WWW.EXFILE.COM, INC. -- 888-775-4789 -- HARSCO CORP. -- FORM 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 or 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Quarterly Period Ended September 30,
2009
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____ to _____
Commission
File Number 1-3970
HARSCO
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
|
23-1483991
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
employer identification number)
|
|
|
|
350
Poplar Church Road, Camp Hill, Pennsylvania
|
|
17011
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant’s telephone
number, including area
code 717-763-7064
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES
x NO
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES o NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
o NO
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding at October 30,
2009
|
Common
stock, par value $1.25 per share
|
|
80,316,209
|
HARSCO
CORPORATION
FORM
10-Q
INDEX
|
Page
|
PART
I – FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
Condensed
Consolidated Statements of Income (Unaudited)
|
3
|
|
Condensed
Consolidated Balance Sheets (Unaudited)
|
4
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
5
|
|
Condensed
Consolidated Statements of Equity (Unaudited)
|
6
|
|
Condensed
Consolidated Statements of Comprehensive Income
(Unaudited)
|
7
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
8 –
22
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
– 40
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
41
|
|
|
|
Item
4.
|
Controls
and Procedures
|
41
|
|
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
42
|
|
|
|
Item
1A.
|
Risk
Factors
|
42
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
42
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
42
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
42
|
|
|
|
Item
5.
|
Other
Information
|
43
|
|
|
|
Item
6.
|
Exhibits
|
43
|
|
|
|
|
|
|
SIGNATURES
|
44
|
PART I – FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
HARSCO
CORPORATION
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
(In
thousands, except per share amounts)
|
|
2009
|
|
|
2008
(a)
|
|
|
2009
|
|
|
2008
(a)
|
|
Revenues
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
$ |
612,432 |
|
|
$ |
876,633 |
|
|
$ |
1,791,081 |
|
|
$ |
2,673,751 |
|
Product
revenues
|
|
|
131,789 |
|
|
|
168,264 |
|
|
|
427,005 |
|
|
|
458,524 |
|
Total revenues
|
|
|
744,221 |
|
|
|
1,044,897 |
|
|
|
2,218,086 |
|
|
|
3,132,275 |
|
Costs
and expenses from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
sold
|
|
|
472,943 |
|
|
|
644,401 |
|
|
|
1,385,054 |
|
|
|
1,968,990 |
|
Cost of products
sold
|
|
|
81,652 |
|
|
|
117,940 |
|
|
|
279,061 |
|
|
|
316,102 |
|
Selling, general and
administrative expenses
|
|
|
125,443 |
|
|
|
153,518 |
|
|
|
381,354 |
|
|
|
470,482 |
|
Research and development
expenses
|
|
|
861 |
|
|
|
1,177 |
|
|
|
2,236 |
|
|
|
3,738 |
|
Other (income)
expense
|
|
|
6,898 |
|
|
|
(6,012 |
) |
|
|
6,427 |
|
|
|
(6,129 |
) |
Total costs and
expenses
|
|
|
687,797 |
|
|
|
911,024 |
|
|
|
2,054,132 |
|
|
|
2,753,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from
continuing operations
|
|
|
56,424 |
|
|
|
133,873 |
|
|
|
163,954 |
|
|
|
379,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
128 |
|
|
|
282 |
|
|
|
280 |
|
|
|
932 |
|
Interest
income
|
|
|
888 |
|
|
|
1,066 |
|
|
|
1,944 |
|
|
|
2,866 |
|
Interest
expense
|
|
|
(15,822 |
) |
|
|
(19,650 |
) |
|
|
(46,621 |
) |
|
|
(55,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes
|
|
|
41,618 |
|
|
|
115,571 |
|
|
|
119,557 |
|
|
|
327,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(6,525 |
) |
|
|
(30,048 |
) |
|
|
(20,508 |
) |
|
|
(89,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
35,093 |
|
|
|
85,523 |
|
|
|
99,049 |
|
|
|
237,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
business
|
|
|
(17,183 |
) |
|
|
(852 |
) |
|
|
(21,094 |
) |
|
|
(1,438 |
) |
Income tax benefit
(expense)
|
|
|
5,391 |
|
|
|
(2,834 |
) |
|
|
6,609 |
|
|
|
(2,588 |
) |
Loss
from discontinued operations
|
|
|
(11,792 |
) |
|
|
(3,686 |
) |
|
|
(14,485 |
) |
|
|
(4,026 |
) |
Net
Income
|
|
|
23,301 |
|
|
|
81,837 |
|
|
|
84,564 |
|
|
|
233,784 |
|
Less: Net income attributable
to noncontrolling interests
|
|
|
(3,119 |
) |
|
|
(1,553 |
) |
|
|
(5,182 |
) |
|
|
(6,578 |
) |
Net
Income attributable to Harsco Corporation
|
|
$ |
20,182 |
|
|
$ |
80,284 |
|
|
$ |
79,382 |
|
|
$ |
227,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
attributable to Harsco Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations, net of tax
|
|
$ |
31,974 |
|
|
$ |
83,970 |
|
|
$ |
93,867 |
|
|
$ |
231,232 |
|
Loss from discontinued
operations, net of tax
|
|
|
(11,792 |
) |
|
|
(3,686 |
) |
|
|
(14,485 |
) |
|
|
(4,026 |
) |
Net income attributable to
Harsco Corporation common stockholders
|
|
$ |
20,182 |
|
|
$ |
80,284 |
|
|
$ |
79,382 |
|
|
$ |
227,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
80,315 |
|
|
|
84,089 |
|
|
|
80,285 |
|
|
|
84,244 |
|
Basic
earnings per common share attributable to Harsco Corporation common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.40 |
|
|
$ |
1.00 |
|
|
$ |
1.17 |
|
|
$ |
2.74 |
|
Discontinued
operations
|
|
|
(0.15 |
) |
|
|
(0.04 |
) |
|
|
(0.18 |
) |
|
|
(0.05 |
) |
Basic
earnings per share attributable to Harsco Corporation common
stockholders
|
|
$ |
0.25 |
|
|
$ |
0.95 |
(b) |
|
$ |
0.99 |
|
|
$ |
2.70 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares of common stock outstanding
|
|
|
80,631 |
|
|
|
84,537 |
|
|
|
80,557 |
|
|
|
84,712 |
|
Diluted
earnings per common share attributable to Harsco Corporation common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.40 |
|
|
$ |
0.99 |
|
|
$ |
1.17 |
|
|
$ |
2.73 |
|
Discontinued
operations
|
|
|
(0.15 |
) |
|
|
(0.04 |
) |
|
|
(0.18 |
) |
|
|
(0.05 |
) |
Diluted
earnings per share attributable to Harsco Corporation common
stockholders
|
|
$ |
0.25 |
|
|
$ |
0.95 |
|
|
$ |
0.99 |
|
|
$ |
2.68 |
|
Cash
dividends declared per common share
|
|
$ |
0.200 |
|
|
$ |
0.195 |
|
|
$ |
0.600 |
|
|
$ |
0.585 |
|
(a)
|
On
January 1, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board related to consolidation accounting and
reporting. These changes, among others, require that minority
interests be renamed noncontrolling interests and that a company present a
consolidated net income measure that includes the amount attributable to
such noncontrolling interests for all periods presented. Results
have been reclassified accordingly.
|
(b)
|
Does
not total due to rounding.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
(In
thousands)
|
|
September
30
2009
|
|
|
December
31
2008
(a)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
97,707 |
|
|
$ |
91,336 |
|
Trade accounts receivable,
net
|
|
|
640,870 |
|
|
|
648,880 |
|
Other
receivables
|
|
|
27,497 |
|
|
|
46,032 |
|
Inventories
|
|
|
300,874 |
|
|
|
309,530 |
|
Other current
assets
|
|
|
106,783 |
|
|
|
104,430 |
|
Assets
held-for-sale
|
|
|
657 |
|
|
|
5,280 |
|
Total current
assets
|
|
|
1,174,388 |
|
|
|
1,205,488 |
|
Property,
plant and equipment, net
|
|
|
1,493,119 |
|
|
|
1,482,833 |
|
Goodwill
|
|
|
668,017 |
|
|
|
631,490 |
|
Intangible
assets, net
|
|
|
133,792 |
|
|
|
141,493 |
|
Other
assets
|
|
|
68,011 |
|
|
|
101,666 |
|
Total assets
|
|
$ |
3,537,327 |
|
|
$ |
3,562,970 |
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
38,586 |
|
|
$ |
117,854 |
|
Current maturities of long-term
debt
|
|
|
4,050 |
|
|
|
3,212 |
|
Accounts
payable
|
|
|
218,680 |
|
|
|
262,783 |
|
Accrued
compensation
|
|
|
70,333 |
|
|
|
85,237 |
|
Income taxes
payable
|
|
|
8,563 |
|
|
|
13,395 |
|
Dividends
payable
|
|
|
16,063 |
|
|
|
15,637 |
|
Insurance
liabilities
|
|
|
24,206 |
|
|
|
36,553 |
|
Advances on
contracts
|
|
|
130,538 |
|
|
|
144,237 |
|
Other current
liabilities
|
|
|
230,790 |
|
|
|
209,518 |
|
Total current
liabilities
|
|
|
741,809 |
|
|
|
888,426 |
|
Long-term
debt
|
|
|
919,187 |
|
|
|
891,817 |
|
Deferred
income taxes
|
|
|
34,049 |
|
|
|
35,442 |
|
Insurance
liabilities
|
|
|
62,345 |
|
|
|
60,663 |
|
Retirement
plan liabilities
|
|
|
190,758 |
|
|
|
190,153 |
|
Other
liabilities
|
|
|
55,042 |
|
|
|
46,497 |
|
Total liabilities
|
|
|
2,003,190 |
|
|
|
2,112,998 |
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Harsco Corporation
stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, Series A junior participating cumulative preferred
stock
|
|
|
— |
|
|
|
— |
|
Common stock
|
|
|
139,186 |
|
|
|
138,925 |
|
Additional paid-in
capital
|
|
|
136,160 |
|
|
|
137,083 |
|
Accumulated other comprehensive
loss
|
|
|
(152,067 |
) |
|
|
(208,299 |
) |
Retained earnings
|
|
|
2,110,374 |
|
|
|
2,079,170 |
|
Treasury stock
|
|
|
(735,016 |
) |
|
|
(733,203 |
) |
Total Harsco Corporation
stockholders’ equity
|
|
|
1,498,637 |
|
|
|
1,413,676 |
|
Noncontrolling
interests
|
|
|
35,500 |
|
|
|
36,296 |
|
Total equity
|
|
|
1,534,137 |
|
|
|
1,449,972 |
|
Total liabilities and
equity
|
|
$ |
3,537,327 |
|
|
$ |
3,562,970 |
|
(a)
|
On
January 1, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board related to consolidation accounting and
reporting. These changes, among others, require that minority
interests be renamed noncontrolling interests and that a company present
such noncontrolling interests as equity for all periods presented.
Results have been reclassified
accordingly.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
|
|
Nine
Months Ended
September
30
|
|
(In
thousands)
|
|
2009
|
|
|
2008
(a)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$ |
84,564 |
|
|
$ |
233,784 |
|
Adjustments to reconcile net
income to net
|
|
|
|
|
|
|
|
|
cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
208,014 |
|
|
|
237,769 |
|
Amortization
|
|
|
20,627 |
|
|
|
23,104 |
|
Equity in income of
unconsolidated entities, net
|
|
|
(280 |
) |
|
|
(932 |
) |
Dividends or distributions from
unconsolidated entities
|
|
|
200 |
|
|
|
484 |
|
Other, net
|
|
|
2,688 |
|
|
|
4,826 |
|
Changes in assets and
liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
and dispositions of
businesses:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
55,251 |
|
|
|
(104,498 |
) |
Inventories
|
|
|
23,230 |
|
|
|
(48,226 |
) |
Accounts
payable
|
|
|
(55,162 |
) |
|
|
13,082 |
|
Accrued interest
payable
|
|
|
20,935 |
|
|
|
26,948 |
|
Accrued
compensation
|
|
|
(19,439 |
) |
|
|
(11,669 |
) |
Other assets and
liabilities
|
|
|
(63,934 |
) |
|
|
7,360 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
276,694 |
|
|
|
382,032 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(123,072 |
) |
|
|
(380,878 |
) |
Purchases of businesses, net of
cash acquired
|
|
|
(12,732 |
) |
|
|
(15,539 |
) |
Proceeds from sales of
assets
|
|
|
11,521 |
|
|
|
20,700 |
|
Other investing
activities
|
|
|
(3,016 |
) |
|
|
9,305 |
|
|
|
|
|
|
|
|
|
|
Net cash used by investing
activities
|
|
|
(127,299 |
) |
|
|
(366,412 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Short-term borrowings,
net
|
|
|
(84,303 |
) |
|
|
(19,109 |
) |
Current maturities and long-term
debt:
|
|
|
|
|
|
|
|
|
Additions
|
|
|
292,996 |
|
|
|
792,552 |
|
Reductions
|
|
|
(296,854 |
) |
|
|
(713,945 |
) |
Cash dividends paid on common
stock
|
|
|
(47,750 |
) |
|
|
(49,336 |
) |
Dividends paid to noncontrolling
interests
|
|
|
(2,466 |
) |
|
|
(4,906 |
) |
Purchase of noncontrolling
interests
|
|
|
(12,953 |
) |
|
|
— |
|
Contributions of equity from
noncontrolling interest
|
|
|
5,332 |
|
|
|
— |
|
Common stock
issued-options
|
|
|
444 |
|
|
|
1,537 |
|
Common stock acquired for
treasury
|
|
|
— |
|
|
|
(52,962 |
) |
Other financing
activities
|
|
|
— |
|
|
|
(889 |
) |
|
|
|
|
|
|
|
|
|
Net cash used by financing
activities
|
|
|
(145,554 |
) |
|
|
(47,058 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
2,530 |
|
|
|
(493 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
6,371 |
|
|
|
(31,931 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
91,336 |
|
|
|
121,833 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
97,707 |
|
|
$ |
89,902 |
|
(a)
|
On
January 1, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board related to consolidation accounting and
reporting. These changes, among others, require that minority
interests be renamed noncontrolling interests for all periods
presented. Results have been reclassified
accordingly.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
|
|
Harsco
Corporation Stockholders’ Equity
|
|
|
|
|
|
|
|
(In
thousands, except share and per share amounts)
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Noncontrolling
Interest (a)
|
|
|
Total
Equity
|
|
|
Issued
|
|
|
Treasury
|
|
Beginning
Balances, January 1, 2008
|
|
$ |
138,665 |
|
|
$ |
(603,169 |
) |
|
$ |
128,622 |
|
|
$ |
1,903,049 |
|
|
$ |
(129 |
) |
|
$ |
38,023 |
|
|
$ |
1,605,061 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,206 |
|
|
|
|
|
|
|
6,578 |
|
|
|
233,784 |
|
Cash
dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.585 per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,187 |
) |
|
|
|
|
|
|
|
|
|
|
(49,187 |
) |
Noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,906 |
) |
|
|
(4,906 |
) |
Translation
adjustments, net of deferred income taxes of $26,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,906 |
) |
|
|
199 |
|
|
|
(34,707 |
) |
Cash
flow hedging instrument adjustments, net of deferred income taxes of
$(3,035)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,420 |
|
|
|
|
|
|
|
7,420 |
|
Pension
liability adjustments, net of deferred income taxes of
$(9,153)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,853 |
|
|
|
|
|
|
|
21,853 |
|
Marketable
securities unrealized loss, net of deferred income taxes of
$21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
|
|
|
|
(38 |
) |
Stock
options exercised, 102,076 shares
|
|
|
128 |
|
|
|
|
|
|
|
2,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,809 |
|
Net
issuance of stock – vesting of restricted stock units, 56,847
shares
|
|
|
108 |
|
|
|
(1,457 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,357 |
) |
Treasury
shares repurchased, 1,053,633 shares
|
|
|
|
|
|
|
(52,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,962 |
) |
Amortization
of unearned compensation on restricted stock units, net of
forfeitures
|
|
|
|
|
|
|
|
|
|
|
4,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,099 |
|
Balances,
September 30, 2008
|
|
$ |
138,901 |
|
|
$ |
(657,588 |
) |
|
$ |
135,394 |
|
|
$ |
2,081,068 |
|
|
$ |
(5,800 |
) |
|
$ |
39,894 |
|
|
$ |
1,731,869 |
|
Beginning
Balances, January 1, 2009
|
|
$ |
138,925 |
|
|
$ |
(733,203 |
) |
|
$ |
137,083 |
|
|
$ |
2,079,170 |
|
|
$ |
(208,299 |
) |
|
$ |
36,296 |
|
|
$ |
1,449,972 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,382 |
|
|
|
|
|
|
|
5,182 |
|
|
|
84,564 |
|
Cash
dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.600 per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,178 |
) |
|
|
|
|
|
|
|
|
|
|
(48,178 |
) |
Noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,466 |
) |
|
|
(2,466 |
) |
Translation
adjustments, net of deferred income taxes of $(15,654)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,278 |
|
|
|
297 |
|
|
|
94,575 |
|
Cash
flow hedging instrument adjustments, net of deferred income taxes of
$10,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,486 |
) |
|
|
|
|
|
|
(27,486 |
) |
Purchase
of subsidiary shares from noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
(3,905 |
) |
|
|
|
|
|
|
|
|
|
|
(9,141 |
) |
|
|
(13,046 |
) |
Contributions
of equity from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,332 |
|
|
|
5,332 |
|
Pension
liability adjustments, net of deferred income taxes of
$4,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,569 |
) |
|
|
|
|
|
|
(10,569 |
) |
Marketable
securities unrealized loss, net of deferred income taxes of
$(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Stock
options exercised, 54,000 shares
|
|
|
67 |
|
|
|
(423 |
) |
|
|
863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507 |
|
Net
issuance of stock – vesting of restricted stock units, 101,918
shares
|
|
|
194 |
|
|
|
(1,390 |
) |
|
|
(616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,812 |
) |
Amortization
of unearned compensation on restricted stock units, net of
forfeitures
|
|
|
|
|
|
|
|
|
|
|
2,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,735 |
|
Balances,
September 30, 2009
|
|
$ |
139,186 |
|
|
$ |
(735,016 |
) |
|
$ |
136,160 |
|
|
$ |
2,110,374 |
|
|
$ |
(152,067 |
) |
|
$ |
35,500 |
|
|
$ |
1,534,137 |
|
(a)
|
On
January 1, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board related to consolidation accounting and
reporting. These changes, among others, require that minority
interests be renamed noncontrolling interests and that a company present
such noncontrolling interests as equity for all periods presented.
