UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) |
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x |
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2006 or |
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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 |
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(Exact name of registrant as specified in its charter) |
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Delaware |
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25-0530110 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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P.O. Box 717, Pittsburgh, PA 15230-0717 |
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(Address of principal executive offices) (Zip Code) |
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(412) 787-6700 |
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(Registrants telephone number, including area code) |
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(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.
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Yes |
o |
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No |
x |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
o |
Accelerated filer |
x |
Non-accelerated filer |
o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.
Class |
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Outstanding at December 7, 2006 |
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Common Stock, $.01 par value |
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39,980,643 shares |
CALGON CARBON CORPORATION
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Yes |
o |
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No |
x |
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FORM 10-Q
QUARTER ENDED September 30,
2006
The Quarterly Report on Form 10-Q contains historical information and forward-looking statements. Statements looking forward in time are included in this Form 10-Q pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause the Companys actual results in the future to differ from performance suggested herein. In the context of forward-looking information provided in this Form 10-Q and in other reports, please refer to the discussion of risk factors detailed in, as well as the other information contained in the Companys filings with the Securities and Exchange Commission.
I N D E X
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Page |
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Item 1. |
2 |
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Introduction to the Condensed Consolidated Financial Statements |
2 |
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Condensed Consolidated Statements of Operations and Retained Earnings (unaudited) |
3 |
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4 |
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5 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
6 |
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Item 2. |
Managements Discussion and Analysis of Results of Operations and Financial Condition |
29 |
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Item 4. |
38 |
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Item 1. |
38 |
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Item 1a. |
38 |
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Item 6. |
50 |
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51 |
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CERTIFICATIONS |
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PART I CONDENSED CONSOLIDATED FINANCIAL INFORMATION
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 (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in 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 are adequate to make the information presented not misleading when read in conjunction with the Companys audited consolidated financial statements and the notes included therein for the year ended December 31, 2005 filed with the Securities and Exchange Commission by the Company in Form 10-K.
In managements opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, which are necessary for a fair presentation, in all material respects, of financial results for the interim periods presented. Operating results for the first nine months of 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
2
CALGON CARBON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
(Dollars in Thousands Except Share and Per Share
Data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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2006 |
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2005 |
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2006 |
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2005 |
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Net sales |
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$ |
79,680 |
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$ |
68,867 |
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$ |
236,769 |
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$ |
219,578 |
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Cost of products sold (excluding depreciation) |
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58,897 |
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51,287 |
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176,270 |
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160,194 |
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Depreciation and amortization |
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4,719 |
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5,096 |
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14,311 |
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16,051 |
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Selling, general and administrative expenses |
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16,547 |
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14,073 |
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47,489 |
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43,892 |
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Research and development expenses |
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1,146 |
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1,074 |
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3,384 |
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3,313 |
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(Gain) loss on insurance settlement (Note 2) |
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(3,173 |
) |
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1,000 |
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(8,072 |
) |
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1,000 |
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Gulf Coast Facility impairment charge (Note 4) |
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2,158 |
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Restructuring charge |
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65 |
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7 |
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423 |
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78,136 |
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72,595 |
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233,389 |
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227,031 |
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Income (loss) from operations |
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1,544 |
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(3,728 |
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3,380 |
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(7,453 |
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Interest income |
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233 |
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165 |
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553 |
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558 |
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Interest expense |
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(1,530 |
) |
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(1,248 |
) |
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(4,628 |
) |
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(3,578 |
) |
Other expensenet |
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(660 |
) |
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(646 |
) |
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(2,018 |
) |
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(1,278 |
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Loss before income taxes, equity income, and minority interest |
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(413 |
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(5,457 |
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(2,713 |
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(11,751 |
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Provision (benefit) for income taxes (Note 16) |
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114 |
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(5,023 |
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(1,156 |
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(6,507 |
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Loss before equity income and minority interest |
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(527 |
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(434 |
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(1,557 |
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(5,244 |
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Equity in income from equity investments |
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39 |
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397 |
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203 |
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1,020 |
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Minority interest |
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(8 |
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8 |
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Loss from continuing operations |
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(496 |
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(37 |
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(1,346 |
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(4,224 |
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Income (loss) from discontinued operations |
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38 |
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(316 |
) |
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1,910 |
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2,458 |
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Net income (loss) |
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(458 |
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(353 |
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564 |
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(1,766 |
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Common stock dividends |
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(1,190 |
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(3,555 |
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Retained earnings, beginning of period |
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102,855 |
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109,026 |
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101,833 |
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112,804 |
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Retained earnings, end of period |
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$ |
102,397 |
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$ |
107,483 |
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$ |
102,397 |
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$ |
107,483 |
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Net income (loss) per Common share |
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Basic: |
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Loss from continuing operations |
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$ |
(.01 |
) |
$ |
.00 |
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$ |
(.03 |
) |
$ |
(.11 |
) |
Income (loss) from discontinued operations |
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$ |
.00 |
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$ |
(.01 |
) |
$ |
.05 |
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$ |
.06 |
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Net income (loss) |
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$ |
(.01 |
) |
$ |
(.01 |
) |
$ |
.01 |
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$ |
(.04 |
) |
Diluted: |
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Loss from continuing operations |
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$ |
(.01 |
) |
$ |
.00 |
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$ |
(.03 |
) |
$ |
(.11 |
) |
Income (loss) from discontinued operations |
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$ |
.00 |
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$ |
(.01 |
) |
$ |
.05 |
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$ |
.06 |
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Net income (loss) |
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$ |
(.01 |
) |
$ |
(.01 |
) |
$ |
.01 |
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$ |
(.04 |
) |
Weighted average shares outstanding |
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Basic |
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39,881,805 |
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39,569,277 |
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39,870,778 |
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39,421,446 |
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Diluted |
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39,881,805 |
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39,569,277 |
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39,870,778 |
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39,421,446 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
CALGON CARBON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except share data)
(Unaudited)
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September 30, |
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December 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
5,071 |
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$ |
5,446 |
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Receivables (net of allowance of $2,210 and $2,172) |
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57,828 |
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51,224 |
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Revenue recognized in excess of billings on uncompleted contracts |
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6,228 |
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5,443 |
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Inventories |
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71,026 |
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67,655 |
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Deferred income taxes current |
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9,827 |
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8,448 |
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Other current assets |
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6,149 |
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6,044 |
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Assets held for sale |
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21,340 |
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Total current assets |
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156,129 |
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165,600 |
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Property, plant and equipment, net |
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107,068 |
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108,745 |
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Equity investments |
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6,975 |
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7,219 |
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Intangibles |
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8,848 |
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10,049 |
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Goodwill |
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34,513 |
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33,874 |
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Deferred income taxes long-term |
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18,056 |
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18,684 |
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Other assets |
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5,580 |
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3,697 |
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Total assets |
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$ |
337,169 |
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$ |
347,868 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
36,468 |
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$ |
36,502 |
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Billings in excess of revenue recognized on uncompleted contracts |
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1,182 |
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3,933 |
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Payroll and benefits payable |
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8,798 |
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11,396 |
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Accrued income taxes |
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|
12,318 |
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|
10,783 |
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Liabilities held for sale |
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6,683 |
