a gross basis within the Company’s condensed consolidated statements of cash flows.  Total borrowings outstanding under the Japanese Working Capital Loan were 1.5 billion Japanese Yen or $15.9 million and 1.6 billion Japanese Yen or $18.6 million at March 31, 2013 and December 31, 2012, respectively, and are shown as short-term debt within the condensed consolidated balance sheets.

 

China Credit Facility

 

The Company maintains an unsecured Chinese credit facility for working capital requirements totaling 10.0 million RMB or $1.6 million that matures on July 19, 2013.  The interest rate per annum on outstanding borrowings as of March 31, 2013 was 5.88%.  Total outstanding borrowings under this facility were 1.1 million Renminbi or $0.2 million at March 31, 2013 and are shown as short-term debt within the condensed consolidated balance sheet.  There were no borrowings under this facility at December 31, 2012.

 

Maturities of Debt

 

The Company is obligated to make principal payments on debt outstanding at March 31, 2013 of $16.1 million in 2013, $47.9 million in 2016, and $0.2 million in 2018.

 

11.       Pensions

 

U.S. Plans:

 

For U.S. plans, the following table provides the components of net periodic pension costs of the plans for the periods ended March 31, 2013 and 2012:

 

 

 

Three Months Ended March 31

 

Pension Benefits

 

2013

 

2012

 

Service cost

 

$

291

 

$

265

 

Interest cost

 

1,127

 

1,216

 

Expected return on plan assets

 

(1,667

)

(1,559

)

Amortization of prior service cost

 

19

 

19

 

Net actuarial loss amortization

 

909

 

834

 

Net periodic pension cost

 

$

679

 

$

775

 

 

The expected long-term rate of return on plan assets is 7.75% in 2013.

 

Employer Contributions

 

In its 2012 financial statements, the Company disclosed that it expected to contribute $1.3 million to its U.S. pension plans in 2013.  As of March 31, 2013, the Company has made contributions of $0.1 million. The Company expects to contribute the remaining $1.2 million over the balance of the year.

 

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European Plans:

 

For European plans, the following table provides the components of net periodic pension costs of the plans for the periods ended March 31, 2013 and 2012:

 

 

 

Three Months Ended March 31

 

Pension Benefits

 

2013

 

2012

 

Service cost

 

$

78

 

$

42

 

Interest cost

 

374

 

439

 

Expected return on plan assets

 

(237

)

(325

)

Net actuarial (gain) loss amortization

 

(24

)

4

 

Foreign currency translation

 

6

 

1

 

Net periodic pension cost

 

$

197

 

$

161

 

 

The expected long-term rate of return on plan assets is between 4.50% and 5.40% in 2013.

 

Employer Contributions

 

In its 2012 financial statements, the Company disclosed that it expected to contribute $2.1 million to its European pension plans in 2013.  As of March 31, 2013, the Company contributed $0.4 million.  The Company expects to contribute the remaining $1.7 million over the balance of the year.

 

Multi-Employer Plan:

 

In addition to the aforementioned European plans, the Company participates in a multi-employer plan accounted for as a defined contribution plan.  This multi-employer plan almost entirely relates to former employees of operations it has divested.  Benefits are distributed by the multi-employer plan.  In August 2012, the Company learned that the multi-employer plan had elected to reduce benefits to entitled parties.  Also in August 2012, the Company learned that the local Labor Court had issued a judgment where it concluded that employers were required to compensate their pensioners for the shortfall if benefits had been reduced by the plan.  As of March 31, 2013 and December 31, 2012, respectively, the Company has a $1.6 million liability recorded to account for shortfalls based on an actuarial analysis that was performed.

 

12. Basic and Diluted Net Income Per Common Share

 

Computation of basic and diluted net income per common share is performed as follows:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands, except per share amounts)

 

2013

 

2012

 

Net income available to common shareholders

 

$

9,814

 

$

7,738

 

Weighted Average Shares Outstanding

 

 

 

 

 

Basic

 

53,620,349

 

56,512,227

 

Effect of Dilutive Securities

 

579,861

 

612,232

 

Diluted

 

54,200,210

 

57,124,459

 

Net income per common share

 

 

 

 

 

Basic and Diluted

 

$

0.18

 

$

0.14

 

 

For the three months ended March 31, 2013 and 2012, there were 381,396 and 124,672 of stock options,

 

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respectively, which were excluded from the dilutive calculations as the effect would have been antidilutive.

 

13.       Income Taxes

 

The effective tax rate for the quarter ended March 31, 2013 was 30.4% compared to 35.0% for the quarter ended March 31, 2012The decrease in the quarter ended March 31, 2013 effective tax rate from the quarter ended March 31, 2012 effective tax rate was primarily due to net tax benefits from the sale of the Company’s activated carbon manufacturing facility in Datong, China which occurred in March 2013 (Refer to Note 1).

 

Unrecognized Income Tax Benefits

 

As of March 31, 2013 and December 31, 2012, the Company’s gross unrecognized income tax benefits were $4.2 million and $4.1 million, respectively.  If recognized, $3.1 million and $3.0 million of the gross unrecognized tax benefits would affect the effective tax rate at March 31, 2013 and December 31, 2012, respectively.  At this time, the Company believes that it is reasonably possible that approximately $0.3 million of the estimated unrecognized tax benefits as of March 31, 2013, will be recognized within the next twelve months based on the expiration of statutory periods all of which will impact the Company’s effective tax rate.

 

14.       Government Grants

 

The Company’s policy for accounting for government grants, including non-monetary grants at fair value, is to recognize them only when there is reasonable assurance that (a) the Company will comply with the conditions attached to the grants and (b) the grants will be received.  A grant will be recognized as income over the period necessary to match it to the related costs, for which it is intended to compensate, on a systematic basis.  Grants related to assets are presented by deducting them from the asset’s carrying amount.  A grant related to income will be deducted from the related expense.

 

On June 20, 2011, the Company was awarded a $1.0 million grant from the Ohio Department of Development’s Ohio Third Frontier Advanced Energy Program (OTF AEP) to support its activated carbon commercialization efforts.  The objective of the project is to commercialize cost-effective activated carbon materials for use in energy storage applications and markets around the world.  The grant is being utilized to upgrade capital equipment at the Company’s Columbus, Ohio facility which will enable the manufacturing of highly demanded cost-effective activated carbon materials for use in energy storage markets.  The Company has received $0.3 million of the grant for each of the periods ended March 31, 2013 and December 31, 2012, respectively.  The Company recognized $0.2 million of the grant received for each of the periods ended March 31, 2013 and December 31, 2012, respectively, as a deduction from the carrying amount of the property, plant and equipment on its condensed consolidated balance sheets as well as $0.1 million for each of the periods as a reduction to research and development expenses on its condensed consolidated statements of comprehensive income.

