PART I – FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
HARSCO
CORPORATION
|
|
Three
Months Ended
June
30
|
|
|
Six
Months Ended
June
30
|
|
(In
thousands, except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
$ |
944,490 |
|
|
$ |
810,429 |
|
|
$ |
1,797,118 |
|
|
$ |
1,533,244 |
|
Product
revenues
|
|
|
155,098 |
|
|
|
135,720 |
|
|
|
290,260 |
|
|
|
252,931 |
|
Total revenues
|
|
|
1,099,588 |
|
|
|
946,149 |
|
|
|
2,087,378 |
|
|
|
1,786,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
sold
|
|
|
686,531 |
|
|
|
585,677 |
|
|
|
1,324,589 |
|
|
|
1,124,215 |
|
Cost of products
sold
|
|
|
105,215 |
|
|
|
97,580 |
|
|
|
198,162 |
|
|
|
184,659 |
|
Selling, general and
administrative expenses
|
|
|
160,332 |
|
|
|
127,313 |
|
|
|
316,964 |
|
|
|
255,068 |
|
Research and development
expenses
|
|
|
1,508 |
|
|
|
734 |
|
|
|
2,561 |
|
|
|
1,727 |
|
Other (income)
expenses
|
|
|
163 |
|
|
|
(1,003 |
) |
|
|
(117 |
) |
|
|
(1,916 |
) |
Total costs and
expenses
|
|
|
953,749 |
|
|
|
810,301 |
|
|
|
1,842,159 |
|
|
|
1,563,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from
continuing operations
|
|
|
145,839 |
|
|
|
135,848 |
|
|
|
245,219 |
|
|
|
222,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
246 |
|
|
|
285 |
|
|
|
650 |
|
|
|
413 |
|
Interest
income
|
|
|
886 |
|
|
|
1,173 |
|
|
|
1,800 |
|
|
|
2,212 |
|
Interest
expense
|
|
|
(19,075 |
) |
|
|
(20,540 |
) |
|
|
(36,194 |
) |
|
|
(39,116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes and minority interest
|
|
|
127,896 |
|
|
|
116,766 |
|
|
|
211,475 |
|
|
|
185,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(35,000 |
) |
|
|
(37,388 |
) |
|
|
(59,188 |
) |
|
|
(58,989 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before minority interest
|
|
|
92,896 |
|
|
|
79,378 |
|
|
|
152,287 |
|
|
|
126,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income
|
|
|
(2,525 |
) |
|
|
(2,335 |
) |
|
|
(5,025 |
) |
|
|
(4,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
90,371 |
|
|
|
77,043 |
|
|
|
147,262 |
|
|
|
122,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
business
|
|
|
(841 |
) |
|
|
8,379 |
|
|
|
(586 |
) |
|
|
11,500 |
|
Income tax
expense
|
|
|
353 |
|
|
|
(2,353 |
) |
|
|
246 |
|
|
|
(3,260 |
) |
Income
(loss) from discontinued operations
|
|
|
(488 |
) |
|
|
6,026 |
|
|
|
(340 |
) |
|
|
8,240 |
|
Net Income
|
|
$ |
89,883 |
|
|
$ |
83,069 |
|
|
$ |
146,922 |
|
|
$ |
130,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding
|
|
|
84,271 |
|
|
|
84,145 |
|
|
|
84,323 |
|
|
|
84,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.07 |
|
|
$ |
0.92 |
|
|
$ |
1.75 |
|
|
$ |
1.46 |
|
Discontinued
operations
|
|
|
(0.01 |
) |
|
|
0.07 |
|
|
|
(0.00 |
) |
|
|
0.10 |
|
Basic
earnings per common share
|
|
$ |
1.07 |
(a) |
|
$ |
0.99 |
|
|
$ |
1.74 |
(a) |
|
$ |
1.55 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
average shares of common stock outstanding
|
|
|
84,751 |
|
|
|
84,702 |
|
|
|
84,801 |
|
|
|
84,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.07 |
|
|
$ |
0.91 |
|
|
$ |
1.74 |
|
|
$ |
1.45 |
|
Discontinued
operations
|
|
|
(0.01 |
) |
|
|
0.07 |
|
|
|
(0.00 |
) |
|
|
0.10 |
|
Diluted
earnings per common share
|
|
$ |
1.06 |
|
|
$ |
0.98 |
|
|
$ |
1.73 |
(a) |
|
$ |
1.54 |
(a) |
Cash
dividends declared per common share
|
|
$ |
0.1950 |
|
|
$ |
0.1775 |
|
|
$ |
0.3900 |
|
|
$ |
0.3550 |
|
(a) Does
not total due to rounding.
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
(In
thousands)
|
|
June
30
2008
|
|
|
December
31
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
123,309 |
|
|
$ |
121,833 |
|
Trade accounts receivable,
net
|
|
|
907,802 |
|
|
|
779,619 |
|
Other
receivables
|
|
|
59,895 |
|
|
|
44,475 |
|
Inventories
|
|
|
368,108 |
|
|
|
310,931 |
|
Other current
assets
|
|
|
99,165 |
|
|
|
88,016 |
|
Assets
held-for-sale
|
|
|
1,261 |
|
|
|
463 |
|
Total current
assets
|
|
|
1,559,540 |
|
|
|
1,345,337 |
|
Property,
plant and equipment, net
|
|
|
1,710,827 |
|
|
|
1,535,214 |
|
Goodwill,
net
|
|
|
744,662 |
|
|
|
720,069 |
|
Intangible
assets, net
|
|
|
178,278 |
|
|
|
188,864 |
|
Other
assets
|
|
|
119,850 |
|
|
|
115,946 |
|
Total assets
|
|
$ |
4,313,157 |
|
|
$ |
3,905,430 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
140,217 |
|
|
$ |
60,323 |
|
Current maturities of long-term
debt
|
|
|
8,096 |
|
|
|
8,384 |
|
Accounts
payable
|
|
|
370,652 |
|
|
|
307,814 |
|
Accrued
compensation
|
|
|
95,136 |
|
|
|
108,871 |
|
Income taxes
payable
|
|
|
35,310 |
|
|
|
41,300 |
|
Dividends
payable
|
|
|
16,437 |
|
|
|
16,444 |
|
Insurance
liabilities
|
|
|
53,240 |
|
|
|
44,823 |
|
Advances on
contracts
|
|
|
82,380 |
|
|
|
52,763 |
|
Other current
liabilities
|
|
|
251,440 |
|
|
|
233,248 |
|
Total current
liabilities
|
|
|
1,052,908 |
|
|
|
873,970 |
|
Long-term
debt
|
|
|
1,039,476 |
|
|
|
1,012,087 |
|
Deferred
income taxes
|
|
|
183,350 |
|
|
|
174,423 |
|
Insurance
liabilities
|
|
|
67,919 |
|
|
|
67,182 |
|
Retirement
plan liabilities
|
|
|
107,939 |
|
|
|
120,536 |
|
Other
liabilities
|
|
|
98,963 |
|
|
|
91,113 |
|
Total liabilities
|
|
|
2,550,555 |
|
|
|
2,339,311 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, Series A junior participating cumulative preferred
stock
|
|
|
— |
|
|
|
— |
|
Common
stock
|
|
|
138,870 |
|
|
|
138,665 |
|
Additional
paid-in capital
|
|
|
133,859 |
|
|
|
128,622 |
|
Accumulated
other comprehensive income (loss)
|
|
|
94,251 |
|
|
|
(2,501 |
) |
Retained
earnings
|
|
|
2,017,106 |
|
|
|
1,904,502 |
|
Treasury
stock
|
|
|
(621,484 |
) |
|
|
(603,169 |
) |
Total stockholders’
equity
|
|
|
1,762,602 |
|
|
|
1,566,119 |
|
Total liabilities and
stockholders’ equity
|
|
$ |
4,313,157 |
|
|
$ |
3,905,430 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
|
|
Six
Months Ended
June
30
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$ |
146,922 |
|
|
$ |
130,723 |
|
Adjustments to reconcile net
income to net
|
|
|
|
|
|
|
|
|
cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
157,542 |
|
|
|
132,787 |
|
Amortization
|
|
|
15,449 |
|
|
|
12,959 |
|
Equity in income of
unconsolidated entities, net
|
|
|
(650 |
) |
|
|
(414 |
) |
Dividends or distributions from
unconsolidated entities
|
|
|
484 |
|
|
|
176 |
|
Other, net
|
|
|
(2,687 |
) |
|
|
(821 |
) |
Changes in assets and
liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
and dispositions of
businesses:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(104,705 |
) |
|
|
(93,118 |
) |
Inventories
|
|
|
(45,846 |
) |
|
|
(54,224 |
) |
Accounts
payable
|
|
|
41,397 |
|
|
|
11,215 |
|
Accrued interest
payable
|
|
|
15,818 |
|
|
|
15,057 |
|
Accrued
compensation
|
|
|
(18,368 |
) |
|
|
(8,323 |
) |
Other assets and
liabilities
|
|
|
5,057 |
|
|
|
50,579 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
210,413 |
|
|
|
196,596 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(258,283 |
) |
|
|
(201,202 |
) |
Net use of cash associated with
the purchases of businesses
|
|
|
(13,575 |
) |
|
|
(227,323 |
) |
Proceeds from sale of
assets
|
|
|
7,167 |
|
|
|
10,773 |
|
Other investing
activities
|
|
|
15,279 |
|
|
|
(1,845 |
) |
|
|
|
|
|
|
|
|
|
Net cash used by investing
activities
|
|
|
(249,412 |
) |
|
|
(419,597 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Short-term borrowings,
net
|
|
|
73,783 |
|
|
|
220,926 |
|
Current maturities and long-term
debt:
|
|
|
|
|
|
|
|
|
Additions
|
|
|
686,373 |
|
|
|
466,480 |
|
Reductions
|
|
|
(675,649 |
) |
|
|
(446,171 |
) |
Cash dividends paid on common
stock
|
|
|
(32,899 |
) |
|
|
(29,837 |
) |
Common stock
issued-options
|
|
|
1,276 |
|
|
|
3,899 |
|
Common stock acquired for
treasury
|
|
|
(16,858 |
) |
|
|
— |
|
Other financing
activities
|
|
|
(3,436 |
) |
|
|
(3,448 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
32,590 |
|
|
|
211,849 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
7,885 |
|
|
|
5,819 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,476 |
|
|
|
(5,333 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
121,833 |
|
|
|
101,260 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
123,309 |
|
|
$ |
95,927 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
|
|
Three
Months Ended
June
30
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
89,883 |
|
|
$ |
83,069 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
14,411 |
|
|
|
28,129 |
|
|
|
|
|
|
|
|
|
|
Net gains (losses) on cash flow
hedging instruments, net of deferred income taxes of ($745) and $5 in 2008
and 2007, respectively
|
|
|
1,846 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
Pension liability adjustments,
net of deferred income taxes of ($937) and $242 in 2008 and 2007,
respectively
|
|
|
2,342 |
|
|
|
(549 |
) |
|
|
|
|
|
|
|
|
|
Marketable securities, unrealized
loss, net of deferred income taxes of $11 and $1 in 2008 and 2007,
respectively
|
|
|
(20 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
gain on cash flow hedging instruments included in net income, net of
deferred income taxes of $2 and $1 in 2008 and 2007,
respectively
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
18,576 |
|
|
|
27,567 |
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$ |
108,459 |
|
|
$ |
110,636 |
|
|
|
Six
Months Ended
June
30
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
146,922 |
|
|
$ |
130,723 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
89,168 |
|
|
|
35,438 |
|
|
|
|
|
|
|
|
|
|
Net gains (losses) on cash flow
hedging instruments, net of deferred income taxes of ($700) and $5 in 2008
and 2007, respectively
|
|
|
1,699 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
Pension liability adjustments,
net of deferred income taxes of ($2,378) and ($4,148) in 2008 and 2007,
respectively
|
|
|
5,930 |
|
|
|
9,474 |
|
|
|
|
|
|
|
|
|
|
Marketable securities, unrealized
loss, net of deferred income taxes of $21 and $1 in 2008 and 2007,
respectively
|
|
|
(39 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
gain on cash flow hedging instruments included in net income, net of
deferred income taxes of $4 and $3 in 2008 and 2007,
respectively
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
96,752 |
|
|
|
44,894 |
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$ |
243,674 |
|
|
$ |
175,617 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
A. Opinion of
Management
Financial
information of Harsco Corporation and its majority-owned subsidiaries (the
“Company”) 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 2007 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 2007 Form 10-K filing. Certain reclassifications were made
to prior year’s amounts to conform with the current year
presentation.