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Total current liabilities |
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58,766 |
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|
69,297 |
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Long-term debt |
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81,693 |
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|
83,925 |
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Deferred income taxes long-term |
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|
1,046 |
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|
1,389 |
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Accrued pension and other liabilities |
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40,193 |
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|
42,697 |
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Total liabilities |
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181,698 |
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|
197,308 |
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Commitments and contingencies |
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Shareholders equity: |
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Common shares, $.01 par value, 100,000,000 shares authorized, 42,517,566 and 42,459,733 shares issued |
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|
425 |
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|
425 |
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Additional paid-in capital |
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71,265 |
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|
69,906 |
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Retained earnings |
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|
102,397 |
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|
101,833 |
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Accumulated other comprehensive income |
|
|
9,976 |
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|
6,442 |
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Deferred compensation |
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(1,355 |
) |
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(917 |
) |
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|
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|
182,708 |
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|
177,689 |
|
Treasury stock, at cost, 2,819,690 and 2,787,258 shares |
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(27,237 |
) |
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(27,129 |
) |
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Total shareholders equity |
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155,471 |
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|
150,560 |
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Total liabilities and shareholders equity |
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$ |
337,169 |
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$ |
347,868 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
CALGON CARBON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Dollars in Thousands)
(Unaudited)
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Nine Months Ended |
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2006 |
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2005 |
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Cash flows from operating activities |
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Net income (loss) |
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$ |
564 |
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$ |
(1,766 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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(Gain) loss on insurance settlement |
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(8,072 |
) |
|
1,000 |
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Gain from divestitures |
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(6,719 |
) |
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Depreciation and amortization |
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|
14,313 |
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|
16,871 |
|
Equity income from equity investments |
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(211 |
) |
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(1,020 |
) |
Employee benefit plan provisions |
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|
2,283 |
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|
3,327 |
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Distributions received from Calgon Mitsubishi Chemical Corporation |
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|
254 |
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Non-cash impairment and restructuring charges |
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|
788 |
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|
2,373 |
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Changes in assets and liabilities - net of effects from purchase of business, non-cash impairment and restructuring: |
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(Increase) decrease in receivables |
|
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(81 |
) |
|
5,959 |
|
Increase in inventories |
|
|
(3,024 |
) |
|
(6,225 |
) |
(Increase) decrease in revenue in excess of billings on uncompleted contracts and other current assets |
|
|
(1,772 |
) |
|
3,311 |
|
Decrease in accounts payable and accrued liabilities |
|
|
(4,724 |
) |
|
(11,613 |
) |
Increase (decrease) in long-term deferred income taxes |
|
|
835 |
|
|
(4,412 |
) |
Decrease in accrued pensions |
|
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(10,588 |
) |
|
(3,711 |
) |
Other items net |
|
|
1,327 |
|
|
1,032 |
|
|
|
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Net cash (used in) provided by operating activities |
|
|
(15,081 |
) |
|
5,380 |
|
|
|
|
|
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Cash flows from investing activities |
|
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|
|
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Purchase of business - net of cash |
|
|
|
|
|
(856 |
) |
Proceeds from divestitures |
|
|
21,213 |
|
|
|
|
Property, plant and equipment expenditures |
|
|
(9,989 |
) |
|
(8,166 |
) |
Proceeds from insurance settlement for plant and equipment |
|
|
4,595 |
|
|
|
|
Proceeds from disposals of property, plant and equipment |
|
|
676 |
|
|
1,118 |
|
|
|
|
|
|
|
|
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Net cash provided by (used in) investing activities |
|
|
16,495 |
|
|
(7,904 |
) |
|
|
|
|
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|
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Cash flows from financing activities |
|
|
|
|
|
|
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Proceeds from borrowings |
|
|
150,338 |
|
|
83,491 |
|
Repayments of borrowings |
|
|
(149,337 |
) |
|
(81,888 |
) |
Debt issuance costs |
|
|
(3,233 |
) |
|
|
|
Treasury stock purchases |
|
|
(108 |
) |
|
|
|
Common stock issued through exercise of stock options |
|
|
464 |
|
|
2,986 |
|
Common stock dividends |
|
|
|
|
|
(3,555 |
) |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(1,876 |
) |
|
1,034 |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
87 |
|
|
889 |
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(375 |
) |
|
(601 |
) |
Cash and cash equivalents, beginning of period |
|
|
5,446 |
|
|
8,780 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
5,071 |
|
$ |
8,179 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
CALGON CARBON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars in Thousands)
(Unaudited)
1. |
Acquisition |
|
|
|
In December 2004, the Company increased its equity ownership in Datong Carbon Corporation from 80% to 100% for a purchase price of $0.7 million, which was paid in the three months ended March 31, 2005. In May 2005, the Company formed a joint venture company with C. Gigantic Carbon to provide carbon reactivation services to the Thailand market. The joint venture company was named Calgon Carbon (Thailand) Ltd. and is 20% owned by the Company after an initial investment of $0.2 million and exchange of technology. It is accounted for in the Companys financial statements under the equity method. |
|
|
2. |
Gain on Insurance Settlement |
|
|
|
In August 2005, the Companys plant located in Pearlington, Mississippi was damaged by Hurricane Katrina and the Company recorded $1.0 million of non-reimbursable expense in the quarter ended September 30, 2005. In accordance with FIN 30, Accounting for Involuntary Conversions of Non-Monetary Assets to Monetary Assets, the Company has written off the net book value of the destroyed inventory and property totaling $1.8 million. The replacement value of the inventory and property exceeded its net book value by approximately $4.9 million, which was recorded as a gain on insurance settlement. As of September 30, 2006, the Company has also settled its business interruption insurance claim with its insurance company for $3.8 million. This amount, net of costs related to business interruption of $0.6 million, was recorded as a gain on insurance settlement. |
|
|
3. |
Discontinued Operations and Assets and Liabilities Held for Sale |
|
|
|
The Companys financial statements for all periods presented were significantly impacted by activities relating to the divestiture of two of the Companys businesses. |
|
|
|
The Company reclassified the following businesses from continuing operations to discontinued operations and assets held for sale for all periods presented: Charcoal/Liquid in Bodenfelde, Germany and Solvent Recovery in Columbus, Ohio; Vero Beach, Florida; and Ashton, United Kingdom. The Charcoal/Liquid and Solvent Recovery businesses were reported in the Companys Consumer and Equipment segments, respectively. |
|
|
|
On February 17, 2006, Calgon Carbon Corporation, through its wholly owned subsidiary Chemviron Carbon GmbH, executed an agreement (the Charcoal Sale Agreement) with proFagus GmbH, proFagus Grundstuecksverwaltungs GmbH and proFagus Beteiligungen GmbH (as Guarantor) to sell, and sold, substantially all the assets, real estate, and specified liabilities of the Bodenfelde, Germany facility (the Charcoal/Liquid business). The facility includes the production of charcoal for consumer use and liquids that are recovered during charcoal production. The products are sold to retail and industrial markets. The aggregate sales price, based on an exchange rate of 1.19 Dollars per Euro, consisted of $20.4 million of cash which included a final working capital adjustment of $1.3 million. The Company provided guarantees to the buyer related to pre-divestiture tax liabilities, future environmental remediation costs related to pre-divestiture activities and other contingencies. Management believes the ultimate cost of such guarantees is not material. An additional $5.0 million could be paid contingent upon the business meeting certain earnings targets over the next three years. As of September 30, 2006, the Company has recorded a pre-tax gain of $5.0 million or $2.0 million, net of tax, on the sale of the Charcoal/Liquid divestiture. |
|
|
|
On April 24, 2006, the Company completed the sale of the assets of its Solvent Recovery business to MEGTEC Systems, Inc. (MEGTEC), a subsidiary of Sequa Corporation. The Solvent Recovery unit provides turnkey on-site regenerable solvent recovery systems, distillation systems, on-site regenerable volatile organic compound concentrators, vapor-phase biological oxidation systems, and related services on a worldwide basis. The purchase price of $1.8 million included cash proceeds of approximately $0.8 million and $0.7 million of assumed liabilities, primarily accounts payable. The transaction was also subject to a working capital adjustment which is currently estimated at $0.3 million, which management expects to finalize and record in the fourth quarter of 2006. As of September 30, 2006, the Company recorded a pre-tax gain of $0.4 million or $0.3 million, net of tax, on the sale of the Solvent Recovery business. |
6
|
The following table details selected financial information for the businesses included within the discontinued operations in the Condensed Consolidated Statements of Operations and Retained Earnings: |
|
|
Charcoal/Liquid |
|
Solvent Recovery |
|
||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
|
|
Three Months |
|
Nine Months |
|
Three Months |
|
Nine Months |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
(Dollars in thousands) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
$ |
5,291 |
|
$ |
1,375 |
|
$ |
25,890 |
|
$ |
(35 |
) |
$ |
2,772 |
|
$ |
2,775 |
|
$ |
11,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(25 |
) |
|
(290 |
) |
|
(427 |
) |
|
2,514 |
|
|
(20 |
) |
|
(175 |
) |
|
(161 |
) |
|
1,263 |
|
Other income (expense)-net |
|
|
120 |
|
|
12 |
|
|
5,009 |
|
|
38 |
|
|
|
|
|
(30 |
) |
|
430 |
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
95 |
|
|
(278 |
) |
|
4,582 |
|
|
2,552 |
|
|
(20 |
) |
|
(205 |
) |
|
269 |
|
|
1,206 |
|
Income tax expense (benefit) |
|
|
44 |
|
|
(96 |
) |
|
2,847 |
|
|
883 |
|
|
(7 |
) |
|
(71 |
) |
|
94 |
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
51 |
|
$ |
(182 |
) |
$ |
1,735 |
|
$ |
1,669 |
|
$ |
(13 |
) |
$ |
(134 |
) |
$ |
175 |
|
$ |
789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The major classes of assets and liabilities of operations held for sale in the Condensed Consolidated Balance Sheets are as follows:
|
|
Charcoal/Liquid |
|
Solvent Recovery |
|
||||||||
|
|
|
|
|
|
||||||||
(Dollars in thousands) |
|
September 30, 2006 |
|
December 31, 2005 |
|
September 30, 2006 |
|
December 31, 2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
$ |
|
|
$ |
1,059 |
|
$ |
|
|
$ |
4,018 |
|
Inventories |
|
|
|
|
|
6,924 |
|
|
|
|
|
113 |
|
Property, plant and equipment, net |
|
|
|
|
|
7,310 |
|
|
|
|
|
42 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
Other assets |
|
|
|
|
|
181 |
|
|
|
|
|
693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets held for sale |
|
$ |
|
|
$ |
15,474 |
|
$ |
|
|
$ |
5,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
2,604 |
|
|
|
|
|
3,157 |
|
Other liabilities |
|
|
|
|
|
922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities held for sale |
|
$ |
|
|
$ |
3,526 |
|
$ |
|
|
$ |
3,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. |
Gulf Coast Facility Impairment Charge |
|
|
|
In 2003, the Company temporarily suspended construction of a new facility in the Gulf Coast region of the United States as it evaluated strategic alternatives. On March 22, 2005, the Company concluded, and the Board of Directors approved, that cancellation of this project was warranted and that construction of such a facility should be suspended for the foreseeable future. Accordingly, the Company recorded an impairment charge of $2.2 million in 2005. |
|
|
5. |
Inventories: |
|
|
September 30, 2006 |
|
December 31, 2005 |
|
||
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
16,026 |
|
$ |
16,501 |
|
Finished goods |
|
|
55,000 |
|
|
51,154 |
|
|
|
|
|
|
|
|
|
|
|
$ |
71,026 |
|
$ |
67,655 |
|
|
|
|
|
|
|
|
|
7
6. |
Supplemental Cash Flow Information: |
|
|
Nine Months Ended September 30, |
|
||||
|
|
|
|
||||
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest |
|
$ |
(4,159 |
) |
$ |
(3,765 |
) |
|
|
|
|
|
|
|
|
Income taxes paid net |
|
$ |
(687 |
) |
$ |
(357 |
) |
|
|
|
|
|
|
|
|
7. |
Dividends: |
|
|
|
The Companys Board of Directors did not declare or pay a dividend for the quarter ended September 30, 2006. Common stock dividends declared and paid during the quarter ended September 30, 2005 were $.03 per common share. |
|
|
8. |
Comprehensive income (loss) |
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(458 |
) |
$ |
(353 |
) |
$ |
564 |
|
$ |
(1,766 |
) |
Other comprehensive income (loss), net of taxes |
|
|
(209 |
) |
|
825 |
|
|
3,534 |
|
|
(4,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(667 |
) |
$ |
472 |
|
$ |
4,098 |
|
$ |
(5,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The only matter contributing to the other comprehensive income (loss) during the three and nine months ended September 30, 2006 was the foreign currency translation adjustment of $(0.3) million and $3.6 million, respectively, and the change in the fair value of the derivative instruments of $0.1 million and $(27) thousand, respectively as described in Note 10. The only matters contributing to the other comprehensive income (loss) during the three and nine months ended September 30, 2005 were the foreign currency translation adjustment of $1.1 million and ($4.1) million, respectively, and the change in the fair value of the derivative instruments of ($0.3) million and $0.1 million, respectively. |
|
|
9. |
Segment Information: |
|
|
|
The Companys management has identified three segments based on product line and associated services. Those segments include Activated Carbon and Service, Equipment, and Consumer. The Companys chief operating decision maker, its chief executive officer John S. Stanik, 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 Companys 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 Companys enabling technologies: carbon adsorption, ultraviolet light, and advanced ion exchange separation. The Consumer segment brings the Companys purification technologies directly to the consumer in the form of products and services including carbon cloth and activated carbon for tarnish prevention and household odors. The following segment information represents the results of the Companys continuing operations. |
8
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbon and Service |
|
$ |
67,869 |
|
$ |
57,936 |
|
$ |
200,489 |
|
$ |
181,166 |
|
Equipment |
|
|
8,740 |
|
|
7,972 |
|
|
26,627 |
|
|
29,333 |
|
Consumer |
|
|
3,071 |
|
|
2,959 |
|
|
9,653 |
|
|
9,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,680 |
|
$ |
68,867 |
|
$ |
236,769 |
|
$ |
219,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before depreciation, amortization, impairment, restructuring, and income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbon and Service |
|
$ |
6,776 |
|
$ |
3,032 |
|
$ |
20,885 |
|
$ |
13,373 |
|
Equipment |
|
|
(848 |
) |
|
(1,318 |
) |
|
(4,520 |
) |
|
(2,204 |
) |
Consumer |
|
|
335 |
|
|
(281 |
) |
|
1,333 |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,263 |
|
|
1,433 |
|
|
17,698 |
|
|
11,179 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbon and Service |