 

On December 7, 2007, the Company was also awarded two separate grants with the Walloon region (the “Region”) in Belgium, where its Feluy facility is located.  The awards are based on the Company’s contributions to the strategic development of the Region through its investment in the expansion of the Feluy facility and creation of employment opportunities.  The grants total approximately 2.6 million Euros or $3.4 million.  The Company received 0.5 million Euros or $0.7 million of the grant as of December 31, 2012 and received an additional 1.2 million Euros or $1.5 million as of March 31, 2013.  The Company has recognized the grants as a deduction from the carrying amount of the property, plant and equipment on its condensed consolidated balance sheets in the respective periods received.

 

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15.       Fair Value Measurement

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).  The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  The three levels of the fair value hierarchy are described below:

 

·                  Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;

·                  Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·                  Level 3 — Unobservable inputs that reflect the reporting entity’s own assumptions.

 

The following financial instrument assets (liabilities) are presented below at carrying amount, fair value, and classification within the fair value hierarchy (refer to Notes 7 and 10 for details relating to the derivative instruments and borrowing arrangements)The only financial instruments measured at fair value on a recurring basis are derivative instruments and the acquisition earn-out liability:

 

 

 

March 312013

 

 

 

Carrying

 

Fair Value

 

(Dollars in thousands)

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Derivative assets

 

$

1,606

 

$

1,606

 

$

 

$

1,606

 

$

 

Derivative liabilities

 

(190

)

(190

)

 

(190

)

 

Acquisition earn-out liability

 

(1,423

)

(1,423

)

 

(1,423

)

 

U.S. credit facility

 

(47,900

)

(47,900

)

 

(47,900

)

 

Japanese working capital loan

 

(15,934

)

(15,934

)

 

(15,934

)

 

China credit facility

 

(173

)

(173

)

 

(173

)

 

Other loans

 

(153

)

(153

)

 

(153

)

 

 

 

 

December 31, 2012

 

 

 

Carrying

 

Fair Value

 

(Dollars in thousands)

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

1,120

 

$

1,120

 

$

 

$

1,120

 

$

 

Derivative liabilities

 

(646

)

(646

)

 

(646

)

 

Acquisition earn-out liability

 

(1,300

)

(1,300

)

 

(1,300

)

 

U.S. credit facility

 

(44,250

)

(44,250

)

 

(44,250

)

 

Japanese working capital loan

 

(18,611

)

(18,611

)

 

(18,611

)

 

Japanese term loan

 

(954

)

(954

)

 

(954

)

 

Other loans

 

(158

)

(158

)

 

(158

)

 

 

Cash and cash equivalents, accounts receivable, and accounts payable included in the condensed consolidated balance sheets approximate fair value and are excluded from the table above.  The recorded debt amounts are primarily based on the prime rate, LIBOR, or Fed Funds rate and, accordingly, the carrying value of these obligations equals fair value.  Fair value for the acquisition earn-out liability is based upon Level 2 inputs which are periodically re-evaluated for changes in future projections and the discount rate. This liability is recorded in accrued pension and other liabilities within the condensed consolidated balance sheets.

 

Assets and Liabilities Reported at Fair Value on a Nonrecurring Basis:

 

As a result of the Company’s restructuring plan, as discussed in Note 1, long-lived assets with a carrying amount of $4.7 million were written down to their fair value of $0.7 million at December 31, 2012.  As a result, the Company recorded a charge of $4.0 million which was included in restructuring charges for the year ended December 31, 2012 within the Company’s consolidated statement of comprehensive income. These long-lived assets were valued using Level 3 inputs. 

 

16. New Accounting Pronouncements

 

In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update, or ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets or Liabilities,” or ASU No. 2013-01. ASU 2013-01 clarifies the scope of ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” or ASU 2011-11. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to

 

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understand the effect of those arrangements on its financial position. Entities are required to disclose both gross and net information for these instruments. Both ASU 2013-01 and ASU 2011-11 are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company adopted this guidance effective January 1, 2013.  Please refer to Note 7 for the required interim period disclosure.

 

In February 2013, the FASB issued ASU, No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income,” or ASU No. 2013-02. ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income. For amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013.  Please refer to Note 5 and the Company’s condensed consolidated statements of comprehensive income for the three months ended March 31, 2013 and 2012, for the required interim period disclosure.

 

17.  Reclassification

 

Certain prior year amounts have been reclassified to conform to the 2013 presentation.  Refer to the condensed consolidated statements of cash flows for reclassifications made to reflect the gross presentation of credit facility borrowings and repayments within financing activities.

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Item 2.         Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

This discussion should be read in connection with the information contained in the Unaudited Condensed Consolidated Financial Statements and Notes to the Unaudited Condensed Consolidated Financial Statements included in Item 1of this Quarterly Report on Form 10-Q.

 

Results of Operations

 

Consolidated net sales decreased by $1.6 million or 1.1% for the quarter ended March 31, 2013 versus the quarter ended March 31, 2012.  The total negative impact of foreign currency translation on consolidated net sales for the quarter ended March 31, 2013 was $3.1 million versus the same period for 2012.

 

Net sales for the quarter ended March 31, 2013 for the Activated Carbon and Service segment increased $1.7 million or 1.4% versus the similar 2012 period.  The increase in sales is primarily due to higher demand for activated carbon products and services in the Potable Water and Industrial Process markets of $5.8 million and $2.7 million, respectively.  The demand in the Potable Water market increased in all geographic regions with the largest increase occurring in the Americas.  The Americas Potable Water sales increase was due to customers’ use of carbon to meet the U.S. EPA Stage 2 Disinfection Byproduct Rule being phased in for U.S. drinking water utilities over the next several years.  However, these increases were largely offset by lower demand and pricing for powder activated carbon for mercury removal from electric generating units in the Americas of $2.4 million.  Sales in the Food market also declined by $2.4 million as the result of a non-repeat contract that the Company had in the first quarter of 2012.  Foreign currency translation had a negative impact of $3.1 million for the Activated Carbon and Service segment due to the weaker Yen.  Net sales for the Equipment segment decreased $2.2 million or 13.7% in the first quarter 2013 versus the comparable 2012 period.  The decrease was due to lower sales of ballast water treatment and ion exchange systems of $2.9 million and $2.6 million, respectively.  The first quarter of 2012 included $1.9 million of sales for two large ballast water treatment systems contracts and $3.0 million of sales for a single ion exchange system contract that did not repeat in the first quarter of 2013.  Partially offsetting these decreases were higher sales of carbon adsorption equipment and traditional ultraviolet light systems of $1.3 million and $1.0 million, respectively.  Net sales for the quarter ended March 31, 2013 for the Consumer segment decreased approximately $1.0 million or 31.3% as compared to the first quarter of 2012 due to lower demand for activated carbon cloth.