Operating
results and cash flows for the three and six months ended June 30, 2008, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008.
B. Review of
Operations by Segment
|
|
Three
Months Ended
June
30, 2008
|
|
|
Three
Months Ended
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
Services Segment
|
|
$ |
429,176 |
|
|
$ |
58,134 |
|
|
$ |
360,921 |
|
|
$ |
49,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
Services Segment
|
|
|
445,490 |
|
|
|
37,114 |
|
|
|
380,824 |
|
|
|
36,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Totals
|
|
|
874,666 |
|
|
|
95,248 |
|
|
|
741,745 |
|
|
|
85,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category (Minerals & Rail Services and Products)
|
|
|
224,862 |
|
|
|
52,036 |
|
|
|
204,404 |
|
|
|
50,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
60 |
|
|
|
(1,445 |
) |
|
|
— |
|
|
|
(666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Totals
|
|
$ |
1,099,588 |
|
|
$ |
145,839 |
|
|
$ |
946,149 |
|
|
$ |
135,848 |
|
|
|
Six
Months Ended
June
30, 2008
|
|
|
Six
Months Ended
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
Services Segment
|
|
$ |
808,000 |
|
|
$ |
95,972 |
|
|
$ |
677,130 |
|
|
$ |
84,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
Services Segment
|
|
|
862,206 |
|
|
|
66,321 |
|
|
|
741,594 |
|
|
|
68,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Totals
|
|
|
1,670,206 |
|
|
|
162,293 |
|
|
|
1,418,724 |
|
|
|
153,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category (Minerals & Rail Services and Products)
|
|
|
417,052 |
|
|
|
85,978 |
|
|
|
367,451 |
|
|
|
69,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
120 |
|
|
|
(3,052 |
) |
|
|
— |
|
|
|
(820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Totals
|
|
$ |
2,087,378 |
|
|
$ |
245,219 |
|
|
$ |
1,786,175 |
|
|
$ |
222,422 |
|
Reconciliation
of Segment Operating Income to Consolidated Income from Continuing
Operations
Before
Income Taxes and Minority Interest
|
|
Three
Months Ended
June
30
|
|
|
Six
Months Ended
June
30
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Operating Income
|
|
$ |
95,248 |
|
|
$ |
85,975 |
|
|
$ |
162,293 |
|
|
$ |
153,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category (Minerals & Rail Services and Products)
|
|
|
52,036 |
|
|
|
50,539 |
|
|
|
85,978 |
|
|
|
69,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
(1,445 |
) |
|
|
(666 |
) |
|
|
(3,052 |
) |
|
|
(820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
145,839 |
|
|
|
135,848 |
|
|
|
245,219 |
|
|
|
222,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
246 |
|
|
|
285 |
|
|
|
650 |
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
886 |
|
|
|
1,173 |
|
|
|
1,800 |
|
|
|
2,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(19,075 |
) |
|
|
(20,540 |
) |
|
|
(36,194 |
) |
|
|
(39,116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes and minority
interest
|
|
$ |
127,896 |
|
|
$ |
116,766 |
|
|
$ |
211,475 |
|
|
$ |
185,931 |
|
C. Accounts
Receivable and Inventories
At June
30, 2008 and December 31, 2007, Trade accounts receivable of $907.8 million and
$779.6 million, respectively, were net of an allowance for doubtful accounts of
$25.9 million and $25.6 million, respectively. The provision for
doubtful accounts was $1.8 million and $1.9 million for the three months ended
June 30, 2008 and 2007, respectively. For the six months ended June
30, 2008 and 2007, the provision for doubtful accounts was $3.2 million and $4.7
million, respectively. Other receivables include insurance claim
receivables, employee receivables, tax claims receivable and other miscellaneous
receivables not included in Trade accounts receivable, net.
Inventories
consist of the following:
|
|
|
Inventories
|
|
|
(In
thousands)
|
|
June
30
2008
|
|
|
December
31
2007
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
201,190 |
|
|
$ |
161,013 |
|
|
Work-in-process
|
|
|
24,907 |
|
|
|
23,776 |
|
|
Raw
materials and purchased parts
|
|
|
86,272 |
|
|
|
76,735 |
|
|
Stores
and supplies
|
|
|
55,739 |
|
|
|
49,407 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Inventories
|
|
$ |
368,108 |
|
|
$ |
310,931 |
|
D. Property,
Plant and Equipment
Property,
plant and equipment consists of the following:
(In
thousands)
|
|
June
30
2008
|
|
|
December
31
2007
|
|
Land
and improvements
|
|
$ |
50,714 |
|
|
$ |
47,250 |
|
Buildings
and improvements
|
|
|
183,400 |
|
|
|
175,744 |
|
Machinery
and equipment
|
|
|
3,307,969 |
|
|
|
2,997,425 |
|
Uncompleted
construction
|
|
|
79,471 |
|
|
|
75,167 |
|
Gross
property, plant and equipment
|
|
|
3,621,554 |
|
|
|
3,295,586 |
|
Less
accumulated depreciation
|
|
|
(1,910,727 |
) |
|
|
(1,760,372 |
) |
Net
property, plant and equipment
|
|
$ |
1,710,827 |
|
|
$ |
1,535,214 |
|
E. Goodwill and
Other Intangible Assets
The
following table reflects the changes in carrying amounts of goodwill by segment
for the six months ended June 30, 2008:
Goodwill
by Segment
|
|
|
|
(In
thousands)
|
|
Access
Services Segment
|
|
|
Mill
Services
Segment
|
|
|
All
Other Category – Minerals & Rail Services and Products
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007, net of accumulated amortization
|
|
$ |
254,856 |
|
|
$ |
348,311 |
|
|
$ |
116,902 |
|
|
$ |
720,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
acquired (a)
|
|
|
11,626 |
|
|
|
— |
|
|
|
— |
|
|
|
11,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
to goodwill (b)
|
|
|
1,336 |
|
|
|
(5,895 |
) |
|
|
266 |
|
|
|
(4,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
7,922 |
|
|
|
9,128 |
|
|
|
210 |
|
|
|
17,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2008, net of accumulated amortization
|
|
$ |
275,740 |
|
|
$ |
351,544 |
|
|
$ |
117,378 |
|
|
$ |
744,662 |
|
(a)
|
Relates
to acquisitions of Baviera S.R.L., Buckley Scaffolding and Sovereign
Access Services Limited, see Note F “Acquisition and
Dispositions.”
|
(b)
|
Relates
principally to opening balance sheet
adjustments.
|
Goodwill
is net of accumulated amortization of $106.3 million and $103.7 million at June
30, 2008 and December 31, 2007, respectively. The change in
accumulated amortization reflects foreign currency translation
adjustments.
The
following table reflects intangible assets by major category:
Intangible
Assets
|
|
|
|
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
(In
thousands)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Customer
relationships
|
|
$ |
160,921 |
|
|
$ |
35,295 |
|
|
$ |
157,717 |
|
|
$ |
25,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
3,483 |
|
|
|
3,102 |
|
|
|
3,382 |
|
|
|
2,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
6,871 |
|
|
|
4,423 |
|
|
|
6,805 |
|
|
|
4,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
67,211 |
|
|
|
17,388 |
|
|
|
66,266 |
|
|
|
12,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
238,486 |
|
|
$ |
60,208 |
|
|
$ |
234,170 |
|
|
$ |
45,151 |
|
During
the first six months of 2008, the Company acquired the following intangible
assets (by major class) which are subject to amortization.
|
Acquired
Intangible Assets
|
|
|
|
|
|
|
(In
thousands)
|
|
Gross
Carrying
Amount
|
|
Residual
Value
|
Weighted-average
Amortization
Period
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$ |
2,087 |
|
None
|
6
years
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
78 |
|
None
|
2
years
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
478 |
|
None
|
2
years
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,643 |
|
|
|
There
were no research and development assets acquired and written off in the first
six months of 2008 or 2007.
Amortization
expense for intangible assets was $7.3 million and $14.5 million for the second
quarter and first six months of 2008, respectively. This compares
with $7.3 million and $12.3 million for the second quarter and first six months
of 2007, respectively. The following table shows the estimated
amortization expense for the next five fiscal years based on current intangible
assets:
(In
thousands)
|
2008
|
2009
|
2010
|
2011
|
2012
|
|
|
|
|
|
|
Estimated
amortization expense (a)
|
$28,400
|
$27,200
|
$26,700
|
$25,300
|
$12,600
|
(a) These
estimated amortization expense amounts do not reflect the potential effect of
future foreign currency exchange rate fluctuations.
F. Acquisitions
and Dispositions
Acquisitions
In
February 2008, the Company acquired Northern Ireland-based Buckley Scaffolding
(“Buckley”), a provider of scaffolding and erection and dismantling services to
customers in the construction, industrial and events
businesses. Buckley recorded revenues of approximately $3 million in
2007 and has been included in the Access Services Segment.
In March
2008, the Company acquired Romania-based Baviera S.R.L. (“Baviera”), a
distributor of formwork and scaffolding products in Romania. The
acquisition of Baviera provides the Company with an operating platform in one of
the fastest-growing construction markets in Eastern Europe. Baviera
recorded revenues of approximately $3 million in 2007 and has been included in
the Access Services Segment.
In April
2008, the Company acquired Sovereign Access Services Limited (“Sovereign”), a
United Kingdom-based provider of mastclimber work platform rental
equipment. Sovereign recorded revenues of approximately $7 million in
2007 and has been included in the Access Services Segment.
The above
acquisitions, individually and in the aggregate, are not material to the
Company’s financial position and results of operations. Goodwill
arising from the acquisitions will be subject to periodic impairment testing and
acquired other intangible assets will be amortized over their estimated useful
lives.
Dispositions
Consistent
with the Company’s strategic focus to grow and allocate financial resources to
its industrial services businesses, on December 7, 2007, the Company sold its
Gas Technologies business group to Wind Point Partners, a private equity
investment firm based in Chicago, Illinois. The terms of the sale
include a total purchase price of $340 million, including $300 million paid in
cash at closing and $40 million payable in the form of an earnout contingent on
the Gas Technologies group achieving certain performance targets in 2008 or
2009. The Company recorded a $26.4 million after-tax gain on the sale
in the fourth quarter of 2007. The amount of this gain is not final
at June 30, 2008, due to possible final working capital adjustments, as provided
in the purchase agreement, and the potential earnout.
Assets
Held for Sale
Throughout
the past several years, management approved the sale of certain long-lived
assets (primarily land and buildings) throughout the Company’s
operations. The net property, plant and equipment reflected as assets
held-for-sale in the June 30, 2008 and December 31, 2007 Condensed Consolidated
Balance Sheets was $1.3 million and $0.5 million, respectively.
G. Debt and
Credit Agreements
In May
2008, the Company completed an offering in the United States of 5.75%, ten-year
senior notes totaling $450.0 million. Net proceeds of $446.6 million
were used to reduce the Company’s U.S. and euro commercial paper borrowings by
$286.4 million and $160.2 million, respectively. The notes include a
covenant that permits the note holders to redeem their notes at 101% of par in
the event of a change in control of the Company, or disposition of a significant
portion of the Company’s assets in combination with a downgrade of the Company’s
credit rating to non-investment grade. The Company was in compliance
with this covenant at June 30, 2008.
