WWW.EXFILE.COM, INC. -- 888-775-4789 -- HARSCO CORPORATION -- FORM 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 or 15 (d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Quarterly Period Ended September 30, 2007
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from _____ to ______
Commission
File Number 1-3970
____________________
HARSCO
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
23-1483991
|
(State
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
350
Poplar Church Road, Camp Hill, Pennsylvania
|
17011
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
Registrant's
Telephone Number
|
(717)
763-7064
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
YES
x NO
o
Indicate
by check mark whether the registrant 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. (Check one):
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES o NO
x
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
Class
|
Outstanding
at October 31, 2007
|
Common
stock, par value $1.25 per share
|
84,212,588
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
(In
thousands, except per share amounts)
|
|
2007
|
|
|
2006
(a)
|
|
|
2007
|
|
|
2006
(a)
|
|
Revenues
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
$ |
785,514
|
|
|
$ |
650,522
|
|
|
$ |
2,318,758
|
|
|
$ |
1,859,546
|
|
Product
revenues
|
|
|
141,850
|
|
|
|
122,768
|
|
|
|
394,780
|
|
|
|
361,830
|
|
Total
revenues
|
|
|
927,364
|
|
|
|
773,290
|
|
|
|
2,713,538
|
|
|
|
2,221,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
sold
|
|
|
570,173
|
|
|
|
472,678
|
|
|
|
1,694,388
|
|
|
|
1,352,635
|
|
Cost
of products
sold
|
|
|
97,274
|
|
|
|
85,609
|
|
|
|
281,933
|
|
|
|
260,211
|
|
Selling,
general and
administrative expenses
|
|
|
133,314
|
|
|
|
117,979
|
|
|
|
388,382
|
|
|
|
345,282
|
|
Research
and development
expenses
|
|
|
864
|
|
|
|
720
|
|
|
|
2,590
|
|
|
|
1,971
|
|
Other
(income)
expenses
|
|
|
1,011
|
|
|
|
(1,640 |
) |
|
|
(905 |
) |
|
|
1,866
|
|
Total
costs and
expenses
|
|
|
802,636
|
|
|
|
675,346
|
|
|
|
2,366,388
|
|
|
|
1,961,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from
continuing operations
|
|
|
124,728
|
|
|
|
97,944
|
|
|
|
347,150
|
|
|
|
259,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
326
|
|
|
|
92
|
|
|
|
739
|
|
|
|
255
|
|
Interest
income
|
|
|
744
|
|
|
|
831
|
|
|
|
2,956
|
|
|
|
2,580
|
|
Interest
expense
|
|
|
(20,976 |
) |
|
|
(15,254 |
) |
|
|
(60,092 |
) |
|
|
(43,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations before income taxes and minority
interest
|
|
|
104,822
|
|
|
|
83,613
|
|
|
|
290,753
|
|
|
|
218,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(32,190 |
) |
|
|
(27,613 |
) |
|
|
(91,179 |
) |
|
|
(72,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations before minority interest
|
|
|
72,632
|
|
|
|
56,000
|
|
|
|
199,574
|
|
|
|
146,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income
|
|
|
(2,379 |
) |
|
|
(1,815 |
) |
|
|
(6,838 |
) |
|
|
(6,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
70,253
|
|
|
|
54,185
|
|
|
|
192,736
|
|
|
|
139,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations of
discontinued business
|
|
|
10,268
|
|
|
|
2,272
|
|
|
|
24,646
|
|
|
|
5,558
|
|
Disposal
costs of discontinued
business
|
|
|
(1,230 |
) |
|
|
-
|
|
|
|
(4,108 |
) |
|
|
-
|
|
Income
tax
expense
|
|
|
(1,969 |
) |
|
|
(656 |
) |
|
|
(5,229 |
) |
|
|
(1,600 |
) |
Income
from discontinued operations
|
|
|
7,069
|
|
|
|
1,616
|
|
|
|
15,309
|
|
|
|
3,958
|
|
Net
Income
|
|
$ |
77,322
|
|
|
$ |
55,801
|
|
|
$ |
208,045
|
|
|
$ |
143,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding
|
|
|
84,189
|
|
|
|
84,019
|
|
|
|
84,128
|
|
|
|
83,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.83
|
|
|
$ |
0.64
|
|
|
$ |
2.29
|
|
|
$ |
1.67
|
|
Discontinued
operations
|
|
|
0.08
|
|
|
|
0.02
|
|
|
|
0.18
|
|
|
|
0.05
|
|
Basic
earnings per common share
|
|
$ |
0.92 |
(b) |
|
$ |
0.66
|
|
|
$ |
2.47
|
|
|
$ |
1.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
average shares of common stock outstanding
|
|
|
84,762
|
|
|
|
84,505
|
|
|
|
84,682
|
|
|
|
84,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.83
|
|
|
$ |
0.64
|
|
|
$ |
2.28
|
|
|
$ |
1.66
|
|
Discontinued
operations
|
|
|
0.08
|
|
|
|
0.02
|
|
|
|
0.18
|
|
|
|
0.05
|
|
Diluted
earnings per common share
|
|
$ |
0.91
|
|
|
$ |
0.66
|
|
|
$ |
2.46
|
|
|
$ |
1.71
|
|
Cash
dividends declared per common share
|
|
$ |
0.1775
|
|
|
$ |
0.1625
|
|
|
$ |
0.5325
|
|
|
$ |
0.4875
|
|
(a)
|
Reclassified
for comparative purposes.
|
(b)
|
Does
not total due to rounding.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
102,668
|
|
|
$ |
101,260
|
|
Accounts
receivable,
net
|
|
|
837,531
|
|
|
|
753,168
|
|
Inventories
|
|
|
269,193
|
|
|
|
285,229
|
|
Other
current
assets
|
|
|
89,433
|
|
|
|
88,398
|
|
Assets
held-for-sale
|
|
|
301,815
|
|
|
|
3,567
|
|
Total
current
assets
|
|
|
1,600,640
|
|
|
|
1,231,622
|
|
Property,
plant and equipment, net
|
|
|
1,478,290
|
|
|
|
1,322,467
|
|
Goodwill,
net
|
|
|
720,910
|
|
|
|
612,480
|
|
Intangible
assets, net
|
|
|
194,085
|
|
|
|
88,164
|
|
Other
assets
|
|
|
126,200
|
|
|
|
71,690
|
|
Total
assets
|
|
$ |
4,120,125
|
|
|
$ |
3,326,423
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
436,907
|
|
|
$ |
185,074
|
|
Current
maturities of long-term
debt
|
|
|
5,092
|
|
|
|
13,130
|
|
Accounts
payable
|
|
|
302,066
|
|
|
|
287,006
|
|
Accrued
compensation
|
|
|
96,774
|
|
|
|
95,028
|
|
Income
taxes
payable
|
|
|
56,487
|
|
|
|
61,967
|
|
Dividends
payable
|
|
|
14,945
|
|
|
|
15,983
|
|
Insurance
liabilities
|
|
|
43,840
|
|
|
|
40,810
|
|
Other
current
liabilities
|
|
|
285,080
|
|
|
|
211,777
|
|
Liabilities
associated with
assets held-for-sale
|
|
|
56,089
|
|
|
|
-
|
|
Total
current
liabilities
|
|
|
1,297,280
|
|
|
|
910,775
|
|
Long-term
debt
|
|
|
887,587
|
|
|
|
864,817
|
|
Deferred
income taxes
|
|
|
168,091
|
|
|
|
103,592
|
|
Insurance
liabilities
|
|
|
67,548
|
|
|
|
62,542
|
|
Retirement
plan liabilities
|
|
|
175,001
|
|
|
|
189,457
|
|
Other
liabilities
|
|
|
104,818
|
|
|
|
48,876
|
|
Total
liabilities
|
|
|
2,700,325
|
|
|
|
2,180,059
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
138,338
|
|
|
|
85,614
|
|
Additional
paid-in capital
|
|
|
120,889
|
|
|
|
166,494
|
|
Accumulated
other comprehensive loss
|
|
|
(65,757 |
) |
|
|
(169,334 |
) |
Retained
earnings
|
|
|
1,829,499
|
|
|
|
1,666,761
|
|
Treasury
stock
|
|
|
(603,169 |
) |
|
|
(603,171 |
) |
Total
stockholders'
equity
|
|
|
1,419,800
|
|
|
|
1,146,364
|
|
Total
liabilities and
stockholders' equity
|
|
$ |
4,120,125
|
|
|
$ |
3,326,423
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
Months Ended
September
30
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
208,045
|
|
|
$ |
143,927
|
|
Adjustments
to reconcile net
income to net
|
|
|
|
|
|
|
|
|
cash
provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
204,014
|
|
|
|
180,901
|
|
Amortization
|
|
|
20,576
|
|
|
|
5,600
|
|
Equity
in income of
unconsolidated entities, net
|
|
|
(739 |
) |
|
|
(255 |
) |
Dividends
or distributions from
unconsolidated entities
|
|
|
176
|
|
|
|
-
|
|
Other,
net
|
|
|
(736 |
) |
|
|
9,132
|
|
Changes
in assets and
liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
and
dispositions of
businesses:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(99,777 |
) |
|
|
(55,452 |
) |
Inventories
|
|
|
(74,665 |
) |
|
|
(22,447 |
) |
Accounts
payable
|
|
|
24,559
|
|
|
|
(10,552 |
) |
Accrued
interest
payable
|
|
|
19,197
|
|
|
|
18,780
|
|
Accrued
compensation
|
|
|
(3,205 |
) |
|
|
3,613
|
|
Other
assets and
liabilities
|
|
|
74,898
|
|
|
|
5,689
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating
activities
|
|
|
372,343
|
|
|
|
278,936
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and
equipment
|
|
|
(326,179 |
) |
|
|
(256,479 |
) |
Net
use of cash associated with
the purchases of businesses
|
|
|
(253,809 |
) |
|
|
(11,421 |
) |
Proceeds
from sales of
assets
|
|
|
18,289
|
|
|
|
11,423
|
|
Other
investing
activities
|
|
|
(2,982 |
) |
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by investing
activities
|
|
|
(564,681 |
) |
|
|
(256,359 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings,
net
|
|
|
238,563
|
|
|
|
(11,796 |
) |
Current
maturities and long-term
debt:
|
|
|
|
|
|
|
|
|
Additions
|
|
|
597,221
|
|
|
|
250,362
|
|
Reductions
|
|
|
(610,003 |
) |
|
|
(258,443 |
) |
Cash
dividends paid on common
stock
|
|
|
(44,779 |
) |
|
|
(40,859 |
) |
Common
stock
issued-options
|
|
|
4,414
|
|
|
|
11,255
|
|
Other
financing
activities
|
|
|
(4,372 |
) |
|
|
(3,691 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by
financing activities
|
|
|
181,044
|
|
|
|
(53,172 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
12,702
|
|
|
|
9,199
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,408
|
|
|
|
(21,396 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
101,260
|
|
|
|
120,929
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
102,668
|
|
|
$ |
99,533
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
CONDENSED CONSOLIDATED
STATEMENTS OF
COMPREHENSIVE INCOME
(Unaudited)
|
|
Three
Months Ended
September
30
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
77,322
|
|
|
$ |
55,801
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign
currency translation
adjustments
|
|
|
44,678
|
|
|
|
15,798
|
|
|
|
|
|
|
|
|
|
|
Net
gains on cash flow hedging
instruments, net of deferred income taxes of ($205) and ($51) in
2007 and
2006, respectively
|
|
|
380
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustments,
net of deferred income taxes of ($5,047) and $1,372 in 2007 and 2006,
respectively
|
|
|
13,572
|
|
|
|
(3,428 |
) |
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
loss on cash flow hedging instruments included in net income, net
of
deferred income taxes of ($29) and ($32) in 2007 and 2006,
respectively
|
|
|
54
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
58,684
|
|
|
|
12,524
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$ |
136,006
|
|
|
$ |
68,325
|
|
|
|
Nine
Months Ended
September
30
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
208,045
|
|
|
$ |
143,927
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign
currency translation
adjustments
|
|
|
80,115
|
|
|
|
57,153
|
|
|
|
|
|
|
|
|
|
|
Net
gains on cash flow hedging
instruments, net of deferred income taxes of ($199) and ($63) in
2007 and
2006, respectively
|
|
|
370
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustments,
net of deferred income taxes of ($9,195) and $4,637 in 2007 and 2006,
respectively
|
|
|
23,046
|
|
|
|
(11,988 |
) |
|
|
|
|
|
|
|
|
|
Marketable
securities, unrealized
gain (loss), net of deferred income taxes of $1 and ($1) in 2007
and 2006,
respectively
|
|
|
(2 |
) |
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
loss on cash flow hedging instruments included in net income, net
of
deferred income taxes of ($26) and ($32) in 2007 and 2006,
respectively
|
|
|
48
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
103,577
|
|
|
|
45,342
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$ |
311,622
|
|
|
$ |
189,269
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
A.
Opinion of Management
Financial
information furnished herein, which is unaudited, in the opinion of management
reflects all adjustments (all of which are of a normal recurring nature) that
are necessary to present a fair statement of the interim period. The
year-end condensed balance sheet information contained in this Form 10-Q was
derived from 2006 audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America for a year-end report. The unaudited interim
information contained herein should also be read in conjunction with the
Company’s 2006 Form 10-K filing.
B.
Reclassifications
Certain
reclassifications have been made to prior years’ amounts to conform with current
year classifications. These reclassifications relate principally to
the Gas Technologies Segment that is currently classified as Discontinued
Operations in accordance with SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (“SFAS 144”) as discussed in Note G,
“Acquisitions and Dispositions.” Additionally, all historical share
and per share data have been restated to reflect the two-for-one stock split
that was effective at the close of business on March 26, 2007. As a
result of these reclassifications, certain 2006 amounts presented for
comparative purposes will not individually agree with previously filed Forms
10-K or 10-Q.
C.
Review of Operations by Segment
|
|
|
Three
Months Ended
September
30, 2007
|
|
|
Three
Months Ended
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Sales
|
|
|
Operating
Income
(loss)
|
|
|
Sales
|
|
|
Operating
Income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
Services Segment
|
|
$ |
351,262
|
|
|
$ |
48,056
|
|
|
$ |
278,627
|
|
|
$ |
35,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
Services Segment
|
|
|
375,935
|
|
|
|
34,464
|
|
|
|
345,864
|
|
|
|
37,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Totals
|
|
|
727,197
|
|
|
|
82,520
|
|
|
|
624,491
|
|
|
|
72,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minerals
& Rail Technologies, Services and Products (“all
other”) Category (a)
|
|
|
200,167
|
|
|
|
42,329
|
|
|
|
148,799
|
|
|
|
25,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
-
|
|
|
|
(121 |
) |
|
|
-
|
|
|
|
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Totals
|
|
$ |
927,364
|
|
|
$ |
124,728
|
|
|
$ |
773,290
|
|
|
$ |
97,944
|
|
|
(a)
|
In
March 2007, after the completion of the Excell Minerals acquisition,
the
“all other” Category was renamed Minerals & Rail Technologies,
Services and Products to reflect the Company’s strengthening strategic
presence in the minerals technologies and railway services
sectors.
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
Nine
Months Ended
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Sales
|
|
|
Operating
Income
(loss)
|
|
|
Sales
|
|
|
Operating
Income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
Services Segment
|
|
$ |
1,028,392
|
|
|
$ |
132,402
|
|
|
$ |
774,081
|
|
|
$ |
88,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
Services Segment
|
|
|
1,117,529
|
|
|
|
103,441
|
|
|
|
1,016,394
|
|
|
|
109,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Totals
|
|
|
2,145,921
|
|
|
|
235,843
|
|
|
|
1,790,475
|
|
|
|
198,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minerals
& Rail Technologies, Services and Products (“all
other”) Category (a)
|
|
|
567,617
|
|
|
|
112,247
|
|
|
|
430,901
|
|
|
|
62,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
-
|
|
|
|
(940 |
) |
|
|
-
|
|
|
|
(1,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Totals
|
|
$ |
2,713,538
|
|
|
$ |
347,150
|
|
|
$ |
2,221,376
|
|
|
$ |
259,411
|
|
|
(a)
|
In
March 2007, after the completion of the Excell Minerals acquisition,
the
“all other” Category was renamed Minerals & Rail Technologies,
Services and Products to reflect the Company’s strengthening strategic
presence in the minerals technologies and railway services
sectors.
|
Reconciliation
of Segment Operating Income to Consolidated Income from Continuing
Operations
Before
Income Taxes and Minority Interest
|
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Operating Income
|
|
$ |
82,520
|
|
|
$ |
72,790
|
|
|
$ |
235,843
|
|
|
$ |
198,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minerals
& Rail Technologies, Services and Products (“all
other”) Category
|
|
|
42,329
|
|
|
|
25,242
|
|
|
|
112,247
|
|
|
|
62,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
(121 |
) |
|
|
(88 |
) |
|
|
(940 |
) |
|
|
(1,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
124,728
|
|
|
|
97,944
|
|
|
|
347,150
|
|
|
|
259,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
326
|
|
|
|
92
|
|
|
|
739
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
744
|
|
|
|
831
|
|
|
|
2,956
|
|
|
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(20,976 |
) |
|
|
(15,254 |
) |
|
|
(60,092 |
) |
|
|
(43,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes and minority
interest
|
|
$ |
104,822
|
|
|
$ |
83,613
|
|
|
$ |
290,753
|
|
|
$ |
218,284
|
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
D. Accounts
Receivable and Inventories
At
September 30, 2007 and December 31, 2006, accounts receivable of $837.5 million
and $753.2 million, respectively, were net of an allowance for doubtful accounts
of $24.0 million and $25.4 million, respectively. Gross accounts
receivable included trade accounts receivable of $819.0 million and $737.1
million at September 30, 2007 and December 31, 2006,
respectively. Other receivables included insurance claim receivables
of $19.8 million and $18.9 million at September 30, 2007 and December 31, 2006,
respectively. The provision for doubtful accounts for the three
months ended September 30, 2007 was less than $0.1 million as recoveries offset
provisions recorded during the quarter. The provision for doubtful
accounts was $1.5 million for the three months ended September 30,
2006. For nine months ended September 30, 2007 and 2006, the
provision for doubtful accounts was $4.6 million and $5.9 million,
respectively.