Results have been reclassified
accordingly.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
|
|
Three
Months Ended
September
30
|
|
(In
thousands)
|
|
2009
|
|
|
2008
(a)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
23,301 |
|
|
$ |
81,837 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments, net of deferred income taxes
|
|
|
44,565 |
|
|
|
(127,855 |
) |
|
|
|
|
|
|
|
|
|
Net gains (losses) on cash flow
hedging instruments, net of deferred income taxes of $779 and ($2,341) in
2009 and 2008, respectively
|
|
|
(1,902 |
) |
|
|
5,730 |
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
gain on cash flow hedging instruments included in net income, net of
deferred income taxes of ($325) and $2 in 2009 and 2008,
respectively
|
|
|
606 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Pension liability adjustments,
net of deferred income taxes of ($4,221)and ($7,188) in 2009 and 2008,
respectively
|
|
|
9,334 |
|
|
|
17,916 |
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable
securities, net of deferred income taxes of ($7) and $0 in 2009 and 2008,
respectively
|
|
|
13 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss)
|
|
|
52,616 |
|
|
|
(104,211 |
) |
|
|
|
|
|
|
|
|
|
Total
comprehensive income (loss)
|
|
|
75,917 |
|
|
|
(22,374 |
) |
|
|
|
|
|
|
|
|
|
Less:
Comprehensive (income) loss attributable to noncontrolling
interests
|
|
|
(3,005 |
) |
|
|
2,228 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) attributable to Harsco Corporation
|
|
$ |
72,912 |
|
|
$ |
(20,146 |
) |
|
|
Nine
Months Ended
September
30
|
|
(In
thousands)
|
|
2009
|
|
|
2008
(a)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
84,564 |
|
|
$ |
233,784 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments, net of deferred income taxes
|
|
|
94,575 |
|
|
|
(34,707 |
) |
|
|
|
|
|
|
|
|
|
Net gains (losses) on cash flow
hedging instruments, net of deferred income taxes of $9,325 and ($3,040)
in 2009 and 2008, respectively
|
|
|
(26,010 |
) |
|
|
7,430 |
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
gain on cash flow hedging instruments included in net income, net of
deferred income taxes of $796 and $5 in 2009 and 2008,
respectively
|
|
|
(1,476 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
Pension liability adjustments,
net of deferred income taxes of $4,775 and ($9,153) in 2009 and 2008,
respectively
|
|
|
(10,569 |
) |
|
|
21,853 |
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) loss on
marketable securities, net of deferred income taxes of ($5) and $21 in
2009 and 2008, respectively
|
|
|
9 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss)
|
|
|
56,529 |
|
|
|
(5,472 |
) |
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
141,093 |
|
|
|
228,312 |
|
|
|
|
|
|
|
|
|
|
Less:
Comprehensive income attributable to noncontrolling
interests
|
|
|
(5,479 |
) |
|
|
(6,777 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
income attributable to Harsco Corporation
|
|
$ |
135,614 |
|
|
$ |
221,535 |
|
(a)
|
On
January 1, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board related to consolidation accounting and
reporting. These changes, among others, require that minority
interests be renamed noncontrolling interests and that a company present a
consolidated net income measure that includes the amount attributable to
such noncontrolling interests for all periods presented. Results
have been reclassified accordingly.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
A. Basis
of Presentation
The
unaudited condensed consolidated financial statements and notes included in this
report have been prepared by management of Harsco Corporation (the
“Company”). In the opinion of management, all adjustments (all of
which, with the exception of the adjustments mentioned below, are of a normal
recurring nature) that are necessary for a fair presentation are reflected in
the condensed consolidated financial statements. The December 31,
2008 Condensed Consolidated Balance Sheet information contained in this Form
10-Q was derived from the 2008 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
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements, including the notes thereto,
included in the Company’s 2008 Annual Report on Form 10-K.
Operating
results and cash flows for the three and nine months ended September 30, 2009
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2009.
In
accordance with changes to consolidation accounting and reporting issued by the
Financial Accounting Standards Board (“FASB”) and adopted by the Company on
January 1, 2009, prior year amounts have been retrospectively adjusted to
conform with the current year presentation. See Note J, “Recently
Adopted and Recently Issued Accounting Standards,” for a further description of
these changes.
During
the third quarter of 2009, the Company recorded non-cash out-of-period
adjustments that had the net effect of reducing after-tax income by $9 million
or $0.11 per diluted share. The adjustments correct errors generated
principally by the improper recognition of certain revenues and delaying the
recognition of certain expenses by one subsidiary, in one country, during the
past three years. Based upon the investigation, which is
substantially completed, these errors primarily related to the failure to
receive advance customer agreement and to invoice on a timely basis for
additional work performed for two customers. The Company assessed the
individual and aggregate impact of these adjustments on the current year and all
prior periods and determined that the cumulative effect of the adjustments was
not material to the full year 2009 results and did not result in a material
misstatement to any previously issued annual or quarterly financial
statements. Consequently, the Company recorded the $9 million net
adjustment in the current quarter and has not revised any previously issued
annual financial statements or interim financial data.
B. Review
of Operations by Segment
|
|
Three
Months Ended
September
30, 2009
|
|
|
Three
Months Ended
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Infrastructure Segment
|
|
$ |
279,450 |
|
|
$ |
22,503 |
|
|
$ |
393,292 |
|
|
$ |
59,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Metals Segment
|
|
|
275,093 |
|
|
|
(4,420 |
) |
|
|
423,831 |
|
|
|
33,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Totals
|
|
|
554,543 |
|
|
|
18,083 |
|
|
|
817,123 |
|
|
|
93,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category – Harsco Minerals & Rail
|
|
|
189,618 |
|
|
|
39,624 |
|
|
|
227,714 |
|
|
|
41,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
60 |
|
|
|
(1,283 |
) |
|
|
60 |
|
|
|
(1,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
744,221 |
|
|
$ |
56,424 |
|
|
$ |
1,044,897 |
|
|
$ |
133,873 |
|
|
|
Nine
Months Ended
September
30, 2009
|
|
|
Nine
Months Ended
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Infrastructure Segment
|
|
$ |
871,962 |
|
|
$ |
66,267 |
|
|
$ |
1,201,292 |
|
|
$ |
155,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Metals Segment
|
|
|
772,958 |
|
|
|
(3,014 |
) |
|
|
1,286,037 |
|
|
|
99,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Totals
|
|
|
1,644,920 |
|
|
|
63,253 |
|
|
|
2,487,329 |
|
|
|
255,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category – Harsco Minerals & Rail
|
|
|
572,986 |
|
|
|
105,725 |
|
|
|
644,766 |
|
|
|
127,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
180 |
|
|
|
(5,024 |
) |
|
|
180 |
|
|
|
(4,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
2,218,086 |
|
|
$ |
163,954 |
|
|
$ |
3,132,275 |
|
|
$ |
379,092 |
|
Reconciliation
of Segment Operating Income to Consolidated Income from Continuing
Operations
Before
Income Taxes
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Operating Income
|
|
$ |
18,083 |
|
|
$ |
93,285 |
|
|
$ |
63,253 |
|
|
$ |
255,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category – Harsco Minerals & Rail
|
|
|
39,624 |
|
|
|
41,975 |
|
|
|
105,725 |
|
|
|
127,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
(1,283 |
) |
|
|
(1,387 |
) |
|
|
(5,024 |
) |
|
|
(4,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
56,424 |
|
|
|
133,873 |
|
|
|
163,954 |
|
|
|
379,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
128 |
|
|
|
282 |
|
|
|
280 |
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
888 |
|
|
|
1,066 |
|
|
|
1,944 |
|
|
|
2,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(15,822 |
) |
|
|
(19,650 |
) |
|
|
(46,621 |
) |
|
|
(55,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
$ |
41,618 |
|
|
$ |
115,571 |
|
|
$ |
119,557 |
|
|
$ |
327,046 |
|
C. Accounts
Receivable and Inventories
At
September 30, 2009 and December 31, 2008, Trade accounts receivable of $640.9
million and $648.9 million, respectively, were net of an allowance for doubtful
accounts of $30.1 million and $27.9 million, respectively. The
provision for doubtful accounts was $2.6 million and $3.5 million for the three
months ended September 30, 2009 and 2008, respectively. For the nine
months ended September 30, 2009 and 2008, the provision for doubtful accounts
was $10.8 million and $6.7 million, respectively. Other receivables
include insurance claim receivables, employee receivables, tax claim receivables
and other miscellaneous receivables not included in Trade accounts receivable,
net.
Inventories
consist of the following:
|
|
Inventories
|
|
(In
thousands)
|
|
September
30
2009
|
|
|
December
31
2008
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
147,187 |
|
|
$ |
156,490 |
|
Work-in-process
|
|
|
24,446 |
|
|
|
21,918 |
|
Raw
materials and purchased parts
|
|
|
85,284 |
|
|
|
83,372 |
|
Stores
and supplies
|
|
|
43,957 |
|
|
|
47,750 |
|
|
|
|
|
|
|
|
|
|
Total
Inventories
|
|
$ |
300,874 |
|
|
$ |
309,530 |
|
D. Property,
Plant and Equipment
Property,
plant and equipment consists of the following:
(In
thousands)
|
|
September
30
2009
|
|
|
December
31
2008
|
|
Land
and improvements
|
|
$ |
45,574 |
|
|
$ |
41,913 |
|
Buildings
and improvements
|
|
|
199,263 |
|
|
|
167,606 |
|
Machinery
and equipment
|
|
|
3,108,658 |
|
|
|
2,905,398 |
|
Uncompleted
construction
|
|
|
68,012 |
|
|
|
75,210 |
|
Gross
property, plant and equipment
|
|
|
3,421,507 |
|
|
|
3,190,127 |
|
Less
accumulated depreciation
|
|
|
(1,928,388 |
) |
|
|
(1,707,294 |
) |
Net
property, plant and equipment
|
|
$ |
1,493,119 |
|
|
$ |
1,482,833 |
|
E. Goodwill
and Other Intangible Assets
The
following table reflects the changes in carrying amounts of goodwill by segment
for the nine months ended September 30, 2009:
Goodwill
by Segment
|
|
|
|
(In
thousands)
|
|
Harsco
Infrastructure Segment
|
|
|
Harsco
Metals Segment
|
|
|
All
Other Category – Harsco Minerals & Rail
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2008
|
|
$ |
220,547 |
|
|
$ |
299,613 |
|
|
$ |
111,330 |
|
|
$ |
631,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
to goodwill
|
|
|
(68 |
) |
|
|
480 |
|
|
|
1,746 |
|
|
|
2,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
15,566 |
|
|
|
15,447 |
|
|
|
3,356 |
|
|
|
34,369 |
|
Balance
as of September 30, 2009
|
|
$ |
236,045 |
|
|
$ |
315,540 |
|
|
$ |
116,432 |
|
|
$ |
668,017 |
|
The
following table reflects intangible assets by major category:
Intangible
Assets
|
|
|
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
(In
thousands)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Customer
relationships
|
|
$ |
148,052 |
|
|
$ |
56,180 |
|
|
$ |
138,752 |
|
|
$ |
40,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
1,426 |
|
|
|
1,310 |
|
|
|
1,414 |
|
|
|
1,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
7,022 |
|
|
|
4,496 |
|
|
|
6,316 |
|
|
|
4,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
65,497 |
|
|
|
26,019 |
|
|
|
60,495 |
|
|
|
19,309 |
|
Total
|
|
$ |
221,997 |
|
|
$ |
88,005 |
|
|
$ |
206,977 |
|
|
$ |
65,442 |
|
During
the first nine months of 2009, 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
|
|
$ |
931 |
|
None
|
6
years
|
|
|
|
|
|
|
|
Patents
|
|
|
425 |
|
None
|
15
years
|
|
|
|
|
|
|
|
Other
|
|
$ |
640 |
|
None
|
2
years
|
Total
|
|
$ |
1,996 |
|
|
|
Amortization
expense for intangible assets was $6.5 million and $19.0 million for the third
quarter and first nine months of 2009, respectively. This compares
with $7.1 million and $21.6 million for the third quarter and first nine months
of 2008, respectively. The following table shows the estimated
amortization expense for the next five fiscal years based on current intangible
assets:
(In
thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
|
|
|
|
|
|
Estimated
amortization expense (a)
|
$25,500
|
$24,500
|
$23,400
|
$11,100
|
$9,700
|
(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 April
2009, the Company acquired the noncontrolling interests of three of its Asia
Pacific region consolidated subsidiaries in the Harsco Metals Segment for $12.9
million. The acquisition of these partnership interests was accounted
for as an equity transaction since the Company retained its controlling interest
in the subsidiaries.