The
maturities of long-term debt for the five annual periods following June 30, 2008
are as follows:
|
(In
millions)
|
|
|
July
1, 2008 – June 30, 2009
|
|
$ |
8.1 |
|
|
July
1, 2009 – June 30, 2010
|
|
|
41.5 |
|
|
July
1, 2010 – June 30, 2011
|
|
|
398.4 |
|
|
July
1, 2011 – June 30, 2012
|
|
|
1.8 |
|
|
July
1, 2012 – June 30, 2013
|
|
|
— |
|
The
following table summarizes credit facilities and commercial paper programs and
available credit at June 30, 2008.
(In
millions)
|
|
Facility
Limit
|
|
|
Outstanding
Balance
|
|
|
Available
Credit
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
commercial paper program
|
|
$ |
550.0 |
|
|
$ |
70.6 |
|
|
$ |
479.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
commercial paper program
|
|
|
315.8 |
|
|
|
65.2 |
|
|
|
250.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-year
revolving credit facility (a)
|
|
|
450.0 |
|
|
|
— |
|
|
|
450.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
364-day
revolving credit facility (a)
|
|
|
450.0 |
|
|
|
— |
|
|
|
450.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bilateral
credit facility (b)
|
|
|
50.0 |
|
|
|
— |
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
at June 30, 2008
|
|
$ |
1,815.8 |
|
|
$ |
135.8 |
|
|
$ |
1,680.0 |
(c) |
|
(b)
|
International-based
program.
|
|
(c)
|
Although the Company has
significant available credit, practically, the Company limits aggregate
commercial paper and credit facility borrowings at any one time to a
maximum of $950 million (the aggregate amount of the back-up
facilities).
|
In
conjunction with the note issuance and euro commercial paper program reduction
noted above, the Company entered into a cross currency interest rate swap in
order to lock in a fixed euro interest rate for $250.0 million of the
borrowing. The swap expires in 2018 and had an unrealized gain of
$1.1 million, net of $0.4 million of deferred taxes, included in Other
comprehensive income at June 30, 2008.
H. Commitments
and Contingencies
Royalty
Expense Dispute
The
Company was involved in a royalty expense dispute with the Canada Revenue Agency
(“CRA”). The CRA disallowed certain expense deductions claimed by the
Company’s Canadian subsidiary on its 1994-1998 tax returns. The Company
completed settlement discussions with the CRA which resulted in a resolution and
closure of the matter in the fourth quarter of 2007. The settlement
resulted in a refund to the Company in the amount of approximately $5.9 million
Canadian dollars, representing a refund of the payment made to the CRA in the
fourth quarter of 2005, with the interest accrued on the 2005 settlement being
utilized to satisfy the final assessment of $0.6 million Canadian
dollars.
The
Ontario Ministry of Finance (“Ontario”) also proposed to disallow certain
expense deductions for the period 1994-1998. In July 2008, the
Company and Ontario settled this matter in a manner consistent with the results
obtained by the Company with the CRA. The settlement resulted in a total
refund to the Company of approximately $4.9 million Canadian dollars,
representing a refund of payments made to Ontario, plus accrued interest.
A portion of these amounts was utilized to satisfy the final assessment of $0.4
million Canadian dollars.
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 Condensed
Consolidated Balance Sheets at June 30, 2008, and December 31, 2007, include
accruals of $4.3 million and $3.9 million, respectively, for environmental
matters. The amounts charged against pre-tax income related to
environmental matters totaled $0.8 million and $1.3 million for the first six
months of 2008 and 2007, respectively.
The
Company and an unrelated third party received a notice of violation in November
2007 from the United States Environmental Protection Agency (“the EPA”), in
connection with an alleged violation by the Company and such third party of
certain applicable federally enforceable air pollution control requirements in
connection with the operation of a slag processing area located on the third
party’s Pennsylvania facility. The Company and such third party have
promptly taken steps to remedy the situation. The Company and the
third party are negotiating with the EPA to resolve this matter
and
received a proposal of settlement from the EPA in May 2008. The
Company has evaluated its potential liability and its financial exposure is
dependent on such factors as the effectiveness of the remedial measures taken
and the allocation of any penalty among the potentially responsible
parties. The Company anticipates that its portion of any penalty
would exceed $0.1 million. However, the Company does not expect that
any sum it may have to pay in connection with this matter would have a material
adverse effect on its financial position, results of operations or cash
flows.
The
Company evaluates its liability for future environmental remediation costs 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 effect 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 on-going. Most of the clean-up and
salvage efforts were completed during 2007, and the site is in a closure
monitoring phase. Estimated environmental remediation expenses to
complete the clean-up have been recognized in the financial statements as of
June 30, 2008. Following the incident, the Company’s remaining rail
grinders were inspected by the Federal Railroad Administration (“FRA”) and each
grinder was found to be in compliance with legal requirements. The
Company also regularly inspects its grinders to ensure they are in proper
working condition and in compliance with contractual commitments. The
Company believes that the insurance proceeds already received from the loss of
the rail grinder have offset the majority of incurred expenses, which have been
recognized in the financial statements as of June 30, 2008, and insurance
proceeds should be available to cover any future
liabilities. Therefore, the Company does not believe that the
derailment will have a material adverse effect 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 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
June 30, 2008, there are 26,292 pending asbestos personal injury claims filed
against the Company. Of these cases, 25,751 were pending in the New
York Supreme Court for New York County in New York State. The other
claims, totaling 541, 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
June 30, 2008, the Company has obtained dismissal by stipulation, or summary
judgment prior to trial, in 17,770 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 (a trial 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 June 30, 2008, the Company has been listed as a defendant in 396 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
to date. The Company has liability insurance coverage 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 effect 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 effect 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 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. Insurance claim receivables are included in Other
receivables in the Company’s Balance Sheet. See Note 1, “Summary of
Significant Accounting Policies,” of the Company’s Form 10-K for the year ended
December 31, 2007, for additional information on Accrued Insurance and Loss
Reserves.
As
indicated in Note F, “Acquisitions and Dispositions,” the working capital
adjustments associated with the Gas Technologies divestiture have not yet been
finalized. The estimated amount of the adjustment considered probable
by the Company is reflected in the Company’s financial statements as of June 30,
2008. Any additional final adjustment amounts are not expected to be
material to the Company’s financial position, results of operations or cash
flows.
I. Reconciliation
of Basic and Diluted Shares
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30
|
|
|
June
30
|
|
(Amounts
in thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
90,371 |
|
|
$ |
77,043 |
|
|
$ |
147,262 |
|
|
$ |
122,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding used to compute basic earnings per
common share
|
|
|
84,271 |
|
|
|
84,145 |
|
|
|
84,323 |
|
|
|
84,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of stock-based compensation
|
|
|
480 |
|
|
|
557 |
|
|
|
478 |
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding used to compute diluted earnings per
common share
|
|
|
84,751 |
|
|
|
84,702 |
|
|
|
84,801 |
|
|
|
84,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share from continuing operations
|
|
$ |
1.07 |
|
|
$ |
0.92 |
|
|
$ |
1.75 |
|
|
$ |
1.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share from continuing operations
|
|
$ |
1.07 |
|
|
$ |
0.91 |
|
|
$ |
1.74 |
|
|
$ |
1.45 |
|
All
outstanding stock options and restricted stock units were included in the
computation of diluted earnings per common share at June 30, 2008 and
2007.
J. Employee
Benefit Plans
Defined
Benefit Pension (Income) Expense:
|
|
Three
Months Ended June 30
|
|
|
|
U.
S. Plans
|
|
|
International
Plans
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
373 |
|
|
$ |
783 |
|
|
$ |
2,410 |
|
|
$ |
2,105 |
|
Interest cost
|
|
|
3,727 |
|
|
|
3,868 |
|
|
|
13,958 |
|
|
|
12,414 |
|
Expected return on plan
assets
|
|
|
(5,862 |
) |
|
|
(5,641 |
) |
|
|
(16,225 |
) |
|
|
(15,183 |
) |
Recognized prior service
costs
|
|
|
83 |
|
|
|
212 |
|
|
|
256 |
|
|
|
229 |
|
Recognized
losses
|
|
|
292 |
|
|
|
315 |
|
|
|
2,898 |
|
|
|
3,834 |
|
Amortization of transition
liability
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
7 |
|
Curtailment/settlement
loss
|
|
|
— |
|
|
|
544 |
|
|
|
— |
|
|
|
— |
|
Defined
benefit plans pension (income) expense
|
|
|
(1,387 |
) |
|
|
81 |
|
|
|
3,307 |
|
|
|
3,406 |
|
Less
Discontinued Operations included in above
|
|
|
— |
|
|
|
320 |
|
|
|
— |
|
|
|
117 |
|
Defined
benefit plans pension (income) expense – continuing
operations
|
|
$ |
(1,387 |
) |
|
$ |
(239 |
) |
|
$ |
3,307 |
|
|
$ |
3,289 |
|
Defined
Benefit Pension (Income) Expense:
|
|
Six
Months Ended June 30
|
|
|
|
U.
S. Plans
|
|
|
International
Plans
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
994 |
|
|
$ |
1,526 |
|
|
$ |
4,802 |
|
|
$ |
4,191 |
|
Interest cost
|
|
|
7,743 |
|
|
|
7,733 |
|
|
|
27,939 |
|
|
|
24,563 |
|
Expected return on plan
assets
|
|
|
(12,089 |
) |
|
|
(11,135 |
) |
|
|
(32,487 |
) |
|
|
(30,106 |
) |
Recognized prior service
costs
|
|
|
166 |
|
|
|
424 |
|
|
|
509 |
|
|
|
460 |
|
Recognized
losses
|
|
|
584 |
|
|
|
698 |
|
|
|
5,819 |
|
|
|
7,598 |
|
Amortization of transition
liability
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
13 |
|
Curtailment/settlement (gain)
loss
|
|
|
(866 |
) |
|
|
2,091 |
|
|
|
— |
|
|
|
— |
|
Defined
benefit plans pension (income) expense
|
|
|
(3,468 |
) |
|
|
1,337 |
|
|
|
6,601 |
|
|
|
6,719 |
|
Less
Discontinued Operations included in above
|
|
|
(694 |
) |
|
|
2,187 |
|
|
|
— |
|
|
|
231 |
|
Defined
benefit plans pension (income) expense – continuing
operations
|
|
$ |
(2,774 |
) |
|
$ |
(850 |
) |
|
$ |
6,601 |
|
|
$ |
6,488 |
|
Defined
benefit pension expense in the second quarter and six months ended June 30, 2008
was $1.6 million and $4.9 million, respectively, lower than the comparable 2007
periods. The decrease for the six months ended June 30, 2008 relates
primarily to a settlement gain of $0.9 million in the first quarter of 2008
compared with a curtailment loss of $1.5 million in the first quarter of
2007. Both of these items related to the Gas Technologies Segment
that was disposed in December 2007. The settlement gain was
recognized in the first quarter of 2008 upon final transfer of pension assets
and liabilities to an authorized trust established by the purchaser of the
business. Additionally, the expected return on plan assets increased
$1.3 million in the second quarter of 2008 compared with the second quarter of
2007, and $3.3 million for the six months ended June 30, 2008, due principally
to higher plan assets at the 2007 plan measurement dates.
In the
quarter ended June 30, 2008, the Company contributed $0.3 million and $5.9
million to the U.S. and international defined benefit pension plans,
respectively. In the six months ended June 30, 2008, the Company
contributed $0.6 million and $13.1 million to the U.S. and international defined
benefit pension plans, respectively. The Company currently
anticipates contributing an additional $1.2 million and $11.1 million for the
U.S. and international plans, respectively, during the remainder of
2008.
In the
quarter ended June 30, 2008, the Company contributed $6.8 million and $3.4
million to multiemployer and defined contribution pension plans,
respectively. In the six months ended June 30, 2008, the Company
contributed $13.5 million and $8.3 million to multiemployer and defined
contribution plans, respectively.
Commencing
in 2008, the Company eliminated the early measurement dates for its defined
benefit pension plans. In accordance with SFAS 158, the incremental
effect of this transition required an adjustment to beginning retained
earnings. As a result of these adjustments, the Company recorded a
net increase of $0.9 million to beginning Stockholders’ Equity as of January 1,
2008.