Inventories
consist of the following:
|
|
|
Inventories
|
|
|
(In
thousands)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
128,366
|
|
|
$ |
117,072
|
|
|
Work-in-process
|
|
|
20,105
|
|
|
|
31,489
|
|
|
Raw
materials and purchased parts
|
|
|
71,716
|
|
|
|
96,750
|
|
|
Stores
and supplies
|
|
|
49,006
|
|
|
|
39,918
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Inventories
|
|
$ |
269,193
|
|
|
$ |
285,229
|
|
E. Property,
Plant and Equipment
Property,
plant and equipment consists of the following:
|
(In
thousands)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
|
Land
and improvements
|
|
$ |
47,184
|
|
|
$ |
41,255
|
|
|
Buildings
and improvements
|
|
|
177,288
|
|
|
|
192,575
|
|
|
Machinery
and equipment
|
|
|
2,930,206
|
|
|
|
2,699,131
|
|
|
Uncompleted
construction
|
|
|
77,015
|
|
|
|
52,640
|
|
|
Gross
property, plant and equipment
|
|
|
3,231,693
|
|
|
|
2,985,601
|
|
|
Less
accumulated depreciation
|
|
|
(1,753,403 |
) |
|
|
(1,663,134 |
) |
|
Net
property, plant and equipment
|
|
$ |
1,478,290
|
|
|
$ |
1,322,467
|
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
F. Goodwill
and Other Intangible Assets
The
following table reflects the changes in carrying amounts of goodwill by segment
for the nine months ended September 30, 2007:
Goodwill
by Segment
|
|
|
|
(In
thousands)
|
|
Access
Services
Segment
|
|
|
Mill
Services
Segment
|
|
|
Minerals
&
Rail
Technologies,
Services
and
Products
(“all
other”)
Category
|
|
|
Gas
Technologies
Segment
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006, net of accumulated amortization
|
|
$ |
241,937
|
|
|
$ |
325,492
|
|
|
$ |
8,137
|
|
|
$ |
36,914
|
|
|
$ |
612,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
acquired during the year
|
|
|
-
|
|
|
|
12,728
|
|
|
|
109,583
|
|
|
|
-
|
|
|
|
122,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
to goodwill (a)
|
|
|
2,201
|
|
|
|
(2,483 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
11,179
|
|
|
|
9,749
|
|
|
|
2,387
|
|
|
|
9
|
|
|
|
23,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
transferred to assets held-for-sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36,923 |
) |
|
|
(36,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2007, net of accumulated
amortization
|
|
$ |
255,317
|
|
|
$ |
345,486
|
|
|
$ |
120,107
|
|
|
$ |
-
|
|
|
$ |
720,910
|
|
(a)
Relate principally to opening balance sheet adjustments.
Goodwill
is net of accumulated amortization of $103.3 million and $109.3 million at
September 30, 2007 and December 31, 2006, respectively. The reduction
in accumulated amortization from December 31, 2006 is due to the transfer of
the
Gas Technologies Segment’s balance to assets held-for-sale.
The
following table reflects intangible assets by major category:
Intangible
Assets
|
|
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
(In
thousands)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Customer
relationships
|
|
$ |
156,500
|
|
|
$ |
20,124
|
|
|
$ |
87,426
|
|
|
$ |
7,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
3,368
|
|
|
|
2,884
|
|
|
|
5,648
|
|
|
|
4,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
6,816
|
|
|
|
4,187
|
|
|
|
4,700
|
|
|
|
3,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(a)
|
|
|
65,576
|
|
|
|
10,183
|
|
|
|
9,800
|
|
|
|
3,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
232,260
|
|
|
$ |
37,378
|
|
|
$ |
107,574
|
|
|
$ |
19,410
|
|
(a) Principally
technical know-how and contractual revenue.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Intangible
assets are included in the Intangible assets, net, and Other current assets
line
items in the Condensed Consolidated Balance Sheets.
During
the first nine months of 2007, the Company acquired the following intangible
assets (by major class) which are subject to amortization. These
intangible assets relate principally to the Excell Minerals acquisition more
fully discussed in Note G, “Acquisitions and Dispositions.”
|
Acquired
Intangible Assets
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Gross
Carrying
Amount
|
|
Residual
Value
|
|
Weighted-average
amortization
period
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$ |
65,443
|
|
None
|
|
6
years
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
2,010
|
|
None
|
|
10
years
|
|
|
|
|
|
|
|
|
|
|
Other
(a)
|
|
|
52,270
|
|
None
|
|
9
years
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
119,723
|
|
|
|
|
(a) Principally
technical know-how and contractual revenue.
There
were no research and development assets acquired and written off in the first
nine months of 2007 or 2006.
Amortization
expense for intangible assets was $7.2 million and $19.5 million for the third
quarter and first nine months of 2007, respectively. This compares
with $1.6 million and $5.0 million for the third quarter and first nine months
of 2006, respectively. The following table shows the estimated
amortization expense for the next five fiscal years based on current intangible
assets:
|
(In
thousands)
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
amortization expense (a)
|
|
$ |
26,400
|
|
|
$ |
26,300
|
|
|
$ |
25,200
|
|
|
$ |
24,900
|
|
|
$ |
23,700
|
|
(a)
These
estimated amortization expense amounts do not reflect the potential effect
of
future foreign currency exchange rate fluctuations.
G. Acquisitions
and Dispositions
Acquisitions
In
August
2007, the Company acquired Alexander Mill Services International (“AMSI”), a
privately held company that provides mill services to some of the leading steel
producers in Poland and Romania. AMSI also provides mill services on
a smaller scale in Greece and Portugal. AMSI recorded 2006 revenues
of approximately $21 million and has been included in the Mill Services
Segment.
In
August
2007, the Company acquired ZETA-TECH Associates, Inc. (“ZETA-TECH”), a Cherry
Hill, NJ-based niche technical services and applied technology company serving
the railway industry with specialized expertise in railway engineering services
and track maintenance software. ZETA-TECH produces a range of
proprietary software tools that are used by railways to regularly monitor and
evaluate the performance of their rail and track assets. ZETA-TECH
recorded 2006 revenues of approximately $4 million and has been included in
the Company’s Harsco Track Technologies Division of the Minerals & Rail
Technologies, Services and Products (“all other”) Category.
In
April
2007, the Company acquired Performix Technologies, Ltd. (“Performix”), an
Ohio-based company that is one of the United States’ leading producers of
specialty additives used by steelmakers in the ladle refining of molten
steel. Performix operates from two plants in the U.S. and serves most
of the major steelmakers in the upper Midwest and Canada. Performix
recorded 2006 sales of approximately $29 million and employs approximately
60
people. Performix has been included in the Mill Services
Segment.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
In
February 2007, the Company acquired Excell Materials, Inc. (“Excell”), a
Pittsburgh-based multinational company, for approximately $210 million, which
excluded direct acquisition costs. Excell specializes in the
reclamation and recycling of high-value content from principally steelmaking
slag. Excell is also involved in the development of mineral-based
products for commercial applications. Excell recorded 2006 sales in
excess of $100 million and maintains operations at nine locations in the
United
States, Canada, Brazil, South Africa and Germany. Goodwill recognized
in this transaction (based on foreign exchange rates at the transaction date)
was $107.6 million, none of which is expected to be deductible for U.S. income
tax purposes. The purchase price allocation and goodwill balance have
not been finalized as of September 30, 2007. Excell has been included
in the Minerals & Rail Technologies, Services and Products (“all other”)
Category and has been renamed Excell Minerals to emphasize its long-term
growth
strategy.
In
November 2006, the Company acquired the Santiago, Chile-based company Moldajes
y
Andamios TH S.A. (“MyATH”), a supplier of rental formwork, scaffolding and
related services to the construction, infrastructure and building maintenance
sectors. MyATH employs approximately 100 people and its annual
revenues are approximately $8 million. MyATH has been included in the
Hünnebeck Division of the Access Services Segment.
In
November 2006, the Company acquired the conveyor services and trading arm of
Technic Gum, a Belgium-based provider of conveyor belt maintenance services
for
the steel and cement-producing industries. Technic Gum Services
recorded revenues of approximately $8 million in 2005 and employs approximately
50 people. Technic Gum Services has been included in the Mill
Services Segment.
In
July
2006, the Company acquired the assets of U.K.-based Cape PLC’s Cleton industrial
maintenance services (“Cleton”) subsidiaries in the Netherlands, Belgium and
Germany for €8 million (approximately $10 million). Cleton posted
2005 revenues in excess of $50 million and employs close to 400
people. Cleton specializes in providing scaffolding and related
insulation services for the maintenance of large-scale industrial plants, and
serves some of the largest oil refinery, petrochemical and process plant sites
in the Benelux countries. Cleton has been included in the SGB
Division of the Access Services Segment.
Dispositions
– Assets Held for Sale and Discontinued Operations
Consistent
with the Company’s strategic focus to grow and allocate financial resources to
its industrial services businesses, in January 2007, the Company’s Board of
Directors approved the divestiture of its Gas Technologies Segment, which
consists of manufacturing businesses. This Segment recorded revenues
and operating income of $397.7 million and $14.2 million, respectively, for
2006. The Company expects the divestiture to occur within the fourth
quarter of 2007. Results of operations of the Segment have been
included in Discontinued Operations of the income statement effective with
the
first quarter 2007 report. The Segment’s assets and liabilities are
classified as held-for-sale in the September 30, 2007 balance
sheet.
The
major
classes of assets and liabilities “held-for-sale” included in the Consolidated
Balance Sheets are as follows:
(In
thousands)
|
|
September
30 (a)
2007
|
|
|
December
31
2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$ |
75,513
|
|
|
$ |
-
|
|
Inventories
|
|
|
110,391
|
|
|
|
-
|
|
Other
current assets
|
|
|
2,128
|
|
|
|
-
|
|
Property,
plant and equipment, net
|
|
|
72,850
|
|
|
|
3,567
|
|
Goodwill,
net
|
|
|
36,923
|
|
|
|
-
|
|
Other
assets
|
|
|
4,010
|
|
|
|
-
|
|
Total
assets “held-for-sale”
|
|
$ |
301,815
|
|
|
$ |
3,567
|
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
(In
thousands)
|
|
September
30 (a)
2007
|
|
|
December
31
2006
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
1,360
|
|
|
$ |
-
|
|
Accounts
payable
|
|
|
36,939
|
|
|
|
-
|
|
Accrued
compensation
|
|
|
1,775
|
|
|
|
-
|
|
Income
taxes payable
|
|
|
-
|
|
|
|
-
|
|
Other
current liabilities
|
|
|
13,852
|
|
|
|
-
|
|
Long-term
debt
|
|
|
1,394
|
|
|
|
-
|
|
Retirement
plan liabilities
|
|
|
500
|
|
|
|
-
|
|
Other
liabilities
|
|
|
269
|
|
|
|
-
|
|
Total
liabilities associated with assets
“held-for-sale”
|
|
$ |
56,089
|
|
|
$ |
-
|
|
(a)
|
September
30, 2007 amounts are predominantly assets and liabilities associated
with
the Gas Technologies Segment.
|
Subsequent
to the reclassification of the Gas Technologies Segment’s results to
Discontinued Operations, the Company’s results from continuing operations for
2006 are as follows:
|
|
Three
Months Ended
|
|
(In
millions, except per share amounts)
|
|
March
31
2006
|
|
|
June
30
2006
|
|
|
September
30
2006
|
|
|
December
31
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from continuing operations
|
|
$ |
682.1
|
|
|
$ |
766.0
|
|
|
$ |
773.3
|
|
|
$ |
804.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
32.6
|
|
|
|
53.2
|
|
|
|
54.2
|
|
|
|
46.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per share from continuing operations
|
|
|
0.39
|
|
|
|
0.63
|
|
|
|
0.64
|
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H. Income
Taxes
The
Company adopted the provisions of FASB Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109” (“FIN 48”), effective January 1,
2007. As a result of the adoption, the Company recognized a
cumulative effect reduction to the January 1, 2007 retained earnings balance
of
$0.5 million. As of the adoption date, the Company had gross
tax-affected unrecognized income tax benefits of $46.0 million, of which $17.8
million, if recognized, would affect the Company’s effective income tax
rate. Of this amount, $0.8 million was classified as current and
$45.2 million was classified as non-current on the Company’s balance
sheet. While the Company believes it has adequately provided for all
tax positions, amounts asserted by taxing authorities could be different than
the accrued position.
The
Company recognizes accrued interest and penalty expense related to unrecognized
income tax benefits within its global operations in income tax
expense. In conjunction with the adoption of FIN 48, the total amount
of accrued interest and penalties resulting from such unrecognized tax benefits
was $4.4 million.
The
Company files its income tax returns as prescribed by the tax laws of the
jurisdictions in which it operates. With few exceptions, the Company
is no longer subject to U.S. and foreign examinations by tax authorities for
years through 1999.
During
the first quarter of 2007, the U.S. Internal Revenue Service commenced its
audit
of the Company’s U.S. income tax returns for 2004 and 2005. It is
reasonably possible that this audit will be completed by the first quarter
of
2008. At this point, an estimate of changes, if any, to unrecognized
tax benefit amounts cannot be made.
The
Company is involved in a royalty dispute with the Canada Revenue Agency
(“CRA”). This matter is more fully discussed in Note I, “Commitments
and Contingencies,” to the Consolidated Financial Statements.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
I. Commitments
and Contingencies
Royalty
Expense Dispute
The
Company is involved in a royalty expense dispute with the Canada Revenue Agency
(“CRA”). The CRA is proposing to disallow certain royalty expense
deductions claimed by the Company’s Canadian subsidiary on its 1994-1998 tax
returns. As of September 30, 2007, the maximum assessment from the CRA for
the period 1994-1998 is approximately 12.6 million Canadian dollars, including
tax and interest. The Company has initiated settlement discussions with
the CRA and they are progressing. It is reasonably possible that
these settlement discussions will lead to a resolution of this matter by
December 31, 2007 and that the resolution will be favorable to the Company
resulting in a significant decrease to the unrecognized tax
benefit. It is premature to discuss the details of any potential
settlement including the quantification of any settlement amounts.
The
Ontario Ministry of Finance (“Ontario”) is also proposing to disallow these same
royalty expense deductions for the period 1994-1998. As of September 30,
2007, the maximum assessment from Ontario is approximately 3.8 million Canadian
dollars, including tax and interest. The Company has filed an
administrative appeal of this assessment and will vigorously contest these
disallowances. We anticipate that Ontario will approach the settlement and
resolution of this matter in a manner consistent with the results obtained
in
the CRA dispute.
The
Company believes that any amount of potential liability regarding this matter
has been fully reserved as of September 30, 2007 and, therefore will not have
a
material adverse impact on the Company’s future results of operations or
financial condition. In accordance with Canadian tax law, the Company made
a payment to the CRA in the fourth quarter of 2005 of 5.9 million Canadian
dollars. Additionally, the Company made a payment to the Ontario Ministry
of Finance in the first quarter of 2006 for the entire disputed amount.
These payments were made for tax compliance purposes and to reduce potential
interest expense on the disputed amount. These payments in no way reflect
the Company’s acknowledgement as to the validity of the assessed
amounts.
Environmental
The
Company is involved in a number of environmental remediation investigations
and
clean-ups and, along with other companies, has been identified as a "potentially
responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities,
and it is possible that some of these matters will be decided unfavorably to
the
Company. The Company has evaluated its potential liability, and its
financial exposure is dependent upon such factors as the continuing evolution
of
environmental laws and regulatory requirements; the availability and application
of technology; the allocation of cost among potentially responsible parties;
the
years of remedial activity required and the remediation methods
selected. The Consolidated Balance Sheets at September 30, 2007 and
December 31, 2006 include accruals of $3.8 million and $3.8 million,
respectively, for environmental matters. The amounts charged against
pre-tax income related to environmental matters totaled $1.7 million and $1.1
million for the first nine months of 2007 and 2006, respectively.
The
liability for future remediation costs is evaluated on a quarterly
basis. Actual costs to be incurred at identified sites in future
periods may vary from the estimates, given inherent uncertainties in evaluating
environmental exposures. The Company does not expect that any sum it
may have to pay in connection with environmental matters in excess of the
amounts recorded or disclosed above would have a material adverse impact on
its
financial position, results of operations or cash flows.
Derailment
One
of
the Company’s production rail grinders derailed near Baxter, California on
November 9, 2006, resulting in two crew member fatalities and the near total
loss of the rail grinder. Government and private investigations into
the cause of the derailment are ongoing. The initial clean-up and
salvage efforts are completed, although work on environmental remediation is
ongoing. Estimated environmental remediation expenses have been
recognized in the financial statements as of September 30, 2007. All
remaining Company rail grinders have been inspected by the Federal Railroad
Administration (“FRA”). The Company also regularly inspects its
grinders to ensure that its grinders are safe and in compliance with contractual
commitments. The Company believes that the insurance proceeds already
received from the loss of the rail grinder will offset the majority of incurred
expenses and contingent liabilities, which have been recognized as of September
30, 2007. Therefore, the Company does not believe that the derailment
will have a material adverse impact on its financial position, results of
operations or cash flows.
Other
The
Company has been named as one of many defendants (approximately 90 or more
in
most cases) in legal actions alleging personal injury from exposure to airborne
asbestos over the past several decades. In their suits, the
plaintiffs
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
have
named as defendants, among others, many manufacturers, distributors and
installers of numerous types of equipment or products that allegedly contained
asbestos.