 

Net sales less cost of products sold (excluding depreciation), as a percentage of net sales, was 31.6% for the quarter ended March 31, 2013 compared to 31.3% for the similar 2012 period, a 0.3 percentage point increase.  The increase was primarily in the Activated Carbon and Service segment which benefited from the $0.4 million settlement on an insurance claim related to Hurricane Isaac (Refer to Note 8 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).  The Company’s cost of products sold excludes depreciation; therefore it may not be comparable to that of other companies.

 

Depreciation and amortization was comparable for the quarter ended March 31, 2013 versus the quarter ended March 31, 2012.

 

Selling, general and administrative expenses decreased $2.7 million or 12.1% for the quarter ended March 31, 2013

 

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versus the comparable 2012 quarter.  The decrease was primarily due to lower employee related expenses as a result of the Company’s worldwide strategy to reduce costs that was announced in the third quarter of 2012 (Refer to Note 1 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).

 

Research and development expenses decreased $0.3 million for the quarter ended March 31, 2013 versus the comparable 2012 quarter due to lower advanced product testing costs related to both mercury removal from flue gas and the use of activated carbon in ultra capacitors.

 

The Company recorded $0.6 million of restructuring charges for the quarter ended March 31, 2013 related to headcount reductions in the Activated Carbon and Service segment.  These charges were offset by a pre-tax gain of $0.6 million for the sale of the Company’s activated carbon manufacturing facility in Datong, China.  Refer to Note 1 to the condensed consolidated financial statements included in Item 1 of the Quarterly Report on Form 10-Q for additional information.

 

Interest income and expense were comparable for the quarter ended March 31, 2013 versus March 31, 2012.

 

Other expense — net increased $0.6 million for the quarter ended March 31, 2013 versus the quarter ended March 31, 2012 as a result of foreign exchange losses due to unhedged positions.

 

The Company recorded an income tax provision of $4.3 million and $4.2 million for the three month periods ended March 31, 2013 and 2012, respectively.  The increase in tax expense primarily relates to the increase in income before income tax provision.  The effective tax rate for the quarter ended March 31, 2013 was 30.4% compared to 35.0% for the quarter ended March 31, 2012The decrease in the quarter ended March 31, 2013 effective tax rate from the quarter ended March 31, 2012 effective tax rate was primarily due to net tax benefits from the sale of the Company’s activated carbon manufacturing facility in Datong, China which occurred in March 2013 (Refer to Note 1 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).

 

In the preparation of its effective tax rate, the Company uses an annualized estimate of pre-tax earnings.  Throughout the year this annualized estimate may change based on actual results and annual earnings estimate revisions in various tax jurisdictions.  Because the Company’s permanent tax benefits are relatively constant, changes in the annualized estimate may have a significant impact on the effective tax rate in future periods.

 

Financial Condition

 

Working Capital and Liquidity

 

Cash flows used in operating activities were $0.6 million for the period ended March 31, 2013 compared to cash flows provided by operating activities of $5.2 million for the comparable 2012 period.  The $5.8 million decrease was due to higher working capital requirements. The $5.8 million of additional cash used for accounts payable and accrued liabilities was related to the timing of payments for raw materials and outsourced carbons.  The $16.2 million of additional cash used for accounts receivable was primarily due to an increased volume of billings for significant equipment projects as well as increased sales volume in Europe and Asia.  The receivables in the Company’s equipment business and Asia region typically have longer payment terms. Partially offsetting this decline in cash was a decrease in revenue in excess of billings on uncompleted contracts and other current assets of $9.5 million primarily as a result of a decline in revenue in excess of billings related to the above mentioned equipment projects.

 

Common stock dividends were not paid during the quarters ended March 31, 2013 and 2012.

 

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U.S. Credit Facility

 

The Company’s U.S. Credit Facility (Credit Facility), which expires on November 17, 2016, contains a revolving credit capacity of $125.0 million with a $30.0 million sublimit for the issuance of letters of credit.  So long as no event of default has occurred and is continuing, the Company from time to time may request one or more increases in the total revolving credit commitment under the Credit Facility of up to $50.0 million in the aggregate.  No assurance can be given, however, that the total revolving credit commitment will be increased above $125.0 million.

 

Availability under the Credit Facility is dependent upon various customary conditions.  A quarterly nonrefundable commitment fee is payable by the Company based on the unused availability under the Amended Credit Agreement and is currently equal to 0.25%. Total availability under the Credit Facility at March 31, 2013 and December 31, 2012 was $74.9 million and $78.6 million, respectively, after considering outstanding letters of credit and borrowings.

 

The interest rate on amounts owed under the Credit Facility will be, at the Company’s option, either (i) a fluctuating base rate based on the highest of (A) the prime rate announced from time to time by the lenders, (B) the rate announced by the Federal Reserve Bank of New York on that day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day plus 3.00% or (C) a daily LIBOR rate plus 2.75%, or (ii) LIBOR-based borrowings in one, two, three, or six month increments at the applicable LIBOR rate plus 1.25%.  A margin may be added to the applicable interest rate based on the Company’s leverage ratio.  The interest rate per annum on outstanding borrowings as of March 31, 2013 ranged from 1.25% to 1.45%.

 

Total outstanding borrowings under the Credit Facility were $47.9 million and $44.3 million as of March 31, 2013 and December 31, 2012, respectively, and are shown as long-term debt within the condensed consolidated balance sheets.  The borrowings and repayments are presented on a gross basis within the Company’s condensed consolidated statements of cash flows.

 

The Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to indebtedness, liens, guaranties, loans and investments, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates.  The Company must comply with certain financial covenants including a minimum interest coverage ratio, maximum leverage ratio, and minimum net worth, as defined within the Credit Facility. The Credit Facility also provides for customary events of default, including failure to pay principal or interest when due, failure to comply with covenants, the fact that any representation or warranty made by the Company is false or misleading in any material respect, certain insolvency or receivership events affecting the Company and its subsidiaries and a change in control of the Company.  If an event of default occurs, the lenders will be under no further obligation to make loans or issue letters of credit.  Upon the occurrence of certain events of default, all outstanding obligations of the Company automatically become immediately due and payable, and other events of default will allow the lenders to declare all or any portion of the outstanding obligations of the Company to be immediately due and payable.