K. New Financial
Accounting Standards Issued
SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”)
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
157 which formally defines fair value, creates a standardized framework for
measuring fair value in generally accepted accounting principles in the United
States (“GAAP”), and expands fair value measurement disclosures. SFAS
157 was amended by FASB Staff Position (“FSP”) No.157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13” (“FSP SFAS 157-1”) and FSP No. 157-2, “Effective
Date of FASB Statement No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-1
excludes SFAS No. 13, “Accounting for Leases,” (“SFAS 13”) as well as other
accounting pronouncements that address fair value measurements on lease
classification or measurement under SFAS 13, from the scope of SFAS
157. FSP FAS 157-2 delays the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15, 2008 (January 1,
2009 for the Company).
SFAS 157,
as amended by FSP SFAS 157-2, is effective for the current fiscal year and was
adopted by the Company as of January 1, 2008. The adoption of SFAS
157, as it relates to financial assets, except for pension plan assets in
regards
to the
funded status of pension plans recorded on the Consolidated Balance Sheet, and
financial liabilities, had no impact on the consolidated financial
statements. Management is currently evaluating the potential impact
of SFAS 157 as it relates to pension plan assets, nonfinancial assets, and
nonfinancial liabilities on the consolidated financial
statements. See Note L, “Fair Value,” for SFAS 157
disclosures.
SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements” (“SFAS
160”).
In
December 2007, the FASB issued SFAS 160, which amends ARB No. 51, “Consolidated
Financial Statements.” SFAS 160 requires the reporting of
noncontrolling (minority) interest in subsidiaries to be measured at fair value
upon acquisition or loss of control and classified as a separate component of
equity. The accounting for transactions between an entity and
noncontrolling interest must be treated as equity transactions. SFAS
160 becomes effective for the Company on January 1, 2009. The Company
is currently evaluating the requirements of SFAS 160 and has not yet determined
the impact on the consolidated financial statements.
SFAS No. 141(R), “Business
Combinations” (“SFAS 141(R)”)
In
December 2007, the FASB issued SFAS 141(R) which significantly modifies the
accounting for business combinations. SFAS 141(R) requires the
acquiring entity in a business combination to recognize and measure the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, at their fair values as of that date, with
limited exceptions. Liabilities related to contingent consideration
are required to be recognized at acquisition and remeasured at fair value in
each subsequent reporting period. Restructuring charges, and all
pre-acquisition related costs (e.g., deal fees for attorneys, accountants and
investment bankers), must be expensed in the period they are
incurred. In addition, changes to acquisition-related deferred tax
assets and unrecognized tax benefits recorded under FIN 48 made subsequent to
the measurement period will generally impact income tax expense in that period
as opposed to being recorded to goodwill. SFAS 141(R) becomes
effective for the Company on January 1, 2009. The Company is
currently evaluating the impact of adopting SFAS 141(R) on its consolidated
financial statements.
SFAS No. 161, “Disclosures
About Derivative Instruments and Hedging Activities – an amendment of FASB
Statement No. 133” (“SFAS 161”).
In March
2008, the FASB issued SFAS 161 which requires enhanced disclosures about the use
of derivative instruments, the accounting for derivatives, and how derivatives
impact financial statements to enable investors to better understand their
effects on a company’s financial position, financial performance, and cash
flows. These requirements include the disclosure of the fair values
of derivative instruments and their gains and losses in a tabular
format. SFAS 161 becomes effective for the Company on January 1,
2009. As SFAS 161 only requires enhanced disclosures, this standard
will only impact notes to the consolidated financial statements.
FSP No. FAS 142-3
“Determination of the Useful life of Intangible Assets” (“FSP FAS
142-3”)
In April
2008, the FASB issued FSP No. FAS 142-3, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible Assets,” (“SFAS 142”) in order to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141(R) and other GAAP. FSP FAS 142-3 becomes
effective for the Company on January 1, 2009. The Company is
currently evaluating the impact of adopting FSP FAS 142-3 on its consolidated
financial statements.
FSP No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,” (“FSP EITF 03-6-1”)
In June
2008, the FASB issued FSP No. EITF 03-6-1 which states that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 becomes effective for the Company on
January 1, 2009. The Company has concluded that the adoption of
FSP EITF 03-6-1 will not have a material impact on the consolidated financial
statements.
L. Fair
Value
Effective
January 1, 2008, the Company adopted SFAS 157, as amended by FSP SFAS
157-2, which provides a framework for measuring fair value under
GAAP. As defined in SFAS 157, fair value is the price that would be
received to
sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). The Company
utilizes market data or assumptions that the Company believes market
participants would use in pricing the asset or liability, including assumptions
about risk and the risks inherent in the inputs to the valuation
technique.
This
standard is now the single source in GAAP for the definition of fair value,
except for the fair value of leased property as defined in SFAS
13. SFAS 157 establishes a fair value hierarchy that distinguishes
between (1) market participant assumptions developed based on market data
obtained from independent sources (observable inputs) and (2) an entity’s
own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). The
fair value hierarchy consists of three broad levels, which gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level
3). The three levels of the fair value hierarchy under SFAS 157 are
described below:
·
|
Level
1—Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
|
·
|
Level
2—Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly,
including quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
|
·
|
Level
3—Inputs that are both significant to the fair value measurement and
unobservable.
|
In
instances in which multiple levels of inputs are used to measure fair value,
hierarchy classification is based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company’s
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability.
The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis at June 30, 2008, and indicates the
fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value.
|
|
Fair
Value Measurements as of June 30, 2008
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
derivatives
|
|
|
— |
|
|
$ |
4,233 |
|
|
|
— |
|
|
$ |
4,233 |
|
Foreign
currency forward exchange contracts
|
|
|
— |
|
|
|
2,720 |
|
|
|
— |
|
|
|
2,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
|
— |
|
|
|
708 |
|
|
|
— |
|
|
|
708 |
|
Cross-currency
interest rate swap
|
|
|
— |
|
|
|
2,711 |
|
|
|
— |
|
|
|
2,711 |
|
The
Company primarily applies the market approach for recurring fair value
measurements and endeavors to utilize the best available
information. Accordingly, the Company utilizes valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable
inputs. The Company is able to classify fair value balances based on
the observability of those inputs. Commodity derivatives, foreign
currency forward exchange contracts, and cross-currency interest rate swaps are
classified as Level 2 fair value based upon pricing models using market-based
inputs. Model inputs can be verified and valuation techniques do not
involve significant management judgment.
FSP SFAS
157-2, issued in February 2008, delayed the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities that are measured on a
nonrecurring basis until January 1, 2009. The Company’s nonfinancial
assets consist principally of property, plant and equipment; goodwill; and other
intangible assets associated with acquired businesses. For these
assets, measurement at fair value in periods subsequent to their initial
recognition will be applicable if one or more of these assets are determined to
be impaired. When and if recognition of these assets at their fair
value is necessary, such measurements would be determined utilizing Level 3
inputs.
M.
Income Taxes
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. The
Company expects that this audit will be completed in the third quarter of 2008
and the resolution will not have a material effect on the Company.
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, 2007, which includes additional information about the
Company’s critical accounting policies, contractual obligations, practices and
transactions that support the financial results, and provides a more
comprehensive summary of the Company’s outlook, trends and strategies for 2008
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,
among other things, statements about management confidence and strategies for
performance; expectations for new and existing products, technologies, and
opportunities; and expectations regarding growth, sales, cash flows, earnings
and 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, interest rates, commodity and fuel costs 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, tax 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 integration of the Company’s acquisitions; (9) the amount
and timing of repurchases of the Company’s common stock, if any; and (10) 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 I, Item 1A, “Risk Factors,” of the Company’s Form 10-K for the year ended
December 31, 2007. 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 except as may be
required by law.
Executive
Overview
The
Company achieved record performance in the second quarter and first six months
of 2008 for sales, income from continuing operations and diluted earnings per
share from continuing operations. This resulted from the Company’s
strategy of constructing a well-balanced industrial services-based portfolio of
businesses based on three scalable operating platforms, focused on growth
through prudent acquisitions and increased geographical
diversity. Consistent with last year, both the Access Services
Segment and the All Other Category (Minerals & Rail Services and Products)
led the Company’s performance.
The
Company’s second quarter 2008 revenues from continuing operations were a record
$1.1 billion. This is an increase of $153.5 million or 16% over the
second quarter of 2007. Organic growth contributed 8% to the growth
in sales, while acquisitions contributed 2% and favorable foreign currency
translation effects contributed 6%. This performance reflects the
Company’s balance as well as its ability to grow organically and through
acquisitions. Income from continuing operations was a record $90.4
million compared with $77.0 million in 2007, an increase of
17%. Diluted earnings per share from continuing operations were a
record $1.07, an 18% increase over 2007.
Revenues
for the first six months of 2008 were a record $2.1 billion. This is
an increase of $301.2 million or 17% over the first six months of
2007. Organic growth contributed 8% to the growth in sales, while
acquisitions contributed 2% and
favorable
foreign currency translation effects contributed 7%. Income from
continuing operations was a record $147.3 million, compared with $122.5 million
in the first six months of 2007, a 20% increase. Diluted earnings per
share from continuing operations were a record $1.74, a 20% increase from the
first six months of 2007.
In the
second quarter of 2008, all major business platforms of the Company achieved
improved sales and operating income over the June 2007 quarter highlighting the
diversity and balance of the Company. Most of the global markets in
which the Company participates remained strong and the Company has 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 continued to make progress on its
geographic expansion strategy as sales in 2008 reflect an increasing geographic
balance, especially in emerging markets. Revenues outside Western
Europe and North America were approximately 21% of total revenues for the first
six months of 2008 compared to 17% for the first six months of 2007. The
Company’s continued geographic expansion strategy is expected to result in a
significant increase to the Company’s presence in emerging markets to
approximately 30% of total Company revenues over the next three years, and
closer to 40% in the longer-term.
The
Company generated operating margin improvement in the Mill Services Segment from
the first to the second quarter of 2008 and expects this quarter-by-quarter
improvement trend to continue gradually for the remainder of 2008 and into 2009
as strategies are executed to mitigate the impact of higher fuel costs; the
implementation of business optimization initiatives continues; contracts
performing below acceptable returns are renegotiated or in some cases exited;
the effects of restructuring actions are realized; and new contracts are
signed.
During
the second quarter of 2008, the Company had record net cash provided by
operating activities of $178.5 million, a 15% increase from the $154.9 million
achieved in the second quarter of 2007. For the first six months of
2008, the Company had record net cash provided by operating activities of $210.4
million, compared with $196.6 million for the first six months of 2007, a 7%
increase. The Company expects to achieve record cash from operations
for the full year 2008, exceeding 2007’s previous record of $471.7
million. Additionally, in the first half of 2008, the Company
invested a record $258.3 million in capital expenditures (over 56% of which were
for revenue-growth projects). The Company’s cash flows are further
discussed in the Liquidity and Capital Resources section.
Segment
Overview
The
Access Services Segment’s revenues in the second quarter of 2008 were $429.2
million compared with $360.9 million in the second quarter of 2007, a 19%
increase. Operating income increased by 18% to $58.1 million, from
$49.3 million in the second quarter of 2007. Operating margins
for the Segment decreased by 20 basis points to 13.5% from 13.7% in the second
quarter of 2007. In comparison with the first six months of 2007,
this Segment achieved period-over-period revenue growth of $130.9 million or
19%, and operating income growth of $11.6 million or 14%. Operating
margins for the first six months of 2008 decreased by 60 basis points to 11.9%
from 12.5% for the first six months of 2007. The record performance
in revenues and operating income for the second quarter and first six months of
2008 was due principally to continued strong end-market demand and positive
foreign currency translation effects. Demand was balanced and
broad-based as organic growth of 10% was generated primarily in certain parts of
Western Europe, the Middle East, Eastern Europe and North America as these
economies continued to make significant investment in new construction and
infrastructure modernization and expansion. Additionally, industrial
maintenance activity remains strong particularly in North America and certain
parts of Western Europe (particularly the Netherlands). This Segment
entered four new countries during the first six months of 2008: India, Russia,
Romania and Panama. Access Services accounted for 39% of the
Company’s revenues for both the second quarter and the first six months of 2008;
and 40% and 39% of the operating income for the second quarter and first six
months of 2008, respectively.