The
Company believes that the claims against it are without merit. The
Company has never been a producer, manufacturer or processor of asbestos
fibers. Any component within a Company product which may have
contained asbestos would have been purchased from a supplier. Based
on scientific and medical evidence, the Company believes that any asbestos
exposure arising from normal use of any Company product never presented any
harmful levels of airborne asbestos exposure, and moreover, the type of asbestos
contained in any component that was used in those products was protectively
encapsulated in other materials and is not associated with the types of injuries
alleged in the pending suits. Finally, in most of the depositions
taken of plaintiffs to date in the litigation against the Company, plaintiffs
have failed to specifically identify any Company products as the source of
their
asbestos exposure.
The
majority of the asbestos complaints pending against the Company have been filed
in New York. Almost all of the New York complaints contain a standard
claim for damages of $20 million or $25 million against the approximately 90
defendants, regardless of the individual plaintiff’s alleged medical condition,
and without specifically identifying any Company product as the source of
plaintiff’s asbestos exposure.
As
of
September 30, 2007, there are 26,376 pending asbestos personal injury claims
filed against the Company. Of these cases, 25,914 were pending in the
New York Supreme Court (a trial court) for New York County in New York
State. The other claims, totaling 462, are filed in various counties
in a number of state courts, and in certain Federal District Courts (including
New York), and those complaints generally assert lesser amounts of damages
than
the New York State court cases or do not state any amount claimed.
As
of
September 30, 2007, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in 17,343 cases.
In
view
of the persistence of asbestos litigation nationwide, which has not yet been
sufficiently addressed either politically or legally, the Company expects to
continue to receive additional claims. However, there have been
developments during the past several years, both by certain state legislatures
and by certain state courts, which could favorably affect the Company’s ability
to defend these asbestos claims in those jurisdictions. These
developments include procedural changes, docketing changes, proof of damage
requirements and other changes that require plaintiffs to follow specific
procedures in bringing their claims and to show proof of damages before they
can
proceed with their claim. An example is the action taken by the New
York Supreme Court, which is responsible for managing all asbestos cases pending
within New York County in the State of New York. This Court issued an
order in December 2002 that created a Deferred or Inactive Docket for all
pending and future asbestos claims filed by plaintiffs who cannot demonstrate
that they have a malignant condition or discernable physical impairment, and
an
Active or In Extremis Docket for plaintiffs who are able to show such medical
condition. As a result of this order, the majority of the asbestos
cases filed against the Company in New York County have been moved to the
Inactive Docket until such time as the plaintiff can show that they have
incurred a physical impairment. As of September 30, 2007, the Company
has been listed as a defendant in 298 Active or In Extremis asbestos cases
in
New York County. The Court’s Order has been challenged by
plaintiffs.
The
Company’s insurance carrier has paid all legal and settlement costs and expenses
relating to the asbestos litigation to date. The Company has
liability insurance coverage available under various primary and excess policies
that the Company believes will be available, if necessary, to substantially
cover any liability that might ultimately be incurred on these
claims.
The
Company intends to continue its practice of vigorously defending these cases
as
they are listed for trial. It is not possible to predict the ultimate
outcome of asbestos-related lawsuits, claims and proceedings due to the
unpredictable nature of personal injury litigation. Despite this
uncertainty, and although results of operations and cash flows for a given
period could be adversely affected by asbestos-related lawsuits, claims and
proceedings, management believes that the ultimate outcome of these cases will
not have a material adverse impact on the Company’s financial condition, results
of operations or cash flows.
The
Company is subject to various other claims and legal proceedings covering a
wide
range of matters that arose in the ordinary course of business. In
the opinion of management, all such matters are adequately covered by insurance
or by accruals, and if not so covered, are without merit or are of such kind,
or
involve such amounts, as would not have a material adverse impact on the
financial position, results of operations or cash flows of the
Company.
Insurance
liabilities are recorded in accordance with SFAS 5, “Accounting for
Contingencies.” Insurance reserves have been estimated based
primarily upon actuarial calculations and reflect the undiscounted estimated
liabilities for ultimate
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
losses
including claims incurred but not reported. Inherent in these
estimates are assumptions which are based on the Company’s history of claims and
losses, a detailed analysis of existing claims with respect to potential value,
and current legal and legislative trends. If actual claims differ
from those projected by management, changes (either increases or decreases)
to
insurance reserves may be required and would be recorded through income in
the
period the change was determined. When a recognized liability is
covered by third-party insurance, the Company records an insurance claim
receivable to reflect the covered liability. See Note 1, “Summary of
Significant Accounting Policies,” of the Company’s Form 10-K for the year ended
December 31, 2006 for additional information on Accrued Insurance and Loss
Reserves.
J. Reconciliation
of Basic and Diluted Shares
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30
|
|
|
September
30
|
|
|
(Amounts
in thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
70,253
|
|
|
$ |
54,185
|
|
|
$ |
192,736
|
|
|
$ |
139,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding used to compute basic earnings
per
common share
|
|
|
84,189
|
|
|
|
84,019
|
|
|
|
84,128
|
|
|
|
83,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of stock-based compensation
|
|
|
573
|
|
|
|
486
|
|
|
|
554
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used to compute dilutive effect of stock-based
compensation
|
|
|
84,762
|
|
|
|
84,505
|
|
|
|
84,682
|
|
|
|
84,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share from continuing operations
|
|
$ |
0.83
|
|
|
$ |
0.64
|
|
|
$ |
2.29
|
|
|
$ |
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share from continuing operations
|
|
$ |
0.83
|
|
|
$ |
0.64
|
|
|
$ |
2.28
|
|
|
$ |
1.66
|
|
All
outstanding stock options and restricted stock units were included in the
computation of diluted earnings per share at September 30, 2007 and
2006.
K. Employee
Benefit Plans
|
|
|
Three
Months Ended
September
30
|
|
|
Defined
Benefit Pension Expense (Income)
|
|
U.
S. Plans
|
|
|
International
Plans
|
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
752
|
|
|
$ |
921
|
|
|
$ |
2,218
|
|
|
$ |
2,303
|
|
|
Interest
cost
|
|
|
3,872
|
|
|
|
3,730
|
|
|
|
12,664
|
|
|
|
11,017
|
|
|
Expected
return on plan
assets
|
|
|
(5,836 |
) |
|
|
(4,986 |
) |
|
|
(15,512 |
) |
|
|
(13,210 |
) |
|
Recognized
prior service
costs
|
|
|
170
|
|
|
|
186
|
|
|
|
241
|
|
|
|
316
|
|
|
Recognized
losses
|
|
|
306
|
|
|
|
737
|
|
|
|
3,872
|
|
|
|
3,304
|
|
|
Amortization
of transition
liability (asset)
|
|
|
-
|
|
|
|
(90 |
) |
|
|
7
|
|
|
|
9
|
|
|
Curtailment/settlement
gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13 |
) |
|
Defined
benefit pension expense
|
|
$ |
(736 |
) |
|
$ |
498
|
|
|
$ |
3,490
|
|
|
$ |
3,726
|
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
|
|
|
Nine
Months Ended
September
30
|
|
|
Defined
Benefit Pension Expense (Income)
|
|
U.
S. Plans
|
|
|
International
Plans
|
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
2,278
|
|
|
$ |
2,764
|
|
|
$ |
6,409
|
|
|
$ |
6,696
|
|
|
Interest
cost
|
|
|
11,605
|
|
|
|
11,190
|
|
|
|
37,227
|
|
|
|
32,035
|
|
|
Expected
return on plan
assets
|
|
|
(16,971 |
) |
|
|
(14,957 |
) |
|
|
(45,618 |
) |
|
|
(38,437 |
) |
|
Recognized
prior service
costs
|
|
|
595
|
|
|
|
557
|
|
|
|
700
|
|
|
|
919
|
|
|
Recognized
losses
|
|
|
1,004
|
|
|
|
2,211
|
|
|
|
11,471
|
|
|
|
9,588
|
|
|
Amortization
of transition
liability (asset)
|
|
|
-
|
|
|
|
(271 |
) |
|
|
20
|
|
|
|
27
|
|
|
Curtailment/settlement
loss
|
|
|
2,091
|
|
|
|
78
|
|
|
|
-
|
|
|
|
223
|
|
|
Defined
benefit pension expense
|
|
$ |
602
|
|
|
$ |
1,572
|
|
|
$ |
10,209
|
|
|
$ |
11,051
|
|
Defined
benefit pension expense in the third quarter and nine months ended September
30,
2007 was $1.5 million and $1.8 million, respectively, lower than the comparable
2006 periods. The decreases relate primarily to higher plan asset
bases in 2007 resulting from cash contributions and significant returns on
plan
assets in 2006. The decreases were partially offset by curtailment
losses in the U.S. in the Gas Technologies Segment in the first quarter of
2007
as a result of the decision to sell the business, and in the railway track
maintenance services and equipment business in the second quarter of 2007,
as a
result of a plan change.
U.S.
defined benefit pension expense in the third quarter and nine months ended
September 30, 2007 includes $0.3 million and $2.5 million, respectively, for
the
Gas Technologies Segment which has been reclassified to Discontinued
Operations. Of the $2.5 million in expense for the nine months ended
September 30, 2007, $1.5 million relates to a one-time curtailment loss in
the
first quarter of 2007. Defined benefit expense in the third quarter
and nine months ended September 30, 2006 includes $0.5 million and $1.4 million,
respectively, for the Gas Technologies Segment.
In
the
quarter ended September 30, 2007, the Company contributed $1.9 million and
$5.8
million to the U.S. and international defined benefit pension plans,
respectively. In the nine months ended September 30, 2007, the
Company contributed $2.8 million and $17.8 million to the U.S. and international
defined benefit pension plans, respectively. During the fourth
quarter of 2007, the Company currently anticipates contributing an additional
$17.4 million to international plans, of which $10.1 million will be voluntary
contributions. No additional contributions are anticipated for the
U.S. plans.
Contributions
to multiemployer pension plans during the third quarter and nine months ended
September 30, 2007 were $5.3 million and $16.9 million,
respectively. Contributions to defined contribution plans during the
third quarter and nine months ended September 30, 2007 were $5.9 million and
$16.0 million, respectively.
|
|
|
Three
Months Ended
|
|
|
Postretirement
Benefits Expense (Income)
|
|
September
30
|
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1
|
|
|
$ |
1
|
|
|
Interest
cost
|
|
|
46
|
|
|
|
46
|
|
|
Recognized
prior service
costs
|
|
|
1
|
|
|
|
1
|
|
|
Recognized
gains
|
|
|
(32 |
) |
|
|
(9 |
) |
|
Curtailment
gains
|
|
|
-
|
|
|
|
(20 |
) |
|
Postretirement
benefits expense
|
|
$ |
16
|
|
|
$ |
19
|
|
|
|
|
Nine
Months Ended
|
|
|
Postretirement
Benefits Expense (Income)
|
|
September
30
|
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
3
|
|
|
$ |
4
|
|
|
Interest
cost
|
|
|
136
|
|
|
|
140
|
|
|
Recognized
prior service
costs
|
|
|
2
|
|
|
|
2
|
|
|
Recognized
gains
|
|
|
(95 |
) |
|
|
(29 |
) |
|
Curtailment
gains
|
|
|
-
|
|
|
|
(20 |
) |
|
Postretirement
benefits expense
|
|
$ |
46
|
|
|
$ |
97
|
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
In
the
quarter ended September 30, 2007, the Company contributed $57 thousand to
the
postretirement plans. For the nine months ended September 30, 2007,
the Company contributed $195 thousand to the postretirement plans and
anticipates contributing approximately $109 thousand during the remainder
of
2007.
L. New
Financial Accounting Standards Issued
FASB
Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109” (“FIN 48”)
In
July
2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty
in
income taxes recognized in an entity’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” It prescribes a recognition
threshold and measurement attribute for financial statement recognition and
disclosure of tax positions taken or expected to be taken on a tax return.
The provisions of FIN 48 are required to be applied to all tax positions upon
initial adoption with any cumulative effect adjustment to be recognized as
an
adjustment to retained earnings. FIN 48 is effective for fiscal
periods beginning after December 15, 2006 (January 1, 2007 for the
Company). The Company implemented FIN 48 effective January 1, 2007
and recognized a cumulative effect reduction to 2007 beginning retained earnings
of $0.5 million.
SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”)
In
September 2006, the FASB issued SFAS 157 to provide a single definition of
fair
value, establish a framework for measuring fair value in U.S. generally accepted
accounting principles (“GAAP”), and expand the disclosure requirements regarding
fair value measurements. SFAS 157 is applicable in the application of
other accounting pronouncements that require or permit fair value measurements,
but does not require new fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 (January 1, 2008
for the Company), with limited retrospective application
required. The Company is currently evaluating the requirements of
SFAS 157 and has not yet determined the impact on the consolidated financial
statements.
SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”)
In
February 2007, the FASB issued SFAS 159, which permits all entities to choose
to
measure eligible items at fair value at specified election
dates. Unrealized gains and losses on items for which the fair value
option has been elected will be reported in earnings at each subsequent
reporting date. The fair value option may be applied financial
instrument by financial instrument (with limited exceptions), is generally
irrevocable, and must be applied to the entire financial
instrument. SFAS 159 is effective for fiscal years that begin after
November 15, 2007 (January 1, 2008 for the Company). The Company is
currently evaluating the requirements of SFAS 159, and has not yet determined
the impact on the consolidated financial statements.
M. Derivative
Instruments
The
Company may periodically use derivative instruments to hedge cash flows
associated with selling price exposure to certain commodities, as well as cash
flows related to foreign currency fluctuations. The Company’s commodity
derivative activities are subject to the management, direction and control
of
the Company’s Risk Management Committee (“the Committee”). The Committee
approves the use of all commodity derivative instruments. During the first
quarter of 2007, the Company executed fixed price swap agreements to hedge
cash
flows associated with the selling price exposure to certain commodities.
During the third quarter of 2007, the Company entered into a cashless collars
(purchased put options and written call options) also designed to hedge cash
flows associated with the selling price exposure to certain
commodities. The unsecured contracts outstanding at September 30,
2007 mature monthly through November 2008 and are with major financial
institutions.
Based
on
the requirements of SFAS No. 133, “Accounting for Derivative Instruments and
hedging Activities” (“SFAS 133”), these contracts qualified as cash flow hedges
for the quarter ending September 30, 2007. During the first and second
quarters of 2007, these contracts did not qualify as cash flow hedges under
SFAS
133. The following table summarizes the open positions as of
September 30, 2007:
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
|
Open
Commodity Cash Flow Hedges as of September 30,
2007
|
|
|
(In
thousands)
|
|
|
|
|
Amount
Recognized in
|
|
|
Hedge
Type
|
|
Notional
Value (a)
|
|
|
Operating
Income (Loss)
|
|
|
Other
Comprehensive Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap
Contracts
|
|
$ |
10,162
|
|
|
$ |
1,043 |
(b) |
|
$ |
551 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless
Collars
|
|
|
6,048
|
|
|
|
(214 |
) |
|
|
(132 |
)(c) |
(a)
|
Notional
value is equal to the hedged volume multiplied by the strike price
of the
derivative.
|
(b)
|
Represents
the cumulative impact on earnings since inception of the
contracts. This includes $503 thousand through June 30, 2007
when the contracts did not qualify as cash flow hedges under SFAS
133 and
$540 thousand of hedge ineffectiveness in the third quarter of
2007.
|
(c)
|
Approximately
$847 thousand of income related to the swaps and $152 thousand of
expense
related to the collars will be classified to earnings over the next
twelve
months.
|
Although
earnings volatility may occur between fiscal quarters if the derivatives do
not
qualify as cash flow hedges under SFAS 133, the economic substance of the
derivatives provides more predictable cash flows by reducing the Company’s
exposure to the commodity price fluctuations.
See
Note
13, “Financial Instruments,” of the Company’s Form 10-K for the year ended
December 31, 2006 for additional information on derivative instruments and
hedging activities.
N. Capital
Stock
The
authorized capital stock of the Company consists of 150,000,000 shares of common
stock and 4,000,000 shares of preferred stock, both having a par value of $1.25
per share. The preferred stock is issuable in series with terms as
fixed by the Board of Directors (the “Board”). None of the preferred
stock has been issued. On September 25, 2007, the Board approved a
revised Preferred Stock Purchase Rights Agreement (the
“Agreement”). Under the Agreement, the Board authorized and declared
a dividend distribution to stockholders of record on October 9, 2007, of one
right for each share of common stock outstanding on the record
date. The rights may only be exercised if, among other things and
with certain exceptions, a person or group has acquired 15% or more of the
Company's common stock without the prior approval of the Board. Each
right entitles the holder to purchase 1/100th share of Harsco Series A Junior
Participating Cumulative Preferred Stock at an exercise price of
$230. Once the rights become exercisable, the holder of a right will
be entitled, upon payment of the exercise price, to purchase a number of shares
of common stock calculated to have a value of two times the exercise price
of
the right. The rights, which expire on October 9, 2017, do not have
voting power, and may be redeemed by the Company at a price of $0.001 per right
at any time until the 10th business day following public announcement that
a
person or group has accumulated 15% or more of the Company's common
stock. The Agreement also includes an exchange feature. At
September 30, 2007, 841,973 shares of $1.25 par value preferred stock were
reserved for issuance upon exercise of the rights.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the accompanying
unaudited financial statements as well as the Company’s annual Form 10-K for the
year ended December 31, 2006, which included additional information about the
Company’s critical accounting policies, contractual obligations, practices and
transactions that support the financial results, and provided a more
comprehensive summary of the Company’s outlook, trends and strategies for 2007
and beyond.
Forward-Looking
Statements
The
nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
the
Company provides the following cautionary remarks regarding important factors
which, among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include
statements about our management confidence and strategies for performance;
expectations for new and existing products, technologies, and opportunities;
and
expectations regarding growth, sales, cash flows, earnings and
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Economic
Value Added (EVA®). These statements can be identified by the use of
such terms as “may,” “could,” “expect,” “anticipate,” “intend,” “believe,” or
other comparable terms.