 

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Japanese Loans

 

Calgon Carbon Japan (CCJ) maintains a Term Loan Agreement (the “Japanese Term Loan”) and a Working Capital Loan Agreement (the “Japanese Working Capital Loan”).  The Company is jointly and severally liable as the guarantor of CCJ’s obligations and the Company permitted CCJ to grant a security interest and continuing lien in certain of its assets, including inventory and accounts receivable, to secure its obligations under both loan agreements.  The Japanese Term Loan provided for a principal amount of 722.0 million Japanese Yen, or $7.7 million at inception.  This loan matured on March 31, 2013 and was repaid.  At December 31, 2012, CCJ had 82.0 million Japanese Yen or $1.0 million outstanding and recorded as short-term debt within the condensed consolidated balance sheet.  The Japanese Working Capital Loan provides for borrowings up to 2.0 billion Japanese Yen, and bears interest based on a daily short-term prime rate fixed on the day a borrowing takes place, which was 1.475% per annum at March 31, 2013.  This loan matured on March 31, 2013 and was renewed until March 31, 2014.  Borrowings and repayments under the Japanese Working Capital Loan have generally occurred in short term intervals, as needed, in order to ensure adequate liquidity while minimizing outstanding borrowings.  The borrowings and repayments are presented on a gross basis within the Company’s condensed consolidated statements of cash flows.  Total borrowings outstanding under the Japanese Working Capital Loan were 1.5 billion Japanese Yen or $15.9 million and 1.6 billion Japanese Yen or $18.6 million at March 31, 2013 and December 31, 2012, respectively, and are shown as short-term debt within the condensed consolidated balance sheets.

 

Accelerated Share Repurchase

 

In November 2012, the Company’s Board of Directors authorized an accelerated share repurchase of Company common stock under a share repurchase program (the “Program”).  On November 20, 2012, the Company paid a purchase price of $50 million and received 3,276,002 shares in connection with the inception of the Program. The actual number of shares that the Company will repurchase under the Program will be determined based on a discount to the arithmetic mean of the volume-weighted average prices of the Company’s common stock for each observation date over the course of applicable calculation periods. The calculation period is expected to end no later than the end of September 2013. If the actual number of shares to be repurchased exceeds the number of shares previously delivered, the Company will receive a number of additional shares equal to such excess following the conclusion of the calculation period.  If the actual number of shares to be repurchased is less than the number of shares previously delivered, the Company will deliver shares equal to such excess following the conclusion of the calculation period.  The Company also retains the right to settle any such deficit in cash.  The Company’s outstanding common shares used to calculate earnings per share will be reduced by the number of repurchased shares pursuant to the Program as they are delivered to the Company, and the $50 million purchase price was recorded as a reduction in stockholders’ equity upon its payment.  As of the period ended March 31, 2013, the actual number of shares to be repurchased is estimated to be approximately 68,365 shares less than the shares that were previously delivered.  Accordingly, the Company has increased its number of diluted shares outstanding by these shares.

 

Contractual Obligations

 

The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements, and unconditional purchase obligations.  As of March 31, 2013, there have been no material changes in

 

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the payment terms of lease agreements and unconditional purchase obligations since December 31, 2012, except for the $1.0 million repayment of the Company’s Japanese Term Loan which matured on March 31, 2013 and the renewal of the Company’s Japanese Working Capital Loan which matured on March 31, 2013 and was renewed until March 31, 2014 (Refer to Note 10 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).  The Company is obligated to make principal payments on debt outstanding at March 31, 2013 of $16.1 million in 2013, $47.9 million in 2016, and $0.2 million in 2018.

 

The Company currently expects that cash from annual 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 Facility, Japanese Working Capital Loan, or other credit facilities.  Specifically, the Equipment and Consumer segments historically have not required extensive capital expenditures; therefore, the Company believes that cash on hand and borrowings will adequately support each of the segments cash needs.

 

Capital Expenditures and Investments

 

Capital expenditures for property, plant and equipment totaled $10.6 million for the three months ended March 31, 2013 compared to expenditures of $11.8 million for the same period in 2012.  The expenditures for the period ended March 31, 2013 were primarily for improvements to the Company’s manufacturing facilities including $5.7 million related to the construction of the Company’s Gila Bend, Arizona facility.  The comparable 2012 period also consisted primarily of improvements to the Company’s manufacturing facilities.  Capital expenditures for 2013 are currently projected to be approximately $40.0 million to $45.0 million.  The aforementioned expenditures are expected to be funded by operating cash flows, cash on hand, and borrowings.

 

The Company received proceeds related to government grants in both the U.S. and Europe of $1.7 million and $0.2 million for the three months ended March 31, 2013 and 2012, respectively (Refer to Note 14 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).

 

Cash and cash equivalents include $13.0 million and $16.0 million held by the Company’s foreign subsidiaries at March 31, 2013 and December 31, 2012, respectively.  Generally, cash and cash equivalents held by foreign subsidiaries are not readily available for use in the United States without adverse tax consequences.  The Company’s principal sources of liquidity are its cash flows from its operating activities or borrowings directly from its lines of credit.  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.

 

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Regulatory Matters

 

United States

 

Big Sandy PlantBy letter dated January 22, 2007, the Company received from the United States Environmental Protection Agency (EPA) Region 4 a report of a hazardous waste facility inspection performed by the EPA and the Kentucky Department of Environmental Protection (KYDEP) as part of a Multi Media Compliance Evaluation of the Company’s Big Sandy Plant in Catlettsburg, Kentucky that was conducted on September 20 and 21, 2005. Accompanying the report was a Notice of Violation (NOV) alleging multiple violations of the Federal Resource Conservation and Recovery Act (RCRA) and corresponding EPA and KYDEP hazardous waste regulations.

 

The alleged violations mainly concern the hazardous waste spent activated carbon regeneration facility. The Company met with the EPA on April 17, 2007 to discuss the inspection report and alleged violations, and submitted written responses in May and June 2007. In August 2007, the EPA notified the Company that it believed there were still significant violations of RCRA that were unresolved by the information provided in the Company’s responses, without specifying the particular violations. During a meeting with the EPA on December 10, 2007, the EPA indicated that the agency would not pursue certain other alleged violations. The Company has taken action to address and remediate a number of the alleged violations. The Company now believes, and the EPA has indicated, that the number of unresolved issues as to alleged continuing violations cited in the January 22, 2007 NOV has been reduced substantially. The EPA can take formal enforcement action to require the Company to remediate any or all of the unresolved alleged continuing violations, which could require the Company to incur substantial additional costs.  The EPA can also take formal enforcement action to impose substantial civil penalties with respect to violations cited in the NOV, including those which have been admitted or resolved.