|
|
4,409 |
|
|
4,667 |
|
|
13,309 |
|
|
14,632 |
|
Equipment |
|
|
180 |
|
|
243 |
|
|
598 |
|
|
794 |
|
Consumer |
|
|
130 |
|
|
186 |
|
|
404 |
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,719 |
|
|
5,096 |
|
|
14,311 |
|
|
16,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before impairment, restructuring, and income taxes |
|
$ |
1,544 |
|
$ |
(3,663 |
) |
$ |
3,387 |
|
$ |
(4,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast Facility impairment charge |
|
|
|
|
|
|
|
|
|
|
|
(2,158 |
) |
Restructuring charge |
|
|
|
|
|
(65 |
) |
|
(7 |
) |
|
(423 |
) |
Interest income |
|
|
233 |
|
|
165 |
|
|
553 |
|
|
558 |
|
Interest expense |
|
|
(1,530 |
) |
|
(1,248 |
) |
|
(4,628 |
) |
|
(3,578 |
) |
Other expense net |
|
|
(660 |
) |
|
(646 |
) |
|
(2,018 |
) |
|
(1,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss before income taxes, equity in income, and minority interest |
|
$ |
(413 |
) |
$ |
(5,457 |
) |
$ |
(2,713 |
) |
$ |
(11,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
|
|
|
|
|
Total Assets |
|
|
|
|
|
|
|
Carbon and Service |
|
$ |
284,432 |
|
$ |
267,408 |
|
Equipment |
|
|
40,652 |
|
|
44,607 |
|
Consumer |
|
|
12,085 |
|
|
14,513 |
|
|
|
|
|
|
|
|
|
Total assets from continuing operations |
|
$ |
337,169 |
|
$ |
326,528 |
|
Assets held for sale |
|
|
|
|
|
21,340 |
|
|
|
|
|
|
|
|
|
Consolidated total assets |
|
$ |
337,169 |
|
$ |
347,868 |
|
|
|
|
|
|
|
|
|
9
10. |
Derivative Instruments |
|
|
|
The Company accounts for its foreign exchange and natural gas derivative instruments under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires recognition of all derivatives as either assets or liabilities at fair value and may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses from changes in the fair value of derivative instruments. |
|
|
|
The Company had thirteen derivative instruments outstanding at September 30, 2006 of which one was a foreign currency swap, nine were foreign currency forward exchange contracts, and three were cash flow hedges for forecasted purchases of natural gas. The Company applied hedge accounting treatment to the foreign currency swap and the three cash flow hedges for forecasted natural gas. The Company had thirty-one derivative instruments outstanding at September 30, 2005 of which one was a foreign currency swap and thirty were foreign currency forward exchange contracts. The Company applied hedge accounting treatment to six of the foreign currency forward exchange contracts, which were treated as foreign exchange cash flow hedges regarding payment for inventory purchases, and the foreign currency swap. The change in the fair market value of the effective hedge portion of the foreign currency forward exchange contracts was ($0.3) million and ($0.1) million, respectively, for the three and nine month periods ended September 30, 2005 and was recorded in other comprehensive (income) loss (see Note 8). It was released into operations over 12 months based on the timing of the sales of the underlying inventory. The release to operations was reflected in cost of products sold. During the periods ended September 30, 2006 and 2005, the Company recorded an immaterial gain in other income for the remaining nine and twenty-four foreign currency forward exchange contracts that did not qualify for hedge accounting treatment. |
|
|
|
On April 26, 2004, the Company entered into a ten-year foreign currency swap agreement to fix the foreign exchange rate on a $6.5 million intercompany loan between the Company and its foreign subsidiary, Chemviron Carbon Ltd. Since its inception, the foreign currency swap has been treated as a foreign exchange cash flow hedge. Accordingly, the change in the fair value of the effective hedge portion of the foreign currency swap, net of tax, of $0.4 million and $0.3 million, respectively, for the three and nine month periods ended September 30, 2006 and $0.1 million for the three and nine month periods ended September 30, 2005 was recorded in other comprehensive income (loss). The balance of the effective hedge portion of the foreign currency swap recorded in other long-term liabilities was $0.7 million and $0.3 million, respectively, as of September 30, 2006 and 2005. The change in fair value and the balance of the effective hedge portion of the cash flow hedges for the forecasted purchase of natural gas recorded in other long-term liabilities was $0.5 million, net of tax, for the three and nine month periods ended September 30, 2006. |
|
|
|
No component of the derivatives gains or losses has been excluded from the assessment of hedge effectiveness. For the periods ended September 30, 2006 and 2005, the net gain or loss recognized due to the amount of hedge ineffectiveness was insignificant. |
|
|
11. |
Contingencies |
|
|
|
In August 2005, the Companys Pearl River plant was impacted by Hurricane Katrina. In June 2006, the Company settled its property damage claim with its insurance carrier for approximately $8.8 million, resulting in a pre-tax gain of $4.9 million. In September 2006, the Company also settled its business interruption claim with its insurance carrier for approximately $3.8 million, resulting in a pre-tax gain of $3.2 million. |
|
|
|
On December 31, 1996, the Company purchased the common stock of Advanced Separation Technologies Incorporated (AST) from Progress Capital Holdings, Inc. and Potomac Capital Investment Corporation. On January 12, 1998, the Company filed a claim for unspecified damages in the United States District Court in the Western District of Pennsylvania alleging among other things that Progress Capital Holdings and Potomac Capital Investment Corporation materially breached various AST financial and operational representations and warranties included in the Stock Purchase Agreement. Based upon information obtained since the acquisition and corroborated in the course of pre-trial discovery, the Company believes that it has a reasonable basis for this claim and intends to vigorously pursue reimbursement for damages sustained. Neither the Company nor its counsel can predict with certainty the amount, if any, of recovery that will be obtained from the defendants in this matter. |
10
|
The Company is a party in three cases involving challenges to the validity of its U.S. Patent No. 6,129,893 and U.S. Patent No. 6,565,803 B1 (U.S. Patents) and its Canadian Patent No. 2,331,525 (the Canadian Patent) for the method of preventing infection from cryptosporidium found in drinking water. In the first case, Wedeco Ideal Horizons, Inc. filed suit against the Company in the United States District Court for the District of New Jersey seeking a declaratory judgment that it does not infringe the Companys U.S. Patents on the grounds that the U.S. Patents are invalid and alleging unfair competition by the Company. On June 30, 2006, the District Court granted Wedecos motion for summary judgment on the issue of validity of the U.S. Patents, denied the Companys motion for summary judgment on infringement on the ground that there can be no infringement where there is no valid patent and granted the Companys motion for summary judgment on Wedecos claim of unfair competition. The Company has appealed the Courts decision against it to the Federal Circuit Court of Appeals and expects a decision will be rendered by the Court in eighteen to twenty-four months. In the second case, the Company filed suit against the Town of Ontario, New York, Trojan Technologies, Inc. (Trojan) and Robert Wykle, et al. in the United States District Court for the Western District of New York alleging that the defendant is practicing the method claimed within the U.S. Patents without a license. The District Court has stayed this action pending the outcome of the Companys appeal in the Wedeco case. In the third case, the Company filed suit against the City of North Bay, Ontario, Canada (North Bay) and Trojan in the Federal Court of Canada alleging infringement of the Canadian Patent by North Bay and inducement of infringement by Trojan. A bench trial was completed in April 2006. On November 14, 2006 the Court dismissed the Companys claim for a declaration that the defendants infringed the Canadian Patent and the Companys claims for an injunction, compensation, damages, interest, and costs and declared that the Canadian Patent is invalid. The Court also found that the defendants are entitled to their costs, to be assessed on the ordinary scale. The Company has insufficient information to estimate the amount of defendants costs, but expects the defendants to claim that they are entitled to costs exceeding $0.5 million. The Company intends to appeal the Courts decision. The Company cannot predict the ultimate outcome of the three matters. |
|
|
|
The Company has received a demand from the Pennsylvania Department of Environmental Protection (PADEP) that the Company reimburse PADEP for response costs the agency alleges have been taken at a site owned by a third party and located in Allegheny County, Pennsylvania (Site). The letter also included an unspecified amount for interest and for any future costs that might be incurred by PADEP at the Site. The Company understands that the response costs are approximately $1.3 million. Based on information provided by PADEP, the Site is approximately 8 acres and was used from the 1950s until the 1960s as a disposal site for coke or carbon sweepings and other industrial wastes. The Company has been in discussions with PADEP regarding the Companys position that it is not the entity that disposed of materials containing the contaminants identified by PADEP at the Site and that any materials that may have been deposited by the Companys predecessor did not contain actionable levels of hazardous substances identified by PADEP. The Company and the PADEP have agreed to a settlement of the matter, subject to written documentation, requiring the Company to pay $515,000 in two installments to resolve the matter. This amount has been charged to earnings for the second quarter ended June 30, 2006. The terms of the settlement have been published for public comment. The initial public comment period has expired and PADEP has received comments on the proposed settlement. PADEP is expected to timely respond to these comments. If there are no further appeals filed after PADEPs responses to the comments are issued, the Company expects to receive notification from PADEP sometime in the first quarter of 2007 that the settlement has been approved and the first installment payment will be made. |
|
|
|
In September 2004, a customer of one of the Companys distributors demanded payment by the Company of approximately $340,000 as reimbursement for losses allegedly caused by activated carbon produced by the Company and sold by the distributor. The claimant contends that the activated carbon contained contamination which adversely impacted its production process. The Company is evaluating the claim, and at this time, cannot predict the outcome of this matter. |
|
|
|
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 Companys policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. Management believes, after consulting with counsel, that the ultimate liabilities, if any, resulting from such lawsuits and claims will not materially affect the consolidated results of operations, cash flows, or financial position of the Company. |
11
|
In conjunction with the February 2004 purchase of substantially all of Waterlinks operating assets and the stock of Waterlinks U.K. subsidiary, several environmental studies were performed on the Columbus, Ohio property by environmental consulting firms which identified and characterized areas of contamination. In addition, these firms identified alternative methods of remediating the property, identified feasible alternatives 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 as a component of noncurrent other liabilities in the Companys consolidated balance sheet. At December 31, 2005, the balance recorded was $5.3 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 other companies. During the first four months of 2006, the Company undertook a process of evaluating contractors and securing bids to perform the remediation work on the Columbus, Ohio property. As a result of the evaluation of the additional information gathered during that process, the Company reduced its estimate of its liability by $1.3 million to $4.0 million as of March 31, 2006. The reduction of the liability was recorded as a reduction of selling, general and administrative expenses on the Companys condensed consolidated statement of operations and retained earnings for the three months ended March 31, 2006. The Company has not incurred any environmental remediation expense for the nine months ended September 30, 2006 and has incurred a total of $0.2 million of environmental remediation expense to date. |
|
|
|
It is reasonably possible that a change in the estimate of this obligation will occur as remediation preparation and remediation activity commences over the upcoming months. The ultimate remediation costs are dependent upon, among other things, the requirements of any state or federal environmental agencies, the remediation methods employed, the final scope of work being determined, and the extent and types of contamination which will not be fully determined until experience is gained through remediation and related activities. The accrued amounts are expected to be paid out over the course of several years once work has commenced. The Company has yet to make a determination that it will proceed with remediation efforts in 2006. |
|
|
|
The Company owns a 49% interest in a joint venture, Calgon Mitsubishi Chemical Corporation, which was formed on October 1, 2002. At September 30, 2006, Calgon Mitsubishi Chemical Corporation had $8.5 million in borrowings from an affiliate of the majority owner of the joint venture. The Company has agreed with the joint venture and the lender that, upon request by the lender, the Company will execute a guarantee for up to 49% of such borrowings. At September 30, 2006, the lender had not requested, and the Company has not provided, such guarantee. |
|
|
12. |
Goodwill & Intangible Assets |
|
|
|
The Company accounts for goodwill and intangible assets in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. This standard requires that goodwill and intangible assets with indefinite useful lives not be amortized but should be tested for impairment at least annually. Management has elected to do the annual impairment test on December 31 of each year. As required by SFAS No. 142, management has allocated goodwill to the Companys reporting units. No such impairment existed based on the Companys most recent test at December 31, 2005. |
|
|
|
The following is the categorization of the Companys intangible assets as of September 30, 2006 and December 31, 2005 respectively: |
|
|
|
|
|
September 30, 2006 |
|
December 31, 2005 |
|
||||||||||||||
|
|
Weighted |
|
|
|
|
|
|||||||||||||||
|
|
|
Gross |
|
Foreign |
|
Accumulated |
|
Gross |
|
Foreign |
|
Accumulated |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents |
|
|
15.4 Years |
|
$ |
1,369 |
|
$ |
|
|
$ |
(771 |
) |
$ |
1,369 |
|
$ |
|
|
$ |
(711 |
) |
Customer Relationships |
|
|
17.0 Years |
|
|
9,323 |
|
|
(59 |
) |
|
(3,305 |
) |
|
9,323 |
|
|
(206 |
) |
|
(2,316 |
) |
Customer Contracts |
|
|
2.8 Years |
|
|
664 |
|
|
(18 |
) |
|
(641 |
) |
|
664 |
|
|
(19 |
) |
|
(577 |
) |
License Agreement |
|
|
5.0 Years |
|
|
500 |
|
|
|
|
|
(292 |
) |
|
500 |
|
|
|
|
|
(217 |
) |
Unpatented Technology |
|
|
20.0 Years |
|
|
2,875 |
|
|
|
|
|
(1,154 |
) |
|
2,875 |
|
|
|
|
|
(1,031 |
) |
Product Certification |
|
|
7.9 Years |
|
|
665 |
|
|
|
|
|
(308 |
) |
|
665 |
|
|
|
|
|
(270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
16.0 Years |
|
$ |
15,396 |
|
$ |
(77 |
) |
$ |
(6,471 |
) |
$ |
15,396 |
|
$ |
(225 |
) |
$ |
(5,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
For the three and nine months ended September 30, 2006, the Company recognized $0.4 million and $1.3 million, respectively, of amortization expense. For the three and nine months ended September 30, 2005, the Company recognized $0.5 million and $1.5 million, respectively, of amortization expense. The Company estimates amortization expense to be recognized during the next five years as follows: |
For the year ending December 31: |
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
1,763 |
|
2007 |
|
$ |
1,530 |
|
2008 |
|
$ |
1,330 |
|
2009 |
|
$ |
1,057 |
|
2010 |
|
$ |
914 |
|
|
The changes in the carrying amounts of goodwill by segment for the nine months ended September 30, 2006 are as follows: |
|
|
Carbon & |
|
Equipment |
|
Consumer |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006 |
|
$ |
20,534 |
|
$ |
13,280 |
|
$ |
60 |
|
$ |
33,874 |
|
Foreign exchange |
|
|
334 |
|
|
305 |
|
|
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006 |
|
$ |
20,868 |
|
$ |
13,585 |
|
$ |
60 |
|
$ |
34,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. |
Borrowing Arrangements |
|
|
|
|
|
On August 18, 2006, the Company issued $75.0 million of Convertible Senior Notes (the Notes) due in 2036 and entered into a new revolving credit facility (the Credit Facility). The Company used $68.4 million of the net proceeds from its offering of the Notes to fully repay indebtedness under the Companys prior revolving credit facility. Accordingly, all parties completed their obligations under the Amended and Restated Credit Agreement, dated as of January 30, 2006 (the Old Credit Agreement). The material terms and conditions of the Old Credit Agreement are more fully discussed in Note 13 to the Companys unaudited condensed consolidated financial statements contained in its Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 2006. As part of the aforementioned repayment, the Company wrote-off $0.3 million of deferred financing fees as well as $0.1 million in fees associated with the repayment. |
|
|
|
5.00% Convertible Senior Notes due 2036 |
|
|
|
The Company initially issued $65.0 million in aggregate principal amount of 5.00% Notes due in 2036 and granted the initial purchaser a 30-day option to purchase up to an additional $10.0 million principal amount of Notes solely to cover over-allotments, if any. The initial purchaser exercised this option in full. Accordingly, $75.0 million in aggregate principal amount of Notes were issued and sold to the initial purchaser upon completion of the offering on August 18, 2006. The Notes accrue interest at the rate of 5.00% per annum and are payable in cash semi-annually in arrears on each February 15 and August 15, commencing February 15, 2007. The Notes will mature on August 15, 2036. |