Revenues
for the second quarter of 2008 for the Mill Services Segment were $445.5 million
compared with $380.8 million in the second quarter of 2007, a 17%
increase. Operating income increased by 1% to $37.1 million, from
$36.7 million in the second quarter of 2007, and operating margins declined by
130 basis points to 8.3% from 9.6%. However as expected, second
quarter 2008 operating margins improved 130 basis points over the first quarter
2008 operating margins of 7.0%, reflecting the execution of business
optimization strategies. In comparison with the first six months of
2007, this Segment’s revenue increased by 16% to $862.2
million. Operating income in the first six months of 2008 declined by
4% to $66.3 million from $69.0 million in the first six months of 2007, and
operating margins declined 160 basis points to 7.7% from 9.3%. The
revenue growth in 2008 was primarily due to organic growth and positive foreign
currency translation effects. The decline in operating income and
margins for the first six months of 2008 was due principally to increased
operating and maintenance expenses, including significantly higher fuel costs,
as well as protracted customer negotiations on certain underperforming
contracts. This Segment accounted for 41% of the Company’s revenues
for both the second quarter and the first six months of 2008; and 25% and 27% of
the operating income for the second quarter and first six months of 2008,
respectively.
Revenues
in the second quarter of 2008 for the All Other Category (Minerals & Rail
Services and Products) were $224.9 million compared with $204.4 million in the
second quarter of 2007, a 10% increase. Operating income increased by
3% to $52.0 million, from $50.5 million in the second quarter of
2007. For the second quarter of 2008, operating margins declined 160
basis points to 23.1% from 24.7% in the second quarter of 2007 due solely to a
gain on an asset sale in 2007. For the first six months of 2008,
operating margins increased 160 basis points to 20.6% from 19.0% in the first
six months of 2007. All six of the businesses contributed higher
revenues due to strong demand, with four businesses contributing higher
operating income in the second quarter and first six months of 2008 compared
with the prior-year periods. This Category accounted for 20% of the
Company’s revenues for both the second quarter and the first six months of 2008;
and 35% and 34% of the operating income for the second quarter and first six
months of 2008, respectively.
Outlook
Overview
The
Company’s operations span several industries and products as more fully
discussed in Part I, Item 1, “Business,” of the Company’s Form 10-K for the
year-ended December 31, 2007. 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 maintenance activity;
and the general business trend towards the outsourcing of
services. The overall outlook for 2008 continues to be positive for
most of these business drivers.
Global
Access Services activity remains strong. Operating performance in
2008 for this Segment is expected to continue to benefit from increased
non-residential and infrastructure construction spending, especially in emerging
markets, and industrial maintenance 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
services; service cross-selling opportunities among the markets served; and
enterprise business optimization opportunities including new technology
applications, consolidated procurement, logistics and LeanSigma® continuous
process improvement initiatives. Further prudent global expansion and
market share gains are also expected from this Segment.
The
long-term growth outlook for the Mill Services Segment remains positive as the
future value of Mill Services contracts has increased since its record level in
December 2007 and global steel consumption is forecast to increase in 2008 and
2009. While considerable progress has been made in the second quarter
on improving the operating margins in this Segment, as evidenced by the margin
improvement of 130 basis points over the first quarter 2008 margins, the Company
remains focused on continued improvement in future quarters. Many
contracts allow the Company to ultimately recoup some of the higher fuel costs
which negatively affected operating results this year. The Company is
pursuing a multi-pronged strategy to address higher fuel costs
including: renegotiating contract escalation clauses and energy
surcharges; customers procuring the fuel for the Company at lower cost; and site
optimization initiatives that reduce fuel consumption. In addition,
the Company continues to renegotiate contracts performing at
lower-than-acceptable returns. These negotiations are expected to
conclude over the remainder of 2008. The Company is prepared to exit
some of these contracts in an orderly fashion if required returns cannot be
negotiated. The Company continues to engage in enterprise business
optimization initiatives including introducing the new LeanSigma® continuous
improvement program, which over time is expected to result in broad-scale
improvement in business practices and consequently operating
margin. In addition, new contract signings and start-ups, as well as
the Company’s geographic expansion strategy, particularly in emerging markets,
are expected to gradually have a positive effect on results in the longer
term. However, the Company may continue to experience higher
operating costs such as maintenance and fuel costs, which could have a negative
impact on operating income and margins to the extent these costs cannot be
passed to the customer.
The
outlook for the All Other Category (Minerals & Rail Services and Products)
remains positive. End-market demand remains strong and backlog
continues at or near record levels for each business. The Company
continues to experience strong bidding activity in its railway track maintenance
services and equipment business, new contract opportunities for its minerals and
recycling technologies business, and potential geographic expansion within its
products businesses.
The
balance and diversity of the Company’s portfolio and the significant investments
made for acquisitions and growth-related capital expenditures provide the base
for achieving the Company’s stated objective of growth in diluted earnings per
share from continuing operations and net cash provided by operating activities
for the full year 2008. The record performance for sales, operating
income and diluted earnings per share from continuing operations achieved in the
first six months of 2008 provides a solid foundation towards achieving the
full-year objectives.
The
following table highlights the Company’s increased geographical balance and
diversity:
Revenues
by Region
|
|
|
|
Total
Revenues
Three
Months Ended
June
30
|
|
|
Percentage
Growth From
2007
to 2008
|
|
(Dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
Volume/Price/
New Business
|
|
|
Currency
|
|
|
Total
|
|
Western
Europe
|
|
$ |
503.3 |
|
|
$ |
442.0 |
|
|
|
5.1 |
% |
|
|
8.8 |
% |
|
|
13.9 |
% |
North
America
|
|
|
370.2 |
|
|
|
338.6 |
|
|
|
8.8 |
|
|
|
0.5 |
|
|
|
9.3 |
|
Latin
America (a)
|
|
|
68.8 |
|
|
|
52.3 |
|
|
|
18.0 |
|
|
|
13.6 |
|
|
|
31.6 |
|
Middle
East and Africa
|
|
|
67.9 |
|
|
|
51.2 |
|
|
|
34.5 |
|
|
|
(1.9 |
) |
|
|
32.6 |
|
Eastern
Europe
|
|
|
53.2 |
|
|
|
32.3 |
|
|
|
39.7 |
|
|
|
25.1 |
|
|
|
64.8 |
|
Asia/Pacific
|
|
|
36.2 |
|
|
|
29.7 |
|
|
|
11.5 |
|
|
|
10.5 |
|
|
|
22.0 |
|
Total
|
|
$ |
1,099.6 |
|
|
$ |
946.1 |
|
|
|
10.1 |
% |
|
|
6.1 |
% |
|
|
16.2 |
% |
Revenues
by Region
|
|
|
|
Total
Revenues
Six
Months Ended
June
30
|
|
|
Percentage
Growth From
2007
to 2008
|
|
(Dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
Volume/Price/
New Business
|
|
|
Currency
|
|
|
Total
|
|
Western
Europe
|
|
$ |
966.1 |
|
|
$ |
858.6 |
|
|
|
3.1 |
% |
|
|
9.4 |
% |
|
|
12.5 |
% |
North
America
|
|
|
693.8 |
|
|
|
615.6 |
|
|
|
11.9 |
|
|
|
0.8 |
|
|
|
12.7 |
|
Latin
America (a)
|
|
|
129.9 |
|
|
|
97.8 |
|
|
|
18.8 |
|
|
|
14.1 |
|
|
|
32.9 |
|
Middle
East and Africa
|
|
|
128.2 |
|
|
|
92.6 |
|
|
|
40.2 |
|
|
|
(1.7 |
) |
|
|
38.5 |
|
Eastern
Europe
|
|
|
97.7 |
|
|
|
59.2 |
|
|
|
40.7 |
|
|
|
24.2 |
|
|
|
64.9 |
|
Asia/Pacific
|
|
|
71.7 |
|
|
|
62.4 |
|
|
|
2.5 |
|
|
|
12.4 |
|
|
|
14.9 |
|
Total
|
|
$ |
2,087.4 |
|
|
$ |
1,786.2 |
|
|
|
10.2 |
% |
|
|
6.7 |
% |
|
|
16.9 |
% |
Revenues
outside Western Europe and North America were approximately 21% of total
revenues for the second quarter of 2008, compared to 17% for the second quarter
of 2007. The Company’s continued geographic expansion strategy is expected
to result in a significant increase to the Company’s presence in emerging
markets to approximately 30% of total Company revenues over the next three
years, and closer to 40% in the longer-term.
2008
Highlights
The
following significant items affected the Company overall during the second
quarter and first six months of 2008, in comparison with the second quarter and
first six months of 2007:
Company
Wide:
·
|
Continued
strong demand in most markets benefited the Company in the second quarter
and first half of 2008. This included increased access
equipment services, sales and rentals, especially in parts of Europe and
the Middle East; as well as increased demand for railway track maintenance
services and equipment, air-cooled heat exchangers and industrial grating
products.
|
·
|
Operating
income and margins for the Mill Services Segment were negatively affected
by increased operating expenses, mainly higher fuel costs, as well as
certain contracts with lower-than-acceptable
margins.
|
·
|
During
the first half of 2008, sales and operating income generated outside the
United States were 70% and 69%, respectively, of total sales and operating
income. This compares with the first half of 2007 levels of 68%
of sales and 66% of operating income. The Company continued to
expand its geographical footprint in emerging markets such as the Middle
East, Eastern Europe, Latin America and
Asia-Pacific.
|
Access Services
Segment:
|
|
Three
Months
Ended
June 30
|
|
|
Six
Months
Ended
June 30
|
|
(Dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
429.2 |
|
|
$ |
360.9 |
|
|
$ |
808.0 |
|
|
$ |
677.1 |
|
Operating
income
|
|
|
58.1 |
|
|
|
49.3 |
|
|
|
96.0 |
|
|
|
84.3 |
|
Operating
margin percent
|
|
|
13.5 |
% |
|
|
13.7 |
% |
|
|
11.9 |
% |
|
|
12.5 |
% |
Access
Services Segment – Significant Impacts on Revenues
|
|
Three
Months
Ended
June 30
|
|
|
Six
Months
Ended
June 30
|
|
(In
millions)
|
|
|
|
|
|
|
Revenues
– 2007
|
|
$ |
360.9 |
|
|
$ |
677.1 |
|
Net
increased volume and new business
|
|
|
34.9 |
|
|
|
67.7 |
|
Impact
of foreign currency translation
|
|
|
29.2 |
|
|
|
58.2 |
|
Acquisitions
|
|
|
4.2 |
|
|
|
5.0 |
|
Revenues
– 2008
|
|
$ |
429.2 |
|
|
$ |
808.0 |
|
Access
Services Segment – Significant Impacts on Operating Income:
·
|
In
the second quarter and first six months of 2008, the Segment’s operating
results continued to improve due to increased non-residential, commercial
and infrastructure construction throughout the world, and in particular
Asia/Pacific, certain parts of Europe and the Middle East. The
Company continues to benefit from its rental equipment capital investments
made in both developed and emerging markets. Additionally,
industrial maintenance activity remains strong in both North America and
certain parts of Western Europe (particularly the
Netherlands).
|
·
|
Foreign
currency translation in the second quarter and the first six months of
2008 increased operating income for this Segment by $5.3 million and $9.0
million compared with the second quarter and first six months of
2007.
|
·
|
In
the second quarter and first six months of 2008, the segment’s operating
results included a significant amount of increased costs associated with
reorganization and new business optimization initiatives and further
process and technology
standardization.