 

By letter dated January 5, 2010, the EPA determined that certain residues resulting from the treatment of the carbon reactivation furnace off-gas are RCRA listed hazardous wastes and the material dredged from the onsite wastewater treatment lagoons were RCRA listed hazardous wastes and that they need to be managed in accordance with RCRA regulations. The Company believes that the cost to treat and/or dispose of the material dredged from the lagoons as hazardous waste could be substantial. However, by letter dated January 22, 2010, the Company received a determination from the KYDEP Division of Waste Management that the materials were not RCRA listed hazardous wastes when recycled, as had been the Company’s practice. The Company believes that pursuant to EPA regulations, KYDEP is the proper authority to make this determination. Thus, the Company believes that there is no basis for the position set forth in the EPA’s January 5, 2010 letter and the Company will vigorously defend any complaint on the matter.  By letter dated May 12, 2010 from the Department of Justice Environmental and Natural Resources Division (the “DOJ”), the Company was informed that the DOJ was prepared to take appropriate enforcement action against the Company for the NOV and other violations under the Clean Water Act (CWA). The Company met with the DOJ on July 9, 2010 and agreed to permit more comprehensive testing of the lagoons and to share data and analysis already obtained.  On July 19, 2010, the EPA sent the Company a formal information request with respect to such data and analysis, which was answered by the Company.  In September 2010, representatives of the EPA met with Company personnel for two days at the Big Sandy plant.  The visit included an

 

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inspection by the EPA and discussion regarding the plan for additional testing of the lagoons and material dredged from the lagoons.

 

The Company, EPA and DOJ have had ongoing meetings and discussions since the September 2010 inspection.  The Company has completed testing of some of the material dredged from the lagoons and of materials in one of the lagoons. The results of this testing have been provided to the EPA and the KYDEP.  The Company believes that the results are favorable.  On March 9, 2012 the KYDEP issued a determination that the material dredged from the lagoons that comes from that portion of the stockpile that has been tested; material currently in the lagoons; and future generated material, no longer contains a hazardous waste.  The determination further states that KYDEP will not regulate the material as a solid waste so long as the material is managed in accordance with certain agreed upon procedures.  On April 2, 2012 the EPA issued a similar determination with respect to the material dredged from the lagoons that comes from that portion of the stockpile that has been tested.

 

On April 11, 2012, the Company met with the EPA to attempt to negotiate a comprehensive settlement including the extent, if any, of additional testing that should be done on any of the remaining material; the long-term plans for the lagoons including possible process modifications and civil penalties. The EPA indicated that such a comprehensive resolution may be possible but that the agency still expects significant civil penalties with respect to the violations cited in the NOV as well as the alleged CWA violations.  The Company believes that the size of any civil penalties, if any, should be reduced since all the alleged violations, except those with respect to the characterization of the certain residues resulting from the treatment of the carbon reactivation furnace off-gas and the material dredged from the onsite wastewater treatment lagoons, have been resolved.  The Company believes that there should be no penalties associated with respect to the characterization of the residues resulting from the treatment of the carbon reactivation furnace off-gas and the material dredged from the onsite wastewater treatment lagoons as the Company believes that those materials are not RCRA listed hazardous waste as has been determined by the KYDEP and the testing has shown that the material is not hazardous.

 

The Company accrued $2.0 million as its estimate of potential loss related to civil penalties as of December 31, 2010. In the second quarter of 2012, the Company recorded a reduction of $0.2 million to this estimate.  Since April 2012, the Company and the EPA have continued to negotiate the issues. In November 2012 the parties met and agreed in principal to a total civil penalty of $1.6 million.  The EPA is currently drafting a consent decree which the Company expects to sign in 2013.

 

Frontier Chemical Processing Royal Avenue SiteIn June 2007, the Company received a Notice Letter from the New York State Department of Environmental Conservation (NYSDEC) stating that the NYSDEC had determined that the Company is a Potentially Responsible Party (PRP) at the Frontier Chemical Processing Royal Avenue Site in Niagara Falls, New York (the “Site”).  The Notice Letter requested that the Company and other PRP’s develop, implement and finance a remedial program for Operable Unit #1 at the Site.  Operable Unit #1 consists of overburden soils and overburden and upper bedrock groundwater.

 

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The Company has joined a PRP group (the “PRP Group”) and has executed a Joint Defense Agreement with the group members.  The PRP Group has approximately $7.5 million in a trust account to fund remediation.  In August 2008, the Company and over 100 PRP’s entered into a Consent Order with the NYSDEC for additional site investigation directed toward characterization of the Site to better define the scope of the remedial project.  The Company contributed monies to the PRP Group to help fund the work required under the Consent Order.  The additional site investigation required under the Consent Order was initiated in 2008 and completed in the spring of 2009. A final report of the site investigation was submitted to the NYSDEC in October 2009 and revised in September 2010.  By letter dated October 10, 2010, the NYSDEC approved the report and terminated the Consent Order.  The PRP Group was issued a Significant Industrial User Permit by the Niagara Falls Water Board (NFWB) in November 2010.  The permit allows the shallow ground water flow from the Site to continue to be naturally captured by the adjacent sewer tunnels with subsequent treatment of the ground water at the Niagara Falls Wastewater Treatment Plant.

 

The PRP Group has now proposed and the NYSDEC has agreed to permit onsite thermal treatment of the contaminated soil to achieve the soil clean-up standards.  Estimated costs for thermal treatment of soils are $7.5 million to $8 million. In March 2013, the Company, along with over thirty other PRPs, entered into a consent decree with the NYSDEC pursuant to which the work plan for the remedial program was agreed upon. The Company has not determined what portion of the costs associated with the remedial program it will be obligated to bear and the Company cannot predict with any certainty the outcome of this matter or range of potential loss.