In August
2009, the Company acquired the noncontrolling interests of four of its Eastern
Europe region consolidated subsidiaries in the Harsco Infrastructure Segment for
$0.6 million. The acquisition of these partnership interests was
accounted for as an equity transaction since the Company retained its
controlling interest in the subsidiaries.
In
September 2009, the Company formed a partnership in Saudi Arabia that will
provide highly-engineered scaffolding and formwork systems and expert
installation services to the infrastructure and construction
markets. The Company contributed $5.3 million to form this
partnership, which has been included in the Harsco Infrastructure
Segment. In September 2009, the partnership acquired the net assets
of Saudi Express Transport LLC, a Saudi Arabia-based provider of similar
services that generated revenues of approximately $22 million in
2008.
In
October 2009, the Company acquired Nicol UK Ltd., a United Kingdom-based
multi-disciplined provider of industrial maintenance services, multi-craft site
services, and scaffolding to major petrochemical, energy and industrial
clients. This business generated revenues of approximately $25
million in 2008 and has been included in the Harsco Infrastructure
Segment.
Inclusion
of the pro-forma financial information for the above transactions is not
necessary due to the immaterial size of the acquisitions.
Net
Income Attributable to the Company and Transfers to Noncontrolling
Interest
The
purpose of the following schedule is to disclose the effects of changes in the
Company’s ownership interest in its subsidiaries on the Company’s
equity.
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to the Company
|
|
$ |
20,182 |
|
|
$ |
80,284 |
|
|
$ |
79,382 |
|
|
$ |
227,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in the Company’s paid-in capital for purchase of partnership
interests
|
|
|
(1,681 |
) |
|
|
— |
|
|
|
(3,905 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
from net income attributable to the Company and transfers to
noncontrolling interest
|
|
$ |
18,501 |
|
|
$ |
80,284 |
|
|
$ |
75,477 |
|
|
$ |
227,206 |
|
Dispositions
On
December 7, 2007, the Company sold its Gas Technologies Segment to Wind Point
Partners, a private equity investment firm. 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 thresholds for achieving the earnout for 2008 were not met
and the Company does not expect them to be met for 2009. The Company
recorded a $26.4 million after-tax gain on the sale in the fourth quarter of
2007. The Company recorded $14.5 million in after-tax charges in
Discontinued Operations in the first nine months of 2009 related to the
settlement of working capital adjustment claims and other costs associated with
arbitration proceedings as described in Note G, “Commitments and
Contingencies.”
G. Commitments
and Contingencies
Environmental
The
Company is involved in a number of environmental remediation investigations and
clean-ups and, along with other companies, has been identified as a “potentially
responsible party” for certain waste
disposal sites. While each of these matters is subject to various
uncertainties, it is probable that the Company will agree to make payments
toward funding certain of these activities and it is possible that some of these
matters will be decided unfavorably to the Company. The Company has
evaluated its potential liability, and its financial exposure is dependent upon
such factors as the continuing evolution of environmental laws and regulatory
requirements, the availability and application of technology, the allocation of
cost among potentially responsible parties, the years of remedial activity
required and the remediation methods selected. The Consolidated
Balance Sheets at September 30, 2009 and December 31, 2008 include accruals in
Other current liabilities of $4.2 million and $3.2 million, respectively, for
environmental matters. There were no amounts charged against pre-tax
income related to environmental matters in the third quarter of 2009 as compared
with $0.2 million in the same period of 2008. Amounts charged against
pre-tax income for the first nine months totaled $1.2 million and $1.0 million
for 2009 and 2008, 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 have reached an agreement in principle with the EPA to resolve this
matter and are in the process of finalizing this agreement. 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.
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
September 30, 2009, there are 26,142 pending asbestos personal injury claims
filed against the Company. Of these cases, 25,623 were pending in the
New York Supreme Court for New York County in New York State. The
other claims, totaling 519, are filed in various counties in a number of state
courts, and in certain Federal District Courts (including New York), and those
complaints generally assert lesser amounts of damages than the New York State
court cases or do not state any amount claimed.
As of
September 30, 2009, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in 18,232 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
plaintiffs can show that they have incurred a physical impairment. As
of September 30, 2009, the Company has been listed as a defendant in 394 Active
or In Extremis asbestos cases in New York County. The Court’s Order
has been challenged by plaintiffs.
Except
with regard to the legal costs in a few limited, exceptional cases, 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 when it is probable that a liability has been incurred
for a particular event and the amount of loss associated with the event can be
reasonably estimated. 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 Consolidated Balance Sheets. See Note 1,
“Summary of Significant Accounting Policies,” of the Company’s Form 10-K for the
year ended December 31, 2008, for additional information on Accrued Insurance
and Loss Reserves.
Gas
Technologies Divestiture
In
October 2009, the Company and Taylor-Wharton International, the purchaser of the
Company’s Gas Technologies business, satisfactorily resolved the open claims and
counterclaims that were submitted to arbitration. The claims and
counterclaims related to both net working capital adjustments associated with
the divestiture and the alleged breach of certain representations and warranties
made by the Company. The settlement and related costs and fees were
reflected in the $14.5 million after-tax loss from discontinued operations for
the nine months ended September 30, 2009.
Value-Added
Tax Dispute
The
Company is involved in a value added and services (“ICMS”) tax dispute with the
State Revenue Authorities from the State of São Paulo, Brazil (the
“SPRA”). In October 2009, the Company received notification of the
SPRA’s administrative decision regarding the levying of ICMS in the State of São
Paulo in relation to services provided to one of the Company’s customers in the
State between January 2004 and May 2005. The assessment from
the SPRA is approximately $12.0 million, including tax, penalty and interest and
could increase to reflect additional interest accrued since December
2007.
The
Company believes that it does not have liability for this assessment and will
vigorously contest it under various alternatives, including judicial
appeal. Any ultimate final determination of this assessment would not
have a material adverse effect on the Company’s annual results of operations,
cash flows or financial condition.
H. Reconciliation
of Basic and Diluted Shares
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(Amounts
in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations attributable to Harsco Corporation common
stockholders
|
|
$ |
31,974 |
|
|
$ |
83,970 |
|
|
$ |
93,867 |
|
|
$ |
231,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
80,315 |
|
|
|
84,089 |
|
|
|
80,285 |
|
|
|
84,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of stock-based compensation
|
|
|
316 |
|
|
|
448 |
|
|
|
272 |
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
80,631 |
|
|
|
84,537 |
|
|
|
80,557 |
|
|
|
84,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations per common share, attributable to Harsco
Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.40 |
|
|
$ |
1.00 |
|
|
$ |
1.17 |
|
|
$ |
2.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.40 |
|
|
$ |
0.99 |
|
|
$ |
1.17 |
|
|
$ |
2.73 |
|
At
September 30, 2009, all restricted stock units outstanding were included in the
three months calculation of diluted earnings per share but 29 thousand
restricted stock units were not included in the nine months calculation, because
the effect was antidilutive. All outstanding stock options at
September 30, 2009 and all outstanding stock options and restricted stock units
at September 30, 2008 were included in the computation of diluted earnings per
share for the respective three month and nine month periods.
I. Employee
Benefit Plans
|
|
Three
Months Ended September 30
|
|
Defined
Benefit Net Periodic Pension Cost (Income)
|
|
U.
S. Plans
|
|
|
International
Plans
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
447 |
|
|
$ |
373 |
|
|
$ |
1,062 |
|
|
$ |
2,281 |
|
Interest cost
|
|
|
3,523 |
|
|
|
3,727 |
|
|
|
11,296 |
|
|
|
13,202 |
|
Expected return on plan
assets
|
|
|
(3,647 |
) |
|
|
(5,862 |
) |
|
|
(10,939 |
) |
|
|
(15,337 |
) |
Recognized prior service
costs
|
|
|
88 |
|
|
|
83 |
|
|
|
92 |
|
|
|
244 |
|
Recognized
losses
|
|
|
857 |
|
|
|
292 |
|
|
|
2,477 |
|
|
|
2,742 |
|
Amortization of transition
liability
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
9 |
|
Curtailment gain
|
|
|
— |
|
|
|
— |
|
|
|
(79 |
) |
|
|
— |
|
Defined
benefit plans net periodic pension
cost
(income) – continuing operations
|
|
$ |
1,268 |
|
|
$ |
(1,387 |
) |
|
$ |
3,918 |
|
|
$ |
3,141 |
|
|
|
Nine
Months Ended September 30
|
|
Defined
Benefit Net Periodic Pension Cost (Income)
|
|
U.
S. Plans
|
|
|
International
Plans
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
1,311 |
|
|
$ |
1,367 |
|
|
$ |
2,998 |
|
|
$ |
7,082 |
|
Interest cost
|
|
|
10,331 |
|
|
|
11,470 |
|
|
|
32,245 |
|
|
|
41,141 |
|
Expected return on plan
assets
|
|
|
(10,693 |
) |
|
|
(17,951 |
) |
|
|
(31,212 |
) |
|
|
(47,823 |
) |
Recognized prior service
costs
|
|
|
257 |
|
|
|
250 |
|
|
|
264 |
|
|
|
753 |
|
Recognized
losses
|
|
|
2,512 |
|
|
|
876 |
|
|
|
6,756 |
|
|
|
8,561 |
|
Amortization of transition
liability
|
|
|
— |
|
|
|
— |
|
|
|
23 |
|
|
|
28 |
|
Curtailment/settlement
gain
|
|
|
— |
|
|
|
(866 |
) |
|
|
(79 |
) |
|
|
— |
|
Defined
benefit plans net periodic pension
cost
(income)
|
|
|
3,718 |
|
|
|
(4,854 |
) |
|
|
10,995 |
|
|
|
9,742 |
|
Less
Discontinued Operations included in above
|
|
|
— |
|
|
|
(694 |
) |
|
|
— |
|
|
|
— |
|
Defined
benefit plans net periodic pension
cost
(income) – continuing operations
|
|
$ |
3,718 |
|
|
$ |
(4,160 |
) |
|
$ |
10,995 |
|
|
$ |
9,742 |
|
Defined
benefit net periodic pension cost in the nine months ended September 30, 2009
was $9.1 million higher, when compared with the first nine months of
2008. This was principally due to lower than expected plan assets at
the 2008 plan measurement date which resulted in a decrease in expected return
on plan assets. Net periodic pension cost from continuing operations
for the full year ending December 31, 2009 is expected to be approximately $20
million, compared with $8.2 million for the year ended December 31,
2008.
In the
quarter ended September 30, 2009, the Company contributed $0.4 million and $4.2
million to the U.S. and international defined benefit pension plans,
respectively. In the nine months ended September 30, 2009, the
Company contributed $2.3 million and $14.7 million to the U.S. and international
defined benefit pension plans, respectively. The Company currently
anticipates contributing approximately $1 million and $11 million for the U.S.
and international plans, respectively, during the remainder of
2009.
In the
quarter ended September 30, 2009, the Company contributed $4.8 million and $5.6
million to multiemployer and defined contribution pension plans,
respectively. In the nine months ended September 30, 2009, the
Company contributed $16.8 million and $11.1 million to multiemployer and defined
contribution plans, respectively.
J. Recently
Adopted and Recently Issued Accounting Standards
The
following accounting standards were adopted in 2009:
On
September 30, 2009, the Company adopted changes issued by the FASB to the
authoritative hierarchy of accounting principles generally accepted in the
United States (“GAAP”). These changes established the FASB Accounting
Standards CodificationTM
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. The FASB will no longer issue new standards in the form
of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts;
instead the FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right as they will only
serve to update the Codification. These changes and the Codification
itself do not change GAAP. The adoption of these changes had no
impact on the Company’s consolidated financial statements, other than the manner
in which new accounting standards are referenced.
On
June 30, 2009, the Company adopted changes issued by the FASB related to
the accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. Specifically, these changes set forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The adoption
of these changes had no impact on the Company’s consolidated financial
statements as the Company’s existing method of accounting for and disclosing
subsequent events did not significantly change.
On June
30, 2009, the Company adopted changes issued by the FASB that require a publicly
traded company to disclose the fair value of its financial instruments whenever
summarized financial information for interim reporting periods is
issued. Such disclosures include the fair value of all financial
instruments, for which it is practicable to estimate that value, whether
recognized or not recognized in the statement of financial position; the related
carrying amount of these financial instruments; and the method(s) and
significant assumptions used to estimate the fair value. Other than
the required disclosures included in Note K, “Derivative Instruments, Hedging
Activities and Fair Value,” the adoption of these changes had no impact on the
Company’s consolidated financial statements.
On
January 1, 2009, the Company adopted changes issued by the FASB related to
disclosures about an entity’s derivative and hedging activities,
including:
·
|
how
and why an entity uses derivative
instruments,
|
·
|
how
derivative instruments and related hedged items are accounted for,
and
|
·
|
how
derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash
flows.
|
Other
than the required disclosures included in Note K, “Derivative Instruments,
Hedging Activities and Fair Value,” the adoption of these changes had no
material impact on the Company’s consolidated financial statements.
On
January 1, 2009, the Company adopted changes issued by the FASB related to
the consolidation accounting and reporting for a noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. These changes
define a noncontrolling interest, previously called a minority interest, as the
portion of equity in a subsidiary not attributable, directly or indirectly, to a
parent. These changes require, among other items, that a
noncontrolling interest be included in the consolidated statement of financial
position within equity separate from the parent’s equity; consolidated net
income to be reported at amounts inclusive of both the parent’s and
noncontrolling interest’s shares and, separately, the amounts of consolidated
net income attributable to the parent and noncontrolling interest all on the
consolidated statement of operations; and if a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be measured
at fair value and a gain or loss be recognized in net income based on such fair
value. The presentation and disclosure requirements of these changes have been
applied retrospectively. Other than the change in presentation of
noncontrolling interests, the adoption of these changes had no material impact
on the Company’s consolidated financial statements.
On
January 1, 2009, the Company adopted changes issued by the FASB related to the
fair value accounting and reporting of nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value in the financial
statements on at least an annual basis. These changes define fair
value, establish a framework for measuring fair value in GAAP, and expand
disclosures about fair value measurements. This standard applies to
other GAAP that require or permit fair value measurements and is to be applied
prospectively with limited exceptions. The adoption of these changes
as they relate to nonfinancial assets and nonfinancial liabilities had no impact
on the Company’s consolidated financial
statements. These
provisions will be applied at such time when a nonrecurring, fair value
measurement of a nonfinancial asset or nonfinancial liability is required, which
may result in a fair value that could be materially different than would have
been calculated prior to the adoption of these changes.
Effective
January 1, 2009, the Company adopted changes issued by the FASB on April 1, 2009
related to the accounting for business combinations. These changes
apply to all assets acquired and liabilities assumed in a business combination
that arise from certain contingencies and requires (i) an acquirer to
recognize at fair value, at the acquisition date, an asset acquired or liability
assumed in a business combination that arises from a contingency if the
acquisition-date fair value of that asset or liability can be determined during
the measurement period; otherwise the asset or liability should be recognized at
the acquisition date if certain defined criteria are met; (ii) contingent
consideration arrangements of an acquiree assumed by the acquirer in a business
combination be recognized initially at fair value; (iii) subsequent
measurements of assets and liabilities arising from contingencies be based on a
systematic and rational method depending on their nature and contingent
consideration arrangements be measured subsequently; and (iv) disclosures
of the amounts and measurement basis of such assets and liabilities and the
nature of the contingencies. These changes are effective for the
Company for all business combinations after December 31, 2008. The
effect of its adoption will depend on the nature of contingencies in business
combinations after the effective date.