|
Mill Services
Segment:
|
|
Three
Months
Ended
June 30
|
|
|
Six
Months
Ended
June 30
|
|
(Dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
445.5 |
|
|
$ |
380.8 |
|
|
$ |
862.2 |
|
|
$ |
741.6 |
|
Operating
income
|
|
|
37.1 |
|
|
|
36.7 |
|
|
|
66.3 |
|
|
|
69.0 |
|
Operating
margin percent
|
|
|
8.3 |
% |
|
|
9.6 |
% |
|
|
7.7 |
% |
|
|
9.3 |
% |
Mill
Services Segment – Significant Impacts on Revenues
|
|
Three
Months
Ended
June 30
|
|
|
Six
Months
Ended
June 30
|
|
(In
millions)
|
|
|
|
|
|
|
Revenues
– 2007
|
|
$ |
380.8 |
|
|
$ |
741.6 |
|
Impact
of foreign currency translation
|
|
|
27.3 |
|
|
|
58.3 |
|
Increased
volume and new business
|
|
|
26.8 |
|
|
|
37.5 |
|
Acquisitions
|
|
|
10.6 |
|
|
|
24.8 |
|
Revenues
– 2008
|
|
$ |
445.5 |
|
|
$ |
862.2 |
|
Mill
Services Segment – Significant Effects on Operating Income:
·
|
Despite
overall increased volume, operating income for the second quarter and
first six months of 2008 was negatively affected by increased operating
and maintenance expenses, particularly higher fuel costs, as well as
certain contracts performing at lower-than-acceptable
returns.
|
·
|
The
2007 acquisitions of Alexander Mill Services International (“AMSI”) and
Performix increased operating income in the second quarter and first six
months of 2008 compared to 2007.
|
·
|
Foreign
currency translation in the second quarter and first six months of 2008
increased operating income for this Segment by $3.6 million and $8.3
million, respectively, compared with the second quarter and first six
months of 2007.
|
All Other Category -
Minerals & Rail Services and Products:
|
|
Three
Months
Ended
June 30
|
|
|
Six
Months
Ended
June 30
|
|
(Dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
224.9 |
|
|
$ |
204.4 |
|
|
$ |
417.1 |
|
|
$ |
367.5 |
|
Operating
income
|
|
|
52.0 |
|
|
|
50.5 |
|
|
|
86.0 |
|
|
|
69.9 |
|
Operating
margin percent
|
|
|
23.1 |
% |
|
|
24.7 |
% |
|
|
20.6 |
% |
|
|
19.0 |
% |
All
Other Category - Minerals & Rail Services and Products –
Significant
Impacts on Revenues
|
|
Three
Months
Ended
June 30
|
|
|
Six
Months
Ended
June 30
|
|
(In
millions)
|
|
|
|
|
|
|
Revenues
– 2007
|
|
$ |
204.4 |
|
|
$ |
367.5 |
|
Air-cooled
heat exchangers
|
|
|
5.7 |
|
|
|
14.0 |
|
Acquisitions
|
|
|
0.9 |
|
|
|
12.5 |
|
Railway
track maintenance services and equipment
|
|
|
4.1 |
|
|
|
8.5 |
|
Industrial
grating products
|
|
|
4.6 |
|
|
|
7.5 |
|
Impact
of foreign currency translation
|
|
|
1.4 |
|
|
|
3.5 |
|
Roofing
granules and abrasives
|
|
|
1.2 |
|
|
|
2.6 |
|
Boiler
and process equipment
|
|
|
1.7 |
|
|
|
1.2 |
|
Reclamation
and recycling services
|
|
|
0.8 |
|
|
|
(0.2 |
) |
Other
|
|
|
0.1 |
|
|
|
— |
|
Revenues
– 2008
|
|
$ |
224.9 |
|
|
$ |
417.1 |
|
All
Other Category - Minerals & Rail Services and Products – Significant Impacts
on Operating Income:
·
|
Strong
demand in the natural gas market resulted in increased volume and
operating income for the air-cooled heat exchangers business in the second
quarter and first six months of
2008.
|
·
|
The
railway track maintenance services and equipment business delivered
increased income in the second quarter and first six months of 2008
compared with 2007 due to increased repair parts volume and rail equipment
sales, partially offset by higher selling, general and administrative
expenses. Additionally, contract services income increased for
the first six months of 2008.
|
·
|
The
industrial grating products business experienced higher sales as a result
of strong demand; however, operating income increases were partially
offset by rising prices of raw materials, particularly
steel.
|
·
|
Operating
income for the boiler and process equipment business was higher in the
second quarter and first six months of 2008 due to increased demand and
favorable pricing from suppliers.
|
·
|
Despite
lower volume and an unfavorable product mix for the roofing granules and
abrasives business in the second quarter and first six months 2008,
operating income increased due to price increases, which were partially
offset by higher manufacturing
costs.
|
·
|
This
Category benefited from a $1.0 million pre-tax gain on the sale of an
asset in the first quarter of 2008. This is offset by a $3.2
million pre-tax gain on the sale of an asset in the second quarter 2007
which was not repeated in 2008.
|
·
|
Foreign
currency translation in the second quarter and first six months of 2008
reduced operating income for this Category by $0.1 million and $0.5
million, respectively, compared with the second quarter and first six
months of 2007.
|
Outlook,
Trends and Strategies
Looking
to the remainder of 2008 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 its industrial
services businesses, with a particular emphasis on prudently 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 selective strategic
acquisitions. Additionally, new higher-margin service and sales
opportunities in the minerals and rail businesses will be pursued
globally.
|
·
|
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
implementation of the Company’s enterprise-wide LeanSigma® continuous
process improvement program in 2008 and beyond should provide long-term
efficiencies as the Company executes enterprise optimization
initiatives.
|
·
|
In
addition to LeanSigma®, the Company will continue to implement
enterprise-wide business optimization initiatives to further enhance
margins for most businesses. These initiatives include improved
supply-chain and logistics management; operating site and capital employed
optimization; and added emphasis on global
procurement. Although the initial investment in these
initiatives may reduce operating margins during 2008 (due to incremental
costs) the overall margin enhancement should be recognized in 2009 and
beyond.
|
·
|
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 Asia-Pacific, Eastern Europe,
Latin America, and the Middle East and Africa to further complement the
Company’s already-strong presence throughout Western Europe and North
America. This strategy is expected to result in a significant
increase to the Company’s presence in these markets to approximately 30%
of total Company revenues over the next three years and closer to 40% in
the longer-term. Revenues in these markets were 21% for both
the second quarter and first six months of
2008.
|
·
|
The
Company expects to generate cash flow from operating activities exceeding
the record of $472 million achieved in 2007. This will support
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 and the Minerals business. However, if Asian
steel exports increase, that 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 businesses. The potential impact
of these risks is currently
unknown.
|
·
|
Volatility
in energy and commodity costs (e.g., oil, 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
materials. Cost increases could result in reduced operating
income for certain products and services, 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 an adverse impact on the Company’s
operating costs. However, increased volatility in energy and
commodity costs may provide additional service opportunities for the Mill
Services Segment and several businesses in the All Other Category
(Minerals & Rail Services and Products) as customers may tend to
outsource more services to reduce overall costs. Such
volatility may also provide opportunities for additional petrochemical
plant maintenance and capital improvement projects. As part of
the enterprise-wide optimization initiatives discussed above, the Company
is implementing programs to help mitigate these
costs.
|
·
|
Foreign
currency translation had an overall favorable effect on the Company’s
sales, operating income and stockholders’ equity during the second quarter
and first six months of 2008 in comparison with 2007. 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, operating 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, operating income and stockholders’
equity.
|
·
|
Financial
markets in the United States and in a number of other countries where the
Company operates, principally in Western Europe, have been volatile since
mid-2007 due to the credit and liquidity issues in the market
place. This
|
|
has
adversely impacted the outlook for the overall U.S. economy as economic
activity slowed, creating increased downside risk to growth. In
some parts of Europe, a more moderate pace of economic growth is expected
in 2008 when compared with 2007. While the Company’s global
footprint; diversity of services and products; long-term mill services
contracts; portability of access services equipment; and large access
services customer base mitigate the overall exposure to changes in any one
single economy, further deterioration of the global economies could have
an adverse impact on the Company’s operating
results.
|
·
|
Changes
in worldwide interest rates, particularly in the United States and Europe,
could have a significant effect on the Company’s overall interest
expense. A one percentage point change in variable interest
rates would change interest expense by approximately $1.9 million per
year. This is substantially lower than prior projected impacts
as variable rate debt has been reduced to approximately 16% of the
Company’s borrowings as of June 30, 2008, compared to approximately 49% at
December 31, 2007. This decrease is due to the repayment of
commercial paper borrowings during the second quarter of 2008 with the
proceeds from the May 2008 U.S. senior notes offering. 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. Strategies to further reduce related risks are under
consideration.
|
·
|
As
the Company continues the strategic expansion of its global footprint and
implements tax planning opportunities, the 2008 effective income tax rate
is expected to be lower than 2007. The effective income tax
rate for continuing operations was 27.4% and 28.0% for the second quarter
and first six months of 2008, respectively, compared with 32.0% and 31.7%
for the second quarter and first six months of 2007,
respectively. The decrease in the effective income tax rate for
the second quarter and first six months of 2008 was primarily due to
increased earnings in jurisdictions with lower tax rates and the
recognition of previously unrecognized tax benefits in certain state and
foreign jurisdictions.
|
Access Services
Segment:
·
|
Both
the international and domestic Access Services businesses have experienced
buoyant markets that are expected to remain stable during
2008. Specifically, international and North American
industrial, non-residential and infrastructure construction activity
continues at high volume levels.
|
·
|
The
Company will continue to emphasize prudent expansion of our geographic
presence in this Segment through entering new markets and further
expansion in emerging economies, and will continue to leverage value-added
services and highly engineered forming, shoring and scaffolding systems to
grow the business.
|
·
|
The
Company will continue to implement continuous process improvement
initiatives including: global procurement and logistics; the sharing of
engineering knowledge and resources; optimizing the business under one
standardized administrative and operating model at all locations
worldwide; and on-going analysis for other potential synergies across the
operations.
|
Mill Services
Segment:
·
|
The
Company will continue to place significant emphasis on improving operating
margins of this Segment and the gradual improvement recognized from the
first quarter of 2008 to the second quarter of 2008 is expected to
continue through the remainder of 2008 and into 2009. Margin
improvements are most likely to be achieved through negotiated recovery of
higher fuel costs from customers; renegotiating or exiting contracts with
lower-than-acceptable returns, principally in North America; internal
enterprise business optimization efforts; 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 continuous process improvement initiatives including
LeanSigma® projects, global procurement initiatives, site efficiency
programs, technology enhancements, maintenance best practices programs and
reorganization actions. Although the costs associated with
these efforts may reduce operating margins during 2008 when compared with
2007 due to incremental costs, the overall margin enhancement should be
recognized in 2009 and beyond.
|
·
|
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 consumption to
increase in 2008 and 2009. Increased steel consumption 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 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.
|
All Other
Category - Minerals
& Rail Services and Products:
·
|
The
Company will emphasize prudent global expansion of its reclamation and
recycling 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 reclamation and recycling services could affect the operating
results of 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 multi-year equipment order signed in 2007 with
China is an example of the underlying strength of the international
markets. Due to long lead-times, this order is expected to
generate most of its revenues during 2009 through 2011. In
addition, increased volume of contract services and LeanSigma® 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 and other commodity prices could have on operating
income. If steel or other commodity 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
commodities 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 could be adversely
affected.
|
·
|
Operating
margins of the abrasives business 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 through the remainder of 2008 and into
2009.