 

Waterlink

 

In conjunction with the February 2004 purchase of substantially all of Waterlink Inc.’s (Waterlink) operating assets and the stock of Waterlink’s U.K. subsidiary, environmental studies were performed on Waterlink’s Columbus, Ohio property by environmental consulting firms that provided an identification and characterization of certain areas of contamination.  In addition, these firms identified alternative methods of remediating the property and prepared cost evaluations of the various alternatives.  The Company concluded from the information in the studies that a loss at this property is probable and recorded the liability. At March 31, 2013 the balance recorded as a component of accounts payable and accrued liabilities and accrued pension and other liabilities was $0.3 million and $1.0 million, respectively.  At December 31, 2012 the balance recorded as a component of accrued pension and other liabilities was $1.4 million.  Liability estimates are based on an evaluation of, among other factors, currently available facts, existing technology, presently enacted laws and regulations, and the remediation experience of experts in groundwater remediation.  It is possible that a further change in the estimate of this obligation will occur as remediation progresses. The Company incurred $0.1 million and $0.3 million of environmental remediation costs for the periods ended March 31, 2013 and 2012, respectively. Remediation activities are ongoing and are currently expected to be completed by the end of 2014.

 

Europe and Asia

 

The Company is also subject to various environmental health and safety laws and regulations at its facilities in Belgium, Germany, the United Kingdom, China, and Japan.  These laws and regulations address substantially the same issues as those applicable to the Company in the United States.  The Company believes it is presently in

 

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substantial compliance with these laws and regulations.

 

Other

 

Carbon Imports

 

General Anti-Dumping Background:  On March 8, 2006, the Company and another U.S. producer of activated carbon (collectively the “Petitioners”) formally requested that the United States Department of Commerce investigate unfair pricing of certain thermally activated carbon imported from the People’s Republic of China.

 

On March 2, 2007, the Commerce Department published its final determination (subsequently amended) finding that imports of the subject merchandise from China were being unfairly priced, or dumped, and that anti-dumping duties should be imposed to offset the amount of the unfair pricing.  The resultant tariff rates ranged from 61.95% ad valorem (i.e., of the entered value of the goods) to 228.11% ad valorem.  Following a finding by the U.S. International Trade Commission that the domestic industry was injured by unfairly traded imports of activated carbon from China, an anti-dumping order imposing these tariffs was issued by the U.S. Department of Commerce and was published in the Federal Register on April 27, 2007.  All imports from China remain subject to the order.  Importers of subject activated carbon from China are required to make cash deposits of estimated anti-dumping duties at the time the goods are entered into the United States’ customs territory.  Final assessment of duties and duty deposits are subject to revision based on annual retrospective reviews conducted by the Commerce Department.

 

The Company is both a domestic producer, exporter from China (through its wholly-owned subsidiary Calgon Carbon (Tianjin) Co., Ltd.), and a U.S. importer of the activated carbon that is subject to the anti-dumping order.  As such, the Company’s involvement in the Commerce Department’s proceedings is both as a domestic producer (a “petitioner”) and as a foreign exporter (a “respondent”).

 

The Company’s role as an importer, which has in the past (and may in the future) required it to pay anti-dumping duties, results in a contingent liability related to the final amount of tariffs that are ultimately assessed on the imported product following the Commerce Department’s periodic review of relevant shipments and calculation of the anti-dumping duties due.  The amount of estimated anti-dumping tariffs payable on goods imported into the United States is subject to review and retroactive adjustment based on the actual amount of dumping that is found on entries made during a given annual period.  As a result of proceedings before the Commerce Department that concluded in November 2011, the Company is currently able to import activated carbon from Calgon Carbon (Tianjin) into the United States without posting a cash deposit.  As noted above, however, anti-dumping duties could be imposed on these shipments in the future, as a result of on-going proceedings before the Commerce Department.

 

As part of its standard process, the Commerce Department conducts annual reviews of sales made to the first unaffiliated U.S. customer, typically over the prior 12-month period.  These reviews will be conducted for at least five years subsequent to a determination in 2013 finding that the anti-dumping duty order should remain in effect, and can result in changes to the anti-dumping tariff rate (either increasing or reducing the rate) applicable to any

 

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foreign exporter.  Revision of tariff rates has two effects.  First, it will alter the actual amount of tariffs that U.S. Customs and Border Protection (“Customs”) will collect for the period reviewed, by either collecting additional duties above those deposited with Customs by the importer at the time of entry or refunding a portion of the duties deposited at the time of importation to reflect a decline in the margin of dumping.  If the actual amount of tariffs owed increases, Customs will require the U.S. importer to pay the difference, plus interest.  Conversely, if the tariff rate decreases, any difference will be refunded by Customs to the U.S. importer with interest.  Second, the revised rate becomes the cash deposit rate applied to future entries, and can either increase or decrease the amount of duty deposits an importer will be required to post at the time of importation.

 

Period of Review I: As an importer of activated carbon from China, and in light of the successful anti-dumping tariff case, the Company was required to pay deposits of estimated anti-dumping duties at the rate of 84.45% ad valorem to Customs on entries made on or after October 11, 2006 through March 1, 2007.  From March 2, 2007 through March 29, 2007, the anti-dumping duty deposit rate was 78.89%.  From March 30, 2007 through April 8, 2007, the anti-dumping duty deposit rate was 69.54%.  Because of limits on the government’s legal authority to impose provisional duties on imports prior to issuance of a final determination, entries made between April 9, 2007 and April 18, 2007 were not subject to anti-dumping duty assessments.  For the period from April 19, 2007 through November 9, 2009, estimated anti-dumping duties were deposited at a rate of 69.54% ad valorem.

 

On November 10, 2009, the Commerce Department announced the final results of its review of the tariff period beginning October 11, 2006 through March 31, 2008 (period of review (“POR”) I).  Based on the POR I results, the Company’s ongoing duty deposit rate was adjusted from 69.54% to 14.51% (as further adjusted by .07% for certain ministerial errors as published in the Federal Register on December 17, 2009) for entries made subsequent to the announcement.  The Department of Commerce determined an assessment rate (final duty to be collected) on the entries made in this period of 31.93% ad valorem, which is substantially lower than the original amounts secured by bonds and cash.  Accordingly, the Company reduced its recorded liability for unpaid deposits in POR I and recorded a receivable of $1.6 million reflecting expected refunds for tariff deposits made during POR I as a result of the announced decrease in the POR I tariff assessment rate. The Company had received the $1.6 million as of December 31, 2012.

 

Period of Review II:  On April 1, 2009, the Commerce Department published a formal notice allowing parties to request a second annual administrative review of the anti-dumping duty order covering the period April 1, 2008 through March 31, 2009 (POR II).  Requests for review were due no later than April 30, 2009.  The Company, in its capacity as a U.S. producer and separately as a Chinese exporter, elected not to participate in this administrative review.  By not participating in the review, the Company’s duty deposits made during POR II became final and are not subject to further adjustment.