Factors
which could cause results to differ include, but are not limited
to: (1) changes in the worldwide business environment in which the
Company operates, including general economic conditions; (2) changes in currency
exchange rates, certain commodity prices and costs, interest rates and capital
costs; (3) changes in the performance of stock and bond markets that could
affect, among other things, the valuation of the assets in the Company’s pension
plans and the accounting for pension assets, liabilities and expenses; (4)
changes in governmental laws and regulations, including environmental, taxes
and
import tariff standards; (5) market and competitive changes, including pricing
pressures, market demand and acceptance for new products, services and
technologies; (6) unforeseen business disruptions in one or more of the many
countries in which the Company operates due to political instability, civil
disobedience, armed hostilities or other calamities; (7) the seasonal nature
of
our business; (8) the successful integration of the Company’s strategic
acquisitions; and (9) other risk factors listed from time to time in the
Company's SEC reports. A further discussion of these, along with
other potential factors, can be found in Part II, Item 1A, “Risk Factors,” of
this Form 10-Q. The Company cautions that these factors may not be
exhaustive and that many of these factors are beyond the Company’s ability to
control or predict. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The Company
undertakes no duty to update forward-looking statements.
Executive
Overview
The
Company’s record performance in the third quarter and first nine months of 2007
reflected the continued execution of the Company’s strategy of growth through
increased international diversity and a balanced, industrial services-based
portfolio, augmented by selective strategic acquisitions. The third
quarter results were led by the Minerals & Rail Technologies, Services and
Products (“all other”) Category and the Access Services Segment.
The
Company’s third quarter 2007 revenues from continuing operations were $927.4
million. This is an increase of $154.1 million or 20% over the third
quarter of 2006. Income from continuing operations was $70.3 million
compared with $54.2 million in 2006, an increase of 30%. Diluted
earnings per share from continuing operations were $0.83, a 30% increase over
2006.
Revenues
for the first nine months of 2007 were a record $2.7 billion. This is
an increase of $492.2 million or 22% over the first nine months of
2006. Income from continuing operations was a record $192.7 million,
compared with $140.0 million in the first nine months of 2006, a 38%
increase. Diluted earnings per share from continuing operations were
$2.28, a 37% increase from the first nine months of 2006.
Both
the
third quarter and first nine months of 2007 results benefited from continued
improved performance in the Access Services Segment and the February 1, 2007
acquisition of Excell Minerals. The improved performance in the
Access Services Segment was due to continued strength in the Company’s worldwide
non-residential and infrastructure construction and industrial services markets,
and positive returns from the Company’s increased investment in highly
engineered formwork rental systems. The Excell Minerals acquisition
was accretive for both the third quarter and first nine months of
2007.
Overall
global markets remain strong and the Company has a number of expansion
opportunities to pursue its prudent acquisition strategy of seeking further
accretive bolt-on acquisitions, as well as organic investments in its industrial
services platforms. The Company also expects continued strength in
its operations for the remainder of 2007 and into 2008, particularly from the
Access Services Segment, as well as the Minerals & Rail Technologies,
Services and Products (“all other”) Category. In addition, the
Company expects improvement during 2008 from the Mill Services Segment, as
global steel production levels begin to increase, new contracts are signed
and
the business margin improvement plan is executed.
During
the third quarter of 2007, the Company had record net cash provided by operating
activities of $175.7 million, an 86% increase from the $94.6 million achieved
in
the third quarter of 2006. For the first nine months of 2007, the
Company had record net cash provided by operating activities of $372.3 million,
compared with $278.9 million for the first nine months of 2006, a 33%
increase. The Company expects to achieve record cash from operations
for the full year 2007, exceeding 2006’s record of $409 million. The
Company’s cash flows are further discussed in the Liquidity and Capital
Resources section.
During
the third quarter of 2007, the Company’s value-based management system continued
to deliver results by creating increased economic value. Significant
improvement in Economic Value Added (“EVA®”) was achieved in the first nine
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
months
of
2007 and the Company’s return on invested capital improved 140 basis points from
the comparable 2006 period. The Company’s value-based management
system is more fully described in the 2006 Annual Report.
During
the first quarter of 2007, the Company’s Board of Directors approved the
divestiture of the Gas Technologies manufacturing business, which is expected
to
occur in the fourth quarter of 2007. Also, effective in the first
quarter of 2007, there was a two-for-one stock split for which one additional
share of common stock was issued to stockholders as of March 26,
2007.
Segment
Overview
The
Access Services Segment’s revenues in the third quarter of 2007 were $351.3
million compared with $278.6 million in the third quarter of 2006, a 26%
increase. Operating income increased by 36% to $48.1 million from
$35.4 million in the third quarter of 2006. Operating margins
for the Segment improved by 100 basis points to 13.7% from 12.7% in the third
quarter of 2006. In comparison with the first nine months of 2006,
this Segment achieved period-over-period revenue growth of $254.3 million or
33%, and operating income growth of $43.5 million or 49%. Operating
margins for the first nine months of 2007 improved by 140 basis points to 12.9%
from 11.5% for the first nine months of 2006. The record performance
in revenues, operating income and operating margins for the third quarter and
first nine months of 2007 was due principally to continued strength in the
Company’s worldwide non-residential and infrastructure construction and
industrial services markets, particularly in Europe and North
America. This Segment accounted for 38% of the Company’s revenues and
38% of the operating income for the third quarter and first nine months of
2007,
respectively.
Revenues
for the third quarter of 2007 for the Mill Services Segment were $375.9 million
compared with $345.9 million in the third quarter of 2006, a 9%
increase. Operating income decreased by 8% to $34.5 million from
$37.3 million in the third quarter of 2006, and operating margins decreased
by
160 basis points to 9.2% from 10.8%. In comparison with the first
nine months of 2006, this Segment’s revenue increased by 10% to $1,117.5
million. Operating income in the first nine months of 2007 decreased
by 5% to $103.4 million from $109.5 million in the first nine months of 2006,
and operating margins decreased 150 basis points to 9.3% from
10.8%. Performance was negatively impacted by higher operating and
maintenance costs and lower steel production in certain regions, particularly
North America. This Segment accounted for 40% and 41% of the
Company’s revenues and 28% and 30% of the operating income for the third quarter
and first nine months of 2007, respectively.
The
Minerals & Rail Technologies, Services and Products (“all other”) Category’s
revenues in the third quarter of 2007 were $200.2 million compared with $148.8
million in the third quarter of 2006, a 35% increase. Operating
income increased by 68% to $42.3 million, from $25.2 million in the third
quarter of 2006. For the third quarter of 2007, operating margins
increased 410 basis points to 21.1% from 17.0% in the third quarter of
2006. For the first nine months of 2007, operating margins increased
530 basis points to 19.8% from 14.5% in the first nine months of
2006. The February 1, 2007 acquisition of Excell Minerals contributed
to this Category’s improved performance in the third quarter and first nine
months of 2007. Four of the other five businesses contributed higher
revenues, and all five businesses contributed higher operating income in the
third quarter and first nine months of 2007 compared with the third quarter
and
first nine months of 2006. This Category accounted for 22% and 21% of
the Company’s revenues and 34% and 32% of the operating income for the third
quarter and first nine months of 2007, respectively.
In
comparison to the third quarter of 2006, the effect of foreign currency
translation for the Company increased third quarter 2007 sales and pre-tax
income from continuing operations by $40.8 million and $4.4 million,
respectively. For the first nine months of 2007, the effect of
foreign currency translation increased sales by $112.8 million and pre-tax
income from continuing operations by $10.4 million compared with the same period
in 2006.
Outlook
Overview
The
Company’s operations span several industries and products as discussed in Part
I, Item 1, “Business,” of the Company’s Form 10-K for the year ended December
31, 2006. On a macro basis, the Company is affected by
non-residential and infrastructure construction and industrial maintenance
and
capital improvement activities; worldwide steel mill production and capacity
utilization; industrial production volume; and the general business trend
towards the outsourcing of services. The overall outlook for 2007 and
2008 continues to be positive for these business drivers.
Both
international and domestic Access Services activity remains
strong. Operating performance in 2007 for this Segment has benefited,
and is expected to continue to benefit, from increased non-residential and
infrastructure construction spending and industrial services activity in the
Company’s major markets; selective strategic investments and acquisitions in
existing and new markets and expansion of current product lines; further market
penetration from new products; product cross-selling opportunities among the
markets served by the three Access Services divisions; and enterprise business
optimization opportunities including new technology applications, consolidated
procurement, logistics
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
and
continuous process improvement initiatives. Further global expansion
and market share gains are also expected from this Segment.
The
Company expects global steel production and consumption to increase at a
sustainable pace into 2008, which would generally have a favorable effect on
this Segment’s revenues. In addition, new contract
signings and start-ups are expected to have a positive effect on results in
the
near term. The Company continues to engage in enterprise business
optimization initiatives designed to improve operating results and
margins. However, the Company may experience higher operating costs,
such as maintenance and energy that could have a negative impact on operating
margins, to the extent these costs cannot be passed to customers.
The
outlook for the Minerals & Rail Technologies, Services and Products (“all
other”) Category remains positive. Excell Minerals is expected to
continue to be accretive to earnings in the fourth quarter of 2007 and in 2008,
as full integration into the Company continues to occur. Likewise,
the railway track maintenance services and equipment business should continue
to
see improved year-over-year operating performance in 2007’s remaining quarter,
as well as longer term. Contract opportunities for the business
remain high (such as the signing of a significant order from China in the second
quarter of 2007), which also provides confidence to the longer-term
outlook. The remaining businesses within this group are also expected
to continue to operate at their current high levels of operating effectiveness
and expand operations into new markets.
The
stable or improved market conditions for most of the Company’s services and
products and the significant investments made recently for acquisitions and
growth-related capital expenditures provide the base for achieving the Company’s
stated growth objectives in diluted earnings per share from continuing
operations and net cash provided by operating activities. The record
performance for revenue and operating income achieved in the first nine months
of 2007 provides a solid foundation towards achieving the full-year objectives
and the momentum for continued improvement in 2008.
|
Revenues
by Region
|
|
|
|
|
Total
Revenues
Three
Months Ended
September
30
|
|
|
Percentage
Growth From
2006
to 2007
|
|
|
(Dollars
in millions)
|
|
2007
|
|
|
2006
|
|
|
Volume
|
|
|
Currency
|
|
|
Total
|
|
|
Europe
|
|
$ |
469.5
|
|
|
$ |
401.9
|
|
|
|
8.7 |
% |
|
|
8.1 |
% |
|
|
16.8 |
% |
|
North
America
|
|
|
320.6
|
|
|
|
262.7
|
|
|
|
21.5
|
|
|
|
0.5
|
|
|
|
22.0
|
|
|
Latin
America
|
|
|
55.2
|
|
|
|
41.5
|
|
|
|
24.9
|
|
|
|
8.0
|
|
|
|
32.9
|
|
|
Middle
East and Africa
|
|
|
46.0
|
|
|
|
39.6
|
|
|
|
15.5
|
|
|
|
0.6
|
|
|
|
16.1
|
|
|
Asia/Pacific
|
|
|
36.1
|
|
|
|
27.6
|
|
|
|
18.7
|
|
|
|
12.1
|
|
|
|
30.8
|
|
|
Total
|
|
$ |
927.4
|
|
|
$ |
773.3
|
|
|
|
14.6 |
% |
|
|
5.3 |
% |
|
|
19.9 |
% |
|
Revenues
by Region
|
|
|
|
|
Total
Revenues
Nine
Months Ended
September
30
|
|
|
Percentage
Growth From
2006
to 2007
|
|
|
(Dollars
in millions)
|
|
2007
|
|
|
2006
|
|
|
Volume
|
|
|
Currency
|
|
|
Total
|
|
|
Europe
|
|
$ |
1,388.5
|
|
|
$ |
1,137.5
|
|
|
|
13.4 |
% |
|
|
8.7 |
% |
|
|
22.1 |
% |
|
North
America
|
|
|
934.3
|
|
|
|
762.9
|
|
|
|
22.3
|
|
|
|
0.2
|
|
|
|
22.5
|
|
|
Latin
America
|
|
|
153.3
|
|
|
|
123.0
|
|
|
|
19.1
|
|
|
|
5.5
|
|
|
|
24.6
|
|
|
Middle
East and Africa
|
|
|
138.9
|
|
|
|
119.1
|
|
|
|
19.0
|
|
|
|
(2.3 |
) |
|
|
16.7
|
|
|
Asia/Pacific
|
|
|
98.5
|
|
|
|
78.9
|
|
|
|
14.3
|
|
|
|
10.5
|
|
|
|
24.8
|
|
|
Total
|
|
$ |
2,713.5
|
|
|
$ |
2,221.4
|
|
|
|
17.1 |
% |
|
|
5.1 |
% |
|
|
22.2 |
% |
2007
Highlights
The
following significant items affected the Company overall during the third
quarter and first nine months of 2007, in comparison with the third quarter
and
first nine months of 2006:
Company
Wide:
·
|
Continued
strong worldwide economic activity, as well as the strong earnings
performance of the Excell Minerals acquisition, benefited the Company
in
the third quarter and first nine months of 2007. This included
increased access
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
|
equipment
services, especially in North America and Europe; increased global
demand
for railway track maintenance services and equipment; and increased
demand
for air-cooled heat exchangers and industrial grating
products.
|
·
|
During
the first nine months of 2007, international sales and operating
income
were 68% and 66%, respectively, of total sales and operating
income. This compares with the first nine months of 2006 levels
of 68% of sales and 71% of operating income. The Excell
Minerals acquisition, based principally in the U.S., and the performance
of the U.S. Access Services business have increased the percentage
of
domestic operating income in 2007.
|
Access
Services Segment:
|
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
|
(Dollars
in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$ |
351.3
|
|
|
$ |
278.6
|
|
|
$ |
1,028.4
|
|
|
$ |
774.1
|
|
|
Operating
income
|
|
|
48.1
|
|
|
|
35.4
|
|
|
|
132.4
|
|
|
|
88.9
|
|
|
Operating
margin percent
|
|
|
13.7 |
% |
|
|
12.7 |
% |
|
|
12.9 |
% |
|
|
11.5 |
% |
|
Access
Services Segment – Significant Impacts on
Revenues
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
|
(Dollars
in millions)
|
|
|
|
|
Percent
(a)
|
|
|
|
|
|
Percent
(a)
|
|
|
Revenues
– 2006
|
|
$ |
278.6
|
|
|
|
-
|
|
|
$ |
774.1
|
|
|
|
-
|
|
|
Net
increased volume and new business
|
|
|
53.0
|
|
|
|
19 |
% |
|
|
154.4
|
|
|
|
20 |
% |
|
Acquisitions
|
|
|
2.4
|
|
|
|
1
|
|
|
|
51.8
|
|
|
|
7
|
|
|
Effect
of foreign currency translation
|
|
|
17.3
|
|
|
|
6
|
|
|
|
48.0
|
|
|
|
6
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
Revenues
– 2007
|
|
$ |
351.3
|
|
|
|
|
|
|
$ |
1,028.4
|
|
|
|
|
|
(a) Percent
change from 2006 Segment revenues.
Access
Services Segment – Significant Impacts on Operating
Income:
·
|
In
the third quarter and first nine months of 2007, the international
access
services business, within Eastern Europe in particular, continued
to
improve due to increased non-residential and infrastructure construction
spending. The Company has also benefited from its recent rental
equipment capital investments made in these markets. Equipment
rentals, particularly in the construction sector, are the highest
margin
revenue source in this Segment.
|
·
|
The
North American non-residential construction and industrial services
markets continued strong in the third quarter and first nine months
of
2007. This had a positive effect on volume which caused overall
margins and operating income in North America to
improve.
|
·
|
The
2006 MyATH (Chile) and Cleton (Northern Europe) acquisitions were
accretive to earnings in the third quarter and first nine months
of
2007.
|
·
|
The
effect of foreign currency translation in the third quarter and first
nine
months of 2007 increased operating income for this Segment by $2.3
million
and $4.9 million, respectively, compared with the third quarter and
first
nine months of 2006.
|
Mill
Services Segment:
|
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
|
(Dollars
in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$ |
375.9
|
|
|
$ |
345.9
|
|
|
$ |
1,117.5
|
|
|
$ |
1,016.4
|
|
|
Operating
income
|
|
|
34.5
|
|
|
|
37.3
|
|
|
|
103.4
|
|
|
|
109.5
|
|
|
Operating
margin percent
|
|
|
9.2 |
% |
|
|
10.8 |
% |
|
|
9.3 |
% |
|
|
10.8 |
% |
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
|
Mill
Services Segment – Significant Impacts on
Revenues
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
|
(Dollars
in millions)
|
|
|
|
|
Percent
(a)
|
|
|
|
|
|
Percent
(a)
|
|
|
Revenues
– 2006
|
|
$ |
345.9
|
|
|
|
-
|
|
|
$ |
1,016.4
|
|
|
|
-
|
|
|
Effect
of foreign currency translation
|
|
|
22.5
|
|
|
|
7 |
% |
|
|
61.2
|
|
|
|
6 |
% |
|
Acquisitions
|
|
|
10.2
|
|
|
|
3
|
|
|
|
20.1
|
|
|
|
2
|
|
|
Increased/(decreased)
volume and new business
|
|
|
(2.6 |
) |
|
|
(1 |
) |
|
|
19.8
|
|
|
|
2
|
|
|
Other
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Revenues
– 2007
|
|
$ |
375.9
|
|
|
|
|
|
|
$ |
1,117.5
|
|
|
|
|
|
(a) Percent
change from 2006 Segment revenues.