|
Results
of Operations
(Dollars are in millions,
except per share |
|
Three
Months
Ended
June 30
|
|
|
Six
Months
Ended
June 30
|
|
and
percentages)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from continuing operations
|
|
$ |
1,099.6 |
|
|
$ |
946.1 |
|
|
$ |
2,087.4 |
|
|
$ |
1,786.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and products sold
|
|
|
791.7 |
|
|
|
683.3 |
|
|
|
1,522.8 |
|
|
|
1,308.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
160.3 |
|
|
|
127.3 |
|
|
|
317.0 |
|
|
|
255.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expenses
|
|
|
0.2 |
|
|
|
(1.0 |
) |
|
|
(0.1 |
) |
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
145.8 |
|
|
|
135.8 |
|
|
|
245.2 |
|
|
|
222.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
19.1 |
|
|
|
20.5 |
|
|
|
36.2 |
|
|
|
39.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense from continuing operations
|
|
|
35.0 |
|
|
|
37.4 |
|
|
|
59.2 |
|
|
|
59.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
90.4 |
|
|
|
77.0 |
|
|
|
147.3 |
|
|
|
122.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
(0.5 |
) |
|
|
6.0 |
|
|
|
(0.3 |
) |
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
89.9 |
|
|
|
83.1 |
|
|
|
146.9 |
|
|
|
130.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share from continuing operations
|
|
|
1.07 |
|
|
|
0.91 |
|
|
|
1.74 |
|
|
|
1.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
|
1.06 |
|
|
|
0.98 |
|
|
|
1.73 |
|
|
|
1.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate for continuing operations
|
|
|
27.4 |
% |
|
|
32.0 |
% |
|
|
28.0 |
% |
|
|
31.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
effective income tax rate
|
|
|
27.3 |
% |
|
|
31.8 |
% |
|
|
28.0 |
% |
|
|
31.5 |
% |
Comparative
Analysis of Consolidated Results
Revenues
Revenues
for the second quarter of 2008 increased $153.4 million or 16% from the second
quarter of 2007. Revenues for the first six months of 2008 increased
$301.2 million or 17% from the first six months of 2007. These
increases were attributable to the following significant items:
Changes
in Revenues – 2008 vs. 2007
|
|
Second
Quarter
|
|
|
Six
Months
|
|
(In
millions)
|
|
|
|
|
|
|
Effect
of foreign currency translation.
|
|
$ |
58.0 |
|
|
$ |
120.0 |
|
Net
increased revenues (excluding acquisitions) in the Access Services Segment
due principally to growth in the Middle East and continued strength in
Europe (principally the Netherlands and the U.K.) and North
America.
|
|
|
34.9 |
|
|
|
67.7 |
|
Effect
of business acquisitions in the Mill Services Segment ($10.6 and $24.8,
for the second quarter and six months, respectively); the Access Services
Segment ($4.2 and $5.0, for the second quarter and six months,
respectively) and the All Other Category - Minerals & Rail Services
and Products ($0.9 and $12.5, for the second quarter and six months,
respectively).
|
|
|
15.7 |
|
|
|
42.3 |
|
Net
increased volume, new contracts and sales price changes in the Mill
Services Segment (excluding acquisitions).
|
|
|
26.8 |
|
|
|
37.5 |
|
Increased
revenues of the air-cooled heat exchangers business due to a continued
strong natural gas market.
|
|
|
5.7 |
|
|
|
14.0 |
|
Increased
revenues in the railway track maintenance services and equipment business
due to increased repair parts sales and rail equipment
sales. Additionally, contract services increased for the first
six months.
|
|
|
4.1 |
|
|
|
8.5 |
|
Increased
revenues in the industrial grating products business due to continued
strong demand.
|
|
|
4.6 |
|
|
|
7.5 |
|
Other
(minor changes across the various units not already
mentioned).
|
|
|
3.6 |
|
|
|
3.7 |
|
Total
Change in Revenues – 2008 vs. 2007
|
|
$ |
153.4 |
|
|
$ |
301.2 |
|
Cost
of Services and Products Sold
Cost of
services and products sold for the second quarter of 2008 increased $108.5
million, or 16%, from the second quarter of 2007, consistent with the 16%
increase in revenues. Cost of services and products sold for the
first six months of 2008 increased $213.9 million, or 16%, from the first six
months of 2007, slightly lower than the 17% increase in
revenues. These increases were attributable to the following
significant items:
Changes
in Cost of Services and Products Sold – 2008 vs. 2007
|
|
Second
Quarter
|
|
|
Six
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 commodity costs included in selling prices).
|
|
$ |
56.9 |
|
|
$ |
97.8 |
|
Effect
of foreign currency translation.
|
|
|
42.1 |
|
|
|
88.5 |
|
Effect
of business acquisitions.
|
|
|
10.9 |
|
|
|
31.9 |
|
Other
(product/service mix, results of enterprise business optimization
initiatives and volume-related efficiencies partially offset by increased
equipment maintenance costs and increased fuel costs not recovered through
increased selling prices).
|
|
|
(1.4 |
) |
|
|
(4.3 |
) |
Total
Change in Cost of Services and Products Sold – 2008 vs.
2007
|
|
$ |
108.5 |
|
|
$ |
213.9 |
|
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses for the second quarter and
first six months of 2008 increased $33.0 million and $61.9 million,
respectively, from the comparable 2007 periods. 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
– 2008 vs. 2007
|
|
Second
Quarter
|
|
|
Six
Months
|
|
(In
millions)
|
|
|
|
|
|
|
Increased
compensation expense due to salary increases and increased headcount to
fill key positions.
|
|
$ |
9.9 |
|
|
$ |
21.5 |
|
Effect
of foreign currency translation.
|
|
|
7.9 |
|
|
|
16.5 |
|
Increased
professional fees due to global optimization projects and global business
expansion.
|
|
|
4.0 |
|
|
|
7.4 |
|
Increased
travel expenses.
|
|
|
2.9 |
|
|
|
4.3 |
|
Effect
of business acquisitions.
|
|
|
1.8 |
|
|
|
4.2 |
|
Increased
commissions, largely related to increased revenues in the air-cooled heat
exchangers business.
|
|
|
0.9 |
|
|
|
3.3 |
|
Other.
|
|
|
5.6 |
|
|
|
4.7 |
|
Total
Change in Selling, General and Administrative
Expenses
– 2008 vs. 2007
|
|
$ |
33.0 |
|
|
$ |
61.9 |
|
Other
(Income) Expenses
This
income statement classification includes impaired asset write-downs, 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 $0.2
million in the second quarter of 2008, compared with income of $1.0 million in
the comparable 2007 period. Net Other income was $0.1 million in
the first six months of 2008, compared with income of $1.9 million in the first
six months of 2007. The decrease in other income for both the second
quarter and six months of 2008 relates principally to incremental gains on the
sale of non-core assets realized in 2007.
Interest
Expense
Interest
expense for the second quarter of 2008 decreased $1.5 million or 7% from the
second quarter of 2007. For the first six months of 2008, interest
expense decreased $2.9 million or 7% from the first six months of
2007. This decrease was primarily due to lower overall debt levels in
2008, partially offset by foreign currency translation that increased interest
expense by $0.3 million and $0.7 million for the second quarter and first six
months of 2008, respectively.
Income
Tax Expense from Continuing Operations
Income
tax expense from continuing operations decreased $2.4 million or 6% in the
second quarter of 2008 compared with the second quarter of 2007. This
decrease was primarily due to a lower effective income tax rate from continuing
operations offset by increased net income. The income tax expense for
the first six months of 2008 remained comparatively the same as the first six
months of 2007 as a result of increased net income offset by the decrease in the
effective income tax rate. The effective income tax rates of 27.4%
and 28.0% for the second quarter and first six months of 2008, respectively,
compared with 32.0% and 31.7% for the second quarter and first six months of
2007, respectively. The decrease in the effective income tax rate for
the second quarter and first six months of 2008 was primarily due to increased
earnings in jurisdictions with lower tax rates and the recognition of previously
unrecognized tax benefits in certain state and foreign
jurisdictions.
Income
from Continuing Operations
Income
from continuing operations increased $13.3 million or 17% in the second quarter
of 2008 compared with the second quarter of 2007. Income from
continuing operations increased $24.8 million or 20% in the first six months of
2008 compared with the first six months of 2007. These increases
resulted from continuing demand for most of the Company’s services and products;
growth of operations in emerging economies, particularly the Middle East; the
net effect of business acquisitions and divestitures and a lower effective
income tax rate.
Loss
from Discontinued Operations
The loss
from discontinued operations of $0.5 million and $0.3 million in the second
quarter and first six months of 2008, respectively, compared to income of $6.0
million and $8.2 million in the second quarter and first six months of 2007,
respectively. Discontinued operations were comprised of the Company’s
Gas Technologies Segment, the sale of which
was
completed in December 2007. See Note 2, “Acquisitions and
Dispositions,” in Part II, Item 8, Financial Statements and Supplementary Data,
of the Company’s 2007 Form 10-K for additional information on the disposition of
the Gas Technologies Segment.
Net
Income and Earnings Per Share
Net
income of $89.9 million and diluted earnings per share of $1.06 in the second
quarter of 2008 exceeded the second quarter of 2007 by $6.8 million and $0.08,
respectively. Net income of $146.9 million and diluted earnings per
share of $1.73 in the first six months of 2008 exceeded the first six months of
2007 by $16.2 million and $0.19, 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 six months of 2008, the Company generated $210.4 million in cash from
operating activities, an increase of 7% compared to the $196.6 million in the
first six months of 2007. This increase was primarily due to higher
net income and the timing of payments in accounts payable offset by reductions
in current liabilities and income tax accruals, which included the effect of a
$20 million income tax payment (mostly as a result of the December 2007 gain on
the sale of the discontinued Gas Technologies business). The Company
continues to expect to achieve record cash from operations for the full year
2008, exceeding 2007’s $471.7 million.
In the
first half of 2008, the Company invested $258.3 million in capital expenditures
(over 56% of which were for revenue-growth projects); returned $16.9 million to
stockholders through the repurchase of Company stock; and paid $32.9 million in
stockholder dividends.
The
Company’s net cash borrowings increased $84.5 million in the first six months of
2008. The incremental borrowings and operating cash flows funded
capital expenditures and the stockholder dividends. Balance sheet
debt, which is affected by foreign currency translation, increased $107.0
million from December 31, 2007. The debt to total capital ratio
decreased from 40.8% to 40.3% as a result of increased equity.
One of
the Company’s strategic objectives for 2008 is to generate record cash provided
by operating activities. The Company plans to sustain its balanced
portfolio through its strategy of redeploying discretionary cash for disciplined
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 or for customer
diversification; for growth and international diversification in the All Other
Category (Minerals & Rail Services and Products); 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. The Company is also likely to continue it recent
history of making discretionary cash contributions to its international pension
plans.
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 and inventories in the Access Services and Mill
Services Segments.
Sources
and Uses of Cash
The
Company’s principal sources of liquidity are cash from operations and borrowings
under its various credit agreements, augmented periodically by cash proceeds
from asset sales. The primary drivers of the Company’s cash flow from
operations are the Company’s sales and income. The Company’s
long-term Mill Services contracts provide predictable cash flows for several
years into the future. (See the “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 intends 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 business; 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. Cash is also used for selective bolt-on acquisitions as the
appropriate opportunities arise.
Resources available for cash
requirements – The Company meets its on-going cash requirements for
operations and growth initiatives by accessing the public debt markets and by
borrowing from banks. Public markets in the United
States
and
Europe are accessed through its commercial paper programs and through
discrete-term note issuance to investors. Various bank credit
facilities are available throughout the world. The Company expects to
utilize both the public debt markets and bank facilities to meet its cash
requirements in the future.
In May
2008, the Company completed an offering in the United States of 5.75%, 10-year
senior notes totaling $450 million. After pricing and underwriting
discounts, the Company received a total of $446.6 million in cash proceeds from
the offering. The proceeds were used to reduce the Company’s U.S. and
euro commercial paper programs by $286.4 million and $160.2 million,
respectively.
The
following table illustrates the amounts outstanding under credit facilities and
commercial paper programs and available credit at June 30, 2008:
Summary
of Credit Facilities and Commercial Paper Programs
|
|
As
of June 30, 2008
|
|
(In
millions)
|
|
Facility
Limit
|
|
|
Outstanding
Balance
|
|
|
Available
Credit
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
commercial paper program
|
|
$ |
550.0 |
|
|
$ |
70.6 |
|
|
$ |
479.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
commercial paper program
|
|
|
315.8 |
|
|
|
65.2 |
|
|
|
250.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-year
revolving credit facility (a)
|
|
|
450.0 |
|
|
|
— |
|
|
|
450.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
364-day
revolving credit facility (a)
|
|
|
450.0 |
|
|
|
— |
|
|
|
450.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bilateral
credit facility (b)
|
|
|
50.0 |
|
|
|
— |
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
at June 30, 2008
|
|
$ |
1,815.8 |
|
|
$ |
135.8 |
|
|
$ |
1,680.0 |
(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 $950 million (the aggregate amount of the back-up
facilities).
|
Pursuant
to the renewal of the Company’s bilateral credit facility in February 2008, the
Company amended its policy to limit aggregate commercial paper and credit
facility borrowings at any one time from a maximum of $900 million to a maximum
of $950 million. For more information on the Company’s credit
facilities and long-term notes, see Note G, “Debt and Credit Agreements,” in
this Form 10-Q and Note 6, “Debt and Credit Agreements,” in the Company’s Form
10-K for the year ended December 31, 2007.