13
|
The Notes can be converted under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after September 30, 2006, if the last reported sale price of the Companys common stock is greater than or equal to 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any 10 consecutive trading-day period (the measurement period) in which the trading price per Note for each day in the measurement period was less than 103% of the product of the last reported sale price of the Companys common stock and the conversion rate on such day; or (3) upon the occurrence of specified corporate transactions described in the Offering Memorandum. On or after June 15, 2011, holders may convert their Notes at any time on the business day immediately preceding the maturity date. Upon conversion, the Company will pay cash and shares of its common stock, if any, based on a daily conversion value (as described herein) calculated on a proportionate basis for each day of the 25 trading-day observation period. |
|
|
|
The initial conversion rate will be 196.0784 shares of the Companys common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $5.10 per share of common stock. The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest, including any additional interest. In addition, following certain fundamental changes that occur prior to August 15, 2011, the Company will increase the conversion rate for holders who elect to convert Notes in connection with such fundamental changes in certain circumstances. |
|
|
|
The Company may not redeem the Notes before August 20, 2011. On or after that date, the Company may redeem all or a portion of the Notes at any time. Any redemption of the Notes will be for cash at 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, to, but excluding, the redemption date. |
|
|
|
Holders may require the Company to purchase all or a portion of their Notes on each of August 15, 2011, August 15, 2016, and August 15, 2026. In addition, if the Company experiences specified types of fundamental changes, holders may require it to purchase the Notes. Any repurchase of the Notes pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest, including any additional interest, to, but excluding, the purchase date. |
|
|
|
The Notes will be the Companys senior unsecured obligations, and will rank equally in right of payment with all of its other existing and future senior indebtedness. The Notes will be guaranteed by certain of the Companys domestic subsidiaries on a senior unsecured basis. The subsidiary guarantees will be general unsecured senior obligations of the subsidiary guarantors and will rank equally in right of payment with all of the existing and future senior indebtedness of the subsidiary guarantors. If the Company fails to make payment on the Notes, the subsidiary guarantors must make them instead. The Notes will be effectively subordinated to any indebtedness of the Companys non-guarantor subsidiaries. The Notes will be effectively junior to all of the Companys existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness. |
|
|
|
The Company sold the Notes at a discount of $3.3 million that will be amortized over a period of five years. The discount will be reflected as a deduction from the face amount of the debt. The Company recorded interest expense of $0.5 million of which $0.1 million related to the amortization of the discount and $0.4 million which related to the Notes. The Company incurred issuance costs of $1.5 million which have been deferred and will be amortized over a five year period. |
|
|
|
The Notes and the Guarantees were sold only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the Securities Act). The notes offered hereby, the subsidiary guarantees and the common stock issuable upon conversion of the notes have not been registered. This offering is being conducted in reliance upon an exemption from registration under the Securities Act and applicable state securities laws. We and the subsidiary guarantors have agreed, however, to use reasonable best efforts to file a shelf registration statement with the SEC within 90 days of the issue date, and to use reasonable efforts to cause such registration statement to become effective within 240 days from the issue date, in order to register resales of the notes, the subsidiary guarantees and common stock issuable upon conversion of the notes under the Securities Act. The 90-day period expired on November 16, 2006. The Company did not file a registration statement within the time period and, as a result, is obligated to pay predetermined additional interest to holders of the notes as described in the registration rights agreement. |
|
|
|
Credit Facility |
|
|
|
The Credit Facility initially is a $50.0 million facility and includes a separate U.K. sub-facility and a separate Belgian sub-facility. The Administrative Agent will use commercially reasonable efforts to obtain commitments from a syndicate of lenders, permitting the total revolving credit commitment to be increased up to $75.0 million. |
14
|
The Company is currently discussing the syndication of its revolving credit facility and plans to increase the total commitment of the current facility. The terms of the Credit Facility are subject to change in the event that the credit facility is syndicated. Availability for domestic borrowings under the Credit Facility is based upon the value of eligible inventory, accounts receivable and property, plant and equipment, with separate borrowing bases to be established for foreign borrowings under a separate U.K. sub-facility and a separate Belgian sub-facility. Availability under the Credit Facility is conditioned upon various customary conditions. |
|
|
|
The Credit Facility is secured by a first perfected security interest in substantially all of the Companys assets, with limitations under certain circumstances in the case of capital stock of foreign subsidiaries. Certain of the Companys domestic subsidiaries unconditionally guarantee all indebtedness and obligations related to domestic borrowings under the Credit Facility. The Company and certain of its domestic subsidiaries also unconditionally guarantee all indebtedness and obligations under the U.K. sub-facility. |
|
|
|
As of September 30, 2006, the carrying amount of assets pledged as collateral was $53.4 million. The carrying amount as of September 30, 2006 for domestic, U.K., and Belgian borrowers were $43.0 million, $5.6 million, and $4.8 million, respectively. The Credit Facility contains a fixed charge coverage ratio covenant which becomes effective when total domestic availability falls below $11.0 million. As of September 30, 2006, total availability was $28.6 million. Availability as of September 30, 2006 for domestic, U.K., and Belgian borrowers were $24.3 million, $4.3 million, and zero, respectively. |
|
|
|
The Credit Facility interest rate is based upon Euro-based (LIBOR) rates with other interest rate options available. The applicable Euro Dollar margin in effect when the Company is in compliance with the terms of the facility ranges from 1.25% to 2.25% and is based upon the Companys overall availability under the credit facility. The unused commitment fee is equal to 0.375% per annum and is based upon the unused portion of the revolving commitment. |
|
|
|
The Company incurred debt issuance costs of $0.5 million which have been deferred and will be amortized over a five year period. Borrowings under the Credit Facility were being charged a weighted average interest rate of 7.08% at September 30, 2006. |
|
|
14. |
Stock Compensation Plans |
|
|
|
The Company has two stock-based compensation plans which are more fully described in Note 12 of the Companys 2005 Annual Report on Form 10-K. Prior to January 1, 2006, the Company accounted for awards granted under those plans following the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and related interpretations. |
|
|
|
The Company adopted SFAS No. 123(R), Share-based Payments, on January 1, 2006 using the modified prospective application method. Under this transition method, compensation cost recognized in the quarter and year-to-date ended September 30, 2006 includes the applicable amounts of compensation cost of all stock-based payments granted prior to, but not yet vested as of January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and previously presented in the pro forma footnote disclosures). Compensation cost in the future will also include stock-based payments granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123(R)). Results for prior periods have not been restated. Prior to the adoption of SFAS No. 123(R), no compensation cost was reflected in net income for stock options or stock appreciation rights (SARS) as all options and SARS granted had an exercise price equal to the market value of the underlying common stock on the date of grant. In accordance with SFAS No. 123(R), compensation expense for stock options and SARS is now recorded over the vesting period using the fair value on the date of grant, as calculated by the Company using the Black-Scholes model. The nonvested restricted stock grant date fair value, which is the market price of the underlying common stock, is expensed over the vesting period. |
15
|
Stock-based compensation expense |
|
|
|
The following table summarizes the total compensation expense recognized for stock-based compensation awards: |
(Dollars in thousands except per share data) |
|
Three Months Ended |
|
Nine Months Ended |
|
||
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized: |
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
$ |
409 |
|
$ |
874 |
|
|
|
|
|
|
|
|
|
Total |
|
|
409 |
|
|
874 |
|
|
|
|
|
|
|
|
|
Tax effect |
|
|
161 |
|
|
344 |
|
|
|
|
|
|
|
|
|
Increase in net loss/decrease in net income, respectively |
|
$ |
248 |
|
$ |
530 |
|
|
|
|
|
|
|
|
|
Decrease in basic and diluted earnings per share |
|
$ |
0.01 |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
Prior period pro forma presentations
The following pro forma information is provided for comparative purposes and illustrates the pro forma effect on net income and earnings per share as if the fair value recognition provision of SFAS No. 123 had been applied to stock-based compensation prior to January 1, 2006:
(Dollars in thousands except per share data) |
|
Three Months Ended |
|
Nine Months Ended |
|
||
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
As reported |
|
$ |
(353 |
) |
$ |
(1,766 |
) |
Stock-based employee compensation Expense included in reported net income, net of tax effect |
|
|
65 |
|
|
159 |
|
Stock-based compensation at fair value, net of tax effects |
|
|
(159 |
) |
|
(563 |
) |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
(447 |
) |
$ |
(2,170 |
) |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
Basic |
|
|
39,569,277 |
|
|
39,421,446 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
39,569,277 |
|
|
39,421,446 |
|
|
|
|
|
|
|
|
|
Net loss per common share |
|
|
|
|
|
|
|
Basic and Diluted |
|
|
|
|
|
|
|
As reported |
|
$ |
(.01 |
) |
$ |
(.04 |
) |
Pro forma |
|
$ |
(.01 |
) |
$ |
(.06 |
) |
|
|
|
|
|
|
|
|
The above disclosures of the effect of stock-based compensation expense for the three and nine months ended September 30, 2006 and the pro forma effect as if SFAS No. 123 had been applied to the three and nine months ended September 30, 2005, are based on the fair value of stock option awards estimated on the date of grant using the Black-Scholes option valuation model with the assumptions listed below:
|
|
Nine Months Ended September 30 |
|
||||
|
|
|
|
||||
|
|
2006 |
|
2005 |
|
||
|
|
|
|
|
|
|
|
Average grant date exercise price per share of stock appreciation rights |
|
$ |
6.19 |
|
$ |
0.00 |
|
Average grant date exercise price per share of unvested awards options |
|
$ |
7.48 |
|
$ |
7.43 |
|
Dividend yield |
|
|
.00-.70 |
% |
|
.70%-1.79 |
% |
Expected volatility |
|
|
34-37 |
% |
|
37%-46 |
% |
Risk-free interest rates |
|
|
3.62%-5.20 |
% |
|
3.03%-3.62 |
% |
Expected lives of options |
|
|
3 -6 years |
|
|
5 years |
|
Average grant date fair value per share of stock appreciation rights |
|
$ |
1.85 |
|
$ |
0.00 |
|
Average grant date fair value per share of unvested option awards |
|
$ |
3.06 |
|
$ |
2.77 |
|
|
|
|
|
|
|
|
|
16
The Dividend yield is based on the latest annualized dividend rate and the current market price of the underlying common stock at the date of grant.
Expected volatility is based on the historical volatility of the Companys stock and the implied volatility calculated from traded options on the Companys stock.
The Risk-free interest rates are based on the U.S. Treasury strip rate for the expected life of the option.
The Expected lives of options are determined from primarily historical stock option exercise data. The Company applied the simplified method in accordance with Staff Accounting Bulletin No. 107 for all plain-vanilla options.
Stock Appreciation Rights
Stock appreciation rights (SARS) granted to employees are valued at the grant date fair value which is the market price of common stock on the date of grant. The grants vest over a service period of three years and are payable in cash. The following table shows a summary of the status and activity of stock appreciation rights for the nine months ended September 30, 2006:
|
|
Shares |
|
Weighted- |
|
Weighted- |
|
Aggregate |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
Granted |
|
|
37,000 |
|
|
6.19 |
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
37,000 |
|
$ |
6.19 |
|
|
2.75 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of employee stock appreciation rights granted during the nine months ended September 30, 2006 was $1.33 per share or $0.1 million.
Stock option activity
The following tables show a summary of the status and activity of stock options for the nine months ended September 30, 2006:
Employee Stock Option Plan:
|
|
Shares |
|
Weighted- |
|
Weighted- |
|
Aggregate |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
|
|
2,138,900 |
|
$ |
6.67 |
|
|
|
|
|
|
|
Granted |
|
|
120,700 |
|
|
7.07 |
|
|
|
|
|
|
|
Exercised |
|
|
(5,250 |
) |
|
5.07 |
|
|
|
|
|
|
|
Canceled |
|
|
(208,650 |
) |
|
6.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
2,045,700 |
|
$ |
6.70 |
|
|
6.19 |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
1,876,700 |
|
$ |
6.62 |
|
|
5.91 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of employee stock options granted during the nine months ended September 30, 2006 was $2.99 per share or $0.4 million. The total fair value of options vested during the nine months ended September 30, 2006 was $2.70 per share or $0.7 million.
17
Non-Employee Directors Stock Option Plan:
|
|
Shares |
|
Weighted- |
|
Weighted- |
|
Aggregate |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
|
|
450,737 |
|
$ |
7.14 |
|
|
|
|
|
|
|
Granted |
|
|
59,520 |
|
|
7.28 |
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
510,257 |
|
$ |
7.16 |
|
|
6.13 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
450,737 |
|
$ |
7.14 |
|
|
5.67 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of non-employee director stock options granted during the nine months ended September 30, 2006 was $3.15 per share or $0.2 million. The total fair value of options vested during the nine months ended September 30, 2006 was $2.06 per share or $11 thousand.
During the nine months ended September 30, 2006, the total intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the option) was $11 thousand. The total amount of cash received from the exercise of options was $27 thousand, and the related net tax benefit realized from the exercise of these options was immaterial.
Nonvested Restricted stock activity
Nonvested restricted stock granted to employees with a zero exercise price under the Companys Employee Stock Option Plan is valued at the grant date fair value, which is the market price of the underlying common stock, and vest over service periods that range from one to three years.
The following table shows a summary of the status and activity of nonvested restricted stock grants for the nine months ended September 30, 2006:
|
|
Shares |
|
Weighted- |
|
||
|
|
|
|
|
|
|
|
Nonvested at January 1, 2006 |
|
|
240,800 |
|
$ |
7.10 |
|
Granted |
|
|
194,400 |
|
|
5.91 |
|
Vested |
|
|
(49,903 |
) |
|
6.91 |
|
Cancelled |
|
|
(56,972 |
) |
|
6.46 |
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
328,325 |
|
$ |
6.48 |
|
|
|
|
|
|
|
|
|
Compensation expense related to nonvested restricted stock totaled $0.4 million for the nine month period ended September 30, 2006. The related net tax benefit related to restricted awards was immaterial for the nine month period ended September 30, 2006.
Total Shareholder Return (TSR) performance stock awards
Performance stock awards vest, subject to the satisfaction of performance goals, at the end of a three-year performance period. The number of performance stock awards that are scheduled to vest is a function of Total Shareholder Return (TSR) performance. Under the terms of the TSR performance stock award, the Companys actual TSR for the performance period is compared to the results of its peer companies for the same period with the Companys relative position in the group determined by percentile rank. The actual award payout is determined by multiplying the target award by the performance factor percentage provided for the Companys percentile ranking and can vest at between zero and 200 percent of the target award. The value of the TSR performance stock is determined using a Monte Carlo simulation model. The following significant assumptions were used: dividend rate of 0%, volatility of 45.6%, risk-free interest rate of 4.69%, and a term of three years. The Monte Carlo value is expensed on a straight-line basis over the three-year performance period.
18
The following table shows a summary of the TSR performance stock awards granted during the nine months ended September 30, 2006 and outstanding as of September 30, 2006:
Performance Period |
|
Fair Value |
|
Unrecognized |
|
Minimum |
|
Target |
|
Maximum |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-2008 |
|
$ |
798 |
|
$ |
653 |
|
|
|
|
|
62,800 |
|
|
125,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $2.6 million of total future compensation cost related to nonvested share-based compensation arrangements and the weighted-average period over which this cost is expected to be recognized is approximately three years.