The
following accounting standards were issued in 2009 and become effective for the
Company at various future dates:
In
October 2009, the FASB issued changes related to the accounting for revenue
recognition when multiple-deliverable revenue arrangements are
present. The changes eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price
method. This method allows a vendor to use its best estimate of
selling price if neither vendor specific objective evidence nor third-party
evidence of selling price exists when evaluating multiple deliverable
arrangements. These changes must be adopted no later than
January 1, 2011 and may be adopted prospectively for revenue arrangements
entered into or materially modified after the date of adoption or
retrospectively for all revenue arrangements for all periods
presented. The Company is currently evaluating the requirements of
these changes and has not yet determined the impact on the consolidated
financial statements.
In June
2009, the FASB issued changes related to the accounting for variable interest
entities. These changes require an enterprise:
·
|
to
perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a
variable interest entity;
|
·
|
to
require ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest
entity;
|
·
|
to
eliminate the quantitative approach previously required for determining
the primary beneficiary of a variable interest
entity;
|
·
|
to
add an additional reconsideration event for determining whether an entity
is a variable interest entity when any changes in facts and circumstances
occur such that holders of the equity investment at risk, as a group, lose
the power from voting rights or similar rights of those investments to
direct the activities of the entity that most significantly impact the
entity’s economic performance; and
|
·
|
to
provide enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprise’s
involvement in a variable interest
entity.
|
These
changes become effective for the Company on January 1, 2010 and are not
expected to have a material effect on the Company’s consolidated financial
statements.
In
December 2008, the FASB issued changes related to employers’ disclosures about
postretirement benefit plan assets. These changes require disclosure
of how investment allocation decisions are made; major categories of plan
assets; inputs and valuation techniques used to measure fair value of plan
assets; the effect of fair value measurements using significant unobservable
inputs on changes in plan assets; and significant concentrations of risk within
plan assets. These changes become effective for the Company’s
year-end December 31, 2009 consolidated financial statements. As
these changes only require enhanced disclosures, the adoption of these changes
will only impact notes to the Company’s consolidated financial
statements.
K. Derivative
Instruments, Hedging Activities and Fair Value
The
Company uses derivative instruments, including swaps and forward contracts, to
manage certain foreign currency, commodity price and interest rate
exposures. Derivative instruments are viewed as risk management tools
by the Company and are not used for trading or speculative
purposes.
All
derivative instruments are recorded on the balance sheet at fair
value. Changes in the fair value of derivatives used to hedge
foreign-currency-denominated balance sheet items are reported directly in
earnings along with offsetting transaction gains and losses on the items being
hedged. Derivatives used to hedge forecasted cash flows associated
with foreign currency commitments or forecasted commodity purchases may be
accounted for as cash flow hedges, as deemed appropriate and if the criteria for
hedge accounting are met. Gains and losses on derivatives designated
as cash flow hedges are deferred as a separate component of equity and
reclassified to earnings in a manner that matches the timing of the earnings
impact of the hedged transactions. Generally, these deferred gains
and losses are reclassified to earnings within one year of the balance sheet
date. The ineffective portion of all hedges, if any, is recognized
currently in earnings.
The fair
value of outstanding derivative contracts recorded as assets and liabilities in
the accompanying September 30, 2009 Condensed Consolidated Balance Sheet were as
follows:
|
|
Fair
Values of Derivative Contracts
|
|
|
|
At
September 30, 2009
|
|
(In
thousands)
|
|
Other
current assets
|
|
|
Other
assets
|
|
|
Other
current liabilities
|
|
Derivatives
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
36 |
|
Commodity
contracts
|
|
|
212 |
|
|
|
— |
|
|
|
1,449 |
|
Cross-currency
interest rate swap
|
|
|
— |
|
|
|
7,779 |
|
|
|
— |
|
Total
derivatives designated as hedging instruments
|
|
$ |
212 |
|
|
$ |
7,779 |
|
|
$ |
1,485 |
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
$ |
1,233 |
|
|
$ |
— |
|
|
$ |
1,035 |
|
The
effect of derivative instruments on the Condensed Consolidated Statements of
Income and the Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2009 was as follows:
Derivatives
Designated as Hedging Instruments
|
|
(In
thousands)
|
|
Amount
of Loss Recognized in Other Comprehensive Income (“OCI”) on Derivative -
Effective Portion
|
|
Location
of Loss Reclassified from Accumulated OCI into Income - Effective
Portion
|
|
Amount
of Loss Reclassified from Accumulated OCI into Income - Effective
Portion
|
|
Location
of Gain (Loss) Recognized in Income on Derivative - Ineffective Portion
and Amount Excluded from Effectiveness Testing
|
|
Amount
of Gain (Loss) Recognized in Income on Derivative - Ineffective Portion
and Amount Excluded from Effectiveness Testing
|
|
For
the three months ended
September
30, 2009:
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
$ |
(57 |
) |
Cost
of services and products sold
|
|
$ |
(8 |
) |
|
|
$ |
— |
|
Commodity
contracts
|
|
|
(1,130 |
) |
Service
Revenues
|
|
|
(923 |
) |
Service
Revenues
|
|
|
259 |
|
Cross-currency
interest rate swap
|
|
|
(1,494 |
) |
|
|
|
— |
|
Cost
of services and products sold
|
|
|
(7,920 |
) (a) |
|
|
$ |
(2,681 |
) |
|
|
$ |
(931 |
) |
|
|
$ |
(7,661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
Designated as Hedging Instruments
|
|
(In
thousands)
|
|
Amount
of Loss Recognized in Other Comprehensive Income (“OCI”) on Derivative -
Effective Portion
|
|
Location
of Gain Reclassified from Accumulated OCI into Income - Effective
Portion
|
|
Amount
of Gain Reclassified from Accumulated OCI into Income - Effective
Portion
|
|
Location
of Loss Recognized in Income on Derivative - Ineffective Portion and
Amount Excluded from Effectiveness Testing
|
|
Amount
of Loss Recognized in Income on Derivative - Ineffective Portion and
Amount Excluded from Effectiveness Testing
|
|
For
the nine months ended
September
30, 2009:
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
$ |
(54 |
) |
|
|
$ |
— |
|
|
|
$ |
— |
|
Commodity
contracts
|
|
|
(3,334 |
) |
Service
Revenues
|
|
|
2,272 |
|
Service
Revenues
|
|
|
(243 |
) |
Cross-currency
interest rate swap
|
|
|
(31,947 |
) |
|
|
|
— |
|
Cost
of services and products sold
|
|
|
(9,707 |
)
(a) |
|
|
$ |
(35,335 |
) |
|
|
$ |
2,272 |
|
|
|
$ |
(9,950 |
) |
(a)
|
The
net losses offset foreign currency fluctuation effects on the debt
principal.
|
Derivatives
Not Designated as Hedging Instruments
|
|
|
|
|
Amount
of Loss Recognized in Income on Derivative
|
|
(In
thousands)
|
Location
of Loss Recognized in Income on Derivative
|
|
For
the Three Months Ended September 30, 2009
|
|
|
For
the Nine Months Ended September 30, 2009
|
|
Foreign
currency forward exchange contracts
|
Cost
of services and products sold
|
|
$ |
(1,946 |
) |
|
$ |
(8,704 |
) |
Note:
These losses offset gains recognized in cost of service and products sold
principally as a result of intercompany or third party foreign currency
exposures.
Commodity
Derivatives
The
Company periodically uses derivative instruments to hedge cash flows associated
with selling price exposure to certain commodities. The Company’s
commodity derivative activities are subject to the management, direction and
control of the Company’s Risk Management Committee, which approves the use of
all commodity derivative instruments.
At
September 30, 2009, the Company’s open commodity derivative contract positions
qualified as cash flow hedges under the requirements for hedge accounting and
consisted of unsecured swap contracts maturing monthly through December
2009. The notional value of these contracts is equal to the hedged
volume multiplied by the strike price of the derivative and totaled $4.7
million. All contracts are with major financial
institutions. In the event of non-performance by the other parties to
the contracts, the Company may be exposed to credit loss. The Company
evaluates the credit worthiness of the counterparties and does not expect
default by them.
Although
earnings volatility may occur between fiscal quarters due to hedge
ineffectiveness, or if the derivatives do not qualify as cash flow hedges under
hedge accounting, the economic substance of the derivatives provides more
predictable cash flows by reducing the Company’s exposure to the commodity price
fluctuations.
Foreign
Currency Forward Exchange Contracts
The
Company conducts business in multiple currencies and, accordingly, is subject to
the inherent risks associated with foreign exchange rate
movements. The financial position and results of operations of
substantially all of the Company’s foreign subsidiaries are measured using the
local currency as the functional currency. Foreign currency
denominated assets and liabilities are translated into U.S. dollars at the
exchange rates existing at the respective balance sheet dates, and income and
expense items are translated at the average exchange rates during the respective
periods. The aggregate effects of translating the balance sheets of
these subsidiaries are deferred and recorded in Accumulated other comprehensive
loss or income, which is a separate component of equity.
The
Company uses derivative instruments to hedge cash flows related to foreign
currency fluctuations. At September 30, 2009, the Company had $207.1
million of contracted amounts of foreign currency forward exchange contracts
outstanding. These contracts are part of a worldwide program to
minimize foreign currency exchange operating income and balance sheet
exposure. The unsecured contracts outstanding at September 30, 2009
mature at various times within six months and are with major financial
institutions. The Company may be exposed to credit loss in the event
of non-performance by the contract counterparties. The Company
evaluates the credit worthiness of the counterparties and does not expect
default by them. Foreign currency forward exchange contracts are used
to hedge commitments, such as foreign currency debt, firm purchase commitments
and foreign currency cash flows for certain export sales
transactions.
The
following tables summarize, by major currency, the contractual amounts of the
Company’’s
foreign currency forward exchange contracts in U.S. dollars as of September 30,
2009. The “Buy” amounts represent the U.S. dollar equivalent of
commitments to purchase foreign currencies, and the “Sell” amounts represent the
U.S. dollar equivalent of commitments to sell foreign currencies.
Foreign
Currency Forward Exchange Contracts
|
|
(In
thousands)
|
As
of September 30, 2009
|
|
|
Type
|
|
U.S.
Dollar Equivalent
|
|
Maturity
|
|
Recognized
Gain (Loss)
|
|
British
pounds sterling
|
Sell
|
|
$ |
32,429 |
|
October
2009
|
|
$ |
419 |
|
British
pounds sterling
|
Buy
|
|
|
49,538 |
|
October
2009 through March 2010
|
|
|
(581 |
) |
Euros
|
Sell
|
|
|
46,272 |
|
October
2009
|
|
|
341 |
|
Euros
|
Buy
|
|
|
73,463 |
|
October
2009 through November 2009
|
|
|
44 |
|
Other
currencies
|
Sell
|
|
|
3,179 |
|
October
2009 through December 2009
|
|
|
(66 |
) |
Other
currencies
|
Buy
|
|
|
2,217 |
|
October
2009 through December 2009
|
|
|
5 |
|
Total
|
|
|
$ |
207,098 |
|
|
|
$ |
162 |
|
Note:
Recognized gains and losses offset amounts recognized in cost of service and
products sold principally as a result of intercompany or third party foreign
currency exposures.
Cross-Currency
Interest Rate Swap
In May
2008, the Company entered into a ten-year, $250.0 million cross-currency
interest rate swap in conjunction with a debt issuance in order to lock in a
fixed euro interest rate for $250.0 million of the issuance. Under
the swap, the Company receives interest based on a fixed U.S. dollar rate and
pays interest on a fixed euro rate on the outstanding notional principal amounts
in dollars and euros, respectively. The cross-currency interest rate
swap is recorded in the consolidated balance sheet at fair value, with changes
in value attributed to the effect of the swaps’ interest spread recorded in
Accumulated other comprehensive loss or income, which is a separate component of
equity. Changes in value attributed to the effect of foreign currency
fluctuations are recorded in the income statement and offset currency
fluctuation effects on the debt principal.
Fair
Value of Derivative Assets and Liabilities and Other Financial
Instruments
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 (an 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.
The fair
value hierarchy distinguishes between (1) market participant assumptions
developed based on market data obtained from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant
assumptions developed based on the best information available in the
circumstances (unobservable inputs). The fair value hierarchy
consists of three broad levels, which gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1)
and the lowest priority to unobservable inputs (Level 3). The three
levels of the fair value hierarchy are described below:
·
|
Level
1—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.
At
September 30, 2009 and December 31, 2008, all of the Company’s derivative assets
and liabilities were classified as Level 2 in the fair value
hierarchy. These assets and liabilities had a fair value of $9.2
million and $2.5 million, respectively, at September 30, 2009 and $61.2 million
and $4.0 million, respectively, at December 31, 2008.
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, such as forward rates, interest
rates, the Company’s credit risk and counterparties’ credit risks, 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.
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, and short-term borrowings approximate fair value
due to the short-term maturities of these assets and liabilities. At
September 30, 2009, and December 31, 2008, total fair value of long-term debt,
including current maturities, was $968 million and $900 million, respectively,
compared to carrying value of $923 million and $895 million,
respectively. Fair values for debt are based on quoted market prices
for the same or similar issues or on the current rates offered to the Company
for debt of the same remaining maturities.
L. 2008
Restructuring Program
As a
result of the deepening financial and economic crisis, the Company initiated a
restructuring program in the fourth quarter of 2008. The program was
designed to improve organizational efficiency and enhance profitability and
shareholder value by generating sustainable operating expense
savings. Under this program, the Company is principally exiting
certain underperforming contracts with customers, closing certain facilities and
reducing the global workforce. Restructuring costs were incurred
primarily in the Harsco Metals and Harsco Infrastructure Segments and recorded
in the Other (income) expense line of the Condensed Consolidated Income
Statements. In the fourth quarter of 2008, the Company recorded net
pre-tax restructuring and other related charges totaling $36.1 million,
including $28.0 million in Other expense, $5.8 million reduction in services
revenue, a net $1.5 million related to pension curtailments and $0.8 million of
other costs. Restructuring actions are expected to be completed by
December 31, 2009.
At
September 30, 2009, the Company has completed workforce reductions of 1,291
employees of a total expected workforce reduction of 1,429 employees related to
the fourth quarter 2008 restructuring program. The majority of the
remaining workforce reductions and exit activities are targeted for completion
during 2009.
The
restructuring accrual at September 30, 2009 and the activity for the nine months
ended September 30, 2009 attributable to each segment is as
follows:
(In
thousands)
|
|
Accrual
December 31 2008
|
|
|
Adjustments
to Previously Recorded Restructuring Charges*
|
|
|
Cash
Expenditures
|
|
|
Remaining
Accrual September 30 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Infrastructure Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
$ |
1,806 |
|
|
$ |
215 |
|
|
$ |
(1,641 |
) |
|
$ |
380 |
|
Cost
to exit activities
|
|
|
1,963 |
|
|
|
(999 |
) |
|
|
(863 |
) |
|
|
101 |
|
Total
Harsco Infrastructure Segment
|
|
|
3,769 |
|
|
|
(784 |
) |
|
|
(2,504 |
) |
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Metals Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
|
9,888 |
|
|
|
— |
|
|
|
(6,807 |
) |
|
|
3,081 |
|
Cost
to exit activities
|
|
|
656 |
|
|
|
(150 |
) |
|
|
(198 |
) |
|
|
308 |
|
Total
Harsco Metals Segment
|
|
|
10,544 |
|
|
|
(150 |
) |
|
|
(7,005 |
) |
|
|
3,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category - Harsco Minerals & Rail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
|
531 |
|
|
|
215 |
|
|
|
(746 |
) |
|
|
— |
|
Total
All Other Category - Harsco Minerals & Rail
|
|
|
531 |
|
|
|
215 |
|
|
|
(746 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
|
113 |
|
|
|
— |
|
|
|
(113 |
) |
|
|
— |
|
Cost
to exit activities
|
|
|
2,448 |
|
|
|
— |
|
|
|
(933 |
) |
|
|
1,515 |
|
Total
Corporate
|
|
|
2,561 |
|
|
|
— |
|
|
|
(1,046 |
) |
|
|
1,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
17,405 |
|
|
$ |
(719 |
) |
|
$ |
(11,301 |
) |
|
$ |
5,385 |
|
|
*
|
Adjustments
to previously recorded cost to exit activities resulted from changes in
facts and circumstances that led to changes in estimated
costs.
|
The
majority of the remaining cash expenditures of $5.4 million related to the 2008
actions are expected to be paid within the next three months.