Credit Ratings and Outlook –
The following table summarizes the Company’s debt ratings at June 30,
2008:
|
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 conjunction with the $450.0 million
note offering in May 2008, all ratings were reaffirmed as shown
above. 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)
|
|
June
30
2008
|
|
|
December
31
2007
|
|
|
Increase
(Decrease)
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
123.3 |
|
|
$ |
121.8 |
|
|
$ |
1.5 |
|
Trade
accounts receivable, net
|
|
|
907.8 |
|
|
|
779.6 |
|
|
|
128.2 |
|
Other
receivables
|
|
|
59.9 |
|
|
|
44.5 |
|
|
|
15.4 |
|
Inventories
|
|
|
368.1 |
|
|
|
310.9 |
|
|
|
57.2 |
|
Other
current assets
|
|
|
99.2 |
|
|
|
88.0 |
|
|
|
11.2 |
|
Assets
held-for-sale
|
|
|
1.3 |
|
|
|
0.5 |
|
|
|
0.8 |
|
Total
current assets
|
|
|
1,559.6 |
|
|
|
1,345.3 |
|
|
|
214.3 |
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable and current maturities
|
|
|
148.3 |
|
|
|
68.7 |
|
|
|
79.6 |
|
Accounts
payable
|
|
|
370.7 |
|
|
|
307.8 |
|
|
|
62.9 |
|
Accrued
compensation
|
|
|
95.1 |
|
|
|
108.9 |
|
|
|
(13.8 |
) |
Income
taxes payable
|
|
|
35.3 |
|
|
|
41.3 |
|
|
|
(6.0 |
) |
Other
current liabilities
|
|
|
403.5 |
|
|
|
347.3 |
|
|
|
56.2 |
|
Total
current liabilities
|
|
|
1,052.9 |
|
|
|
874.0 |
|
|
|
178.9 |
|
Working
Capital
|
|
$ |
506.7 |
|
|
$ |
471.3 |
|
|
$ |
35.4 |
|
Current
Ratio
|
|
1.5:1
|
|
|
1.5:1
|
|
|
|
|
|
Working
capital increased approximately 8% in the first six months of 2008 due
principally to the following factors:
·
|
Net
trade accounts receivable increased $128.2 million primarily due to the
growth in each of the Company’s businesses; foreign currency translation
and the timing of collections.
|
·
|
The
$57.2 million increase in inventory balances related principally to higher
quantities to support increased demand in the Access Services and the
railway track maintenance services and equipment business, higher price
levels for inventory purchases in the first six months of 2008 and foreign
currency translation.
|
·
|
Notes
payable and current maturities increased $79.6 million primarily due to
the anticipated payment of commercial paper borrowings within one
year.
|
·
|
Accounts
payable increased $62.9 million primarily due to the timing of payments,
including increased capital expenditures; foreign currency translation and
increased costs of inventory
purchased.
|
·
|
Other
current liabilities increased $56.2 million due principally to advances on
contracts within the railway track maintenance services and equipment
business; accrued interest; insurance liabilities; foreign currency
translation, partially offset by payments on existing
accruals.
|
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 and the strong discretionary
cash flows (operating cash flows in excess of the amounts necessary for capital
expenditures to maintain current revenue levels) generated by the
Company. Traditionally, the Company has utilized these discretionary
cash flows for growth-related capital expenditures. At December 31,
2007, the Company’s mill services contracts had estimated future revenues of
$5.0 billion. As of June 30, 2008, the Company had an order backlog
of $503.4 million in its All Other Category (Minerals & Rail Services and
Products). This compares with $448.1 million at December 31,
2007. The increase from December 31, 2007 is due principally to
increased demand for certain products within the railway track maintenance
services and equipment business, as a result of the new international orders, as
well as heat exchangers and industrial grating. The railway track
maintenance services and equipment business backlog includes a significant
portion that will not be realized until 2009 and later due to the long lead-time
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 services of high-value content from steelmaking slag is excluded from
the above amounts. These amounts are generally
not
quantifiable due to the short order lead times for certain services, the nature
and timing of the products and services provided and equipment rentals with the
ultimate length of the rental period 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 global portfolio, is among the top three companies (relative to sales)
in the industries 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
|
|
|
Six
Months Ended
June
30
|
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
210.4 |
|
|
$ |
196.6 |
|
|
Investing
activities
|
|
|
(249.4 |
) |
|
|
(419.6 |
) |
|
Financing
activities
|
|
|
32.6 |
|
|
|
211.8 |
|
|
Effect of exchange rate changes on
cash
|
|
|
7.9 |
|
|
|
5.8 |
|
|
Net change in cash and cash
equivalents
|
|
$ |
1.5 |
|
|
$ |
(5.3 |
)
(a) |
(a) Does
not total due to rounding
Cash From Operating Activities –
Net cash provided by operating activities in the first six months of 2008
was $210.4 million, an increase of $13.8 million (7%) from the first six months
of 2007. The increased cash from operations was a result of higher
net income and the timing of payments in accounts payable. These
increases were partially offset by timing of salary and lower incentive
compensation payments, and the timing of estimated tax payments.
Cash Used in Investing Activities –
Net cash used in investing activities in the first six months of 2008
declined compared to the same period of 2007 due principally to the $210.0
million purchase of Excell Minerals in 2007, partially offset by higher capital
expenditures in the first half of 2008. In the first half of 2008,
cash used in investing activities was $249.4 million consisting primarily of
capital investments in the first half of 2008 of $258.3
million. Growth in capital investments was $57.1 million (28%) over
the first half of 2007 as over 56% of the investments were for projects intended
to grow future revenues. Investments were made predominantly in the
industrial services businesses, with 51% in the Access Services Segment and 44%
in the Mill Services Segment. Throughout the remainder of 2008 and
into 2009, the Company plans to continue to manage its balanced portfolio and
invest in value creation projects including prudent, bolt-on acquisitions,
principally in the industrial services business. Additionally, the
Company will shift more growth investments into the All Other Category in 2009
and beyond, as this group continues to expand globally and operate at near
maximum capacity.
Cash Used in Financing Activities –
The following table summarizes the Company’s debt and capital positions
at June 30, 2008 and December 31, 2007.
|
(Dollars
are in millions)
|
|
June
30
2008
|
|
|
December
31
2007
|
|
|
Notes
Payable and Current Maturities
|
|
$ |
148.3 |
|
|
$ |
68.7 |
|
|
Long-term
Debt
|
|
|
1,039.5 |
|
|
|
1,012.1 |
|
|
Total
Debt
|
|
|
1,187.8 |
|
|
|
1,080.8 |
|
|
Total
Equity
|
|
|
1,762.6 |
|
|
|
1,566.1 |
|
|
Total
Capital
|
|
$ |
2,950.4 |
|
|
$ |
2,646.9 |
|
|
Total
Debt to Total Capital
|
|
|
40.3 |
% |
|
|
40.8 |
% |
The
Company’s debt as a percent of total capital as of June 30, 2008 decreased from
December 31, 2007. Overall debt increased primarily due to capital
expenditures for growth initiatives, and to a lesser extent, due to foreign
currency translation resulting from the weakening of the U.S. dollar in
comparison with the euro. Total equity increased due
principally
to the net income generated during the first six months of 2008 and foreign
currency translation due to the weakening of the U.S. dollar.
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 June 30, 2008, the Company
could increase borrowings by approximately $1.5 billion and still be within its
debt covenants. Alternatively, keeping all other factors constant,
the Company’s equity could decrease by approximately $972.0 million and the
Company would still be within its covenants. Additionally, the
Company’s 7.25% British pound sterling-denominated notes, due
October 27, 2010, and its 5.75% notes, due May 2018, also include
covenants that permit the note holders to redeem their notes, at par and 101% of
par, respectively, in the event of a change of control of the Company or
disposition of a significant portion of the Company’s assets in combination with
the Company’s credit rating downgraded to non-investment grade. The
Company expects to be compliant with these debt covenants one year from
now.
Cash
and Value-Based Management
The
Company plans to continue with its strategy of selective prudent 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 created when a project or initiative produces a return above the cost
of capital. In the first six months of 2008, improvement in EVA was
achieved compared with the first six months of 2007.
The
Company is committed to continue paying dividends to
stockholders. The Company has increased the dividend rate for
fourteen consecutive years, and in May 2008, the Company paid its 232nd
consecutive quarterly cash dividend. In June 2008, the Company
declared its 233rd
consecutive quarterly cash dividend.
The
Company also plans to use discretionary cash flows to pay down
debt. Additionally, the Company has remaining authorization to
repurchase up to 1.7 million of its shares through January 31,
2009.
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 prudently and
strategically, using a disciplined approach, in 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 K, “New
Financial Accounting Standards Issued,” in Part I, Item 1, Financial
Statements.
See Part
II, Item 1A, “Risk Factors,” for quantitative and qualitative disclosures about
market risk.
The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of disclosure controls and
procedures as of June 30, 2008. 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 changes in
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting during the second quarter of 2008.
PART II – OTHER
INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
Information
on legal proceedings is included in Note H, “Commitments and Contingencies,” in
Part I, Item 1, Financial Statements.
ITEM 1A.
RISK
FACTORS
There
have been no material changes from the risk factors as previously disclosed in
the Company’s Form 10-K (Part I, Item 1A) for the year ended December 31, 2007
(filed with the Commission on February 29, 2008).
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.
(b) Not
applicable.
(c) Issuer
Purchases of Equity Securities.
Period
|
Total
Number 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
|
|
|
|
|
|
April
1, 2008 – April 30, 2008
|
—
|
—
|
—
|
1,700,000
|
May
1, 2008 – May 31, 2008
|
—
|
—
|
—
|
1,700,000
|
June
1, 2008 – June 30, 2008
|
—
|
—
|
—
|
1,700,000
|
Total
|
—
|
—
|
—
|
|
The
Company’s share repurchase program was extended by the Board of Directors in
November 2007. The program authorizes the repurchase of up to
2,000,000 shares of the Company’s common stock and expires January 31,
2009. As of June 30, 2008, there are 1,700,000 shares remaining under
that authorization.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE BY SECURITY HOLDERS
None.
ITEM
5. OTHER
INFORMATION
On June
17, 2008, the Company’s Board of Directors declared a quarterly cash dividend of
$0.195 per share, payable August 15, 2008, to stockholders of record as of July
15, 2008.
COMMON STOCK OPTION
DISCLOSURE
Salvatore
D. Fazzolari, the Company’s Chairman and CEO, holds options to purchase 24,000
shares of the Company’s common stock that will expire in January 2009. The
Company anticipates that, prior to such expiration date, Mr. Fazzolari will take
steps to exercise such options. The timing and nature of the exercise
have yet to be determined.
ITEM
6. EXHIBITS
The
following exhibits are filed as a part of this report:
Exhibit
Number
|
Description
|
|
|
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 (Chief Executive
Officer)
|
|
|
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 (Chief Financial
Officer)
|
|
|
32
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief
Financial Officer)
|
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
|
August
7, 2008
|
|
/S/
Stephen J. Schnoor
|
|
|
|
|
Stephen
J. Schnoor
|
|
|
|
|
Senior
Vice President and
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
DATE
|
August
7, 2008
|
|
/S/
Richard M. Wagner
|
|
|
|
|
Richard
M. Wagner
|
|
|
|
|
Vice
President and Controller
|
|
|
|
|
|
|