Mill
Services Segment – Significant Impacts on Operating
Income:
·
|
Operating
income for the third quarter and first nine months of 2007 was negatively
impacted by increased operating and maintenance expenses, unplanned
outages at a number of mills, and lower steel production in certain
regions.
|
·
|
The
2007 AMSI and Performix acquisitions were accretive to earnings in
the
third quarter and first nine months of
2007.
|
·
|
Foreign
currency translation in the third quarter and first nine months of
2007
increased operating income for this Segment by $2.6 million and $6.6
million, respectively, compared with the third quarter and first
nine
months of 2006.
|
Minerals
& Rail Technologies, Services and Products (“all other”)
Category:
|
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
|
(Dollars
in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$ |
200.2
|
|
|
$ |
148.8
|
|
|
$ |
567.6
|
|
|
$ |
430.9
|
|
|
Operating
income
|
|
|
42.3
|
|
|
|
25.2
|
|
|
|
112.2
|
|
|
|
62.7
|
|
|
Operating
margin percent
|
|
|
21.1 |
% |
|
|
17.0 |
% |
|
|
19.8 |
% |
|
|
14.5 |
% |
|
Minerals
& Rail Technologies, Services and Products (“all other”) Category –
Significant Impacts on Revenues
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
|
(Dollars
in millions)
|
|
|
|
|
Percent
(a)
|
|
|
|
|
|
Percent
(a)
|
|
|
Revenues
– 2006
|
|
$ |
148.8
|
|
|
|
-
|
|
|
$ |
430.9
|
|
|
|
-
|
|
|
Acquisitions
|
|
|
29.2
|
|
|
|
20 |
% |
|
|
90.8
|
|
|
|
21 |
% |
|
Air-cooled
heat exchangers
|
|
|
9.6
|
|
|
|
6
|
|
|
|
20.5
|
|
|
|
5
|
|
|
Industrial
grating products
|
|
|
8.0
|
|
|
|
5
|
|
|
|
19.9
|
|
|
|
5
|
|
|
Railway
track maintenance services and equipment
|
|
|
3.5
|
|
|
|
2
|
|
|
|
7.6
|
|
|
|
2
|
|
|
Effect
of foreign currency translation
|
|
|
1.0
|
|
|
|
1
|
|
|
|
3.6
|
|
|
|
1
|
|
|
Boiler
and process equipment
|
|
|
0.4
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
Roofing
granules and abrasives
|
|
|
(0.4 |
) |
|
|
-
|
|
|
|
(5.9 |
) |
|
|
(1 |
) |
|
Other
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
Revenues
– 2007
|
|
$ |
200.2
|
|
|
|
|
|
|
$ |
567.6
|
|
|
|
|
|
(a) Percent
change from 2006 Category revenues.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Minerals
& Rail Technologies, Services and Products (“all other”) Category –
Significant Impacts on Operating Income:
·
|
The
Excell Minerals acquisition was accretive to the Category’s performance in
the third quarter and first nine months of 2007. During the
first nine months of 2007, Excell Minerals had strong customer demand
for
the division’s high-value materials as well as favorable market
pricing.
|
·
|
Operating
income of the air-cooled heat exchangers business continued to benefit
from increased volume resulting from a strong natural gas market
during
the third quarter and first nine months of
2007.
|
·
|
Increased
third quarter and first nine months 2007 operating income for the
industrial grating products business was due principally to strong
demand,
partially offset by higher material
costs.
|
·
|
The
railway track maintenance services and equipment business delivered
increased income in the third quarter and first nine months of 2007
compared with the third quarter and first nine months of 2006, due
to
increased volume and reduced operating expenses for contract services,
partially offset by lower income from equipment sales. This
business also benefited from a gain on the disposal of an asset in
the
third quarter of 2007.
|
·
|
Despite
lower volume for the roofing granules and abrasives business in the
third
quarter and first nine months of 2007, operating income increased
due to
price increases, which offset higher
costs.
|
·
|
Operating
income for the boiler and process equipment business was slightly
higher
in the third quarter and first nine months of 2007 compared with
the
comparable periods for 2006, due to increased equipment sales and
a
favorable product mix.
|
·
|
Foreign
currency translation in the first nine months of 2007 increased operating
income for this Category by $0.9 million, compared with the first
nine
months of 2006, although it did not significantly impact the third
quarter
of 2007.
|
Outlook,
Trends and Strategies
Looking
to the remainder of 2007 and beyond, the following significant items, trends
and
strategies are expected to affect the Company:
Company
Wide:
·
|
The
Company will continue its disciplined focus on expanding all of its
industrial services businesses, with a particular emphasis on growing
the
Access Services Segment, especially in emerging economies and other
targeted markets. Growth is expected to be achieved through the
provision of additional services to existing customers, new contracts
in
both developed and emerging markets, and strategic acquisitions,
such as
the February 2007 acquisition of Excell Minerals and the August 2007
acquisition of Alexander Mill Services
International. Additionally, new higher-margin service and
sales opportunities in railway track maintenance services and equipment
will be pursued globally.
|
·
|
In
January 2007, the Company announced its intention to divest the Gas
Technologies manufacturing business. This decision is
consistent with the Company’s overall strategic focus on industrial
services businesses. The divestiture is expected to be
completed in the fourth quarter of
2007.
|
·
|
The
Company will continue to invest in selective strategic acquisitions
and
growth capital investments; however, management will continue to
be very
selective and disciplined in allocating capital, choosing projects
with
the highest Economic Value Added (“EVA®”)
potential.
|
·
|
The
Company will place a strong focus on corporate-wide expansion into
emerging economies in the coming years. More specifically, within
the next three to five years, the Company’s global growth strategies
include steady, targeted expansion in the Asia-Pacific,
Eastern Europe, Latin America, and Middle East and Africa to further
complement the Company’s already-strong presence throughout Europe and
North America. This strategy is expected to result in doubling the
Company’s presence in these markets to approximately 30% of total Company
revenues.
|
·
|
The
Company will continue to implement enterprise business optimization
initiatives across the Company to further enhance margins for most
businesses, especially the Mill Services Segment. These
initiatives include improved supply-chain and logistics management;
operating site and capital employed optimization; and added emphasis
on
global procurement.
|
·
|
The
Company expects strong cash flow from operating activities in 2007,
exceeding the record of $409 million achieved in 2006. This,
combined with the expected cash from the Gas Technologies Segment
divestiture, as well as other asset sales, will support both the
Company’s
growth initiatives and help reduce
debt.
|
·
|
The
continued growth of the Chinese steel industry, as well as other
Asian
emerging economies, could impact the Company in several
ways. Increased steel mill production in China, and in other
Asian countries, may provide additional service opportunities for
the Mill
Services Segment. However, increased Asian steel exports could
result in lower steel production in other parts of the world, affecting
the Company’s customer base. Additionally, continued increased
Chinese economic activity may result in increased commodity costs
in the
future, which may adversely affect the Company’s manufacturing
businesses. The potential impact of these risks is currently
unknown.
|
·
|
Volatility
in energy and commodity costs (e.g., fuel, natural gas, steel, etc.)
and
worldwide demand for these commodities could have an adverse impact
on the
Company’s operating costs and ability to obtain the necessary raw
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
|
materials. Cost
increases could result in reduced operating income for certain products,
to the extent that such costs cannot be passed on to
customers. The effect of continued Middle East armed
hostilities on the cost of fuel and commodities is currently unknown,
but
it could have a significant effect. However, increased
volatility in energy and commodity costs may provide additional service
opportunities for the Mill Services Segment and several businesses
in the
Minerals & Rail Technologies, Services and Products (“all other”)
Category as customers may tend to outsource more services to reduce
overall costs.
|
·
|
The
armed hostilities in the Middle East could also have a significant
effect
on the Company’s operations in the region. The potential impact
of this risk is currently unknown. This exposure is further
discussed in Part II, Item 1A, “Risk
Factors.”
|
·
|
Foreign
currency translation had an overall favorable effect on the Company’s
sales, operating income and Stockholders’ Equity during the first nine
months of 2007 in comparison to the same period in 2006. If the
U.S. dollar strengthens, particularly in relationship to the euro
or
British pound sterling, the impact on the Company would generally
be
negative in terms of reduced sales, income and Stockholders’
Equity. Should the U.S. dollar weaken further in relationship
to these currencies, the impact on the Company would generally be
positive
in terms of higher sales, income and Stockholders’
Equity.
|
·
|
Total
pension expense (defined benefit, defined contribution and multi-employer)
for 2007 is expected to be higher than the 2006 level due to increased
volume which affects defined contribution and multi-employer pension
expense. On a comparative basis, total pension expense in the
first nine months of 2007 was $4.9 million higher than the first
nine
months of 2006 due principally to increased multi-employer and defined
contribution pension expense resulting from increased volume in the
Access
Services Segment and $1.5 million as a result of a one-time defined
benefit plan curtailment loss in the first quarter of 2007 related
to the
Gas Technologies Segment.
|
·
|
Defined
benefit pension expense decreased $1.8 million in the first nine
months of
2007 compared to the first nine months of 2006 due primarily to higher
plan asset bases in 2007 resulting from cash contributions and significant
returns on plan assets in 2006. The decreases were partially
offset by plan curtailment losses in the U.S. in the Gas Technologies
Segment and in the railway track maintenance services and equipment
business. Defined benefit pension expense is expected to
decline for the full year 2007 compared with 2006 due to the significant
level of cash contributions, including voluntary cash contributions
to the
defined benefit pension plans (approximately $10.6 million during
2006 and
$16.9 million during 2005, mostly to the U.K. plan), which will have
a
positive effect on future years’ pension expense, as well as the
higher-than-expected plan asset returns in 2006. During the
fourth quarter of 2007, the Company currently anticipates contributing
an
additional $17.4 million to international plans, of which $10.1 million
will be voluntary contributions.
|
·
|
The
Company’s pension committee continues to evaluate alternative strategies
to further reduce overall pension expense including the consideration
of
converting remaining defined benefit plans to defined contribution
plans;
the on-going evaluation of investment fund managers’ performance; the
balancing of plan assets and liabilities; the risk assessment of
all
multi-employer pension plans; the possible merger of certain plans;
the
consideration of incremental cash contributions to certain plans;
and
other changes that are likely to reduce future pension expense volatility
and minimize risk.
|
·
|
Changes
in worldwide interest rates, particularly in the U.S. and Europe,
could
have a significant effect on the Company’s overall interest expense, as
approximately 58% of the Company’s borrowings are at variable interest
rates as of September 30, 2007 (in comparison to approximately 48%
at
December 31, 2006). The Company manages the mix of fixed-rate
and floating-rate debt to preserve adequate funding flexibility,
as well
as control the effect of interest-rate changes on consolidated interest
expense.
|
Access
Services Segment:
·
|
Both
the international and domestic Access Services businesses have experienced
buoyant markets that are expected to continue for the remainder of
2007
and into 2008. Specifically, international and North American
non-residential and infrastructure construction activity continues
at
historically high volume levels. Additionally, recent
product-line additions continue to benefit growth in North
America.
|
·
|
The
Company will continue to emphasize expansion of our geographic presence
in
this Segment through entering new markets and will continue to leverage
value-added services and highly engineered forming, shoring and
scaffolding systems to grow the
business.
|
Mill
Services Segment:
·
|
To
maintain pricing levels, a more disciplined and consolidated steel
industry has been adjusting production levels to bring inventories
in-line
with current demand. The Company expects global steel production to
increase modestly in 2007 and continue to increase in 2008, as inventory
levels have declined during 2007. Increased steel production
would generally have a favorable effect on this Segment’s
revenues.
|
·
|
Further
consolidation in the global steel industry is possible. Should
additional transactions occur involving some of the steel industry’s
larger companies that are customers of the Company, it would result
in an
increase in
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
|
concentration
of revenues and credit risk for the Company. If a large
customer were to experience financial difficulty, or file for bankruptcy
protection, it could adversely impact the Company’s income, cash flows and
asset valuations. As part of its credit risk management
practices, the Company closely monitors the credit standing and accounts
receivable position of its customer base. Further consolidation
may also increase pricing pressure on the Company and the competitive
risk
of services contracts which are due for renewal. Conversely,
such consolidation may provide additional service opportunities for
the
Company as the Company believes it is well-positioned
competitively.
|
·
|
The
Company will continue to place significant emphasis on improving
operating
margins of this Segment. Margin improvements are most likely to
be achieved through internal enterprise business optimization efforts;
renegotiating or exiting underperforming contracts, principally in
North
America; divesting low margin product lines; continuing to execute
a
geographic expansion strategy in Eastern Europe, the Middle East
and
Africa, Latin America and Asia Pacific; and implementing global
procurement initiatives, process improvement programs, technology
enhancements, maintenance best practices programs, and reorganization
actions.
|
Minerals
& Rail Technologies, Services and Products (“all other”)
Category:
·
|
The
Company will focus on global expansion, particularly in Western Europe
and
Asia, of Excell Minerals’ value-added services of extracting high-value
metallic content from slag and responsibly handling and recycling
residual
materials.
|
·
|
Market
pricing volatility for some of the high-value materials involved
in
certain Excell Minerals services could affect the operating results
for
this business either favorably or
unfavorably.
|
·
|
International
demand for the railway track maintenance services and equipment business’s
products and services is expected to be strong in the long
term. A large equipment order recently signed with China is an
example of the underlying strength of the international
markets. Due to long lead-times, this order is expected to
generate revenues beginning in 2008 and beyond. In addition,
increased volume of higher-margin contract services and enterprise
business optimization initiatives are expected to improve margins
on a
long-term basis.
|
·
|
Worldwide
supply and demand for steel and other commodities could have an adverse
impact on raw material costs and the ability to obtain the necessary
raw
materials for several businesses in this Category. The Company
has implemented certain strategies to help ensure continued product
supply
to our customers and mitigate the potentially negative impact that
rising
steel prices could have on operating
income.
|
·
|
The
abrasives business and, to a lesser extent, roofing granules are
expected
to continue to perform well in the near-term, although operating
margins
could be impacted by volatile energy prices that affect both production
and transportation costs. This business continues to pursue
cost and site optimization initiatives and the use of more
energy-efficient equipment to help mitigate future energy-related
increases.
|
·
|
Due
to a strong natural gas market and additional North American
opportunities, demand for air-cooled heat exchangers is expected
to remain
strong for the remainder of 2007 and into
2008.
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Results
of Operations
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(Dollars
are in millions, except per share and
percentages)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
from continuing operations
|
|
$ |
927.4
|
|
|
$ |
773.3
|
|
|
$ |
2,713.5
|
|
|
$ |
2,221.4
|
|
Cost
of services and products sold
|
|
|
667.4
|
|
|
|
558.3
|
|
|
|
1,976.3
|
|
|
|
1,612.8
|
|
Selling,
general and administrative expenses
|
|
|
133.3
|
|
|
|
118.0
|
|
|
|
388.4
|
|
|
|
345.3
|
|
Other
(income) expenses
|
|
|
1.0
|
|
|
|
(1.6 |
) |
|
|
(0.9 |
) |
|
|
1.9
|
|
Operating
income from continuing operations
|
|
|
124.7
|
|
|
|
97.9
|
|
|
|
347.2
|
|
|
|
259.4
|
|
Interest
expense
|
|
|
21.0
|
|
|
|
15.3
|
|
|
|
60.1
|
|
|
|
44.0
|
|
Income
tax expense from continuing operations
|
|
|
32.2
|
|
|
|
27.6
|
|
|
|
91.2
|
|
|
|
72.1
|
|
Income
from continuing operations
|
|
|
70.3
|
|
|
|
54.2
|
|
|
|
192.7
|
|
|
|
140.0
|
|
Income
from discontinued operations
|
|
|
7.1
|
|
|
|
1.6
|
|
|
|
15.3
|
|
|
|
4.0
|
|
Net
income
|
|
|
77.3
|
|
|
|
55.8
|
|
|
|
208.0
|
|
|
|
143.9
|
|
Diluted
earnings per common share from continuing operations
|
|
|
0.83
|
|
|
|
0.64
|
|
|
|
2.28
|
|
|
|
1.66
|
|
Diluted
earnings per common share
|
|
|
0.91
|
|
|
|
0.66
|
|
|
|
2.46
|
|
|
|
1.71
|
|
Effective
income tax rate for continuing operations
|
|
|
30.7 |
% |
|
|
33.0 |
% |
|
|
31.4 |
% |
|
|
33.0 |
% |
Consolidated
effective income tax rate
|
|
|
30.0 |
% |
|
|
32.9 |
% |
|
|
31.0 |
% |
|
|
32.9 |
% |
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Comparative
Analysis of Consolidated Results
Revenues
Revenues
for the third quarter of 2007 increased $154.1 million or 20% from the third
quarter of 2006. Revenues for the first nine months of 2007 increased
$492.2 million or 22% from the first nine months of 2006. These
increases were attributable to the following significant items:
|
Changes
in Revenues – 2007 vs. 2006
|
|
Third
Quarter
|
|
|
Nine
Months
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Effect
of business acquisitions in the Minerals & Rail Technologies, Services
and Products (“all other”) Category ($29.2 million and $90.8 million, for
the third quarter and nine months, respectively), the Access Services
Segment ($2.4 million and $51.8 million, for the third quarter and
nine
months, respectively) and the Mill Services Segment ($10.2 million
and
$20.1 million, for the third quarter and nine months,
respectively).
|
|
$ |
41.8
|
|
|
$ |
162.7
|
|
|
Net
increased revenues (excluding acquisitions) in the Access Services
Segment
due principally to the continued strength of both the North American
and
international businesses (particularly in Europe).
|
|
|
53.0
|
|
|
|
154.5
|
|
|
Effect
of foreign currency translation.
|
|
|
40.8
|
|
|
|
112.8
|
|
|
Increased
revenues of the air-cooled heat exchangers business due to a continued
strong natural gas market.
|
|
|
9.6
|
|
|
|
20.5
|
|
|
Increased
revenues in the industrial grating products business due to continued
strong demand.
|
|
|
8.0
|
|
|
|
19.9
|
|
|
Net
increased (decreased) volume, new contracts and sales price changes
in the
Mill Services Segment (excluding acquisitions).
|
|
|
(2.6 |
) |
|
|
19.8
|
|
|
Increased
revenues in the railway track maintenance services and equipment
business. Revenues increased in the third quarter 2007
principally due to increased contract services. For the first
nine months of 2007, increased contract services and repair parts
sales
were partially offset by decreased rail equipment sales.
|
|
|
3.5
|
|
|
|
7.6
|
|
|
Other
(minor changes across the various units not already
mentioned).
|
|
|
—
|
|
|
|
(5.6 |
) |
|
Total
Change in Revenues – 2007 vs. 2006
|
|
$ |
154.1
|
|
|
$ |
492.2
|
|
Cost
of Services and Products Sold
Cost
of
services and products sold for the third quarter of 2007 increased $109.2
million, or 20%, from the third quarter of 2006, consistent with the 20%
increase in revenues. Cost of services and products sold for the
first nine months of 2007 increased $363.5 million, or 23%, from the first
nine
months of 2006, slightly higher than the 22% increase in
revenues. These increases were attributable to the following
significant items:
|
Changes
in Cost of Services and Products Sold – 2007 vs.