M. Subsequent
Events
The
Company’s management has evaluated all activity of the Company through November
5, 2009 (the issue date of the consolidated financial statements) and concluded
that subsequent events are properly reflected in the Company’s financial
statements and notes as required by standards for accounting and disclosure of
subsequent events.
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, 2008, which included additional information about the
Company’s critical accounting policies, contractual obligations, practices and
the transactions that support the financial results, and provided a more
comprehensive summary of the Company’s outlook, trends and strategies for 2009
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 our management confidence and strategies
for performance; expectations for new and existing products, technologies, and
opportunities; and expectations regarding growth, sales, cash flows, earnings
and 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, public health issues or other calamities; (7)
the seasonal nature of the business; (8) our ability to successfully enter into
new contracts and complete new acquisitions in the timeframe contemplated; (9)
the integration of the Company’s strategic acquisitions; (10) the amount and
timing of repurchases of the Company’s common stock, if any; (11) the ongoing
global financial and credit crisis, which could result in our customers
curtailing development projects, construction, production and capital
expenditures, which, in turn, could reduce the demand for our products and
services and, accordingly, our sales, margins and profitability; (12) the
financial condition of our customers, including the ability of customers
(especially those that may be highly leveraged and those with inadequate
liquidity) to maintain their credit availability; and (13) 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, 2008. 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
In the
third quarter of 2009, the global recession continued to significantly impact
the Company’s results. As in the first half of 2009, major challenges
included the strength of the U.S. dollar compared to 2008; unprecedented low
global steel production; and a lack of available credit that continued to
adversely impact non-residential construction projects
worldwide. Although the Company has begun to see some improvement in
global steel production and an abatement of the strong U.S. dollar compared to
prior quarters, challenges remain with commercial and multi-family construction
projects being cancelled or postponed due to unavailability of
credit. Additionally, pricing pressures are also having a negative
impact as competitors pursue remaining projects and customers seek price
reductions. The Company does not anticipate substantial improvement
in these business drivers in the fourth quarter of 2009. Global
governments’ commitments for stimulus packages to fund infrastructure projects
throughout the world have not had a major impact in most of the Company’s
markets, as funds have not been disbursed or have not yet resulted in a
significant increase in project starts. The Company does not expect
any substantial impact from stimulus projects.
The
Company’s third quarter 2009 revenues from continuing operations totaled $744.2
million, a decrease of $300.7 million or 29% from the third quarter of
2008. The Company experienced lower volume levels resulting from a
deterioration of global steel markets and weaker demand for infrastructure
services, particularly in the United Kingdom, North America and several other
key European countries. Foreign currency translation decreased sales
by $53.2 million and accounted for approximately 18% of the decline in
sales. Operating income from continuing operations was $56.4 million
compared with $133.9 million in 2008, a decrease of 58%. Diluted
earnings per share from continuing operations were $0.40, a 60% decrease from
2008. Third quarter 2009 results also included a net non-cash charge
of $0.11 per share for adjustments to correct errors generated principally by
the improper recognition of certain revenues and delaying the recognition of
certain expenses by one subsidiary, in one country, during the past three
years. The Company assessed the individual and aggregate impact of
these adjustments on the current year and all prior periods and determined that
the cumulative effect of the adjustments was not material to the full year 2009
results and it did not result in a material misstatement to any previously
issued annual or quarterly financial statements. Consequently, the Company
recorded the net adjustment in the current quarter and has not revised any
previously issued annual financial statements or interim financial
data.
Revenues
for the first nine months of 2009 were $2.2 billion, a decrease of $914.2
million or 29% from the first nine months of 2008. Operating income
from continuing operations was $164.0 million compared with $379.1 million in
the first nine months of 2008, a 57% decrease. Diluted earnings per
share from continuing operations were $1.17, a 57% decrease from the first nine
months of 2008. Foreign currency translation decreased revenues and
operating income for the first nine months of 2009 by $309.0 million and $32.8
million, respectively, in comparison with the first nine months of
2008. Revenues from emerging markets were approximately 21% of total
revenues for the first nine months of both 2009 and 2008.
In
response to further deterioration of global markets during 2009, the Company
supplemented its 2008 restructuring initiatives with additional countermeasures
targeting expense reduction, revenue enhancement and asset
optimization. The combination of the 2008 and 2009 countermeasures
have enabled the Company to make substantial progress in reducing its cost
structure and the related savings will continue to benefit the fourth quarter of
2009 and beyond. The Company’s actions to minimize its cost base
include, but are not limited to, the following:
·
|
redeployment
of its mobile asset base in the Harsco Infrastructure and Harsco Metals
Segments to focus on market segments that remain strong and provide growth
opportunities, such as the relocation of infrastructure rental assets from
the United Kingdom to the Middle East and Asia
Pacific;
|
·
|
reduction
in the global workforce of approximately 4,000 employees since September
2008 and substantial reductions in discretionary
spending;
|
·
|
continued
expansion of the Company’s LeanSigma® continuous
improvement initiative;
|
·
|
substantial
reductions in capital spending;
|
·
|
strengthening
certain key positions in the global leadership
team;
|
·
|
implementation
of supply chain optimization initiatives;
and
|
·
|
implementation
of further countermeasures to improve efficiency and remove unnecessary
costs.
|
The
Company continues to have significant available liquidity and remains
well-positioned from a financial flexibility perspective. Net cash
from operations for the third quarter and the first nine months of 2009 is less
than comparable periods in 2008, but was offset by decreased capital
expenditures compared with prior years. This has allowed the Company
to further enhance its balance sheet, maintain its dividend, reduce debt to the
extent possible under borrowing agreements and pursue prudent, bolt-on
acquisitions that are consistent with the Company’s growth
strategies. During the third quarter of 2009, the Company generated
net cash from operating activities of $120.4 million, compared with $171.6
million achieved in the third quarter of 2008. For the first nine
months of 2009, the Company generated net cash from operating activities of
$276.7 million compared with $382.0 million for the first nine months of
2008. For the first nine months of 2009, capital expenditures were
$123.1 million compared with $380.9 million in the first nine months of
2008. Cash flow from operations for all of 2009 is expected to be
approximately $400 million and total capital expenditures are expected to be
approximately $150 million. The Company’s cash flows are further
discussed in the Liquidity and Capital Resources section.
Segment
Overview
The
Harsco Infrastructure Segment recorded lower revenue and operating income in the
third quarter and first nine months of 2009 compared to similar periods in
2008. The reductions in 2009 were due principally to reduced
end-market demand, particularly in the United Kingdom, North America and several
other key European countries, and negative foreign currency translation
effects. Lower demand is being driven by the continued lack of
available credit that has resulted in cancelled and delayed nonresidential
construction projects, as well as a significant decline in export sales of
infrastructure-related equipment. This Segment’s revenues in the
third quarter of 2009 were $279.5 million compared with $393.3 million in the
third quarter of 2008, a 29% decrease. Operating income decreased by
63% to $22.5 million, from $60.0 million in the third quarter of
2008. Operating margins for the Segment declined by 720 basis points
to 8.1% from 15.3% in the third quarter of 2008. In comparison with
the first nine months of 2008, this Segment’s revenue decreased by 27% to $872.0
million. Operating income in the first nine months of 2009 declined
by 58% to $66.3 million from $156.0 million in the first nine months of 2008,
and operating margins declined 540 basis points to 7.6% from
13.0%. Foreign currency translation decreased revenues and operating
income for the first nine months of 2009 by $134.4 million and $16.7 million,
respectively, in comparison with the first nine months of
2008. Harsco Infrastructure accounted for 38% and 39% of the
Company’s revenues for the third quarter and the first nine months of 2009,
respectively; and 40% of the operating income for both the third quarter and
first nine months of 2009.
Results
for the Harsco Metals Segment for the third quarter and first nine months of
2009 reflected ongoing unprecedented steel production cuts resulting from lower
end-market demand due to the global recession. Revenues for the third
quarter of 2009 for the Harsco Metals Segment were $275.1 million compared with
$423.8 million in the third quarter of 2008, a 35% decrease. In
comparison with the first nine months of 2008, this Segment’s revenue decreased
by $513.0 million to $773.0 million. Volume decreases attributable to
steel production cuts drove 67% of the reduction in
LeanSigma®
is a registered trademark of TBM Consulting Group, Inc.
year-over-year
sales; negative foreign currency translation contributed 31% of the decline; and
the remainder was attributable to the revenue reversal
adjustment. Including this adjustment, this Segment generated
operating losses of $4.4 million and $3.0 million during the third quarter and
first nine months of 2009, respectively. This is compared with operating
income of $33.3 million and $99.6 million in the third quarter and first nine
months of 2008, respectively. Foreign currency translation decreased
revenues and operating income for the first nine months of 2009 by $156.6
million and $13.9 million, respectively, in comparison with the first nine
months of 2008. Harsco Metals accounted for 37% and 35% of the
Company’s revenues for the third quarter and the first nine months of 2009,
respectively.
The All
Other Category (“Harsco Minerals & Rail”), revenues in the third quarter of
2009 were $189.6 million compared with $227.7 million in the third quarter of
2008, a decrease of 17%. Operating income decreased by 6% to $39.6
million, from $42.0 million in the third quarter of 2008 due principally to
volume and commodity price declines in the minerals business and an overall
market decline in the industrial grating products business. Despite
the revenue and income decline, operating margins for the All Other Category
increased by 250 basis points to 20.9% from 18.4% in the third quarter of
2008. Comparing the first nine months of 2009 to the first nine
months of 2008, revenues decreased 11% to $573.0 million from $644.8 million,
respectively, and operating income decreased 17% to $105.7 million from $128.0
million, respectively. Operating margins for the first nine months of
2009 decreased 130 basis points to 18.5% from 19.8% in the first nine months of
2008. The Harsco Rail business recorded increased revenues in the
third quarter and first nine months of 2009 compared with the prior year periods
due to shipments of equipment to China under contracts with the China Ministry
of Railways. The minerals business continued to be adversely impacted
by a lack of metals production and fluctuating commodity prices and the
industrial products business experienced an overall market decline as customers
reduced stock levels from high 2008 inventory levels. The All Other
Category accounted for 26% of the Company’s revenues for both the third quarter
and first nine months of 2009; and 70% and 65% of the operating income for the
third quarter and first nine months of 2009, 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, 2008. On a macro basis, the Company is
affected by: non-residential and infrastructure construction and infrastructure
maintenance and capital improvement activities; worldwide steel production;
industrial production volume and maintenance activity; and the general business
trend towards the outsourcing of services. The overall outlook for
the fourth quarter of 2009 and beyond for most of these business drivers remains
challenging due to the impact of the global recession. While some
signs of recovery have begun to appear, it appears more substantial benefits of
a general economic upswing and government stimulus packages will be delayed into
2010.
The
overall strength of the U.S. dollar in 2009 compared to 2008 is expected to have
a significant negative impact on the Company’s performance for the full year
2009. While the U.S. dollar weakened in the third quarter of 2009,
the positive impact that a weakened U.S. dollar may provide in the fourth
quarter is not expected to offset the effect of the stronger U.S. dollar for the
first nine months of 2009. Additionally, the Company’s pension plans’
assets declined in value at December 31, 2008, consistent with the weakening
economy, resulting in significantly increased defined benefit net periodic
pension cost during 2009. Therefore, net periodic pension cost is
expected to be approximately $3 million higher in the fourth quarter of 2009
compared with the fourth quarter of 2008.
In the
fourth quarter of 2008, the Company implemented a restructuring program designed
to improve organizational efficiency and enhance profitability and stockholder
value. The restructuring program included exiting certain
underperforming contracts with customers in the metals business, closing certain
facilities and reducing the Company’s global workforce. The actions
taken in 2008 were supplemented by additional countermeasures targeting expense
reduction, revenue enhancement and asset optimization throughout
2009. The cost savings from the combination of the 2008 and 2009
countermeasures will manifest themselves throughout the remainder of 2009 and
beyond. Targeted reductions in capital spending, coupled with
redeployment of equipment from slowing markets into strategically important,
growing markets will also help control cash flow and contribute to
liquidity. The Company is confident its strong balance sheet,
available liquidity and ability to generate strong cash flows position it to
take advantage of reversing economic trends as they occur. Current
economic conditions may provide the Company with expansion opportunities to
pursue its prudent acquisition strategy of seeking bolt-on
acquisitions.
The
long-term outlook across the global footprint of the Harsco Infrastructure
business remains positive. The near-term outlook however, is
challenging due to the global economic climate, principally the lack of
available credit that has resulted in cancelled or delayed projects, pricing
pressures and the lack of stimulus spending for infrastructure
projects. This Segment will leverage its global breadth and mobile
asset base to relocate equipment to focus on: emerging markets as well as market
segments that remain stable such as infrastructure maintenance services;
institutional services such as hospitals and education; and global
infrastructure work. Operating performance for this Segment in the
long term is expected to continue to benefit from: the execution of numerous
global government stimulus packages which are expected to fund much needed
infrastructure projects; selective strategic investments and acquisitions in
existing and new
markets;
enterprise business optimization opportunities including new technology
applications; consolidated procurement, logistics and supply chain initiatives;
and LeanSigma continuous improvement.
The
long-term outlook for the Harsco Metals Segment remains stable as the global
steel market is expected to grow at more historical rates over the
long-term. The key factor behind this anticipated growth is the
demand from emerging economies for significant infrastructure development
needs. The near-term outlook, however, is cautious because of the
uncertainty of economic recovery in the U.S. and Europe. The global
recession deeply cut into demand for steel and associated steel
production. Steel demand has begun to show signs of stabilization and
a mild recovery is anticipated in 2010. It is expected that some of
the negative impact from steel volume reductions will be mitigated by improved
overall contract performance, new contract signings and cost optimization
initiatives being implemented by the Company. The Segment continues
to engage in enterprise business optimization initiatives including the
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.
