We are reaffirming our Neutral recommendation on Calgon Carbon Corporation (CCC) following our assessment of its first-quarter 2012 results. Its revenues and earnings for the quarter beat the Zacks Consensus Estimates. However, profit clipped nearly 9% year-over-year on account of higher costs.

Revenues (up roughly 10%) were driven by improved demand for activated carbon product and services. The company saw growth across the board in the quarter with its equipment business leading the way.

Equipment revenues shot up roughly 77%, riding on higher sales from ballast water treatment systems and ion exchange equipment. However, the company saw lower sales from carbon adsorption equipment in the quarter.

Calgon Carbon continues to believe ballast water treatment, reactivation services, disinfection by-products, and mercury removal as its basis for sustainable growth. The company said that it will actively focus on improving margins across all regions.

Calgon Carbon’s strategic initiatives position it for significant growth in the longer term. The company’s last year’s acquisition of Calgon Carbon Japan KK (“CCJ”) has strengthened its position in the second largest carbon consuming market in the world.

The company’s reactivation facilities have remarkably supported its growth and have established its presence in several markets. The global demand for reactivation services is expected to climb as regulations for water quality strengthen around the world.

Calgon Carbon has also reduced its exposure to rising coal costs by identifying new sources of supply and a variety of coals that are effective in the manufacture of its high quality products.

While healthy sales gains and strategic initiatives adopted by the company are expected to usher in benefits in the longer term, we remain concerned about the economic challenges that the company might face this year.

Moreover, Calgon Carbon uses bituminous coal as the main raw material in the activated carbon production process. The expiry of coal supply contracts, between 2012 and 2015, may affect its ability to meet customer demand.

The challenge also comes in the form of escalating costs. Calgon Carbon’s gross margin contracted in the first quarter as it had to contend with higher plant maintenance expenses, unfavorable mix and raw material inflation.

Calgon Carbon recently announced the retirement of John S. Stanik, its chairman, president and chief executive officer (CEO). The next person who would assume the helm will have a challenging task of keeping the lid on costs.

Calgon Carbon, which competes with MeadWestvaco Corporation (MWV) among others, currently retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.

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