15. |
Pensions |
|
|
|
U.S. Plans: |
|
|
|
For U.S. plans, the following table provides the components of net periodic pension costs of the plans for the three and nine months ended September 30, 2006 and 2005: |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
|
||||||||
|
|
|
|
|
|
||||||||
Pension Benefits (in thousands) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
617 |
|
$ |
729 |
|
$ |
1,873 |
|
$ |
2,225 |
|
Interest cost |
|
|
1,237 |
|
|
1,181 |
|
|
3,690 |
|
|
3,534 |
|
Expected return on plan assets |
|
|
(1,152 |
) |
|
(1,021 |
) |
|
(3,281 |
) |
|
(3,085 |
) |
Amortization of prior service cost |
|
|
88 |
|
|
114 |
|
|
225 |
|
|
345 |
|
Net amortization |
|
|
188 |
|
|
165 |
|
|
644 |
|
|
469 |
|
Settlement |
|
|
509 |
|
|
|
|
|
509 |
|
|
|
|
Curtailment |
|
|
279 |
|
|
|
|
|
279 |
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
1,766 |
|
$ |
1,168 |
|
$ |
3,939 |
|
$ |
3,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected long-term rate of return on plan assets is 8.25% in 2006. |
|
|
|
Employer Contributions |
|
|
|
In its 2005 financial statements, the Company disclosed that it expected to contribute $4.4 million to its U.S. pension plans in 2006. As of September 30, 2006, the Company has contributed the $4.4 million as well as an additional $4.7 million. No further contributions are expected to be made for the remainder of the year. |
19
|
European Plans: |
|
|
|
For European plans, the following table provides the components of net periodic pension costs of the plans for the three and nine months ended September 30, 2006 and 2005: |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
|
||||||||
|
|
|
|
|
|
||||||||
Pension Benefits (in thousands) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
249 |
|
$ |
241 |
|
$ |
747 |
|
$ |
723 |
|
Interest cost |
|
|
389 |
|
|
430 |
|
|
1,167 |
|
|
1,290 |
|
Expected return on plan assets |
|
|
(272 |
) |
|
(302 |
) |
|
(816 |
) |
|
(906 |
) |
Amortization of prior service cost |
|
|
12 |
|
|
14 |
|
|
36 |
|
|
42 |
|
Net amortization |
|
|
44 |
|
|
23 |
|
|
132 |
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
422 |
|
$ |
406 |
|
$ |
1,266 |
|
$ |
1,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected long-term rate of return on plan assets ranges from 5.00% to 7.10% in 2006. |
|
|
|
Employer Contributions |
|
|
|
In its 2005 financial statements, the Company disclosed that it expected to contribute $2.0 million to its European pension plans in 2006. As of September 30, 2006, the Company contributed $1.5 million. The Company expects to contribute the remaining $0.5 million as well as an additional $0.1 million over the remainder of the year. |
|
|
|
Defined Contribution Plans |
|
|
|
The Company also sponsors a defined contribution pension plan for certain U.S. employees that permits employee contributions of up to 50% of eligible compensation in accordance with Internal Revenue Service guidance. As of January 1, 2006, for all U.S. salaried employees that elected to freeze their benefits under the Companys defined benefit plans, the Company makes a fixed contribution of 2% of employee eligible compensation and matches contributions made by each participant in an amount equal to 100% of the employee contribution up to a maximum of 2% of employee compensation. In addition, each of these employees is eligible for an additional Company contribution of up to 4% of employee compensation based upon annual Company performance at the discretion of the Companys Board of Directors. In September 2006, the Company announced the freezing of its defined benefit pension plans for salaried employees replacing it with the aforementioned defined contribution plan. For all other U.S. salaried employees, the Company makes matching contributions on behalf of each participant in an amount equal to 25% of the employee contribution up to a maximum of 4% of employee eligible compensation. Employer matching contributions vest immediately. Total expenses related to this defined contribution plan for the three months ended September 30, 2006 and 2005 were $0.1 million and $45 thousand, respectively, and for the nine months ended September 30, 2006 and 2005 were $0.3 million and $0.1 million, respectively. |
|
|
16. |
Taxation |
|
|
|
The effective tax rate for the nine month period ended September 30, 2006 was a benefit of 42.6% compared to a benefit of 55.4% for the period ended September 30, 2005. The period ended September 30, 2006 tax rate was higher than the statutory Federal Income Tax Rate due to our lower than expected profit and certain benefits, principally the exclusion provided under United States income tax laws with respect to the Extraterritorial Income Exclusion Benefit, benefits related to foreign tax credits, and recognition of state income tax benefits combined with a change in estimate of the Companys full year pre-tax earnings. The nine month period ended September 30, 2005 tax rate was higher than the statutory Federal Income Tax Rate due to the Extraterritorial Income Exclusion Benefit, recognition of foreign tax credit benefits, and recognition of state income tax benefits. The primary items that contributed to the change in the effective tax rate between the nine month period ended September 30, 2006 and the similar period for 2005 was the reduction in estimate of the Companys full year 2006 pre-tax earnings and its impact on the tax effect of the aforementioned permanent items. |
20
|
During 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. Because the Companys permanent tax benefits are relatively constant, changes in the annualized estimate may have a significant impact on the effective tax rate in future periods. |
|
|
|
The Company provides an estimate for income taxes based on an evaluation of the underlying accounts, its tax filing positions and interpretations of existing law. Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations. The Company does not believe that resolution of existing unresolved tax matters will have a material impact on the consolidated financial condition of the Company, although a resolution could have a material impact on the Companys consolidated statement of income and comprehensive income for a particular future period and on the Companys effective tax rate. |
|
|
17. |
New Accounting Pronouncements |
|
|
|
In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4, which requires the recognition of costs of idle facilities, excessive spoilage, double freight and re-handling costs as a component of current-period expenses. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 151 effective January 1, 2006 as required. Such adoption had no material impact on the accompanying financial statements. |
|
|
|
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. The Company adopted SFAS No. 154 effective January 1, 2006 as required. Such adoption had no material impact on the accompanying financial statements. |
|
|
|
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which establishes the accounting for transactions in which an entity exchanges its equity instruments or certain liabilities based upon an entitys equity instruments for goods or services. SFAS No. 123R generally requires that publicly traded companies measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award at the grant date. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award which is usually the vesting period. Management adopted SFAS No. 123R beginning January 1, 2006 as required and the related costs are reflected in the accompanying financial statements. |
|
|
|
In June 2006, the FASB issued FASB Interpretation no. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes an Interpretation of FASB Standard No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the financial impact of adopting FIN No. 48. |
|
|
|
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosure about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company expects to adopt SFAS No. 157 as required for the fiscal year 2008 and that adoption will not have material impact on the financial statements. |
|
|
|
In September 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans An amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires recognition of the funded status of a benefit plan on the balance sheet; the recognition in other comprehensive income of gains or losses and prior service costs or credits arising during the period but which are not included as components of periodic benefit cost; the measurement of defined benefit plan assets and obligations as of the balance sheet date; and disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition of gains and losses in the current period. SFAS No. 158 is effective the Companys year ended December 31, 2006. The Company is in the process of evaluating the financial impact of adopting SFAS No. 158. However, based on the funded status of the Companys defined benefit pension plans and other postretirement plan as of December 31, 2005 (the Companys most recent measurement date), the Company would be required to increase its net liabilities for pension and other postretirement benefits, which would result in a decrease in stockholders equity of approximately $29.0 million. The actual impact may vary from the estimated impact as the ultimate amounts recorded will depend on a number of assumptions, including, but not limited to, the discount rates in effect at December 31, 2006, the actual rate of return on the Companys pension plan assets for the year then ended and the impact of the Companys pension contributions during the year ended December 31, 2006. Changes in these assumptions since the Companys last measurement date could increase or decrease the impact of adopting SFAS No. 158 on the Companys consolidated financial statements at December 31, 2006. |
21
|
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current years financial statements are materially misstated. SAB 108 becomes effective during fiscal year 2006. |
|
|
18. |
Earnings Per Share |
|
|
|
Calgon Carbon Corporations obligation under the Senior Convertible Notes is to settle the par value of the Notes in cash and to settle the amount in excess of par value in its common shares. Therefore the Company is not required to include any shares underlying the Notes in its diluted weighted average shares outstanding until the average stock price per share for the quarter exceeds the $5.10 conversion price. At such time, only the number of shares that would be issuable (under the treasury stock method of accounting for share dilution) will be included, which is based upon the amount by which the average stock price exceeds the conversion price. For the first $0.50 per share that the Companys average stock price exceeds the $5.10 conversion price of the Notes, it will include approximately 1,300,000 additional shares in its diluted share count. For the second $0.50 per share that the Companys average stock price exceeds the $5.10 conversion price, it will include approximately 1,100,000 additional shares, for a total of approximately 2,400,000 shares, in its diluted share count, and so on, with the additional shares dilution decreasing for each $1 per share that the Companys average stock price exceeds $5.10 if the stock price rises further above $5.10 (see table below). As of September 30, 2006, the average stock price was $4.32, which was lower than the conversion price of $5.10, therefore zero shares were included in the dilutive share calculation for the period of time the Notes were outstanding for the quarter ended September 30, 2006. |
22
Treasury Stock Method of Accounting for Share Dilution
Conversion Price: |
|
$ |
5.10 |
|
Number of underlying shares: |
|
|
14,705,880 |
|
Principal Amount: |
|
$ |
75,000,000 |
|
Formula: |
Number of extra dilutive shares |
|
=((Stock Price * Underlying Shares) - Principal)/Stock Price |
|
|
Condition: |
Only applies when share price exceeds $5.10 |
Stock |
|
Conversion |
|
Price |
|
Included in |
|
Share Dilution Per |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 5.10 |
|
|
$ 5.10 |
|
|
$ 0.00 |
|
|
|
|
|
|
|
$ 5.60 |
|
|
$ 5.10 |
|
|
$ 0.50 |
|
|
1,313,023 |
|
|
2,626,046 |
|
$ 6.10 |
|
|
$ 5.10 |
|
|
$ 1.00 |
|
|
2,410,798 |
|
|
2,410,798 |
|
$ 7.10 |
|
|
$ 5.10 |
|
|
$ 2.00 |
|
|
4,142,500 |
|
|
2,071,250 |
|
$ 8.10 |
|
|
$ 5.10 |
|
|
$ 3.00 |
|
|
5,446,621 |
|
|
1,815,540 |
|
$ 9.10 |
|
|
$ 5.10 |
|
|
$ 4.00 |
|
|
6,464,122 |
|
|
1,616,031 |
|
$ 10.10 |
|
|
$ 5.10 |
|
|
$ 5.00 |
|
|
7,280,137 |
|
|
1,456,027 |
|
19. |
Other Financial Information |
|
|
|
Calgon Carbon Corporation has issued $75.0 million in aggregate principal amount of 5.00% Convertible Senior Notes due in 2036. The Notes are fully and unconditionally guaranteed by certain of our domestic subsidiaries on a senior unsecured basis. All of the subsidiary guarantors are wholly owned by the parent company and the guarantees are joint and several. The subsidiary guarantees will be general unsecured senior obligations of the subsidiary guarantors and will rank equally in right of payment with all of the existing and future senior indebtedness of the subsidiary guarantors. If the Company fails to make payment on the Notes, the subsidiary guarantors must make them instead. The Notes will be effectively subordinated to any indebtedness of the Companys non-guarantor subsidiaries. The Notes will be effectively junior to all of the Companys existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness. The Notes and the Guarantees were sold only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the Securities Act). |
23
|