2006
|
|
Third
Quarter
|
|
|
Nine
Months
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Increased
costs due to increased revenues (exclusive of the effect of foreign
currency translation and business acquisitions and including the
impact of
increased costs included in selling prices).
|
|
$ |
42.4
|
|
|
$ |
133.7
|
|
|
Effect
of business acquisitions.
|
|
|
30.1
|
|
|
|
109.0
|
|
|
Effect
of foreign currency translation.
|
|
|
30.4
|
|
|
|
84.5
|
|
|
Other
(product/service mix and increased equipment maintenance costs, partially
offset by enterprise business optimization initiatives and volume-related
efficiencies).
|
|
|
6.3
|
|
|
|
36.3
|
|
|
Total
Change in Cost of Services and Products Sold – 2007 vs.
2006
|
|
$ |
109.2
|
|
|
$ |
363.5
|
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses for the third quarter of 2007
increased $15.3 million or 13% from the third quarter of 2006, a lower rate than
the 20% increase in revenues. SG&A expenses for the first nine
months of 2007 increased $43.1 million or 12% from the first nine months of
2006, a lower rate than the 22% increase in revenues. The increases
in SG&A expenses were attributable to the following significant items with
the principal driver being the continued expansion of the business:
|
Changes
in Selling, General and Administrative
Expenses
– 2007 vs. 2006
|
|
Third
Quarter
|
|
|
Nine
Months
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Effect
of foreign currency translation.
|
|
$ |
5.4
|
|
|
$ |
15.1
|
|
|
Effect
of business acquisitions.
|
|
|
4.1
|
|
|
|
14.1
|
|
|
Increased
compensation expense due to salary increases as well as higher commissions
due to increased volume.
|
|
|
3.3
|
|
|
|
10.9
|
|
|
Other.
|
|
|
2.5
|
|
|
|
3.0
|
|
|
Total
Change in Selling, General and Administrative
Expenses
– 2007 vs. 2006
|
|
$ |
15.3
|
|
|
$ |
43.1
|
|
Other
(Income) Expenses
This
income statement classification includes impaired asset write-downs associated
with exit activities, employee termination benefit costs and other costs to
exit
activities, offset by net gains on the disposal of non-core
assets. Net Other expense was $1.0 million in the third quarter of
2007, compared with income of $1.6 million in the comparable 2006
period. Net Other income was $0.9 million in the first nine
months of 2007, compared with $1.9 million of expense in the first nine months
of 2006. These variances were attributable to the following
significant items:
|
Changes
in Other (Income) Expenses – 2007 vs. 2006
|
|
Third
Quarter
|
|
|
Nine
Months
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Decrease
in other exit costs due principally to a loss on a sublease in the
first
quarter of 2006 and certain contract termination costs in the second
and
third quarters of 2006.
|
|
$ |
(0.5 |
) |
|
$ |
(1.8 |
) |
|
Increase
(decrease) in employee termination benefit costs.
|
|
|
0.3
|
|
|
|
(0.7 |
) |
|
(Increase)
decrease in net gains on the disposal of non-core assets.
|
|
|
2.8
|
|
|
|
(0.3 |
) |
|
Total
Change in Other (Income) Expenses – 2007 vs. 2006
|
|
$ |
2.6
|
|
|
$ |
(2.8 |
) |
Interest
Expense
Interest
expense for the third quarter of 2007 increased $5.7 million or 38% from the
third quarter of 2006. For the first nine months of 2007, interest
expense increased $16.1 million or 37% from the first nine months of
2006. These increases were principally due to increased borrowings to
finance business acquisitions and higher interest rates on variable-rate
borrowings. Additionally, there was approximately $0.6 million and
$2.1 million of increased interest expense due to the effect of foreign currency
translation in the third quarter and first nine months of 2007,
respectively.
Income
Tax Expense from Continuing Operations
The
increase from comparable 2006 periods in income tax expense from continuing
operations for the third quarter and first nine months of 2007 of
$4.6 million or 17% and $19.0 million or 26%, respectively, was primarily
due to increased earnings from continuing operations, partially offset by a
decrease in the effective income tax rate from continuing
operations. The effective income tax rates of 30.7% and 31.4% for the
third quarter and first nine months of 2007, respectively, compared with 33.0%
for the third quarter and first nine months of 2006. The decrease in
the effective income tax rate for the third quarter and first nine months of
2007 was primarily due to book-to-tax-return adjustments in certain
jurisdictions, settlement of audits in certain state jurisdictions and the
recognition of previously unrecognized tax benefits in certain foreign
jurisdictions. Book-to-tax-return adjustments represent changes to
prior estimates upon the filing of tax returns. Additionally, changes
in statutory tax rates in the U.K. and Germany partially offset by changes
in
foreign tax holidays reduced the effective income tax rate in the third quarter
of 2007.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Income
from Continuing Operations
Income
from continuing operations increased $16.1 million or 30% in the third quarter
of 2007 compared with the third quarter of 2006. Income from
continuing operations increased $52.8 million or 38% in the first nine months
of
2007 compared with the first nine months of 2006. These increases
resulted from strong demand for most of the Company’s services and products and
the net effect of business acquisitions and divestitures.
Income
from Discontinued Operations
Income
from discontinued operations increased $5.5 million or 337% in the third quarter
of 2007 compared with the third quarter of 2006. Income from
discontinued operations increased $11.4 million or 287% in the first nine months
of 2007 compared with the first nine months of 2006. This was
primarily due to increased pre-tax income from the operations of the Gas
Technologies Segment ($8.0 million and $18.8 million in the third quarter and
first nine months of 2007, respectively), partially offset by pre-tax
transaction costs related to the anticipated sale of this Segment ($1.2 million
and $4.1 million in the third quarter and first nine months of 2007,
respectively).
Net
Income and Earnings Per Share
Net
income of $77.3 million and diluted earnings per share of $0.91 in the third
quarter of 2007 exceeded the third quarter of 2006 by $21.5 million and $0.25,
respectively. Net income of $208.0 million and diluted earnings per
share of $2.46 in the first nine months of 2007 exceeded the first nine months
of 2006 by $64.1million and $0.75, respectively. These increases are
primarily due to increased income from continuing operations for the reasons
described above.
Liquidity
and Capital Resources
Overview
During
the first nine months of 2007, the Company generated $372.3 million in operating
cash, 33.5% higher than the $278.9 million in the first nine months of
2006. This significant source of cash, supplemented by the use of
available credit capacity and cash on-hand, enabled the Company to invest $326.2
million in capital expenditures (approximately 55% of which were for revenue
growth projects); $253.8 million in strategic acquisitions; and $44.8 million
in
stockholder dividends.
During
the first nine months of 2007, the Company’s value-based management system
continued to deliver results by creating increased economic
value. Significant Economic Value Added (“EVA”) improvement was
achieved in the first nine months of 2007 and the Company’s return on invested
capital improved 140 basis points from the comparable 2006
period. The Company’s value-based management system is more fully
described in the 2006 Annual Report.
The
Company’s net cash borrowings increased $225.8 million in the first nine months
of 2007, but decreased $15.5 million in the third quarter of
2007. The increase for the first nine months of 2007 is due to
business acquisitions, principally the first quarter Excell Minerals
acquisition. Balance sheet debt, which is affected by foreign
currency translation, increased $266.6 million from December 31,
2006. In the third quarter of 2007, the debt to total capital ratio
decreased from 50.4% at June 30, 2007 to 48.4% at September 30, 2007 due
principally to a $122.4 million increase in Stockholders’
Equity. Debt to total capital was 48.1% at December 31,
2006.
The
Company plans to sustain its balanced portfolio through its strategy of
redeploying discretionary cash for growth and international diversification
in
the Access Services Segment; in long-term, high-return and high-renewal-rate
services contracts for the Mill Services Segment, principally in emerging
economies; for growth and international diversification in the Minerals &
Rail Technologies, Services and Products (“all other”) Category; and for
selective bolt-on acquisitions in the industrial services
businesses. The Company also foresees continuing its long and
consistent history of paying dividends to stockholders and paying down
debt.
The
Company is also focused on improved working capital
management. Specifically, enterprise business optimization programs
are being used to improve the effective and efficient use of working capital,
particularly accounts receivable in the Access Services and Mill Services
Segments and inventory levels in the manufacturing businesses.
Sources
and Uses of Cash
The
Company’s principal sources of liquidity are cash from operations and short-term
borrowings under its various credit agreements, augmented periodically by cash
proceeds from asset sales. The sale of the Gas Technologies Segment,
currently classified as held-for-sale, is expected to provide a significant
source of cash in the fourth quarter of 2007.
The
primary drivers of the Company’s cash flow from operations are the Company’s
sales and income, particularly in the services businesses. The
Company’s long-term Mill Services contracts provide predictable cash flows for
several years
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
into
the
future. (See “Certainty of Cash Flows” section for additional
information on estimated future revenues of Mill Services contracts and order
backlogs for the Company’s manufacturing businesses and railway track
maintenance services and equipment business). Cash returns on capital
investments made in prior years, for which no cash is currently required, are
a
significant source of operating cash. Depreciation expense related to
these investments is a non-cash charge. The Company also strives to
maintain working capital at a manageable level based upon the requirements
and
seasonality of the businesses.
Major
uses of operating cash flows and borrowed funds include capital investments,
principally in the industrial services businesses; payroll costs and related
benefits; pension funding payments; inventory purchases; raw material purchases
for the manufacturing businesses; income tax payments; debt principal and
interest payments; insurance premiums and payments of self-insured casualty
losses; and machinery, equipment, automobile and facility rental payments;
and
dividend payments. Cash is also used for selective bolt-on
acquisitions as the appropriate opportunities arise.
In
addition to cash requirements previously disclosed in the Company’s 2006 Form
10-K, the Company has $46.8 million in long-term liabilities and $4.0 million
in
current liabilities for uncertain tax benefits. See Note H, “Income
Taxes,” for additional information on uncertain tax benefits.
Resources
available for cash requirements – The Company has various credit
facilities and commercial paper programs available for use throughout the
world. The following table illustrates the amounts outstanding under
credit facilities and commercial paper programs and available credit at
September 30, 2007.
|
Summary
of Credit Facilities and Commercial Paper
Programs
|
|
As
of September 30, 2007
|
|
|
(In
millions)
|
|
Facility
Limit
|
|
|
Outstanding
Balance
|
|
|
Available
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
commercial paper program
|
|
$ |
550.0
|
|
|
$ |
428.4
|
|
|
$ |
121.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
commercial paper program
|
|
|
282.9
|
|
|
|
140.4
|
|
|
|
142.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility (a)
|
|
|
450.0
|
|
|
|
-
|
|
|
|
450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
credit facilities (a)
|
|
|
325.0
|
|
|
|
-
|
|
|
|
325.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bilateral
credit facility (b)
|
|
|
50.0
|
|
|
|
26.3
|
|
|
|
23.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
at September 30, 2007
|
|
$ |
1,657.9
|
|
|
$ |
595.1
|
|
|
$ |
1,062.8 |
(c) |
|
(b)
|
International-based
program
|
|
(c)
|
Although
the Company has significant available credit, it is the Company’s policy
to limit aggregate commercial paper and credit facility borrowings
at any
one time to a maximum of $825
million.
|
During
the second quarter of 2007, the Company entered into a short-term bank loan
with
the Royal Bank of Scotland Finance (Ireland) for $125 million. The
proceeds from this loan were used to pay down borrowings under the U.S.
commercial paper program. This credit agreement terminates upon
repayment, but no later than December 31, 2007.
Subsequent
to September 30, 2007, the Company entered into a new $450 million 364-day
revolving credit facility with a syndicate of 13 banks. Any borrowings
outstanding at the termination of the facility may, at the Company’s option, be
repaid over the following 12 months. This new facility will replace the
Company’s aforementioned $325 million supplemental credit facilities that will
expire in December 2007.
For
more
information on the Company’s credit facilities and long-term notes, see Note 6,
“Debt and Credit Agreements,” to the Company’s Form 10-K for the year ended
December 31, 2006.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
Credit
Ratings and Outlook – The following table summarizes the Company's debt
ratings at September 30, 2007:
|
|
Long-term
Notes
|
U.S.–Based
Commercial
Paper
|
Outlook
|
|
|
|
|
|
|
Standard
& Poor’s (S&P)
|
A-
|
A-2
|
Stable
|
|
Moody’s
|
A3
|
P-2
|
Stable
|
|
Fitch
|
A-
|
F2
|
Stable
|
The
Company’s euro-based commercial paper program has not been rated since the euro
market does not require it. In May 2007, Moody’s reaffirmed its A3
and P-2 ratings for the Company’s long-term notes and U.S. commercial paper,
respectively, and its stable outlook. In August 2007, Fitch
reaffirmed its A- and F2 ratings for the Company’s long-term notes and U.S.
commercial paper, respectively, and its stable outlook. In August
2007, S&P reaffirmed its A- and A-2 ratings for the Company’s long-term
notes and U.S. commercial paper, respectively, and its stable
outlook. Any continued tightening of the credit markets, which
began during 2007 may adversely impact the Company’s access to capital and the
associated costs of borrowing, however this is mitigated by the Company’s strong
financial position and earnings outlook as reflected in the above-mentioned
credit ratings. A downgrade to the Company’s credit ratings would
probably increase borrowing costs to the Company, while an improvement in the
Company’s credit ratings would probably decrease borrowing costs to the
Company.
Working
Capital Position – Changes in the Company’s working capital are
reflected in the following table:
|
(Dollars
are in millions)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
|
Increase
(Decrease)
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
102.7
|
|
|
$ |
101.2
|
|
|
$ |
1.5
|
|
|
Accounts
receivable, net
|
|
|
837.5
|
|
|
|
753.2
|
|
|
|
84.3
|
|
|
Inventories
|
|
|
269.2
|
|
|
|
285.2
|
|
|
|
(16.0 |
) |
|
Other
current assets
|
|
|
89.4
|
|
|
|
88.4
|
|
|
|
1.0
|
|
|
Assets
held-for-sale
|
|
|
301.8
|
|
|
|
3.6
|
|
|
|
298.2
|
|
|
Total
current assets
|
|
|
1,600.6
|
|
|
|
1,231.6
|
|
|
|
369.0
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable and current maturities
|
|
|
442.0
|
|
|
|
198.2
|
|
|
|
243.8
|
|
|
Accounts
payable
|
|
|
302.0
|
|
|
|
287.0
|
|
|
|
15.0
|
|
|
Accrued
compensation
|
|
|
96.8
|
|
|
|
95.0
|
|
|
|
1.8
|
|
|
Income
taxes payable
|
|
|
56.5
|
|
|
|
62.0
|
|
|
|
(5.5 |
) |
|
Other
current liabilities
|
|
|
343.9
|
|
|
|
268.6
|
|
|
|
75.3
|
|
|
Liabilities
associated with assets held-for-sale
|
|
|
56.1
|
|
|
|
—
|
|
|
|
56.1
|
|
|
Total
current liabilities
|
|
|
1,297.3
|
|
|
|
910.8
|
|
|
|
386.5
|
|
|
Working
Capital
|
|
$ |
303.3
|
|
|
$ |
320.8
|
|
|
$ |
(17.5 |
) |
|
Current
Ratio
|
|
1.2:1
|
|
|
1.4:1
|
|
|
|
|
|
Working
capital decreased approximately 5% during the first nine months of 2007 due
principally to the following factors:
·
|
Notes
payable and current maturities increased $243.8 million primarily
due to
an increase in short-term debt resulting from the Excell Minerals
and
Alexander Mill Services International
acquisitions.
|
·
|
Assets
held-for-sale increased $298.2 million and liabilities associated
with
assets held-for-sale increased $56.1 million due to the reclassification
of the Gas Technologies Segment to Discontinued Operations in the
first
quarter of 2007. All related assets and liabilities continue to
be classified as held-for-sale as of September 30,
2007.
|
·
|
Accounts
receivable increased $84.3 million due to higher sales in the third
quarter of 2007 compared with the fourth quarter of 2006, and the
timing
of collections in the international Access Services businesses and
the
Mill Services Segment. Additionally, accounts receivable
increased due to the acquisition of Excell Minerals and, to a
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
|
lesser
extent, foreign currency translation. Partially offsetting
these increases was the reclassification of the Gas Technologies
Segment
to Discontinued Operations in the first quarter of
2007.
|
·
|
Other
current liabilities increased $75.3 million principally due to a
$29.7
million advance payment for a large equipment order from China in
the
railway track maintenance services and equipment business, as well
as
normal increases in accrued interest
payable.
|
·
|
Inventories
decreased $16.0 million due principally to the reclassification of
the Gas
Technologies Segment to Discontinued Operations in the first quarter
of
2007. Partially offsetting this decrease were increased
finished goods and raw materials inventories in the Minerals & Rail
Technologies, Services and Products Category due to the Excell Minerals
acquisition; and higher material costs and increased inventory purchases
in this Category, as well as the Access Services Segment, to meet
expected
customer demand.
|
Certainty
of Cash Flows – The certainty of the Company’s future cash flows is
underpinned by the long-term nature of the Company’s mill services
contracts. At December 31, 2006, the Company’s mill services
contracts had estimated future revenues of $4.4 billion. As of
September 30, 2007, the Company’s continuing operations had an order backlog of
$455.0 million for its Minerals & Rail Technologies, Services and Products
businesses. This compares with $236.5 million at December 31, 2006
and $228.5 million at September 30, 2006. The increase from December
31, 2006 and September 30, 2006 is due principally to increased demand for
certain products within the railway track maintenance services and equipment
business, including a significant order from China received in the second
quarter of 2007, as well as increased demand for heat exchangers and industrial
grating. The railway track maintenance services and equipment
business backlog includes a significant portion that will not be realized until
2008 and later due to the long leadtime necessary to build certain equipment,
and the long-term nature of certain service contracts. Order backlog
for scaffolding, shoring and forming services; for roofing granules and slag
abrasives; and the reclamation and recycling of high-value content from
steelmaking slag is excluded from the above amounts. These services
and products generally have short order lead times and the ultimate length
of
the access equipment rental periods and revenue amounts is often
unknown.