 

On November 17, 2010, the Commerce Department announced the results of its review for POR II.  Because the Company was not involved in this review its deposit rates did not change from the rate of 14.51%, which was established during POR I.  However, for the cooperative respondents involved in POR II that did not receive a company-specific rate, their new deposit rate will be collected on a $0.127 per pound basis.

 

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Period of Review III:  On April 1, 2010, the Commerce Department published a formal notice allowing parties to request a third annual administrative review of the anti-dumping duty order covering the period April 1, 2009 through March 31, 2010 (“POR III”).  On October 31, 2011, the Commerce Department published the results of its review of POR III.  Based on the POR III results, the Company’s ongoing duty deposit rate was adjusted to zero.  The Company recorded a receivable of $1.1 million reflecting expected refunds for duty deposits made during POR III as a result of the announced decrease in the POR III assessment rate.  However, for the cooperative respondents involved in POR III, their deposit rate will be collected on a $0.127 per pound basis.  In early December 2011, several separate rate respondents appealed the Commerce Department’s final results of POR III.  The Company does not expect any of the appeals to be successful.  However, in the event the court finds merit in the arguments raised in the appeals, the Company does not expect the revised rates to materially impact the anticipated $1.1 million of expected refunds for tariff deposits it made during POR III.  The main impact that a successful appeal would have is related to the new deposit rates of the cooperative respondents.  An initial decision from the court in the POR III appeal process is expected during the second or third quarter of 2013.

 

Period of Review IV:  On April 1, 2011, the Commerce Department published a formal notice allowing parties to request a fourth annual administrative review of the anti-dumping duty order covering the period April 1, 2010 through March 31, 2011 (“POR IV”).  On November 9, 2012, the Commerce Department published the final results of its review of POR IV.  Specifically, Commerce calculated anti-dumping margins for the mandatory respondents it examined ranging from $0.20 per pound (Jacobi Carbons AB and its affiliates) to $0.96 per pound (Ningxia Guanghua Cherishmet Activated Carbon Co., Ltd. and its affiliates), and it calculated an anti-dumping margin of $0.47 per pound for the separate rate respondents whose shipments of activated carbon to the United States were not individually reviewed.  The Commerce Department also calculated a $0.00 anti-dumping margin for Datong Juqiang Activated Carbon Co., Ltd.  The Company, as a Chinese exporter and a U.S. importer, elected not to participate as a respondent in this administrative review.  By not participating as a respondent in the review, the Company’s tariff deposits made at a rate of 14.51% during POR IV became final and are not subject to further adjustment.  The Company’s ongoing deposit rate continues to be zero which was a result of the rate calculated in POR III.  Appeals challenging the Commerce Department’s final results for POR IV have been commenced before the U.S. Court of International Trade by Jacobi Carbons AB, Ningxia Guanghua Cherishment Activated Carbon Co., Ltd. and its affiliates; Tangshan Solid Carbon Co., Ltd.; Carbon Activated Corporation and Car Go Worldwide, Inc.; and Shanxi Industry Technology Trading Co., Ltd.  The Company does not expect an initial decision from the court concerning these appeals before the end of 2013, and expects that this litigation will not directly impact the Company’s operations.

 

Period of Review V: On April 2, 2012, the Commerce Department published a formal notice allowing parties to request a fifth annual administrative review of the anti-dumping duty order covering the period April 1, 2011 through March 31, 2012 (“POR V”).  Requests for review were due no later than April 30, 2012. On July 11, 2012, the Commerce Department announced its selection of Jacobi Carbons AB and Ningxia Huahui Activated Carbon Co, Ltd. as the two mandatory respondents for POR V.  Albemarle Corporation has requested a review of Calgon Carbon (Tianjin) for POR V.  The analysis of POR V data began in 2012 and the preliminary results of the Commerce Department’s review of POR V were announced on May 3, 2013. The Commerce Department calculated preliminary anti-dumping margins for the mandatory respondents that it examined ranging from $0.13 per pound (Ningxia Huahui Activated Carbon Co.) to $0.25 per pound (Jacobi Carbons AB and its affiliates), and as a result, it calculated a preliminary anti-dumping margin of $0.19 per pound for the separate rate respondents whose shipments of activated carbon to the United States were not individually reviewed.  These preliminary margins are subject to change by the final determination, which will not be issued until early September 2013, and can be extended until early November 2013.

 

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Sunset Review: In March 2012, the Commerce Department and U.S. International Trade Commission (“ITC”) initiated proceedings as part of a five-year “sunset” review to evaluate whether the anti-dumping order should be continued for an additional five years.  Affirmative determinations by both agencies are necessary to continue the order.  The Company, and two other U. S. producers of activated carbon, participated in this review to support continuation of the anti-dumping order for an additional five years.  The Company believes that the continuation of the anti-dumping order is appropriate as the Commerce Department has determined that Chinese producers and exporters have continued — and, absent continuation of the anti-dumping order, will in the future continue — to sell activated carbon in the United States at unfairly low prices.  This is demonstrated by the positive anti-dumping duty margins and deposit rates determined during the various annual reviews conducted by the Commerce Department since the anti-dumping order took effect in April 2007.  The Company believes that the disciplining effect of the order plays an important role in maintaining fair market pricing of the activated carbon market overall.  Without the anti-dumping order in place, the Company believes that Chinese producers and exporters would resume or increase dumping of certain thermally activated carbon in the United States.  Since the anti-dumping order was published, the Company has reduced its imports of covered activated carbon products from China and has increased production of activated carbon in the United States. On June 6, 2012, the Commerce Department published in the Federal Register its final results in an expedited sunset review, and determined that absent continuation of the anti-dumping order dumping of Chinese activated carbon in the United States would be likely to continue or recur.  As a result, it determined the order should be continued for an additional five years.

 

On June 4, 2012 the ITC voted unanimously to conduct a full review of the anti-dumping order.  As a result, the agency utilized a process similar to its original injury investigation, where the agency distributed detailed questionnaires to gather information for its investigation from domestic producers, foreign producers, U.S. importers, and purchasers, and conducted a hearing on December 18, 2012.  The Company and the two other U.S. producers of activated carbon, as well as a U.S. importer of activated carbon, participated in the hearing.  Based on the information gathered by the agency during its review, the ITC reached an affirmative determination on February 8, 2013.  The ITC voted unanimously in favor of this determination.  As a result, the antidumping order will be continued for an additional five years.