For the
All Other Category (Harsco Minerals & Rail), the long-term outlook also
remains positive, as recovery from the global recession will provide opportunity
to expand activity in the businesses. The near-term outlook for the
minerals business will benefit if steel production levels continue their gradual
improvement. The Company’s railway track maintenance services and
equipment business continues to have a strong order backlog, although quarterly
performance could be influenced by the timing of completed unit
deliveries. The industrial products businesses will continue to show
some short-term weakness as end market drivers remain soft due to the slow pace
of the industrial recovery in North America. Longer term, the Company
also anticipates new contract opportunities for its minerals business and
potential geographic expansion opportunities within its industrial products
businesses.
|
|
Revenues
by Region
|
|
|
|
Total
Revenues
Three
Months Ended
September
30
|
|
|
Percentage
Change From
2008
to 2009
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
Volume/Price
|
|
|
Currency
|
|
|
Total
|
|
Western
Europe
|
|
$ |
310.0 |
|
|
$ |
450.8 |
|
|
|
(23.4 |
)% |
|
|
(7.8 |
)% |
|
|
(31.2 |
)% |
North
America
|
|
|
256.6 |
|
|
|
363.2 |
|
|
|
(29.0 |
) |
|
|
(0.4 |
) |
|
|
(29.4 |
) |
Middle
East and Africa
|
|
|
59.7 |
|
|
|
69.4 |
|
|
|
(14.3 |
) |
|
|
0.3 |
|
|
|
(14.0 |
) |
Latin
America (a)
|
|
|
53.0 |
|
|
|
72.5 |
|
|
|
(17.5 |
) |
|
|
(9.4 |
) |
|
|
(26.9 |
) |
Eastern
Europe
|
|
|
33.7 |
|
|
|
54.5 |
|
|
|
(21.8 |
) |
|
|
(16.4 |
) |
|
|
(38.2 |
) |
Asia
Pacific
|
|
|
31.2 |
|
|
|
34.5 |
|
|
|
(7.5 |
) |
|
|
(2.1 |
) |
|
|
(9.6 |
) |
Total
|
|
$ |
744.2 |
|
|
$ |
1,044.9 |
|
|
|
(23.7 |
)% |
|
|
(5.1 |
)% |
|
|
(28.8 |
)% |
|
|
Revenues
by Region
|
|
|
|
Total
Revenues
Nine
Months Ended
September
30
|
|
|
Percentage
Change From
2008
to 2009
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
Volume/Price
|
|
|
Currency
|
|
|
Total
|
|
Western
Europe
|
|
$ |
923.4 |
|
|
$ |
1,416.9 |
|
|
|
(19.9 |
)% |
|
|
(14.9 |
)% |
|
|
(34.8 |
)% |
North
America
|
|
|
823.0 |
|
|
|
1,057.1 |
|
|
|
(21.1 |
) |
|
|
(1.0 |
) |
|
|
(22.1 |
) |
Middle
East and Africa
|
|
|
172.0 |
|
|
|
197.5 |
|
|
|
(11.0 |
) |
|
|
(1.9 |
) |
|
|
(12.9 |
) |
Latin
America (a)
|
|
|
134.9 |
|
|
|
202.5 |
|
|
|
(16.7 |
) |
|
|
(16.7 |
) |
|
|
(33.4 |
) |
Eastern
Europe
|
|
|
86.2 |
|
|
|
152.1 |
|
|
|
(20.6 |
) |
|
|
(22.7 |
) |
|
|
(43.3 |
) |
Asia
Pacific
|
|
|
78.6 |
|
|
|
106.2 |
|
|
|
(12.3 |
) |
|
|
(13.7 |
) |
|
|
(26.0 |
) |
Total
|
|
$ |
2,218.1 |
|
|
$ |
3,132.3 |
|
|
|
(19.3 |
)% |
|
|
(9.9 |
)% |
|
|
(29.2 |
)% |
2009
Highlights
The
following significant items affected the Company overall during the third
quarter and first nine months of 2009, in comparison with the third quarter and
first nine months of 2008:
Company
Wide:
·
|
Revenues
and operating income were impacted by the global recession
as:
|
o
|
the
average value of the U.S. dollar increased significantly from 2008 to
2009, accounting for 18% and 34% of the sales decline for the third
quarter and nine month comparisons, respectively; and 6% and 15% of the
decline in operating income for the third quarter and nine month
comparisons, respectively;
|
o
|
global
steel production, which declined in the latter part of 2008, remained at
unprecedented low levels; and
|
o
|
restrictive
lending and credit practices continued to adversely affect non-residential
construction projects worldwide, coupled with pricing pressure as
customers seek price breaks and competitors pursue a limited number of
available projects.
|
·
|
During
2009, the Company’s operating income benefitted from the restructuring
actions implemented in the fourth quarter of 2008. Operational
improvements were also recognized as a result of additional
countermeasures implemented during the first nine months of 2009 targeting
expense reduction, revenue enhancement and asset
optimization. Cost savings from the combination of the 2008 and
2009 countermeasures will manifest themselves throughout the fourth
quarter of 2009 and beyond with significant annualized
benefits.
|
·
|
Defined
benefit net periodic pension cost increased $9.1 million for the nine
months ended September 30, 2009 compared with
2008.
|
·
|
Due
to strong operating cash flows and controlled capital spending, the
Company repaid debt of $88.2 million in the first nine months of 2009.
However, this was offset by the effect of foreign currency translation as
balance sheet debt declined by $51.1 million in the same
period.
|
·
|
Cash
flow from operations for the first nine months of 2009 was $276.7
million. This was more than sufficient to fund the cash
requirements for investing activities of $127.3 million while also
providing excess funds to reduce
debt.
|
Harsco Infrastructure
Segment:
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
279.5 |
|
|
$ |
393.3 |
|
|
$ |
872.0 |
|
|
$ |
1,201.3 |
|
Operating
income
|
|
|
22.5 |
|
|
|
60.0 |
|
|
|
66.3 |
|
|
|
156.0 |
|
Operating
margin percent
|
|
|
8.1 |
% |
|
|
15.3 |
% |
|
|
7.6 |
% |
|
|
13.0 |
% |
Harsco
Infrastructure Segment – Significant Impacts on Revenues
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(In
millions)
|
|
|
|
|
|
|
Revenues
– 2008
|
|
$ |
393.3 |
|
|
$ |
1,201.3 |
|
Impact
of foreign currency translation
|
|
|
(24.3 |
) |
|
|
(134.4 |
) |
Net
decreased volume
|
|
|
(90.3 |
) |
|
|
(197.4 |
) |
Acquisitions
|
|
|
0.8 |
|
|
|
2.5 |
|
Revenues
– 2009
|
|
$ |
279.5 |
|
|
$ |
872.0 |
|
Harsco
Infrastructure Segment – Significant Impacts on Operating Income:
·
|
In
the third quarter and first nine months of 2009, the Segment’s operating
results decreased due to reduced non-residential, commercial and
infrastructure construction spending, particularly in the United Kingdom,
North America and several other key European countries. This
was partially offset by continued strength in emerging economies in the
Middle East and Asia Pacific regions, as well as global industrial
maintenance. The Company has benefited from its capital
investments made in these markets in prior years and its ability to
redeploy equipment throughout the
globe.
|
·
|
In
response to further deterioration of global infrastructure markets during
2009, this Segment implemented additional countermeasures targeting
expense reduction, revenue enhancement, asset optimization and facility
rationalization.
|
·
|
Foreign
currency translation in the third quarter and the first nine months of
2009 decreased operating income for this Segment by $3.0 million and $16.7
million, respectively, compared with the third quarter and first nine
months of 2008.
|
Harsco Metals
Segment:
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
275.1 |
|
|
$ |
423.8 |
|
|
$ |
773.0 |
|
|
$ |
1,286.0 |
|
Operating
(loss) income
|
|
|
(4.4 |
) |
|
|
33.3 |
|
|
|
(3.0 |
) |
|
|
99.6 |
|
Operating
margin percent
|
|
|
(1.6 |
)% |
|
|
7.9 |
% |
|
|
(0.4 |
)% |
|
|
7.7 |
% |
Harsco
Metals Segment – Significant Impacts on Revenues
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(In
millions)
|
|
|
|
|
|
|
Revenues
– 2008
|
|
$ |
423.8 |
|
|
$ |
1,286.0 |
|
Net
decreased volume
|
|
|
(113.5 |
) |
|
|
(346.1 |
) |
Impact
of foreign currency translation
|
|
|
(24.9 |
) |
|
|
(156.6 |
) |
Principally
out-of-period adjustment and other changes
|
|
|
(10.3 |
) |
|
|
(10.3 |
) |
Revenues
– 2009
|
|
$ |
275.1 |
|
|
$ |
773.0 |
|
Harsco
Metals Segment – Significant Effects on Operating Income:
·
|
Revenues,
operating income and margins for the third quarter and the first nine
months of 2009 were negatively affected by unprecedented declines in
global steel production and the stronger U.S. dollar in 2009 compared with
the same periods of 2008.
|
·
|
During
the third quarter and the first nine months of 2009, the Company’s
operating income benefitted from the restructuring actions implemented in
the fourth quarter of 2008. Operational improvements were also
recognized as a result of additional countermeasures implemented during
2009 targeting expense reduction, revenue enhancement and asset
optimization.
|
·
|
The
reversal of revenue improperly recognized over the prior three years
resulted in an operating income decrease for the third quarter and first
nine months of 2009. The improperly recorded revenue related to
the failure to receive advance customer agreement and to invoice on a
timely basis, for additional work performed for two customers; was
isolated to a business unit in one country; and is considered a one-time
event.
|
·
|
Foreign
currency translation in the third quarter and first nine months of 2009
decreased operating income for this Segment by $1.3 million and $13.9
million, respectively, compared with the third quarter and first nine
months of 2008.
|
All Other Category – Harsco
Minerals & Rail:
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
189.6 |
|
|
$ |
227.7 |
|
|
$ |
573.0 |
|
|
$ |
644.8 |
|
Operating
income
|
|
|
39.6 |
|
|
|
42.0 |
|
|
|
105.7 |
|
|
|
128.0 |
|
Operating
margin percent
|
|
|
20.9 |
% |
|
|
18.4 |
% |
|
|
18.5 |
% |
|
|
19.8 |
% |
All
Other Category – Harsco Minerals & Rail –
Significant
Impacts on Revenues
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(In
millions)
|
|
|
|
|
|
|
Revenues
– 2008
|
|
$ |
227.7 |
|
|
$ |
644.8 |
|
Railway
track maintenance services and equipment
|
|
|
8.8 |
|
|
|
41.5 |
|
Minerals
and recycling technologies
|
|
|
(1.3 |
) |
|
|
(31.6 |
) |
Industrial
grating products
|
|
|
(15.6 |
) |
|
|
(35.2 |
) |
Impact
of foreign currency translation
|
|
|
(4.0 |
) |
|
|
(18.0 |
) |
Air-cooled
heat exchangers
|
|
|
(24.8 |
) |
|
|
(24.9 |
) |
Other
changes not individually discussed
|
|
|
(1.2 |
) |
|
|
(3.6 |
) |
Revenues
– 2009
|
|
$ |
189.6 |
|
|
$ |
573.0 |
|
All
Other Category – Harsco Minerals & Rail – Significant Impacts on Operating
Income:
·
|
The
railway track maintenance services and equipment business operating income
increased for the quarter and the first nine months of 2009 due
principally to shipments of equipment to China under contracts with the
China Ministry of Railways.
|
·
|
Operating
income for the minerals business improved in the third quarter relative to
the first half of 2009 due to an increase in customer demand and an
increase in metal prices. Despite this third quarter
improvement, the nine month results were lower in 2009 due to overall
lower metal prices, continued steel mill production declines and product
mix.
|
·
|
The
air-cooled heat exchangers business experienced a significant decline in
operating income in the third quarter of 2009 due to cutbacks by customers
within North America resulting from depressed natural gas prices combined
with unfavorable economic conditions. This decline started in
the second quarter of 2009 and offset increases resulting from
efficiencies in labor and overhead, coupled with lower commodity costs
that contributed to increased operating income in the first several months
of 2009.
|
·
|
The
economic downturn and customer decreases in inventory levels compared with
2008 contributed to a reduction in operating income for the industrial
grating products business.
|
·
|
Countermeasures
targeting expense reduction, revenue enhancement and asset optimization
have been implemented.
|
·
|
Foreign
currency translation in the third quarter and first nine months of 2009
decreased operating income for the All Other Category by $0.7 million and
$3.1 million, respectively, compared with the third quarter and first nine
months of 2008.
|
Outlook, Trends and
Strategies
Company
Wide:
Economic
uncertainty continues throughout the world as a result of the global
recession. Since the fourth quarter of 2008, the Company has faced
several major challenges arising from the Great Recession.
In the
third quarter of 2009, certain negative economic trends began to abate, as
overall steel production at mills served by the Company’s operations showed a
modest sequential quarterly increase and the U.S. dollar has recently weakened
against certain major currencies. While improving steel production
and a slightly weaker U.S. dollar positively contribute to the outlook for the
Company, expectations are that many of the challenges stemming from the global
recession will continue for the remainder of 2009 and into the first half of
2010.
Benefits
from government monetary and fiscal stimulus packages, designed as a primary
driver of the global economic recovery, have not yet materialized in many of the
Company’s key markets. The timing of those benefits cannot be
predicted with any certainty.
Responding
to these challenges, the Company has and will continue to proactively and
aggressively implement countermeasures to reinforce 2009 and future
performance.
Although
global economic conditions remain uncertain, the Company believes it is
well-positioned to capitalize on opportunities and execute strategic initiatives
based on its strong balance sheet, available liquidity and its ability to
generate strong operating cash flows. The Company is confident that
its cost reduction countermeasures, along with its LeanSigma continuous
improvement program, has significantly reduced the Company’s cost structure and
further enhanced its financial strength. Additionally, the Company’s
global footprint with expansion in emerging markets; its diversity of services
and products in industries that are fundamental to global growth; long-term mill
services contracts; portability and mobility of infrastructure services
equipment; and large infrastructure services customer base help mitigate its
overall exposure to changes in any one single economy. However,
continued or further deterioration of global economies could still have an
adverse impact on the Company’s operating results.
Looking
to the remainder of 2009 and beyond, the following significant items, risks,
trends and strategies are expected to affect the Company:
·
|
The
Company will continue its disciplined focus on expanding its industrial
services businesses, 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 targeted, strategic, bolt-on
acquisitions in strategic countries and market
sectors. Additionally, new higher-margin service and sales
opportunities in the minerals and rail businesses will be pursued
globally.
|
·
|
Management
will continue to be very selective and disciplined in allocating capital,
choosing projects with the highest Economic Value Added (“EVA”)
potential.
|
·
|
Global
governments have enacted stimulus packages to fund much needed
infrastructure projects throughout the world. However, any substantial
near-term benefit from stimulus packages is uncertain, particularly in the
United States and the United Kingdom. When stimulus package funding
becomes available, the Harsco Infrastructure Segment and the Harsco Rail
business are well positioned with their engineering expertise and the
Company’s capital investment base to take advantage of any expected
opportunities. Steel production is also likely to increase, benefitting
the Harsco Metals
Segment.
|
·
|
Continued
implementation of the Company’s enterprise-wide LeanSigma continuous
improvement program around the world should provide long-term benefits and
improve the overall performance of the Company through a reduced cost
structure and increased efficiency.
|
·
|
In
addition to LeanSigma, the Company will continue its efforts to further
enhance margins for most businesses through enterprise-wide business
optimization initiatives including: improved supply-chain and logistics
management; capital use optimization; and added emphasis on global
procurement and marketing.
|
·
|
The
Company will place a strong focus on corporate-wide expansion into
emerging economies in the coming years to better balance its geographic
footprint. More specifically, the Company’s global growth strategies
include steady, targeted expansion, particularly in the Middle East and
Africa, Asia Pacific and Latin America 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 several years and closer to 40% in the
longer-term. Revenues in these markets were 24% of the
Company’s total revenues for the third quarter of 2009 compared with 22%
for the third quarter of 2008; and 21% for the first nine months of both
2009 and 2008. Over time, the improved geographic footprint
will also benefit the Company through further diversification of its
customer base.
|
·
|
Volatility
in energy and commodity costs (e.g., crude oil, natural gas, steel, etc.)
and worldwide demand for these commodities could impact the Company’s
operations. 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. Cost decreases could result
in increased operating income to the extent that such cost savings do not
need to be passed to customers. However, volatility in energy
and commodity costs may provide additional service opportunities for the
Harsco Metals Segment and several businesses in the All Other Category
(Harsco Minerals & Rail) as customers may tend to outsource more
services to reduce overall costs. Volatility may also provide
opportunities in the Harsco Infrastructure Segment for additional
petrochemical plant maintenance and capital improvement
projects. In addition to embracing opportunities for revenue
enhancement, the Company is implementing programs to help mitigate these
costs as part of its on-going enterprise-wide optimization initiatives
noted above.