The
types
of products and services that the Company provides are not subject to rapid
technological change, which increases the stability of related cash
flows. Additionally, each of the Company’s businesses, in its
balanced portfolio, is among the top three companies (relative to sales) in
the
industries or markets the Company serves. Due to these factors, the
Company is confident in its future ability to generate positive cash flows
from
operations.
Cash
Flow Summary
The
Company’s cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
Summarized
Cash Flow Information
|
|
|
Nine
Months Ended
September
30
|
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
372.3
|
|
|
$ |
278.9
|
|
|
Investing
activities
|
|
|
(564.7 |
) |
|
|
(256.4 |
) |
|
Financing
activities
|
|
|
181.0
|
|
|
|
(53.2 |
) |
|
Effect
of exchange rate changes on
cash
|
|
|
12.7
|
|
|
|
9.2
|
|
|
Net
change in cash and cash
equivalents
|
|
$ |
1.4 |
(a) |
|
$ |
(21.4 |
)(a) |
(a)
Does
not total due to rounding
Cash
From Operating Activities – Net cash provided by operating activities
in the first nine months of 2007 was $372.3 million, an increase of $93.4
million (33.5%) from the first nine months of 2006. The increased
cash from operations was the result of the following factors:
·
|
Higher
net income in the first nine months of 2007 compared with the first
nine
months of 2006.
|
·
|
Increase
in advances on contracts primarily due to customer payments in the
railway
track maintenance services and equipment
business.
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
·
|
Increased
source of cash due principally to the timing of cash disbursements
in the
railway track maintenance services and equipment business, international
Access Services business and, to a lesser extent, the Mill Services
Segment.
|
·
|
Partially
offsetting the above cash sources were increased inventories due
to the
timing of shipments at the railway track maintenance services and
equipment business as well as increased inventory purchases required
to
meet customer demand principally in the international Access Services
business, Gas Technologies Segment, and, to a lesser extent, the
Mill
Services Segment.
|
·
|
Also
offsetting the above cash sources was the timing of sales and accounts
receivable collections, primarily in the international Access Services
business, the railway track maintenance services and equipment business
and, to a lesser extent, the Mill Services
Segment.
|
Cash
Used in Investing Activities – In the first nine months of 2007, cash
used in investing activities consisted of a $253.8 million use of cash,
principally related to the purchase of the Excell Minerals business in February
2007. Also, capital investments for the first nine months of 2007
were $326.2 million. This was an increase of $69.7 million (27.2%)
over the first nine months of 2006. Approximately 55% of the
investments were for projects intended to grow future revenues with the
remainder of the expenditures made generally to maintain current revenue
streams. Investments were made predominantly in the industrial
services businesses with 55% in the Access Services Segment and 39% in the
Mill
Services Segment. Throughout the remainder of 2007 and into 2008, the
Company will continue to manage its balanced portfolio and invest in
value-creation projects including bolt-on acquisitions, principally in the
industrial services businesses.
Cash
Used in Financing Activities – The following table summarizes the
Company’s debt and capital positions at September 30, 2007 and December 31,
2006:
|
(Dollars
are in millions)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
|
Notes
Payable and Current Maturities
|
|
$ |
442.0
|
|
|
$ |
198.2
|
|
|
Long-term
Debt
|
|
|
887.6
|
|
|
|
864.8
|
|
|
Total
Debt
|
|
|
1,329.6
|
|
|
|
1,063.0
|
|
|
Total
Equity
|
|
|
1,419.8
|
|
|
|
1,146.4
|
|
|
Total
Capital
|
|
$ |
2,749.4
|
|
|
$ |
2,209.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Debt to Total Capital
|
|
|
48.4 |
% |
|
|
48.1 |
% |
The
Company's debt as a percent of total capital as of September 30, 2007 increased
slightly from December 31, 2006. Overall debt increased due to the
Excell Minerals acquisition, and to a lesser extent, to foreign currency
translation resulting from the weakening of the U.S. dollar in comparison with
the euro and the British pound sterling. Additionally, total equity
increased due principally to the net income generated during the first nine
months of 2007.
Debt
Covenants
The
Company’s credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt
to
capital ratio of 60%. Based on balances at September 30, 2007, the
Company could increase borrowings by approximately $800.1 million and still
be
within its debt covenants. Alternatively, keeping all other factors
constant, the Company’s equity could decrease by approximately $532.0 million
and the Company would still be in compliance with its covenants. The
Company’s 7.25% British pound sterling-denominated notes due October 27, 2010
also include a covenant that permits the note holders to redeem their notes,
at
par, in the event of a change in control of the Company. The Company
expects to remain compliant with these debt covenants one year from
now.
Cash
and Value-Based Management
The
Company plans to continue with its strategy of selective investing for strategic
purposes for the foreseeable future. The goal of this strategy is to
improve the Company’s Economic Value Added (“EVA®”) under the program that
commenced January 1, 2002. Under this program, the Company evaluates
strategic investments based upon the investment’s economic
profit. EVA equals after-tax operating profits less a charge for the
use of the capital employed to create those profits (only the service cost
portion of pension expense is included for EVA purposes). Therefore,
value is
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
I -
FINANCIAL INFORMATION
created
when a project or initiative produces a return above the cost of
capital. Consistent with the first nine months of 2007 results,
meaningful improvement in EVA was achieved compared with the first nine months
of 2006.
The
Company is committed to continue paying dividends to
stockholders. The Company has increased the dividend rate for
thirteen consecutive years, and in August 2007, the Company paid its 229th consecutive
quarterly cash dividend. In September 2007, the Company declared its
230th
consecutive quarterly cash dividend. The Company also plans to use
discretionary cash flows to pay down debt. Additionally, the Company
has authorization to repurchase up to two million of its shares through January
31, 2008.
The
Company's financial position and debt capacity should enable it to meet current
and future requirements. As additional resources are needed, the
Company should be able to obtain funds readily and at competitive
costs. The Company is well-positioned and intends to continue
investing strategically in selective high-return projects and acquisitions,
to
reduce debt, and pay cash dividends as a means to enhance stockholder
value.
New
Financial Accounting Standards Issued
Information
on new financial accounting standards issued is included in Note L, "New
Financial Accounting Standards Issued," in Part I, Item 1, Financial
Statements.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See
Part
II, Item 1A, “Risk Factors,” for quantitative and qualitative disclosures about
market risk.
ITEM
4. CONTROLS AND PROCEDURES
The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, has conducted an evaluation of the effectiveness of disclosure controls
and procedures as of September 30, 2007. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective. There have been no
significant changes in internal controls over financial reporting that could
materially affect, or are likely to materially affect, internal control over
financial reporting during the third quarter of 2007.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Information
on legal proceedings is included under Part I, Item 1, Note I labeled
"Commitments and Contingencies."
ITEM
1A. RISK FACTORS
Market
risk.
In
the
normal course of business, the Company is routinely subjected to a variety
of
risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
Cyclical
industry and economic conditions may adversely impact the Company’s
businesses.
The
Company’s businesses are subject to general economic slowdowns and cyclical
conditions in the industries served. In particular,
·
|
The
Company’s Access Services business may be adversely impacted by slowdowns
in non-residential or infrastructure construction and annual industrial
and building maintenance cycles;
|
·
|
The
Company’s Mill Services business may be adversely impacted by slowdowns in
steel mill production; excess capacity, consolidation or bankruptcy
of
steel producers; or a reversal or slowing of current outsourcing
trends in
the steel industry;
|
·
|
The
railway track maintenance services and equipment business may be
adversely
impacted by developments in the railroad industry that lead to lower
capital spending or reduced maintenance
spending;
|
·
|
The
industrial abrasives and roofing granules business may be adversely
impacted by reduced home resales or economic conditions that slow
the rate
of residential roof replacement, or by slowdowns in the industrial
and
infrastructure refurbishment
industries;
|
·
|
The
industrial grating business may be adversely impacted by slowdowns
in
non-residential construction, infrastructure build and industrial
production;
|
·
|
The
air-cooled heat exchangers business is affected by cyclical conditions
in
the natural gas industry. A high demand for natural gas is
currently creating increased demand for the Company’s air-cooled heat
exchangers. However, a slowdown in natural gas production could
adversely affect this business;
|
·
|
The
Excell Minerals business may be adversely impacted by the selling
price of
its materials which is market-based and varies based upon the current
fair
value of the components being sold. Therefore, the revenue
amounts recorded from the sale of such recycled materials vary based
upon
the fair value of the commodity components being
sold;
|
·
|
The
Company’s Gas Technologies business, now classified in Discontinued
Operations, may be adversely impacted by reduced industrial production
and
lower demand for industrial gases, slowdowns in demand for medical
cylinders, and valves; or lower demand for natural gas vehicles;
and,
|
·
|
The
Company's access to capital and the associated costs of borrowing
may be
adversely impacted by the tightening of credit markets. Capital
constraints and increased borrowing costs may also adversely impact
the
financial position and operations of the Company’s customers across all
business segments.
|
The
Company’s defined benefit pension expense is directly affected by the equity and
bond markets and a downward trend in those markets could adversely impact the
Company’s future earnings. An upward trend in the equity and bond
markets could positively affect the Company’s future
earnings.
In
addition to the economic issues that directly affect the Company’s businesses,
changes in the performance of equity and bond markets, particularly in the
United Kingdom and the United States, impact actuarial assumptions used in
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
determining
annual pension expense, pension liabilities and the valuation of the assets
in
the Company’s defined benefit pension plans. An upward trend in
capital markets would likely result in a decrease in future unfunded obligations
and pension expense. This could also result in an increase to
Stockholders’ Equity and a decrease in the Company’s statutory funding
requirements. If the financial markets deteriorate, it would most
likely have a negative impact on the Company’s pension expense and the
accounting for pension assets and liabilities. This could result in a
decrease to Stockholders’ Equity and an increase in the Company’s statutory
funding requirements.
In
response to the adverse market conditions, during 2002 and 2003 the Company
conducted a comprehensive global review of its pension plans in order to
formulate a plan to make its long-term pension costs more predictable and
affordable. The Company implemented design changes for most of these
plans during 2003. The principal change involved converting future
pension benefits for many of the Company’s non-union employees in both the U.K.
and U.S. from defined benefit plans to defined contribution plans as of January
1, 2004. This conversion is expected to make the Company’s pension
expense more predictable and affordable and less sensitive to changes in the
financial markets. The Company’s pension committee continues to
evaluate alternative strategies to further reduce overall pension expense
including the consideration of converting remaining defined benefit plans to
defined contribution plans; the on-going evaluation of investment fund managers’
performance; the balancing of plan assets and liabilities; the risk assessment
of all multi-employer pension plans; the possible merger of certain plans;
the
consideration of incremental cash contributions to certain plans; and other
changes that are likely to reduce future pension expense volatility and minimize
risk.
In
addition to the Company’s defined benefit pension plans, the Company also
participates in numerous multi-employer pension plans throughout the world.
Within the U.S., the Pension Protection Act of 2006 (the "Act") may
require additional funding for multiemployer plans that could cause the Company
to be subject to higher cash contributions in the future. The effect,
if any, of the Act is not determinable until further guidance becomes available.
The Company continues to assess any full and partial withdrawal liability
implications associated with these plans.
Changes
in the related pension benefit costs may occur in the future due to changes
in
the actuarial assumptions and due to changes in returns on plan assets resulting
from financial market conditions. Using the expense calculated for
calendar year 2007, and the asset and liability balances as of December 31,
2006, and holding all other assumptions constant, a one-half percent increase
or
decrease in the discount rate and the expected long-term rate of return on
plan
assets would increase or decrease annual pre-tax defined benefit pension expense
as follows:
|
Approximate
Changes in Pre-tax Defined Benefit
Pension
Expense
|
|
U.S.
Plans
|
U.K.
Plan
|
Discount
rate
|
|
|
|
|
|
One-half
percent increase
|
Decrease
of $0.7 million
|
Decrease
of $4.3
million
|
One-half
percent decrease
|
Increase
of $2.0 million
|
Increase
of $4.1
million
|
|
|
|
Expected
long-term rate of return on plan assets
|
|
|
|
|
|
One-half
percent increase
|
Decrease
of $1.3 million
|
Decrease
of $3.7
million
|
One-half
percent decrease
|
Increase
of $1.3 million
|
Increase
of $3.7
million
|
Should
circumstances change that affect these estimates, changes (either increases
or
decreases) to the net pension obligations may be required and would be recorded
in accordance with the provisions of SFAS 87 and SFAS 158. See Note
8, “Employee Benefit Plans,” included in the Company’s 2006 Form 10-K for more
information on the impact of SFAS 158. Additionally, certain events
could result in the pension obligation changing at a time other than the annual
measurement date. This would occur when the benefit plan is amended
or when plan curtailments occur under the provisions of SFAS 88.
The
Company’s global presence subjects it to a variety of risks arising from doing
business internationally.
The
Company operates in
over
45 countries,
including the United States. The
Company’s
global footprint exposes it to a variety of risks that may adversely
impact results of operations, cash flows or financial position. These
include the following:
·
|
periodic
economic downturns in the countries in which the Company does
business;
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
·
|
fluctuations
in currency exchange rates;
|
·
|
customs
matters and changes in trade policy or tariff
regulations;
|
·
|
imposition
of or increases in currency exchange controls and hard currency
shortages;
|
·
|
changes
in regulatory requirements in the countries in which the Company
does
business;
|
·
|
higher
tax rates in certain jurisdictions and potentially adverse tax
consequences including restrictions on repatriating earnings, adverse
tax
withholding requirements and "double
taxation'';
|
·
|
longer
payment cycles and difficulty in collecting accounts
receivable;
|
·
|
complications
in complying with a variety of international laws and
regulations;
|
·
|
political,
economic and social instability, civil unrest and armed hostilities
in the
countries in which the Company does
business;
|
·
|
inflation
rates in the countries in which the Company does
business;
|
·
|
laws
in various international jurisdictions that limit the right and ability
of
subsidiaries to pay dividends and remit earnings to affiliated companies
unless specified conditions are met;
and‚
|
·
|
uncertainties
arising from local business practices, cultural considerations and
international political and trade
tensions.
|
If
the
Company is unable to successfully manage the risks associated with its global
business, the Company’s financial condition, cash flows and results of
operations may be negatively affected.
The
Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq, Iran, Israel, Lebanon and other countries with
a
continued high risk of armed hostilities. During the first nine
months of 2007, 2006 and 2005, these countries contributed approximately $30.6
million, $26.2 million and $23.8 million, respectively, to the Company’s
operating income. Additionally, the Company has operations in and
sales to countries that have encountered outbreaks of communicable diseases
(e.g., Acquired Immune Deficiency Syndrome (AIDS), avian influenza and
others). Should these outbreaks worsen or spread to other countries,
the Company may be negatively impacted through reduced sales to and within
those
countries and other countries impacted by such diseases.
Exchange
rate fluctuations may adversely impact the Company’s
business.
Fluctuations
in foreign exchange rates between the U.S. dollar and the approximately 41
other
currencies in which the Company conducts business may adversely impact the
Company’s operating income and income from continuing operations in any given
fiscal period. For the nine months ended September 30, 2007 and 2006,
approximately 68% of the Company’s sales from continuing operations and
approximately 66% and 71%, respectively, of the Company’s operating income from
continuing operations were derived from operations outside the United
States. More specifically, during the nine months ended September 30,
2007 and 2006, approximately 21% and 23%, respectively, of the Company’s
revenues from continuing operations were derived from operations in the
U.K. Additionally, approximately 25% and 24% of the Company’s
revenues from continuing operations were derived from operations with the euro
as their functional currency during the nine months ended September 30, 2007
and
2006, respectively. Given the structure of the Company’s revenues and
expenses, an increase in the value of the U.S. dollar relative to the foreign
currencies in which the Company earns its revenues generally has a negative
impact on operating income, whereas a decrease in the value of the U.S. dollar
tends to have the opposite effect. The Company’s principal foreign
currency exposures are to the British pound sterling and the euro.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
Compared
with the corresponding period in 2006, the average values of major currencies
changed as follows in relation to the U.S. dollar during the nine months ended
September 30, 2007, impacting the Company’s sales and income:
|
Foreign
Currency
|
|
Nine
Months Ended
September
30
|
|
|
British
pound sterling
|
|
Strengthened
by 9%
|
|
|
Euro
|
|
Strengthened
by 8%
|
|
|
South
African rand
|
|
Weakened
by 7%
|
|
|
Brazilian
real
|
|
Strengthened
by 9%
|
|
|
Australian
dollar
|
|
Strengthened
by 9%
|
|
Compared
with exchange rates at December 31, 2006, the values of major currencies changed
as follows as of September 30, 2007:
•
|
British
pound sterling
|
Strengthened
by 3%
|
•
|
Euro
|
Strengthened
by 7%
|
•
|
South
African rand
|
Strengthened
by 2%
|
•
|
Brazilian
real
|
Strengthened
by 14%
|
•
|
Australian
dollar
|
Strengthened
by 10%
|
The
Company’s foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies
change materially in relation to the U.S. dollar, the Company’s financial
position, results of operations, or cash flows may be materially
affected.