Condensed consolidating financial information for Calgon Carbon Corporation (issuer); Calgon Carbon Investments Inc., Chemviron Carbon Ltd., Waterlink (UK) Holdings Ltd., Sutcliffe Speakman Ltd., Lakeland Processing Ltd., Charcoal Cloth (International) Ltd., BSC Columbus LLC, and CCC Columbus LLC (guarantor subsidiaries); and the non-guarantor subsidiaries are as follows: |
|
|
Condensed Consolidating Statements of Operations |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating and |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
68,788 |
|
$ |
12,287 |
|
$ |
8,569 |
|
$ |
(9,964 |
) |
$ |
79,680 |
|
Cost of products sold |
|
|
51,297 |
|
|
10,356 |
|
|
7,208 |
|
|
(9,964 |
) |
|
58,897 |
|
Depreciation and amortization |
|
|
4,279 |
|
|
357 |
|
|
83 |
|
|
|
|
|
4,719 |
|
Selling, general and administrative expenses |
|
|
11,254 |
|
|
1,269 |
|
|
851 |
|
|
|
|
|
13,374 |
|
Research and development expense |
|
|
1,055 |
|
|
91 |
|
|
|
|
|
|
|
|
1,146 |
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense net |
|
|
5,260 |
|
|
(3,774 |
) |
|
(189 |
) |
|
|
|
|
1,297 |
|
Other expense net |
|
|
209 |
|
|
130 |
|
|
321 |
|
|
|
|
|
660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
(733 |
) |
|
4 |
|
|
843 |
|
|
|
|
|
114 |
|
Results of affiliates operations |
|
|
(3,381 |
) |
|
117 |
|
|
|
|
|
3,264 |
|
|
|
|
Equity in income from equity investments |
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
39 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(452 |
) |
|
3,737 |
|
|
(509 |
) |
|
(3,272 |
) |
|
(496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
(6 |
) |
|
(7 |
) |
|
51 |
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss |
|
|
(458 |
) |
|
3,730 |
|
|
(458 |
) |
|
(3,272 |
) |
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Operations |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating and |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
59,523 |
|
$ |
11,127 |
|
$ |
9,413 |
|
$ |
(11,196 |
) |
$ |
68,867 |
|
Cost of products sold |
|
|
46,193 |
|
|
8,338 |
|
|
7,952 |
|
|
(11,196 |
) |
|
51,287 |
|
Depreciation and amortization |
|
|
4,655 |
|
|
386 |
|
|
55 |
|
|
|
|
|
5,096 |
|
Selling, general and administrative expenses |
|
|
13,042 |
|
|
1,235 |
|
|
796 |
|
|
|
|
|
15,073 |
|
Research and development expense |
|
|
976 |
|
|
98 |
|
|
|
|
|
|
|
|
1,074 |
|
Restructuring |
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
65 |
|
Interest (income) expense net |
|
|
4,237 |
|
|
(3,123 |
) |
|
(31 |
) |
|
|
|
|
1,083 |
|
Other expense net |
|
|
117 |
|
|
173 |
|
|
356 |
|
|
|
|
|
646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
(5,638 |
) |
|
261 |
|
|
354 |
|
|
|
|
|
(5,023 |
) |
Results of affiliates operations |
|
|
(3,676 |
) |
|
358 |
|
|
|
|
|
3,318 |
|
|
|
|
Equity in income (loss) from equity investments |
|
|
|
|
|
|
|
|
403 |
|
|
(6 |
) |
|
397 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(448 |
) |
|
3,401 |
|
|
334 |
|
|
(3,324 |
) |
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
95 |
|
|
(229 |
) |
|
(182 |
) |
|
|
|
|
(316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(353 |
) |
$ |
3,172 |
|
$ |
152 |
|
$ |
(3,324 |
) |
$ |
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Condensed Consolidating Statements of Operations |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating and |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
208,518 |
|
$ |
33,052 |
|
$ |
32,399 |
|
$ |
(37,200 |
) |
$ |
236,769 |
|
Cost of products sold |
|
|
158,874 |
|
|
27,734 |
|
|
26,862 |
|
|
(37,200 |
) |
|
176,270 |
|
Depreciation and amortization |
|
|
12,928 |
|
|
1,147 |
|
|
236 |
|
|
|
|
|
14,311 |
|
Selling, general and administrative expenses |
|
|
34,212 |
|
|
2,575 |
|
|
2,630 |
|
|
|
|
|
39,417 |
|
Research and development expense |
|
|
3,119 |
|
|
265 |
|
|
|
|
|
|
|
|
3,384 |
|
Restructuring |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Interest (income) expense - net |
|
|
15,444 |
|
|
(10,845 |
) |
|
(524 |
) |
|
|
|
|
4,075 |
|
Other expense net |
|
|
941 |
|
|
358 |
|
|
719 |
|
|
|
|
|
2,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
(209 |
) |
|
(35 |
) |
|
(912 |
) |
|
|
|
|
(1,156 |
) |
Results of affiliates operations |
|
|
(17,254 |
) |
|
(5,493 |
) |
|
|
|
|
22,747 |
|
|
|
|
Equity in income from equity investments |
|
|
|
|
|
|
|
|
203 |
|
|
|
|
|
203 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
456 |
|
|
17,346 |
|
|
3,591 |
|
|
(22,739 |
) |
|
(1,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
108 |
|
|
67 |
|
|
2,723 |
|
|
(988 |
) |
|
1,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
564 |
|
$ |
17,413 |
|
$ |
6,314 |
|
$ |
(23,727 |
) |
$ |
564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Operations |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating and |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
194,298 |
|
$ |
32,736 |
|
$ |
26,272 |
|
$ |
(33,728 |
) |
$ |
219,578 |
|
Cost of products sold |
|
|
145,705 |
|
|
25,762 |
|
|
22,455 |
|
|
(33,728 |
) |
|
160,194 |
|
Depreciation and amortization |
|
|
14,611 |
|
|
1,221 |
|
|
219 |
|
|
|
|
|
16,051 |
|
Selling, general and administrative expenses |
|
|
38,779 |
|
|
3,873 |
|
|
2,240 |
|
|
|
|
|
44,892 |
|
Research and development expense |
|
|
3,045 |
|
|
268 |
|
|
|
|
|
|
|
|
3,313 |
|
Restructuring |
|
|
2,581 |
|
|
|
|
|
|
|
|
|
|
|
2,581 |
|
Interest (income) expense - net |
|
|
11,941 |
|
|
(8,825 |
) |
|
(96 |
) |
|
|
|
|
3,020 |
|
Other expense net |
|
|
89 |
|
|
253 |
|
|
936 |
|
|
|
|
|
1,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
(7,038 |
) |
|
330 |
|
|
201 |
|
|
|
|
|
(6,507 |
) |
Results of affiliates operations |
|
|
(13,122 |
) |
|
(1,937 |
) |
|
|
|
|
15,059 |
|
|
|
|
Equity in income (loss) from equity investments |
|
|
|
|
|
|
|
|
1,031 |
|
|
(11 |
) |
|
1,020 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(2,293 |
) |
|
11,791 |
|
|
1,348 |
|
|
(15,070 |
) |
|
(4,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
527 |
|
|
261 |
|
|
1,670 |
|
|
|
|
|
2,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,766 |
) |
$ |
12,052 |
|
$ |
3,018 |
|
$ |
(15,070 |
) |
$ |
(1,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Condensed Consolidating Balance Sheets |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating and |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & Cash Equivalents |
|
$ |
1,675 |
|
$ |
1,751 |
|
$ |
17,303 |
|
$ |
(15,658 |
) |
$ |
5,071 |
|
Receivables |
|
|
47,073 |
|
|
13,836 |
|
|
4,946 |
|
|
(8,027 |
) |
|
57,828 |
|
Inventories |
|
|
58,790 |
|
|
6,552 |
|
|
5,651 |
|
|
33 |
|
|
71,026 |
|
Other current assets |
|
|
17,948 |
|
|
1,993 |
|
|
2,263 |
|
|
|
|
|
22,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
125,486 |
|
|
24,132 |
|
|
30,163 |
|
|
(23,652 |
) |
|
156,129 |
|
Intercompany accounts receivable |
|
|
54,464 |
|
|
154,891 |
|
|
568 |
|
|
(209,923 |
) |
|
|
|
Property, plant, and equipment, net |
|
|
92,805 |
|
|
6,855 |
|
|
7,408 |
|
|
|
|
|
107,068 |
|
Intangibles |
|
|
5,100 |
|
|
3,748 |
|
|
|
|
|
|
|
|
8,848 |
|
Goodwill |
|
|
17,764 |
|
|
8,093 |
|
|
8,656 |
|
|
|
|
|
34,513 |
|
Equity investments |
|
|
221,740 |
|
|
107,043 |
|
|
6,790 |
|
|
(328,598 |
) |
|
6,975 |
|
Other assets |
|
|
12,503 |
|
|
7,475 |
|
|
3,658 |
|
|
|
|
|
23,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
529,862 |
|
$ |
312,237 |
|
$ |
57,243 |
|
$ |
(562,173 |
) |
$ |
337,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
29,221 |
|
$ |
17,076 |
|
$ |
3,739 |
|
$ |
(12,878 |
) |
$ |
37,158 |
|
Other current liabilities |
|
|
31,225 |
|
|
4,880 |
|
|
2,867 |
|
|
(17,364 |
) |
|
21,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
60,446 |
|
|
21,956 |
|
|
6,606 |
|
|
(30,242 |
) |
|
58,766 |
|
Intercompany accounts payable |
|
|
143,478 |
|
|
49,112 |
|
|
10,775 |
|
|
(203,365 |
) |
|
|
|
Long-term debt |
|
|
81,693 |
|
|
|
|
|
|
|
|
|
|
|
81,693 |
|
Other non-current liabilities |
|
|
88,774 |
|
|
11,252 |
|
|
9,740 |
|
|
(68,527 |
) |
|
41,239 |
|
Shareholders equity |
|
|
155,471 |
|
|
229,917 |
|
|
30,122 |
|
|
(260,039 |
) |
|
155,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
529,862 |
|
$ |
312,237 |
|
$ |
57,243 |
|
$ |
(562,173 |
) |
$ |
337,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Condensed Consolidating Balance Sheets |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating and |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & Cash Equivalents |
|
$ |
3,048 |
|
$ |
3,681 |
|
$ |
9,837 |
|
$ |
(11,120 |
) |
$ |
5,446 |
|
Receivables |
|
|
45,802 |
|
|
15,307 |
|
|
3,486 |
|
|
(13,371 |
) |
|
51,224 |
|
Inventories |
|
|
57,099 |
|
|
6,713 |
|
|
3,810 |
|
|
33 |
|
|
67,655 |
|
Other current assets |
|
|
17,100 |
|
|
1,921 |
|
|
914 |
|
|
|
|
|
19,935 |
|
Assets held for sale |
|
|
5,165 |
|
|
702 |
|
|
15,473 |
|
|
|
|
|
21,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
128,214 |
|
|
28,324 |
|
|
33,520 |
|
|
(24,458 |
) |
|
165,600 |
|
Intercompany accounts receivable |
|
|
51,085 |
|
|
139,772 |
|
|
436 |
|
|
(191,293 |
) |
|
|
|
Property, plant, and equipment, net |
|
|
91,088 |
|
|
6,952 |
|
|
5,099 |
|
|
5,606 |
|
|
108,745 |
|
Intangibles |
|
|
5,991 |
|
|
4,058 |
|
|
|
|
|
|
|
|
10,049 |
|
Goodwill |
|
|
17,764 |
|
|
7,757 |
|
|
8,353 |
|
|
|
|
|
33,874 |
|
Equity investments |
|
|
213,606 |
|
|
103,005 |
|
|
7,034 |
|
|
(316,426 |
) |
|
7,219 |
|
Other assets |
|
|
11,798 |
|
|
6,864 |
|
|
3,719 |
|
|
|
|
|
22,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
519,546 |
|
$ |
296,732 |
|
$ |
58,161 |
|
$ |
(526,571 |
) |
$ |
347,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
33,820 |
|
$ |
16,777 |
|
$ |
1,571 |
|
$ |
(11,733 |
) |
$ |
40,435 |
|
Other current liabilities |
|
|
28,660 |
|
|
7,060 |
|
|
991 |
|
|
(14,532 |
) |
|
22,179 |
|
Liabilities held for sale |
|
|
2,156 |
|
|
1,001 |
|
|
3,526 |
|
|
|
|
|
6,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
64,636 |
|
|
24,838 |
|
|
6,088 |
|
|
(26,265 |
) |
|
69,297 |
|
Intercompany accounts payable |
|
|
129,654 |
|
|
47,665 |
|
|
8,440 |
|
|
(185,759 |
) |
|
|
|
Long-term debt |
|
|
83,925 |
|
|
|
|
|
|
|
|
|
|
|
83,925 |
|
Other non-current liabilities |
|
|
90,771 |
|
|
11,253 |
|
|
10,000 |
|
|
(67,938 |
) |
|
44,086 |
|
Shareholders equity |
|
|
150,560 |
|
|
212,976 |
|
|
33,633 |
|
|
(246,609 |
) |
|
150,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
519,546 |
|
$ |
296,732 |
|
$ |
58,161 |
|
$ |
(526,571 |
) |
$ |
347,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Condensed Consolidating Statements of Cash Flows |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating and |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
(24,667 |
) |
$ |
12,413 |
|
$ |
(2,986 |
) |
$ |
159 |
|
$ |
(15,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from insurance settlement for property and equipment |
|
|
4,595 |
|
|
|
|
|
|
|
|
|
|
|
4,595 |
|
Proceeds from sale of assets |
|
|
778 |
|
|
|
|
|
20,435 |
|
|
|
|
|
21,213 |
|
Property, plant and equipment expenditures |
|
|
(9,459 |
) |
|
(116 |
) |
|
(414 |
) |
|
|
|
|
(9,989 |
) |
Investment from (in) affiliates |
|
|
11,217 |
|
|
(823 |
) |
|
(10,394 |
) |
|
|
|
|
|
|
Other |
|
|
676 |
|
|
|
|
|
|
|
|
|
|
|
676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
7,807 |
|
|
(939 |
) |
|
9,627 |
|
|
|
|
|
16,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) |
|
|
6,121 |
|
|
(607 |
) |
|
25 |
|
|
(4,538 |
) |
|
1,001 |
|
Debt issuance costs |
|
|
(3,233 |
) |
|
|
|
|
|
|
|
|
|
|
(3,233 |
) |
Intercompany and equity transactions |
|
|
10,444 |
|
|
(13,672 |
) |
|
3,228 |
|
|
|
|
|
|
|
Other |
|
|
356 |
|
|
30 |
|
|
|
|
|
(30 |
) |
|
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
13,688 |
|
|
(14,249 |
) |
|
3,253 |
|
|
(4,568 |
) |
|
(1,876 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
1,798 |
|
|
844 |
|
|
(2,426 |
) |
|
(129 |
) |
|
87 |
|
(Decrease) increase in cash and cash equivalents |
|
|
(1,374 |
) |
|
(1,931 |
) |
|
7,468 |
|
|
(4,538 |
) |
|
(375 |
) |
Cash and cash equivalents, beginning of period |
|
|
3,049 |
|
|
3,681 |
|
|
9,836 |
|
|
(11,120 |
) |
|
5,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
1,675 |
|
$ |
1,750 |
|
$ |
17,304 |
|
$ |
(15,658 |
) |
$ |
5,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating and |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
(7,870 |
) |
$ |
16,833 |
|
$ |
(2,430 |
) |
$ |
(1,153 |
) |
$ |
5,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from insurance settlement for property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment expenditures |
|
|
(7,396 |
) |
|
(102 |
) |
|
(668 |
) |
|
|
|
|
(8,166 |
) |
Investment from (in) affiliates |
|
|
|
|
|
858 |
|
|
(858 |
) |
|
|
|
|
|
|
Other |
|
|
(116 |
) |
|
378 |
|
|
|
|
|
|
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(7,512 |
) |
|
1,134 |
|
|
(1,526 |
) |
|
|
|
|
(7,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) |
|
|
(964 |
) |
|
(77 |
) |
|
|
|
|
2,644 |
|
|
1,603 |
|
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany and equity transactions |
|
|
6,822 |
|
|
(17,192 |
) |
|
6,818 |
|
|
(3 |
) |
|
(3,555 |
) |
Other |
|
|
2,986 |
|
|
(154 |
) |
|
154 |
|
|
|
|
|
2,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
8,844 |
|
|
(17,423 |
) |
|
6,972 |
|
|
2,641 |
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
1,369 |
|
|
(1,345 |
) |
|
(291 |
) |
|
1,156 |
|
|
889 |
|
(Decrease) increase in cash and cash equivalents |
|
|
(5,169 |
) |
|
(801 |
) |
|
2,725 |
|
|
2,644 |
|
|
(601 |
) |
Cash and cash equivalents, beginning of period |
|
|
11,243 |
|
|
6,923 |
|
|
8,316 |
|
|
(17,702 |
) |
|
8,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
6,074 |
|
$ |
6,122 |
|
$ |
11,041 |
|
$ |
(15,058 |
) |
$ |
8,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Managements 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.