|
·
|
The
stronger U.S. dollar in the first nine months of 2009 compared with 2008
created a negative effect on the Company’s sales, operating income and
equity from foreign currency translation. If the U.S. dollar
strengthens compared to 2008, particularly in relationship to the euro,
the impact on the Company would generally be negative in terms of reduced
revenue, operating income and equity. Should the U.S. dollar
weaken in relationship to these currencies, the effect on the Company
would generally be positive in terms of higher revenue, operating income
and equity. Additionally, even if the U.S. dollar maintains its
September 30, 2009 value for the remainder of 2009, the Company’s full
year revenue and operating income will be negatively impacted in
comparison to 2008.
|
·
|
Since
December 2007, the Company has taken advantage of historically low
long-term interest rates and reduced variable rate debt from 49% of its
total borrowings to 5% at September 30, 2009. This decrease
resulted from the repayment of commercial paper borrowings during the
second quarter of 2008 with the proceeds from the May
2008
|
|
U.S.
senior notes offering, coupled with strong operating cash flows in 2008
and additional reductions in commercial paper and other borrowings during
the first nine months of 2009. The Company manages the mix of
fixed-rate and floating-rate debt to preserve adequate funding
flexibility, as well as to control the effect of interest-rate changes on
consolidated interest expense. At September 30, 2009, a one
percentage point change in variable interest rates would change interest
expense by $0.4 million per year. Strategies to further reduce
related risks are under
consideration.
|
·
|
Total
defined benefit net periodic pension expense for 2009 will be
substantially higher than in 2008 due to the decline in pension asset
values during the second half of 2008. This decline was due to
the financial crisis and the deterioration of global economic
conditions. To mitigate a portion of this overall increased
cost for 2009, the Company implemented additional plan design changes for
the U.K. defined benefit pension plan so that accrued service would no
longer be granted for periods after December 31,
2008. Additional plan design changes were made for the U.S.
defined benefit pension plans so that salary continuation would no longer
be included in the calculation of employee pension
benefits. These actions were part of the Company’s overall
strategy to reduce net periodic pension expense and
volatility.
|
·
|
As
the Company continues the strategic expansion of its global footprint, the
2009 effective income tax rate is expected to be lower than the 2008
effective income tax rate. The effective income tax rate from
continuing operations decreased to 15.7% and 17.2% for the third quarter
and first nine months of 2009, respectively, compared with 26.0% and 27.3%
for the third quarter and first nine months of 2008,
respectively. The decrease in the effective income tax rate for
these 2009 periods compared with 2008 reflected a decline in earnings in
jurisdictions with higher tax rates and certain net discrete tax benefits
recognized in 2009. In the third quarter of 2009, these net
discrete benefits related primarily to the recognition of previously
unrecognized tax benefits in certain foreign jurisdictions. Net
discrete benefits recognized prior to the third quarter related primarily
to the permanent reinvestment of additional earnings for certain non-U.S.
subsidiaries. Due to the expansion of the Company’s global footprint
within emerging markets, the effective income tax rate for the fourth
quarter of 2009, before discrete items, is expected to be approximately
22% to 24%.
|
·
|
Currently,
a majority of the Company’s revenue is generated from customers located
outside the United States, and a substantial portion of the Company’s
assets and employees are located outside the United
States. U.S. income tax and foreign withholding taxes have not
been provided on undistributed earnings for certain non-U.S. subsidiaries,
because such earnings are intended to be indefinitely reinvested in the
operations of those subsidiaries. Several U.S. legislation
proposals have been announced that would substantially reduce (or have the
effect of substantially reducing) the Company’s ability to defer U.S.
taxes on profit permanently reinvested outside the United
States. Proposals to date could have a negative impact on the
Company’s financial position and operating results. Additionally,
they could have a negative impact on the Company’s ability to compete in
the global marketplace. The probability of any of these proposals
being enacted cannot be predicted with any
certainty. Indications are that reform in 2010 is still likely
but such reform may be structured with more of the business community’s
concerns in mind. Nonetheless, the Company is working with
legislators with the goal of achieving a balanced and fair approach to tax
reform. The Company continues to monitor legislation to be in
position to structure operations in a manner that will reduce the impact
of enacted changes.
|
·
|
Building
on record 2008 operating cash flows, the Company expects continued strong
cash flows from operating activities for the remainder of 2009 and
2010. The Company also plans to significantly reduce the amount
of cash invested for capital expenditures during 2009 to approximately
$150 million compared with the $458 million expended in
2008. The Company believes that in the current economic
environment, the mobile nature of its capital investment pool will
facilitate strategic growth initiatives in the near term, lessening the
need for growth capital expenditures for 2009 and
beyond.
|
Harsco Infrastructure
Segment:
·
|
Fluctuations
in the U.S. dollar impact the Harsco Infrastructure Segment, as
approximately 80% of this business operates outside the United
States. If the U.S. dollar would strengthen as it has overall
from 2008 to 2009, sales and operating income would generally be
reduced. If the U.S. dollar were to continue to weaken, as it
has during the third quarter of 2009, sales and operating income would
generally improve.
|
·
|
The
near-term outlook for the Harsco Infrastructure Segment is impacted by
continued uncertainty in the global credit markets, which has caused
projects to be deferred or cancelled, and thus contributed to pricing
pressure. The current weakness in the commercial construction
market, particularly in the U.K., other parts of Europe and in North
America, is expected to be partially offset by a steady level of activity
from the Company’s infrastructure maintenance services, institutional and
global infrastructure projects, and continued overall performance in the
Gulf region of the Middle East.
|
·
|
The
Company will continue to emphasize prudent expansion of its geographic
presence in this Segment through entering new markets and further
expansion in emerging economies, and will continue to leverage its
value-added services and highly engineered forming, shoring and
scaffolding systems to grow the business. The Infrastructure
Segment’s mobile capital investment base is also available to take
advantage of these opportunities as they
occur.
|
·
|
The
Company will continue to diversify this business, focusing on growth in
institutional and global infrastructure projects and infrastructure
maintenance projects.
|
·
|
Operating
performance for this Segment in the long term is expected to benefit from
the execution of global government stimulus packages which should fund
much-needed infrastructure projects throughout the
world.
|
·
|
Benefits
from the 2008 restructuring program and additional countermeasures
implemented in 2009 should improve the operational efficiency and enhance
profitability of the Harsco Infrastructure Segment in 2010 and
beyond. Initiatives included overall reduction in the global
workforce, substantial reduction of discretionary spending and facility
rationalization, among
others.
|
·
|
The
Company will continue to implement its LeanSigma continuous improvement
program and other key 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.
|
·
|
Further
declines in the economy and, more specifically, the construction industry
may impact the ability of customers to meet their obligations to the
Company on a timely basis and could adversely impact the realizability of
receivables, particularly if customers file for bankruptcy
protection.
|
Harsco Metals
Segment:
·
|
A
strengthening U.S. dollar would generally adversely impact, and a
weakening U.S. dollar would generally improve, the sales and operating
income of the Harsco Metals Segment as approximately 85% of the Segment
operates outside the United States.
|
·
|
In
conjunction with the economic uncertainty of the global recession, steel
demand declined around the world and steel companies significantly scaled
back production in late 2008 and 2009. These customer
actions have had a significant negative impact on the Harsco Metals
Segment’s results in 2009. While the Metals’ Segment’s
customers showed sequential improvement in production in the third quarter
of 2009, coupled with signs of stabilization in several markets, overall
global demand for steel remains weak compared to 2008. Steel
production cuts of this depth and breadth are not expected to be
sustainable for long periods of time. The Company anticipates a
continued modest recovery in steel production in the fourth quarter of
2009 compared to 2008, even with seasonal shutdowns over holiday periods,
as the industry benefits from the tail winds of restocking historically
depleted inventories and government stimulus programs. However,
a significant improvement in this Segment’s operations is not foreseen
until 2010 and beyond.
|
·
|
Benefits
from the 2008 restructuring program and additional countermeasures
implemented in 2009 should continue to improve the operational efficiency
and enhance profitability of the Harsco Metals Segment in 2009 and
beyond. Initiatives so far have included: improved terms or
exit from underperforming contracts with customers and underperforming
operations; defined benefit pension plan design changes; overall reduction
in the global workforce; and a substantial reduction of discretionary
spending.
|
·
|
The
Company will continue to place significant emphasis on improving operating
margins of this Segment and continue to execute a geographic expansion
strategy in emerging markets in the Middle East and Africa, Latin America
and Asia Pacific.
|
·
|
The
Company will continue to pursue growth opportunities in environmental
services as awareness of environmental issues creates additional
outsourced functions in slag
management.
|
·
|
Further
consolidation in the global steel industry is possible. Should
additional consolidations occur involving some of the steel industry’s
larger companies that are customers of the Company, it could 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. As a result of this
customer concentration, a key strategy of the Company is to diversify its
customer base.
|
All Other
Category – Harsco
Minerals & Rail:
·
|
The
Company will emphasize prudent global expansion of its minerals business
for extracting high-value metallic content from slag and responsibly
handling and recycling residual materials. Environmental
services provide growth opportunities in the minerals business as
additional outsourced functions in slag management of stainless steel and
other high-value metals arise.
|
·
|
Continued
low production levels will have an overall negative effect on certain
reclamation and recycling services in the fourth quarter of 2009, while
metal price increases experienced in the third quarter of 2009, if
sustained, will have a positive effect on those
results.
|
·
|
Certain
businesses in this Category are dependent on a small group of key
customers. The loss of one of these customers due to
competition or due to financial difficulty, or the filing for bankruptcy
protection 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.
|
·
|
U.S.
railway track maintenance service opportunities are expected to increase
over the next one to four years from the American Recovery and
Reinvestment Act of 2009 as many states have budget proposals for track
services under this stimulus package. International demand for
the railway track maintenance services and equipment business’s products
and services is expected to be strong in both the near term and the long
term. In addition, further implementation of LeanSigma
continuous improvement initiatives are expected to improve margins on a
long-term basis.
|
·
|
Worldwide
supply and demand for steel and other commodities impact raw material
costs for certain businesses in this Category. The Company has
implemented strategies to help mitigate the potential impact that changes
in 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. Conversely, reduced steel and other commodity costs
would improve operating income to the extent such savings do not have to
be passed to customers.
|
·
|
The
air-cooled heat exchangers business continues to explore international
opportunities in addition to further growth in its customary North
American markets. The Company’s first sales of air-cooled heat
exchangers in the Asia Pacific region are anticipated in the near
term. Overall sales are expected to be negatively impacted by a
lower level of industrial demand for natural gas expected for the
remainder of 2009 and possibly into 2010 as a result of lower natural gas
prices and the global recession. Recent low natural gas prices
have curtailed the need for additional gas compression and coolers to
support that compression. Increased industrial use due to
improving economic conditions, as well as weather patterns over the winter
months will influence the price and demand for natural gas and,
consequently, the demand for heat exchanger
equipment.
|
Results
of Operations
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(In
millions, except per share and percentages)
|
|
2009
|
|
|
2008
(a)
|
|
|
2009
|
|
|
2008
(a)
|
|
Revenues
from continuing operations
|
|
$ |
744.2 |
|
|
$ |
1,044.9 |
|
|
$ |
2,218.1 |
|
|
$ |
3,132.3 |
|
Cost
of services and products sold
|
|
|
554.6 |
|
|
|
762.3 |
|
|
|
1,664.1 |
|
|
|
2,285.1 |
|
Selling,
general and administrative expenses
|
|
|
125.4 |
|
|
|
153.5 |
|
|
|
381.4 |
|
|
|
470.5 |
|
Other
(income) expense
|
|
|
6.9 |
|
|
|
(6.0 |
) |
|
|
6.4 |
|
|
|
(6.1 |
) |
Operating
income from continuing operations
|
|
|
56.4 |
|
|
|
133.9 |
|
|
|
164.0 |
|
|
|
379.1 |
|
Interest
expense
|
|
|
15.8 |
|
|
|
19.7 |
|
|
|
46.6 |
|
|
|
55.8 |
|
Income
tax expense from continuing operations
|
|
|
6.5 |
|
|
|
30.0 |
|
|
|
20.5 |
|
|
|
89.2 |
|
Income
from continuing operations
|
|
|
35.1 |
|
|
|
85.5 |
|
|
|
99.1 |
|
|
|
237.8 |
|
Loss
from discontinued operations
|
|
|
(11.8 |
) |
|
|
(3.7 |
) |
|
|
(14.5 |
) |
|
|
(4.0 |
) |
Net
income attributable to Harsco Corporation
|
|
|
20.2 |
|
|
|
80.3 |
|
|
|
79.4 |
|
|
|
227.2 |
|
Diluted
earnings per common share from continuing operations attributable to
Harsco Corporation common stockholders
|
|
|
0.40 |
|
|
|
0.99 |
|
|
|
1.17 |
|
|
|
2.73 |
|
Effective
income tax rate for continuing operations
|
|
|
15.7 |
% |
|
|
26.0 |
% |
|
|
17.2 |
% |
|
|
27.3 |
% |
(a)
|
On
January 1, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board related to consolidation accounting and
reporting. These changes, among others, require that minority
interests be renamed noncontrolling interests and that a company present a
consolidated net income measure that includes the amount attributable to
such noncontrolling interests for all periods presented. Results
have been reclassified accordingly.
|
Comparative
Analysis of Consolidated Results
Revenues
Revenues
for the third quarter of 2009 decreased $300.7 million or 29% from the third
quarter of 2008. Revenues for the first nine months of 2009 decreased
$914.2 million or 29% from the first nine months of 2008. These
decreases were attributable to the following significant items:
Changes
in Revenues – 2009 vs. 2008
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months
Ended
September
30
|
|
(In
millions)
|
|
|
|
|
|
|
Net
decreased volume in the Harsco Metals Segment principally due to the
deterioration of the global steel markets and decline in steel
production.
|
|
$ |
(106.1 |
) |
|
$ |
(345.8 |
) |
Effect
of foreign currency translation.
|
|
|
(53.2 |
) |
|
|
(309.0 |
) |
Net
decreased volume (excluding acquisitions) in the Harsco Infrastructure
Segment principally due to weaker demand in Europe, particularly in the
United Kingdom.
|
|
|
(90.5 |
) |
|
|
(197.3 |
) |
Decreased
revenues in the industrial grating products business due to weaker demand
and lower commodity pricing.
|
|
|
(15.5 |
) |
|
|
(35.2 |
) |
Decreased
revenues of the minerals business due to weaker demand and lower commodity
pricing.
|
|
|
(1.3 |
) |
|
|
(31.6 |
) |
Decreased
revenues of air-cooled heat exchangers business due to a weaker natural
gas market.
|
|
|
(24.8 |
) |
|
|
(24.9 |
) |
Increased
revenues in the Harsco Rail business principally due to shipments of
equipment to China.
|
|
|
8.9 |
|
|
|
41.5 |
|
Effect
of business acquisitions in the Harsco Infrastructure
Segment.
|
|
|
0.8 |
|
|
|
2.5 |
|
Out-of-period
adjustment in the Harsco Metals Segment and other changes across the
various units not already mentioned.
|
|
|
(19.0 |
) |
|
|
(14.4 |
) |
Total
Change in Revenues – 2009 vs. 2008
|
|
$ |
(300.7 |
) |
|
$ |
(914.2 |
) |
Cost
of Services and Products Sold
Cost of
services and products sold for the third quarter and first nine months of 2009
decreased $207.8 million or 27% and $621.0 million or 27%, respectively, from
the comparable 2008 periods. These decreases were attributable to the
following significant items:
Changes
in Cost of Services and Products Sold – 2009 vs. 2008
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months
Ended
September
30
|
|
(In
millions)
|
|
|
|
|
|
|
Decreased
costs due to lower revenues (exclusive of the effect of foreign currency
translation and business acquisitions, and including the impact of
increased commodity costs included in selling prices).
|
|
$ |
(170.7 |
) |
|
$ |
(411.7 |
) |
Effect
of foreign currency translation.
|
|
|
(38.7 |
) |
|
|
(224.4 |
) |
Effect
of business acquisitions.
|
|
|
0.6 |
|
|
|
1.7 |
|
Other
(product/service mix and increased equipment maintenance costs, partially
offset by enterprise business optimization initiatives and volume-related
efficiencies).
|
|
|
1.0 |
|
|
|
13.4 |
|
Total
Change in Cost of Services and Products Sold – 2009 vs.