To
illustrate the effect of foreign currency exchange rate changes in certain
key
markets of the Company, in the first nine months of 2007, revenues would have
been approximately 4% or $112.8 million lower, while operating income would
have
been approximately 4% or $12.4 million lower if the average exchange rates
for
the first nine months of 2006 were utilized. A similar comparison for
the first nine months of 2006 would have decreased revenues and operating income
by less than 1% or approximately $4.7 million and $1.3 million, respectively,
if
the average exchange rates would have remained the same as the first nine months
of 2005. If the U.S. dollar weakens in relation to the euro and
British pound sterling, the Company would expect to see a positive impact on
future sales and income from continuing operations as a result of foreign
currency translation. Currency changes also result in assets and
liabilities denominated in local currencies being translated into U.S. dollars
at different amounts than at the prior period end. If the U.S. dollar
weakens in relation to currencies in countries in which the Company does
business, the translated values of the related assets and liabilities, and
therefore stockholders’ equity, would increase. Conversely, if the
U.S. dollar strengthens in relation to currencies in countries in which the
Company does business, the translated values of the related assets, liabilities,
and therefore stockholders’ equity, would decrease.
The
Company seeks to reduce exposures to foreign currency transaction fluctuations
through the use of forward exchange contracts. At September 30, 2007,
the notional amount of these contracts was $175.2 million, and over 99% will
mature in the fourth quarter of 2007. The Company does not hold or
issue financial instruments for trading purposes, and it is the Company's policy
to prohibit the use of derivatives for speculative purposes.
Although
the Company engages in foreign currency forward exchange contracts and other
hedging strategies to mitigate foreign exchange risk, hedging strategies may
not
be successful or may fail to offset the risk.
In
addition, competitive conditions in the Company’s manufacturing businesses may
limit the Company’s ability to increase product prices in the face of adverse
currency movements. Sales of products manufactured in the United
States for the domestic and export markets may be affected by the value of
the
U.S. dollar relative to other currencies. Any long-term strengthening
of the U.S. dollar could depress demand for these products and reduce sales
and
may cause translation gains or losses due to the revaluation of accounts
payable, accounts receivable and other asset and liability
accounts. Conversely, any long-term weakening of the U.S. dollar
could improve demand for these products and increase sales and may cause
translation gains or losses due to the revaluation of accounts payable, accounts
receivable and other asset and liability accounts.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
Negative
economic conditions may adversely impact the ability of the Company’s
customers to meet their obligations to the Company
on a timely basis and impact the valuation of the
Company’s assets.
If
a
downturn in the economy occurs, it may adversely impact the ability of the
Company’s customers to meet their obligations to the Company on a timely basis
and could result in bankruptcy filings by them. If customers are
unable to meet their obligations on a timely basis, it could adversely impact
the realizability of receivables, the valuation of inventories and the valuation
of long-lived assets across the Company’s businesses, as well as negatively
affect the forecasts used in performing the Company’s goodwill impairment
testing under SFAS No. 142, "Goodwill and Other Intangible Assets'' (“SFAS
142”). If management determines that goodwill or other assets are
impaired or that inventories or receivables cannot be realized at recorded
amounts, the Company will be required to record a write-down in the period
of
determination, which will reduce net income for that
period. Additionally, the risk remains that certain Mill Services
customers may file for bankruptcy protection, be acquired or consolidate in
the
future, which could have an adverse impact on the Company’s income and cash
flows. Conversely, such consolidation may provide additional service
opportunities for the Company.
A
negative outcome on personal injury claims against the Company
may adversely impact results of operations and
financial condition.
The
Company has been named as one of many defendants (approximately 90 or more
in
most cases) in legal actions alleging personal injury from exposure to airborne
asbestos. In their suits, the plaintiffs have named as defendants
many manufacturers, distributors and repairers of numerous types of equipment
or
products that may contain asbestos. Most of these complaints contain
a standard claim for damages of $20 million or $25 million against the named
defendants. If the Company was found to be liable in any of these
actions and the liability was to exceed the Company’s insurance coverage,
results of operations, cash flows and financial condition could be adversely
affected. For more information concerning this litigation, see Note
I, “Commitments and Contingencies,” in Part 1, Item 1, Financial
Statements.
The
Company may lose customers or be required to reduce prices as a result of
competition.
The
industries in which the Company operates are highly competitive.
·
|
The
Company’s Access Services business rents and sells equipment and provides
erection and dismantling services to principally the non-residential
and
infrastructure construction and industrial plant maintenance
markets. Contracts are awarded based upon the Company’s
engineering capabilities, product availability, safety record, and
the
ability to competitively price its rentals and services. If the
Company is unable to consistently provide high-quality products and
services at competitive prices, it may lose customers or operating
margins
may decline due to reduced selling
prices.
|
·
|
The
Company’s Mill Services business is sustained mainly through contract
renewals. Historically, the Company’s contract renewal rate has
averaged approximately 95%. If the Company is unable to renew
its contracts at the historical rates or renewals are at reduced
prices,
revenue may decline.
|
·
|
The
Company’s manufacturing businesses compete with companies that manufacture
similar products both internationally and domestically. Certain
international competitors export their products into the United States
and
sell them at lower prices due to lower labor costs and government
subsidies for exports. Such practices may limit the prices the
Company can charge for its products and services. Additionally,
unfavorable foreign exchange rates can adversely impact the Company’s
ability to match the prices charged by international
competitors. If the Company is unable to match the prices
charged by international competitors, it may lose
customers.
|
The
Company’s strategy to overcome this competition includes enterprise business
optimization programs, international customer focus and the diversification,
streamlining and consolidation of operations.
Increased
customer concentration and credit risk in the Mill Services Segment may
adversely affect the Company’s future earnings and cash
flows.
The
Company’s Mill Services Segment (and, to a lesser extent, the Minerals &
Rail Technologies, Services and Products (“all other”) Category) has several
large customers throughout the world with significant accounts receivable
balances. In December 2005, the Company acquired the Northern Hemisphere
steel mill services operations of Brambles Industrial Services (“BISNH”), a unit
of the Sydney, Australia-based Brambles Industrials Limited. This
acquisition has increased the Company’s corresponding concentration of credit
risk to customers in the steel industry. Additionally, further
consolidation in the global steel industry occurred in 2006 and additional
consolidation is possible. Should additional
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
transactions
occur involving some of the steel industry’s larger companies, which are
customers of the Company, it would result in an increase in concentration of
credit risk for the Company. If a large customer were to experience
financial difficulty, or file for bankruptcy protection, it could adversely
impact the Company’s income, cash flows and asset valuations. As part
of its credit risk management practices, the Company is developing strategies
to
mitigate this increased concentration of credit risk. In the Access
Services Segment, concentrations of credit risk with respect to accounts
receivable are generally limited due to the Company’s large number of customers
and their dispersion across different geographies.
Increases
in energy prices could increase the Company’s operating costs and reduce its
profitability.
Worldwide
political and economic conditions, an imbalance in the supply and demand for
oil, extreme weather conditions, armed hostilities in oil-producing regions,
among other factors, may result in an increase in the volatility of energy
costs, both on a macro basis and for the Company specifically. In the
first nine months of 2007 and 2006, energy-related costs have approximated
3.6%
and 4.1% of the Company’s revenue from continuing operations,
respectively. To the extent that such costs cannot be passed to
customers in the future, operating income and results of operations may be
adversely affected.
Increases
or decreases in purchase prices (or selling prices) or availability of steel
or
other materials and commodities may affect the Company’s
profitability.
The
profitability of the Company’s manufactured products is affected by changing
purchase prices of steel and other materials and commodities. If raw
material costs associated with the Company’s manufactured products increase and
the costs cannot be passed on to the Company’s customers, operating income would
be adversely affected. Additionally, decreased availability of steel
or other materials could affect the Company’s ability to produce manufactured
products in a timely manner. If the Company cannot obtain the necessary
raw materials for its manufactured products, then revenues, operating income
and
cash flows will be adversely affected. Certain services performed by
the Excell Minerals Division result in the recovery, processing and sale of
specialty steel and other high-value metal by-products to its
customers. The selling price of the by-products material is
market-based and varies based upon the current fair value of its
components. Therefore, the revenue amounts recorded from the sale of
such by-products material vary based upon the fair value of the commodity
components being sold. The Company has executed hedging instruments
designed to reduce the volatility of the revenue from the sale of the
by-products material at varying market prices. However, there can be
no guarantee that such hedging strategies will be fully effective in reducing
the variability of revenues from period to period.
The
Company is subject to various environmental laws and the success of existing
or
future environmental claims against it could adversely impact the
Company’sresults of operations and cash
flows.
The
Company’s operations are subject to various federal, state, local and
international laws, regulations and ordinances relating to the protection of
health, safety and the environment, including those governing discharges to
air
and water, handling and disposal practices for solid and hazardous wastes,
the
remediation of contaminated sites and the maintenance of a safe work
place. These laws impose penalties, fines and other sanctions for
non-compliance and liability for response costs, property damages and personal
injury resulting from past and current spills, disposals or other releases
of,
or exposure to, hazardous materials. The Company could incur
substantial costs as a result of non-compliance with or liability for
remediation or other costs or damages under these laws. The Company
may be subject to more stringent environmental laws in the future, and
compliance with more stringent environmental requirements may require the
Company to make material expenditures or subject it to liabilities that the
Company currently does not anticipate.
The
Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a "potentially responsible party'' for certain waste disposal
sites under the federal "Superfund'' law. At several sites, the
Company is currently conducting environmental remediation, and it is probable
that the Company will agree to make payments toward funding certain other of
these remediation activities. It also is possible that some of these
matters will be decided unfavorably to the Company and that other sites
requiring remediation will be identified. Each of these matters is
subject to various uncertainties and financial exposure is dependent upon such
factors as the continuing evolution of environmental laws and regulatory
requirements, the availability and application of technology, the allocation
of
cost among potentially responsible parties, the years of remedial activity
required and the remediation methods selected. The Company has
evaluated its potential liability and the Consolidated Balance Sheets for both
September 30, 2007 and December 31, 2006 include an accrual of $3.8 million
for
environmental matters. The amounts charged against pre-tax income
from continuing operations related to environmental matters totaled $1.7 million
and $1.1 million for the nine months ended September 30, 2007 and 2006,
respectively. The liability for future
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
remediation
costs is evaluated on a quarterly basis. Actual costs to be incurred
at identified sites in future periods may be greater than the estimates, given
inherent uncertainties in evaluating environmental exposures.
Restrictions
imposed by the Company’s credit facilities and outstanding notes, as well as
credit market conditions, may limit the Company’s ability to obtain additional
financing or to pursue business opportunities.
The
Company’s credit facilities and certain notes payable agreements contain a
covenant requiring a maximum debt to capital ratio of 60%. In
addition, certain notes payable agreements also contain a covenant requiring
a
minimum net worth of $475 million. These covenants limit the amount
of debt the Company may incur, which could limit its ability to obtain
additional financing or to pursue business opportunities. In
addition, the Company’s ability to comply with these ratios may be affected by
events beyond its control. A breach of any of these covenants or the
inability to comply with the required financial ratios could result in a default
under these credit facilities. In the event of any default under
these credit facilities, the lenders under those facilities could elect to
declare all borrowings outstanding, together with accrued and unpaid interest
and other fees, to be due and payable, which would cause an event of default
under the notes. This could, in turn, trigger an event of default
under the cross-default provisions of the Company’s other outstanding
indebtedness. Additionally, the tightening of the credit markets or a
downgrade to the Company’s credit ratings may adversely impact the Company’s
access to capital and the associated costs of borrowing. At September
30, 2007, the Company was in compliance with the covenants with a debt to
capital ratio of 48.4% and a net worth of $1.4 billion. The company
had $429.1 million in outstanding indebtedness containing these covenants at
September 30, 2007.
Higher
than expected insurance claims, under which the Company retains a portion of
risk, could adversely impact results of operations and cash
flows.
The
Company retains a significant portion of the risk for property, workers'
compensation, U.K. employers’ liability, automobile, general and product
liability losses. Reserves have been recorded which reflect the
undiscounted estimated liabilities for ultimate losses including claims incurred
but not reported. Inherent in these estimates are assumptions that
are based on the Company’s history of claims and losses, a detailed analysis of
existing claims with respect to potential value, and current legal and
legislative trends. At September 30, 2007 and December 31, 2006, the
Company had recorded liabilities of $111.4 million and $103.4 million,
respectively, related to both asserted and unasserted insurance
claims. Included in the balances at September 30, 2007 and December
31, 2006 were $25.7 million and $18.9 million, respectively, of recognized
liabilities covered by insurance carriers. If actual claims are
higher than those projected by management, an increase to the Company’s
insurance reserves may be required and would be recorded as a charge to income
in the period the need for the change was determined. Conversely, if
actual claims are lower than those projected by management, a decrease to the
Company’s insurance reserves may be required and would be recorded as a
reduction to expense in the period the need for the change was
determined.
The
seasonality of the Company’s business may cause its quarterly results to
fluctuate.
The
Company has historically generated the majority of its cash flows in the third
and fourth quarters (periods ending September 30 and December
31). This is a direct result of normally higher sales and income
during the second half of the year, as the Company’s business tends to follow
seasonal patterns. If the Company is unable to successfully manage
the cash flow and other effects of seasonality on the business, its results
of
operations and cash flows may be adversely affected.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
Historical
Revenue from Continuing Operations Patterns
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter Ended
March
31
|
|
$ |
840.0
|
|
|
$ |
682.1
|
|
|
$ |
558.0
|
|
|
$ |
478.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter Ended June 30
|
|
|
946.1
|
|
|
|
766.0
|
|
|
|
606.0
|
|
|
|
534.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter Ended September 30
|
|
|
927.4
|
|
|
|
773.3
|
|
|
|
599.5
|
|
|
|
532.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter Ended December 31
|
|
|
-
|
|
|
|
804.2
|
|
|
|
632.5
|
|
|
|
616.8
|
|
|
Totals
|
|
$ |
-
|
|
|
$ |
3,025.6
|
|
|
$ |
2,396.0
|
|
|
$ |
2,163.0
|
|
Historical
Cash Provided by Operations
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter Ended
March
31
|
|
$ |
41.7
|
|
|
$ |
69.8
|
|
|
$ |
48.1
|
|
|
$ |
32.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter Ended June 30
|
|
|
154.9
|
|
|
|
114.5
|
|
|
|
86.3
|
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter Ended September 30
|
|
|
175.7
|
|
|
|
94.6
|
|
|
|
98.1
|
|
|
|
68.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter Ended December 31
|
|
|
-
|
|
|
|
130.3
|
|
|
|
82.7
|
|
|
|
104.6
|
|
|
Totals
|
|
$ |
-
|
|
|
$ |
409.2
|
|
|
$ |
315.3 |
(a) |
|
$ |
270.5
|
|
|
(a)
|
Does
not total due to rounding.
|
The
Company's cash flows and earnings are subject to changes in interest
rates.
The
Company’s total debt as of September 30, 2007 was $1.33 billion. Of
this amount, approximately 42.0% had fixed rates of interest and 58.0% had
variable rates of interest. The weighted average interest rate of
total debt was approximately 5.9%. At current debt levels, a
one-percentage increase/decrease in variable interest rates would
increase/decrease interest expense by approximately $7.7 million per
year.
The
future financial impact on the Company associated with the above risks cannot
be
estimated.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a). There
were no unregistered sales of equity securities during the period covered by
the
report.
(c). Issuer
Purchases of Equity Securities
Period
|
Total
umber
of
Shares
Purchased
|
Average
Price
Paid
per
Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans or
Programs
|
Maximum
Number of
Shares
that May Yet
Be
Purchased Under
the
Plans or
Programs
|
|
|
|
|
|
July
1, 2007 – July 31, 2007
|
-
|
-
|
-
|
2,000,000
|
August
1, 2007 – August 31, 2007
|
-
|
-
|
-
|
2,000,000
|
September
1, 2007 – September 30, 2007
|
-
|
-
|
-
|
2,000,000
|
Total
|
-
|
-
|
-
|
|
The
Company’s share repurchase program was extended by the Board of Directors in
November 2006. The program authorizes the repurchase of up to
2,000,000 shares of the Company’s common stock and expires January 31,
2008.
ITEM
5. OTHER INFORMATION
STOCK
SPLIT
On
January 23, 2007, the Company's Board of Directors approved a two-for-one stock
split of the Company's Common Stock, par value $1.25 per share (the "Common
Stock"), to be effected in the form of a distribution of one additional share
of
the Company's Common Stock for each share that is issued and outstanding.
The record date for the stock split was February 28, 2007 and the payment date
was March 26, 2007. All historical share and per share data has been
restated to reflect the two-for-one stock split.
DIVIDEND
INFORMATION
On
September 25, 2007, the Company’s Board of Directors declared a quarterly cash
dividend of $0.1775 per share, on a post split basis, payable November 15,
2007,
to stockholders of record as of October 15, 2007.
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
PART
II –
OTHER INFORMATION
ITEM
6. EXHIBITS
Listing
of Exhibits filed with Form 10-Q:
Exhibit
Number
|
Data
Required
|
Location
|
|
|
|
31
(a)
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a), as Adopted Pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002
|
Exhibit
|
|
|
|
31
(b)
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a), as Adopted Pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002
|
Exhibit
|
|
|
|
32
(a)
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
Exhibit
|
|
|
|
32
(b)
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
Exhibit
|
HARSCO
CORPORATION AND SUBSIDIARY
COMPANIES
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
HARSCO
CORPORATION
(Registrant)
|
|
|
|
|
|
DATE November
8, 2007
|
|
/s/ Salvatore
D. Fazzolari |
|
|
|
Salvatore
D. Fazzolari |
|
|
|
President
and Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
DATE November
8, 2007
|
|
/s/ Stephen
J. Schnoor |
|
|
|
Stephen
J. Schnoor |
|
|
|
Vice
President and Controller |
|
|
|
|
|