Results of Operations
Continuing Operations:
Consolidated net sales increased by $10.8 million or 15.7% and $17.2 million or 7.8% for the quarter and year-to-date period ended September 30, 2006, respectively, versus the quarter and year-to-date periods ended September 30, 2005. Net sales for the quarter and year-to-date periods ended September 30, 2006 for the Carbon and Service segment increased $9.9 million or 17.1% and $19.3 million or 10.7%, respectively, versus the similar 2005 period. The increase for both periods was primarily due to increased demand for activated carbon in the industrial process, food, environmental water treatment, and respirator markets. Higher prices for certain carbon and service products also contributed to the increase for both the quarter and year-to-date periods. Increased sales of activated carbon in Japan to the Companys joint venture company also contributed to the year-to-date increase versus the comparable 2005 period. Sales for this segment were adversely affected by sales losses due to Hurricane Katrina for the comparative 2005 quarter and year-to date periods. Foreign currency translation had a positive impact of $1.2 million for the quarter and had a negative impact of $0.4 million for the year-to-date period. Net sales for the Equipment segment increased $0.8 million or 9.6% for the quarter and decreased $2.7 million or 9.2% for the year-to-date period versus the comparable 2005 periods. The increase for the quarter was primarily due to higher demand for carbon adsorption systems in the U.S. and ISEP® systems in Asia partially offset by the reduced demand for odor control systems in the U.S. The decrease for the year-to-date period was primarily due to non-repeat sales of equipment for perchlorate removal from ground water and the aforementioned odor control systems. Foreign currency translation had a negligible impact on sales for the quarter, but a positive impact on year-to-date sales of $0.1 million. Net sales for the quarter and year-to-date periods ended September 30, 2006 for the Consumer segment increased by $0.1 million or 3.8% and $0.6 million or 6.3% versus the similar periods of 2005. The increase for the quarter was attributable to higher demand for PreZerve® products. The increase for the year-to-date period was due to the aforementioned increase in demand for PreZerve® products as well as increased sales of activated carbon cloth. Foreign currency translation had a positive impact on the quarter sales of $0.1 million, but had a negative impact on year-to-date sales of $0.1 million. The total impact of foreign currency translation on consolidated net sales for the quarter ended September 30, 2006 was favorable $1.3 million, however, it had a negative impact on net sales for the year-to-date period of $0.4 million. Net sales in the future could be affected by the anti-dumping ruling as described in the Companys Form 8-K filed on October 6, 2006. The Company received notification from the United States Department of Commerce (the DOC) announcing the imposition of preliminary anti-dumping duties on all imports of steam activated carbon from China. The DOC immediately ordered U.S. Customs and Border Protection to require importers to post a bond or cash deposit in the amount of the duties. Over the next several months the DOC will verify information submitted by various respondents. A final determination is expected in April 2007. The final dumping duties could be imposed for up to five years.
Net sales less cost of products sold, as a percentage of net sales, was 26.1% and 25.6% for the quarter and year-to-date periods ended September 30, 2006, respectively, compared to 25.5% and 27.0% for the similar 2005 periods, a 0.6 percent increase for the quarter and a 1.4 percentage point decrease for the year-to-date period. The increase for the quarter was primarily due to price increases for certain carbon and service products, while the decline in the year-to-date periods was primarily due to higher raw material, energy, and transportation costs, as well as inefficiencies at the Companys production facilities brought about by dealing with the after effects of Hurricane Katrina which could only be partially offset by the aforementioned price increases. The Companys cost of products sold excludes depreciation, therefore it may not be comparable to that of other companies.
29
The depreciation and amortization decrease of $0.4 million and $1.7 million during the quarter and year-to-date periods ended September 30, 2006 versus the periods ended September 30, 2005 was primarily decreased depreciation due to an increase in fully depreciated fixed assets.
Selling, general and administrative expenses for the quarter and year-to-date periods ended September 30, 2006 increased versus the comparable 2005 periods by $2.5 million and $3.6 million, respectively. The increase for the quarter ended September 30, 2006 period versus the similar 2005 period was primarily due to an increase in legal expense of $0.5 million, severance related costs of $0.9 million, and pension curtailment and settlement charges of $0.8 million. The increase for the year-to-date period is primarily attributable to an increase in legal expense of approximately $3.2 million, the aforementioned severance related costs, and pension settlement and curtailment charges. Partially offsetting this increase was a decrease due to the change in the estimate of the Companys environmental liabilities assumed in the Waterlink acquisition of approximately $1.3 million.
Research and development expenses for the quarter and year-to-date periods ended September 30, 2006 were comparable to the similar 2005 periods.
The gain from insurance settlement is due to Hurricane Katrina as discussed in Note 2. The non-recoverable costs of approximately $1.0 million related to damage caused at the Companys Pearl River plant by Hurricane Katrina were recorded for the year-to-date period ended September 30, 2005.
The impairment charge of $2.2 million for the year-to-date period ended September 30, 2005 was as a result of the Companys decision on March 22, 2005 to cancel the construction of a reactivation facility on the U.S. Gulf Coast and to suspend the construction of such facility for the foreseeable future.
Restructuring charges for the quarter and year-to-date periods ended September 30, 2006 decreased $0.1 million and $0.4 million versus the comparable 2005 periods. The restructuring charges for the quarter ended September 30, 2005 were attributable to the Companys closure of two small manufacturing facilities. The 2005 year-to-date period includes pension curtailment charges as a result of employee separations from the Companys 2005 re-engineering plan as well as the aforementioned facility closures.
Other expense for the quarter ended September 30, 2006 was comparable to the similar 2005 period, however increased $0.7 million for the year-to-date period ended September 30, 2006, as compared to September 30, 2005. This increase was due to a gain on sale of an asset of $0.2 million which occurred in the period ended September 30, 2005 and the write-off of approximately $0.6 million of deferred financing fees associated with the Companys old credit facility during the period ended September 30, 2006.
Interest expense, net of interest income, increased $0.2 million and $1.1 million for the quarter and year-to-date periods ended September 30, 2006 versus the similar 2005 periods. The increase for the quarter and year-to-date periods was primarily the result of higher interest rates paid on the Companys borrowings under its old credit facility as a result of the increase in LIBOR rates from 2005. Also contributing to the quarter increase were higher interest rates related to the Companys new credit facility and convertible senior notes. The year-to-date increase was also impacted by the Company paying higher interest spreads on its borrowings under its old credit facility during the first six months of 2006 as a result of a lower trailing twelve months EBITDA.
The effective tax rate for the nine month period ended September 30, 2006 was a benefit of 42.6% compared to a benefit of 55.4% for the period ended September 30, 2005. The period ended September 30, 2006 tax rate was higher than the statutory Federal Income Tax Rate due to our lower than expected profit and certain benefits, principally the exclusion provided under United States income tax laws with respect to the Extraterritorial Income Exclusion Benefit, benefits related to foreign tax credits, and recognition of state income tax benefits combined with a change in estimate of the Companys full year pre-tax earnings. The nine month period ended September 30, 2005 tax rate was higher than the statutory Federal Income Tax Rate due to the Extraterritorial Income Exclusion Benefit, recognition of foreign tax credit benefits, and recognition of state income tax benefits. The primary items that contributed to the change in the effective tax rate between the nine month period ended September 30, 2006 and the similar period for 2005 was the reduction in estimate of the Companys full year 2006 pre-tax earnings and its impact on the tax effect of the aforementioned permanent items.
30
During 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. Because the Companys permanent tax benefits are relatively constant, changes in the annualized estimate may have a significant impact on the effective tax rate in future periods.
The Company provides an estimate for income taxes based on an evaluation of the underlying accounts, its tax filing positions and interpretations of existing law. Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations. The Company does not believe that resolution of existing unresolved tax matters will have a material impact on the consolidated financial condition of the Company, although a resolution could have a material impact on the Companys consolidated statement of income and comprehensive income for a particular future period and on the Companys effective tax rate.
Equity in income from equity investments decreased $0.4 million and $0.8 million for the quarter and year-to-date periods ended September 30, 2006 versus the similar 2005 periods. The decrease was due to reduced margins as a result of increased sales of its higher cost inventory that was produced at the former carbon production facility in Japan that was shutdown in December 2005.
Discontinued Operations:
Income from discontinued operations increased $0.4 million and decreased $0.5 million, respectively, for the quarter and year-to-date periods ended September 30, 2006 versus the similar 2005 periods. The increase for the quarter is as a result of a net loss in the third quarter of 2005 related to both of the Companys divested Charcoal/Liquid and Solvent Recovery businesses. The year-to-date increase is primarily due to the $2.3 million net of tax gain recognized on the sale of the Companys Charcoal/Liquid and Solvent Recovery businesses. Partially offsetting this increase was lower net income for the first nine months of 2006 due to the divestiture of both the Charcoal/Liquid and Solvent Recovery businesses that occurred in the first and second quarter of 2006.
Financial Condition
Working Capital and Liquidity
The cash flows discussed for the quarter and year-to-date periods ended September 30, 2006 and 2005 include discontinued operations. Cash flows used in operations were ($15.1) million for the period ended September 30, 2006 compared to cash flows provided by operations of $5.4 million for the comparable 2005 period.
The $20.5 million decrease was primarily due to the inclusion of the cash generated from the divested businesses in 2005 for the full nine months, where in 2006 the cash flows from the divested businesses were only included pre-divestiture. Also contributing to the decrease was the gain from insurance settlement of $5.3 million net of cash received related to Hurricane Katrina, gain from divestitures of $6.7 million, decreased depreciation and amortization of $2.6 million, and decreased accrued pensions net of employee benefit plan provisions of $7.9 million. Operating working capital (exclusive of debt) increased $1.0 million. The divestitures are expected to decrease cash flows from operations by approximately $3.0 million on an annual, on-going basis.
Common stock dividends were not paid during the quarter ended September 30, 2006 as compared to dividends that were paid during the quarter ended September 30, 2005 which represented $.03 per common share.
On August 18, 2006, the Company issued $75.0 million of Convertible Senior Notes (the Notes) due in 2036 and entered into a new revolving credit facility (the Credit Facility). The Company used $68.4 million of the net proceeds from its offering of the Notes to fully repay indebtedness under the Companys prior revolving credit facility. Accordingly, all parties have completed their obligations under the Amended and Restated Credit Agreement, dated as of January 30, 2006 (the Old Credit Agreement). The material terms and conditions of the Old Credit Agreement are more fully discussed in Note 13 to the Companys unaudited condensed consolidated financial statements contained in its Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 2006. As part of the aforementioned repayment, the Company wrote-off $0.3 million of deferred financing fees as well as $0.1 million in fees associated with the repayment.
31
5.00% Convertible Senior Notes due 2036
The Company initially issued $65.0 million in aggregate principal amount of 5.00% Notes due in 2036 and granted the initial purchaser a 30-day option to purchase up to an additional $10.0 million principal amount of Notes solely to cover over-allotments, if any. The initial purchaser exercised this option in full. Accordingly, $75.0 million in aggregate principal amount of Notes were issued and sold to the initial purchaser upon completion of the offering on August 18, 2006. The Notes accrue interest at the rate of 5.00% per annum and are payable in cash semi-annually in arrears on each February 15 and August 15, commencing February 15, 2007. The Notes will mature on August 15, 2036.
The Notes can be converted under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after September 30, 2006, if the last reported sale price of the Companys common stock is greater than or equal to 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any 10 consecutive trading-day period (the measurement period) in which the trading price per Note for each day in the measurement period was less than 103% of the product of the last reported sale price of the Companys common stock and the conversion rate on such day; or (3) upon the occurrence of specified corporate transactions described in the Offering Memorandum. On or after June 15, 2011, holders may convert their Notes at any time on the business day immediately preceding the maturity date. Upon conversion, the Company will pay cash and shares of its common stock, if any, based on a daily conversion value (as described herein) calculated on a proportionate basis for each day of the 25 trading-day observation period.
The initial conversion rate will be 196.0784 shares of the Companys common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $5.10 per share of common stock. The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest, including any additional interest. In addition, following certain fundamental changes that occur prior to August 15, 2011, the Company will increase the conversion rate for holders who elect to convert Notes in connection with such fundamental changes in certain circumstances.
The Company may not redeem the Notes before August 20, 2011. On or after that date, the Company may redeem all or a portion of the Notes at any time. Any redemption of the Notes will be for cash at 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, to, but excluding, the redemption date.
Holders may require the Company to purchase all or a portion of their Notes on each of August 15, 2011, August 15, 2016, and August 15, 2026. In addition, if the Company experiences specified types of fundamental changes, holders may require it to purchase the Notes. Any repurchase of the Notes pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest, including any additional interest, to, but excluding, the purchase date.
The Notes will be the Companys senior unsecured obligations, and will rank equally in right of payment with all of its other existing and future senior indebtedness. The Notes will be guaranteed by certain of the Companys domestic subsidiaries on a senior unsecured basis. The subsidiary guarantees will be general unsecured senior obligations of the subsidiary guarantors and will rank equally in right of payment with all of the existing and future senior indebtedness of the subsidiary guarantors. If the Company fails to make payment on the Notes, the subsidiary guarantors must make them instead. The Notes will be effectively subordinated to any indebtedness of the Companys non-guarantor subsidiaries. The Notes will be effectively junior to all of the Companys existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
The Company sold the Notes at a discount of $3.3 million that will be amortized over a period of five years. The discount will be reflected as a deduction from the face amount of the debt. The Company recorded interest expense of $0.5 million of which $0.1 million related to the amortization of the discount and $0.4 million which related to the Notes. The Company incurred issuance costs of $1.5 million which have been deferred and will be amortized over a five year period.
The Notes and the Guarantees were sold only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the Securities Act). The notes offered hereby, the subsidiary guarantees and the common stock issuable upon conversion of the notes have not been registered. This offering is being conducted in reliance upon an exemption from registration under the Securities Act and applicable state securities laws. We and the subsidiary guarantors have agreed, however, to use reasonable best efforts to file a shelf registration statement with the SEC within 90 days of the issue date, and to use reasonable efforts to cause such registration statement to become effective within 240 days from the issue date, in order to register resales of the notes, the subsidiary guarantees and common stock issuable upon conversion of the notes under the Securities Act. The 90-day period expired on November 16, 2006. The Company did not file a registration statement within the time period and, as a result, is obligated to pay predetermined additional interest to holders of the notes as described in the registration rights agreement.
32
Credit Facility
The Credit Facility initially is a $50.0 million facility and includes a separate U.K. sub-facility and a separate Belgian sub-facility. The Administrative Agent will use commercially reasonable efforts to obtain commitments from a syndicate of lenders, permitting the total revolving credit commitment to be increased up to $75.0 million. The Company is currently discussing the syndication of its revolving credit facility and plans to increase the total commitment of the current facility. The terms of the Credit Facility are subject to change in the event that the credit facility is syndicated. Availability for domestic borrowings under the Credit Facility is based upon the value of eligible inventory, accounts receivable and property, plant and equipment, with separate borrowing bases to be established for foreign borrowings under a separate U.K. sub-facility and a separate Belgian sub-facility. Availability under the Credit Facility is conditioned upon various customary conditions.