 

Period of Review VI: On April 2, 2013, the Commerce Department published a formal notice allowing parties to request a sixth annual administrative review of the anti-dumping duty order covering the period April 1, 2012 through March 31, 2013 (“POR VI”).  Requests for an administrative review were submitted to the Commerce Department in April of 2013.

 

Continued Dumping and Subsidy Offset Act Distributions:  Pursuant to the Continued Dumping and Subsidy Offset Act (CDSOA) of 2000 (repealed effective February 8, 2006), as an affected domestic producer, the Company is eligible to apply for a share of the distributions of certain tariffs collected on imports of subject merchandise from China that entered the United States from October 11, 2006 to September 30, 2007.  As a result, the Company is

 

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eligible to receive a distribution of duties collected on imports of certain activated carbon that entered the United States during a portion of POR I.  In June 2012 and July 2011, 2010, 2009 and 2008, the Company applied for such distributions which are typically made in the fourth quarter.  There were no additional amounts received by the Company for the years ended December 31, 2011 and 2010.  In November 2009 and December 2008, the Company received distributions of approximately $0.8 million and $0.2 million, respectively, which reflected 59.57% of the total amount of duties then available and distributed by Customs in connection with the anti-dumping order on certain activated carbon from China.

 

CDSOA distributions related to POR I imports have been on hold while the POR I final results for certain exporters have been under appeal.  All POR I appeals have been resolved and Customs issued liquidation instructions in October 2011 for activated carbon entries affected by the appeal process involving POR I.  Because the Company imported subject activated carbon during the time period in POR I when the CDSOA was in effect (October 11, 2006 to September 30, 2007), and because these duties were subject to litigation on December 8, 2010, the Company expects to receive 59.57% of the final anti-dumping tariffs collected on its entries returned to the Company as CDSOA distributions  The Company received $1.8 million in December 2012 related to the CDSOA distributions of which $1.5 million was reflected within the Company’s consolidated statement of comprehensive income for the year ended December 31, 2012.

 

New Accounting Pronouncements

 

In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update, or ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets or Liabilities,” or ASU No. 2013-01. ASU 2013-01 clarifies the scope of ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” or ASU 2011-11. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross and net information for these instruments. Both ASU 2013-01 and ASU 2011-11 are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company adopted this guidance effective January 1, 2013.  (Refer to Note 7 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).

 

In February 2013, the FASB issued ASU, No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income,” or ASU No. 2013-02. ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income. For amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013.  (Refer to Note 5 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).

 

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Outlook

 

Activated Carbon and Service

 

The Company believes that the activated carbon and service sales volume for 2013 will increase over 2012.  Sales volume growth is expected to come from several sources including the ongoing impacts of environmental regulations as discussed below.  Expected volume growth will be met by the virgin carbon expansion recently completed at our Pearl River facility; increased utilization of reactivation capacity in all three regions; and, the sale of outsourced carbons.  Impediments to growth could include an economic slowdown in any or all the regions served as well as any impacts from delays in environmental regulations further discussed below.   The Company’s sale of mercury removal carbons is expected to decline in 2013 due to the expiration of contracts that existed in 2012 as well as U.S. electric utilities expanded usage of natural gas for electric generation.  However, in February of 2013, the Company announced a significant, long-term contract for mercury removal with an estimated value of $16.0 million to $22.0 million.

 

The Company also believes that the price for activated carbon will increase in the Americas in 2013 compared to 2012 due to fair pricing brought about by a tariff increase on Chinese steam activated carbon announced in November 2012.  The new tariff rates, effective upon announcement, increase the average tariff rate from approximately 13 cents to 47 cents per pound.   The Company announced a price increase in February 2013.  Because of existing contracts, outstanding bids and other factors, it typically takes approximately 12 months for the full effect of a price increase to be realized.

 

Raw material costs for production in 2013 are expected to be approximately equivalent to 2012’s costs on a per unit basis.   The most significant raw material cost is coal.  The quantity of coal consumed varies based on the overall production levels achieved as well as the mix of products manufactured during the year.   The Company expects its total cost of coal to increase in 2013 given expectations for increased production at our U.S. virgin activated carbon plants due to the 2012 Pearl River plant expansion as well as fewer total scheduled maintenance outages.   The Company’s 2012 cost per ton of coal used in production increased 5.0% versus 2011.   As of March 31, 2013, the Company has approximately 45% of its 2013 full year anticipated coal requirements under contract.

 

The Company continues to make research and development expenditures related to its advanced products aimed at significantly reducing the amount of powdered activated carbon (PAC) required for mercury removal from coal-fired power plant flue gas as compared to competing products.  PAC is recognized today by the U.S. Environmental Protection Agency (EPA) as the leading abatement technology for mercury removal from coal-fired power plant flue gas.  The current U.S. driver of sales to owners of coal-fired power plants is state regulations.  However, on December 21, 2011, the U.S. EPA issued the Mercury and Air Toxics Standards (MATS) requiring mercury and other substances to be removed from the flue gas of coal-fired power plants.  The MATS regulation was published in the Federal Register on February 16, 2012.  Compliance with MATS will generally be required three years from this publication date.  Exceptions for newly installed equipment and/or “reliability critical paths” could potentially delay implementation for applicable power plants up to an additional two years.    The Company cannot predict when the other MATS legal challenges will be resolved.

 

In addition to MATS, the EPA has promulgated mercury removal regulations related to industrial boilers and

 

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cement manufacturers.  There are also mercury removal regulations for the flue gas of coal-fired power plants in effect for certain Canadian provinces.  The Company suspects that these regulations could continue to be challenged and that compliance implementation for MATS or these other mercury removal regulations may be delayed.

 

The Company believes that mercury removal could become the largest U.S. market for activated carbon and has made great strides in establishing itself as a market leader. The Company currently estimates that the current annual demand for mercury removal in North America is 130 million to 180 million pounds and may grow to as much as 380 million to 765 million pounds by 2015.   However, today the North American activated carbon supply capacity for this market is greater than current demand.  As a result, recent pricing in this market has deteriorated.  The Company expects this trend to continue in the near future until compliance with MATS draws nearer.  Many of the Company’s multi-year contracts, as well as those of its competitors have expired or are near their scheduled expiration and are expected to be re-bid.  The Company believes its advanced products for mercury which have carbon usage rates of 50% to 70% less than alternative products, are important to its ongoing success in this market.

 

Compliance with other proposed emissions regulations such as the Cross State Air Pollution Rule (CSAPR) or the Clean Air Interstate Rule (CAIR) could significantly impact the amount of carbon utilized by electric utilities for compliance with MATS.  However, a f