The Credit Facility is secured by a first perfected security interest in substantially all of the Companys assets, with limitations under certain circumstances in the case of capital stock of foreign subsidiaries. Certain of the Companys domestic subsidiaries unconditionally guarantee all indebtedness and obligations related to domestic borrowings under the Credit Facility. The Company and certain of its domestic subsidiaries also unconditionally guarantee all indebtedness and obligations under the U.K. sub-facility.
As of September 30, 2006, the carrying amount of assets pledged as collateral was $53.4 million. The carrying amount as of September 30, 2006 for domestic, U.K., and Belgian borrowers were $43.0 million, $5.6 million, and $4.8 million, respectively. The Credit Facility contains a fixed charge coverage ratio covenant which becomes effective when total domestic availability falls below $11.0 million. As of September 30, 2006, total availability was $28.6 million. Availability as of September 30, 2006 for domestic, U.K., and Belgian borrowers were $24.3 million, $4.3 million, and zero, respectively.
The Credit Facility interest rate is based upon Euro-based (LIBOR) rates with other interest rate options available. The applicable Euro Dollar margin in effect when the Company is in compliance with the terms of the facility ranges from 1.25% to 2.25% and is based upon the Companys overall availability under the credit facility. The unused commitment fee is equal to 0.375% per annum and is based upon the unused portion of the revolving commitment.
The Company incurred debt issuance costs of $0.5 million which have been deferred and will be amortized over a five year period. Borrowings under the Credit Facility were being charged a weighted average interest rate of 7.08% at September 30, 2006.
In its 2005 financial statements, the Company disclosed that it expected to contribute $6.4 million to its U.S. and European pension plans in 2006. As of September 30, 2006, the Company has contributed $10.6 million. The Company expects to contribute $0.6 million to its European pension plans over the remainder of the year.
The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements, and unconditional purchase obligations. As of September 30, 2006, with the exception of the convertible senior notes and new credit facility as noted above, there have been no further changes in the payment terms of other long-term debt, lease agreements, and unconditional purchase obligations since December 31, 2005. The following table represents the significant cash contractual obligations and other commercial commitments.
|
|
Due in |
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
(Thousands) |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
2,925 |
|
$ |
|
|
$ |
78,768 |
|
$ |
81,693 |
|
Operating leases |
|
|
5,019 |
|
|
3,781 |
|
|
3,029 |
|
|
2,694 |
|
|
2,539 |
|
|
12,245 |
|
|
29,307 |
|
Unconditional purchase obligations* |
|
|
26,755 |
|
|
21,626 |
|
|
16,887 |
|
|
8,041 |
|
|
7,753 |
|
|
5,711 |
|
|
86,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash Obligations |
|
$ |
31,774 |
|
$ |
25,407 |
|
$ |
19,916 |
|
$ |
13,660 |
|
$ |
10,292 |
|
$ |
96,724 |
|
$ |
197,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Primarily for the purchase of raw materials, transportation, and information systems services. |
Note: Interest is not included in the above schedule. As of September 30, 2006 the Companys interest rate was 6.08% and the Company projects interest payments of approximately $2.0 million for the year ending December 31, 2006. |
33
Capital Expenditures and Investments
Capital expenditures for property, plant and equipment totaled $10.0 million for the nine months ended September 30, 2006 compared to expenditures of $8.2 million for the same period in 2005. The expenditures for the period ended September 30, 2006 consisted primarily of improvements to the Companys manufacturing facilities of $6.1 million, $2.3 million related to the repair of the Companys Pearl River plant as a result of Hurricane Katrina, and additional customer capital of $1.4 million. The comparable 2005 expenditures consisted primarily of $7.4 million for improvements to manufacturing facilities and $0.4 million for customer capital. Capital expenditures for 2006 are projected to be approximately $16.0 million.
The September 30, 2005 purchase of business cash usage of $0.9 million, as shown on the statement of cash flows, represents primarily the Companys increased equity ownership in Datong Carbon Corporation from 80% to 100% for a purchase price of $0.7 million.
In 2003, the Company temporarily suspended construction of a new facility in the Gulf Coast region of the United States as it evaluated strategic alternatives. On March 22, 2005, the Company concluded, and the Board of Directors approved, that cancellation of this project was warranted and that construction of such a facility should be suspended for the foreseeable future. Accordingly, the Company recorded an impairment charge of $2.2 million for the period ended September 30, 2005.
In January 2006, the Company announced the temporary idling of its reactivation facility in Blue Lake, California in an effort to reduce operating costs and to more efficiently utilize the capacity at its other existing locations. The Company conducted an impairment review of the plants assets having a net book value of $1.7 million in connection with the temporary idling of the facility and concluded that the assets were not impaired. It is managements intention to resume operation of the plant in the second half of 2007. If management should conclude that the idling of the plant beyond 2007 is warranted, operating results may be adversely affected by impairment charges.
Regulatory Matters
Each of the Companys domestic production facilities has permits and licenses regulating air emissions and water discharges. All of the Companys domestic production facilities are controlled under permits issued by local, state and federal air pollution control entities. The Company is presently in compliance with these permits. Continued compliance will require administrative control and will be subject to any new or additional standards. In May 2003, the Company partially discontinued operation of one of its three activated carbon lines at its Catlettsburg, Kentucky facility. The Company will need to install pollution abatement equipment estimated at approximately $7.0 million in order to remain in compliance with state requirements regulating air emissions before resuming full operation of this line. Management has not determined its plan of action for compliance related to this activated carbon line; however, if it is determined that a shutdown of the full operation of the activated carbon line is warranted, the impact to current operating results would be insignificant.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4, which requires the recognition of costs of idle facilities, excessive spoilage, double freight and re-handling costs as a component of current-period expenses. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 151 effective January 1, 2006 as required. Such adoption had no material impact on the accompanying financial statements.
34
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which establishes the accounting for transactions in which an entity exchanges its equity instruments or certain liabilities based upon an entitys equity instruments for goods or services. SFAS No. 123R generally requires that publicly traded companies measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award at the grant date. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award which is usually the vesting period. Management adopted SFAS No. 123R beginning January 1, 2006 as required and the related costs are reflected in the accompanying financial statements as discussed in Note 14.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. The Company adopted SFAS No. 154 effective January 1, 2006 as required. Such adoption had no material impact on the accompanying financial statements.
In June 2006, the FASB issued FASB Interpretation no. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes an Interpretation of FASB Standard No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the financial impact of adopting FIN 48.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosure about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company expects to adopt SFAS No. 157 as required for the fiscal year 2008 and that adoption will not have material impact on the financial statements.
In September 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans An amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires recognition of the funded status of a benefit plan on the balance sheet; the recognition in other comprehensive income of gains or losses and prior service costs or credits arising during the period but which are not included as components of periodic benefit cost; the measurement of defined benefit plan assets and obligations as of the balance sheet date; and disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition of gains and losses in the current period. SFAS No. 158 is effective the Companys year ended December 31, 2006. The Company is in the process of evaluating the financial impact of adopting SFAS No. 158. However, based on the funded status of the Companys defined benefit pension plans and other postretirement plan as of December 31, 2005 (the Companys most recent measurement date), the Company would be required to increase its net liabilities for pension and other postretirement benefits, which would result in a decrease in stockholders equity of approximately $29.0 million. The actual impact may vary from the estimated impact as the ultimate amounts recorded will depend on a number of assumptions, including, but not limited to, the discount rates in effect at December 31, 2006, the actual rate of return on the Companys pension plan assets for the year then ended and the impact of the Companys pension contributions during the year ended December 31, 2006. Changes in these assumptions since the Companys last measurement date could increase or decrease the impact of adopting SFAS No. 158 on the Companys consolidated financial statements at December 31, 2006.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current years financial statements are materially misstated. SAB 108 becomes effective during fiscal year 2006.
35
Critical Accounting Policies
Management of the Company has evaluated the accounting policies used in the preparation of the financial statements and related footnotes and believes the policies to be reasonable and appropriate. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make judgments, estimates, and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Management uses historical experience and all available information to make these judgments and estimates, and actual results will inevitably differ from those estimates and assumptions that are used to prepare the Companys financial statements at any given time. Despite these inherent limitations, management believes that Managements Discussion and Analysis (MD&A) and the financial statements and related footnotes provide a meaningful and fair perspective of the Companys financial condition and results of operations.
The following are the critical accounting policies impacted by managements judgments, assumptions, and estimates. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Companys operating results and financial condition.
Revenue Recognition
The Company recognizes revenue and related costs when goods are shipped or services are rendered to customers provided that ownership and risk of loss have passed to the customer. Revenue for major equipment projects is recognized under the percentage of completion method by comparing actual costs incurred to total estimated costs to complete the respective projects.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The amount of allowance recorded is based upon a quarterly review of specific customer transactions that remain outstanding at least three months beyond their respective due dates. If the financial condition of the Companys customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
The Companys inventories are carried at the lower of cost or market and adjusted to net realizable value. The inventory obsolescence adjustment is recorded quarterly based upon a review of specific products that have remained unsold for a prescribed period of time.
Goodwill and Other Intangible Assets
The Company tests goodwill for impairment at least annually by initially comparing the fair value of the Companys reporting units to their related carrying values. If the fair value of a reporting unit were less than its carrying value, additional steps would be necessary to determine the amount, if any, of goodwill impairment. Fair values are estimated using discounted cash flow and other valuation methodologies that are based on projections of the amounts and timing of future revenues and cash flows.
Environmental Costs
Liabilities for environmental costs are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. These liabilities are not reduced by possible recoveries from third parties, and projected cash expenditures are not discounted.
Pensions
Accounting for pensions involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover and discount rates. These assumptions are reviewed annually. In determining the expected return on plan asset assumption, the Company evaluates long-term actual return information, the mix of investments that comprise plan assets and future estimates of long-term investment returns.
36
Income Taxes
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Significant judgment is required in determining the Companys annual tax rate and in evaluating tax positions. The Company establishes reserves when, despite managements belief that the Companys tax return positions are fully supportable, it believes that certain positions are probable to be challenged upon review by tax authorities. Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations or changes in facts and circumstances. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. The resolution of tax matters will not have a material impact on the consolidated financial condition of the Company, although a resolution could have a material impact on the Companys consolidated statements of operations and comprehensive income for a particular future period and on the Companys effective tax rate.
The Company is subject to varying statutory tax rates in the countries where it conducts business. Fluctuations in the mix of the Companys income between countries result in changes to the Companys overall effective tax rate.
Litigation
The Company is involved in various asserted and unasserted legal claims. An estimate is made to accrue for a loss contingency relating to any of these legal claims if it is probable that a liability was incurred at the date of the financial statements and the amount of loss can be reasonably estimated. Because of the subjective nature inherent in assessing the outcome of legal claims and because the potential that an adverse outcome in a legal claim could have material impact on the Companys legal position or results of operations, such estimates are considered to be critical accounting estimates. After review, it was determined at September 30, 2006, that for each of the various unresolved legal claims in which the Company is involved, the conditions mentioned above were not met. As such, no accrual was recorded. The Company will continue to evaluate all legal matters as additional information becomes available.
Long-Lived Assets
The Company evaluates long-lived assets under the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment of long-lived assets, and for long-lived assets to be disposed of. For assets to be held and used, the Company groups a long-lived asset or assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company performs an impairment assessment whenever events or changes indicate a long-lived assets carrying value might not be recoverable. An impairment loss for an asset group reduces only the carrying amounts of a long-lived asset or assets of the group being evaluated. The loss is allocated to the long-lived assets of the group on a pro-rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group does not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort. Estimates of future cash flows used to test the recoverability of a long-lived asset group include only the future cash flows that are associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group. The future cash flow estimates used by the Company exclude interest charges.
37
Controls and Procedures |
Disclosure Controls and Procedures:
The Companys principal executive officer and principal financial officer have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), at the end of the period covered by this Quarterly Report on Form 10-Q. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Companys disclosure controls and procedures are ineffective.
On October 30, 2006, management and the Audit Committee of the Company determined that the Unaudited Condensed Consolidated Financial Statements for the fiscal quarters ended March 31, and June 30, 2006 contained errors and should no longer be relied upon. The errors were as a result of an error made in the calculation of the Companys interim tax provision for the quarters ended March 31 and June 30, 2006. Our interim preparation and review controls surrounding income taxation failed to fully consider the impact of the disposition that occurred in the period.
In connection with these restatements, management evaluated the effectiveness of our disclosure controls and procedures. Solely as a result of this material weakness, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of the end of the fiscal quarter ended September 30, 2006.
Changes in Internal Control:
There have not been any changes in the Companys internal controls over financial reporting that occurred during the period ended September 30, 2006 that have significantly affected, or are reasonably likely to significantly affect, the Companys internal controls over financial reporting.
Legal Proceedings |
|
|
|
|
See Note 11 to the unaudited interim Condensed Consolidated Financial Statements contained herein. |
|
|
Risk Factors |
Risk relating to our business
Our pension plans are currently underfunded, and we expect to be subject to significant increases in pension contributions to our defined benefit pension plans, thereby restricting our cash flow.
We sponsor various pension plans in the United States and Europe that are underfunded and require significant cash payments. We contributed $4.0 million and $2.4 million to our U.S. Pension plans and $1.0 million and $2.1 million to our European pension plans in 2004 and 2005, respectively. We are required to make minimum aggregate contributions of $6.4 million in 2006 but plan to contribute $9.1 million during 2006. We currently expect to be required to contribute approximately $3.1 million to our U.S. pension plans in 2007. If our cash flow from operations is insufficient to fund our worldwide pension liability, we may be forced to reduce or delay capital expenditures, seek additional capital or restructure or refinance our indebtedness.
The funding status of our pension plans is determined using many assumptions, such as inflation, investment rates, mortality, turnover and discount rates, any of which could prove to be different than projected. If the performance of the assets in our pension plans does not meet our expectations, or if other actuarial assumptions are modified, we may be required to contribute more to our pension plans than we currently expect. For example, an approximate 25-basis point decline in the current liability interest rate, which is used under the Employee Retirement Income Security Act of 1974, or ERISA, for funding purposes, would increase our minimum required con