2008
|
|
$ |
(207.8 |
) |
|
$ |
(621.0 |
) |
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the third quarter and first nine months
of 2009 decreased $28.1 million or 18% and $89.1 million or 19%, respectively,
from the comparable 2008 periods. These decreases were attributable
to the following significant items:
Changes
in Selling, General and Administrative
Expenses
– 2009 vs. 2008
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
(In
millions)
|
|
|
|
|
|
|
Effect
of foreign currency translation.
|
|
$ |
(9.5 |
) |
|
$ |
(51.8 |
) |
Decreased
compensation expense.
|
|
|
(9.2 |
) |
|
|
(17.8 |
) |
Reduced
travel expenses due to discretionary spending reductions.
|
|
|
(2.5 |
) |
|
|
(9.1 |
) |
Lower
professional fees.
|
|
|
(2.6 |
) |
|
|
(6.9 |
) |
Increased
directors’ fees and expenses.
|
|
|
2.0 |
|
|
|
3.1 |
|
Increased
commissions.
|
|
|
0.4 |
|
|
|
2.5 |
|
Effect
of business acquisitions.
|
|
|
— |
|
|
|
0.5 |
|
Other
(due to spending reductions).
|
|
|
(6.7 |
) |
|
|
(9.6 |
) |
Total
Change in Selling, General and Administrative Expenses – 2009 vs.
2008
|
|
$ |
(28.1 |
) |
|
$ |
(89.1 |
) |
Other
(Income) Expense
This
income statement classification includes impaired asset write-downs, employee
termination benefit costs and costs to exit activities, offset by net gains on
the disposal of non-core assets. Net Other expense was $6.9 million
and $6.4 million for the third quarter and first nine months of 2009,
respectively. This compares with net Other income of $6.0 million and
$6.1 million in the third quarter and first nine months of 2008,
respectively. The income in 2008 related principally to net gains on
the sale of non-core assets and the expense in 2009 related principally to
employee termination benefit costs.
Interest
Expense
Interest
expense for the third quarter of 2009 decreased $3.8 million or 20% from the
third quarter of 2008. For the first nine months of 2009, interest
expense decreased $9.2 million or 17% from the first nine months of
2008. This decrease was principally due to reduced debt levels
coupled with foreign currency translation that lowered interest expense by $0.9
million and $4.8 million for the third quarter and first nine months of 2009,
respectively.
Income
Tax Expense from Continuing Operations
Income
tax expense from continuing operations decreased $23.5 million or 78% in the
third quarter of 2009 compared with the third quarter of 2008. Similarly,
income tax expense from continuing operations decreased $68.7 million or 77% in
the first nine months of 2009 compared with the first nine months of 2008.
These declines were due to lower earnings from continuing operations and a
decrease in the effective income tax rate from continuing
operations. The effective income tax rates of 15.7% and 17.2% for the
third quarter and first nine months of 2009, respectively, compared with 26.0%
and 27.3% for the third quarter and first nine months of 2008,
respectively. The decrease in the effective income tax rate for these 2009
periods compared with 2008 reflected a decline in earnings in jurisdictions with
higher tax rates and certain net discrete tax benefits recognized in
2009. In the third quarter of 2009, these net discrete benefits
related primarily to the recognition of previously unrecognized tax benefits in
certain foreign jurisdictions. Net discrete benefits recognized prior
to the third quarter related primarily to the permanent reinvestment of
additional earnings for certain non-U.S. subsidiaries.
Income
from Continuing Operations
Income
from continuing operations decreased $50.4 million or 59% in the third quarter
of 2009 compared with the third quarter of 2008. Income from
continuing operations decreased $138.8 million or 58% in the first nine months
of 2009 compared with the first nine months of 2008. These decreases
resulted from slowed demand for most of the Company’s services and products as a
result of the global recession and the effect of unfavorable foreign currency
translation.
Loss
from Discontinued Operations
The loss
from discontinued operations of $11.8 million and $14.5 million in the third
quarter and first nine months of 2009, respectively, compared with losses of
$3.7 million and $4.0 million in the third quarter and first nine months of
2008, respectively. Discontinued operations consisted of the
Company’s Gas Technologies Segment, the sale of which was
completed
in December 2007. The loss incurred in 2009 related to the resolution
of the open claims and counterclaims that were submitted to
arbitration.
Net
Income Attributable to Harsco Corporation and Earnings Per Share
Net
income attributable to Harsco Corporation of $20.2 million and diluted earnings
per share of $0.25 in the third quarter of 2009 were lower than the third
quarter of 2008 by $60.1 million or 75% and $0.70 or 74%,
respectively. Net income attributable to Harsco Corporation of $79.4
million and diluted earnings per share of $0.99 in the first nine months of 2009
were lower than the first nine months of 2008 by $147.8 million or 65% and $1.69
or 63%, respectively. These decreases are primarily due to lower
income from continuing operations for the reasons described above.
Liquidity
and Capital Resources
Overview
Global
financial markets that have been under stress due to poor lending and investment
practices and sharp declines in real estate values have started to show signs of
improvement for certain high-quality issuers. However, during the
nine months of 2009, tightened credit conditions for funding of non-residential
construction projects restrained growth in that sector and that continues
today. In response to these changes in global economic conditions,
the Company has undertaken several initiatives to conserve capital and enhance
liquidity including: prudently reducing capital spending to only critical
projects where the highest returns can be achieved while redeploying existing
capital investments; optimizing worldwide cash positions; reducing or
eliminating discretionary spending; and additional scrutiny and tightening of
credit terms with customers. The Company continues to have sufficient
available liquidity and has been able to issue commercial paper as
needed. The Company currently expects operational and business needs
to be covered by cash from operations in 2009 and beyond.
During
the first nine months of 2009, the Company generated $276.7 million in operating
cash, 28% lower than the $382.0 million in the first nine months of
2008. This decrease was primarily due to lower net income, net
payments of accounts payable due to reduced spending levels and a reduction in
advances on contracts due to shipments in 2009. These decreases were
partially offset by lower receivables as a result of lower sales volume and a
reduction of inventory levels due to targeted reductions and reduced
replenishment activities.
In the
first nine months of 2009, the Company invested $123.1 million in capital
expenditures (60% of which were for revenue-growth projects) and paid $47.8
million in stockholder dividends. This is compared with $380.9
million of capital expenditures and $49.3 million in stockholder dividends paid
in the first nine months of 2008.
The
Company’s net cash borrowings decreased $88.2 million in the first nine months
of 2009. Debt as presented on the balance sheet, which is affected by
foreign currency translation, decreased $51.1 million from December 31,
2008. The debt to total capital ratio decreased from 41.1% at
December 31, 2008 to 38.5% at September 30, 2009 as a result of the lower debt
and increased equity at September 30, 2009.
Despite
current global economic conditions, the Company expects to generate strong
operating cash flows for the full year of 2009. The Company plans to
sustain its balanced portfolio through its strategy of redeploying discretionary
cash for disciplined growth and international diversification in the Harsco
Infrastructure Segment; in long-term, high-return and high-renewal-rate services
contracts for the Harsco Metals Segment, principally in emerging economies or
for customer diversification; for growth and international diversification in
the All Other Category (Harsco Minerals & Rail); and for targeted, 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 continues to focus on improving working capital
management. Specifically, short-term and long-term enterprise
business optimization programs are being used to continue to further improve the
effective and efficient use of working capital, particularly accounts receivable
and inventories in the Harsco Infrastructure and Harsco Metals
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 non-core 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 Harsco Metals contracts provide a predictable level of
minimum cash flows for several years into the future. (See “Certainty
of Cash Flows” section for additional information on estimated future revenues
of Harsco Metals 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 cash from
operations. Depreciation expense related to these investments is a
non-cash charge. The Company also continues to
focus on
maintaining 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 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
targeted, 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’s 200 million British
pound sterling-denominated notes mature in October 2010. The Company
plans to utilize operating cash flows and, if necessary, new public borrowings
to repay these notes. The Company expects to utilize both the public
debt markets and bank facilities to meet its cash requirements in the
future.
The
following table illustrates the amounts outstanding under credit facilities and
commercial paper programs and available credit at September 30,
2009:
Summary
of Credit Facilities and Commercial Paper Programs
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Facility
Limit
|
|
|
Outstanding
Balance
|
|
|
Available
Credit
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
commercial paper program
|
|
$ |
550.0 |
|
|
$ |
10.9 |
|
|
$ |
539.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
commercial paper program
|
|
|
291.4 |
|
|
|
7.3 |
|
|
|
284.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-year
revolving credit facility (a)
|
|
|
450.0 |
|
|
|
— |
|
|
|
450.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
364-day
revolving credit facility (a) (b)
|
|
|
220.0 |
|
|
|
— |
|
|
|
220.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bilateral
credit facility (c)
|
|
|
30.0 |
|
|
|
— |
|
|
|
30.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
at September 30, 2009
|
|
$ |
1,541.4 |
|
|
$ |
18.2 |
|
|
$ |
1,523.2 |
(d) |
(b)
|
The
Company does not intend on renewing this facility that expired in November
2009.
|
(c)
|
International-based
program
|
(d)
|
Although
the Company has significant available credit, for practical purposes, the
Company limits aggregate commercial paper and credit facility borrowings
at any one time to a maximum of $700 million (the aggregate amount of the
back-up facilities).
|
For more
information on the Company’s credit facilities and long-term notes, see Note 6,
“Debt and Credit Agreements,” to the Company’s Form 10-K for the year ended
December 31, 2008.
Credit Ratings and Outlook –
The following table summarizes the Company’s debt ratings at September
30, 2009:
|
Long-term
Notes
|
U.S.–Based
Commercial Paper
|
Outlook
|
|
|
|
|
Standard
& Poor’s (S&P)
|
A-
|
A-2
|
Stable
|
Moody’s
|
Baa1
|
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. Standard & Poor’s and Fitch ratings
were reaffirmed in April 2009 and August 2009, respectively. In May
2009, Moody’s reaffirmed the Company’s U.S. based commercial paper ratings, but
changed its ratings of the Company’s long-term notes from A3 to Baa1 and the
Company’s outlook from negative to stable. A downgrade to the
Company’s credit ratings may increase borrowing costs to the Company, while an
improvement in the Company’s credit ratings may decrease
borrowing
costs to the Company. Additionally, a downgrade in the Company’s
credit ratings may result in reduced access to credit markets.
Working Capital Position –
Changes in the Company’s working capital are reflected in the following
table:
(Dollars
are in millions)
|
|
September
30
2009
|
|
|
December
31
2008
|
|
|
Increase
(Decrease)
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
97.7 |
|
|
$ |
91.3 |
|
|
$ |
6.4 |
|
Trade
accounts receivable, net
|
|
|
640.9 |
|
|
|
648.9 |
|
|
|
(8.0 |
) |
Other
receivables
|
|
|
27.5 |
|
|
|
46.0 |
|
|
|
(18.5 |
) |
Inventories
|
|
|
300.9 |
|
|
|
309.5 |
|
|
|
(8.6 |
) |
Other
current assets
|
|
|
106.8 |
|
|
|
104.5 |
|
|
|
2.3 |
|
Assets
held-for-sale
|
|
|
0.6 |
|
|
|
5.3 |
|
|
|
(4.7 |
) |
Total
current assets
|
|
|
1,174.4 |
|
|
|
1,205.5 |
|
|
|
(31.1 |
) |
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable and current maturities
|
|
|
42.6 |
|
|
|
121.1 |
|
|
|
(78.5 |
) |
Accounts
payable
|
|
|
218.7 |
|
|
|
262.8 |
|
|
|
(44.1 |
) |
Accrued
compensation
|
|
|
70.3 |
|
|
|
85.2 |
|
|
|
(14.9 |
) |
Income
taxes payable
|
|
|
8.6 |
|
|
|
13.4 |
|
|
|
(4.8 |
) |
Other
current liabilities
|
|
|
401.6 |
|
|
|
405.9 |
|
|
|
(4.3 |
) |
Total
current liabilities
|
|
|
741.8 |
|
|
|
888.4 |
|
|
|
(146.6 |
) |
Working
Capital
|
|
$ |
432.6 |
|
|
$ |
317.1 |
|
|
$ |
115.5 |
|
Current
Ratio
|
|
1.6:1
|
|
|
1.4:1
|
|
|
|
|
|
Working
capital increased approximately 36% in the first nine months of 2009 due
principally to reduced current liabilities and, more specifically, the following
factors:
·
|
Net
trade accounts receivable decreased $8.0 million primarily due to reduced
sales volume in the first nine months of 2009 partially offset by foreign
currency translation effects.
|
·
|
Other
receivables decreased $18.5 million primarily due to collections of
insurance proceeds related to insured claims settled during the first
quarter of 2009 and an income tax refund received in the third quarter of
2009.
|
·
|
Inventories
decreased $8.6 million primarily due to the Company’s focus on reducing
inventory levels based upon current market demand, partially offset by the
build up of inventory in the Company’s railway track maintenance services
and equipment business to satisfy current international
contracts.
|
·
|
Notes
payable and current maturities decreased $78.4 million due to strong
operating cash flows that facilitated repayments of short-term commercial
paper borrowings and other short-term
borrowings.
|
·
|
Accounts
payable decreased $44.1 million primarily due to reduced spending levels
partially offset by foreign currency
translation.
|
·
|
Accrued
compensation decreased $14.9 million due principally to the payment of
incentive compensation earned during 2008 and a decline in current year
accrual of incentive compensation based on current EVA
levels.
|
Certainty of Cash Flows – The
certainty of the Company’s future cash flows is underpinned by the long-term
nature of the Company’s metal 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. As the Company
has demonstrated this year, it has the ability to substantially reduce its
capital expenditures without negatively impacting the business. The
Company has continued to grow in countries with increased demand through prudent
relocation of its existing equipment.
The types
of products and services that the Company provides are not subject to rapid
technological change, which increases the stability of related cash
flows. Additionally, each of the Company’s businesses, in its
balanced portfolio, is among the top three companies (relative to sales) in the
industries and markets the Company serves. Due to these factors, the
Company is confident in its future ability to generate positive cash flows from
operations.
Cash
Flow Summary
The
Company’s cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
Summarized
Cash Flow Information
|
|
Nine
Months Ended
September
30
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
276.7 |
|
|
$ |
382.0 |
|
Investing
activities
|
|
|
(127.3 |
) |
|
|
(366.4 |
) |
Financing
activities
|
|
|
(145.6 |
) |
|
|
(47.1 |
) |
Effect of exchange rate changes on
cash
|
|
|
2.5 |
|
|
|
(0.5 |
) |
Net change in cash and cash
equivalents
|
|
$ |
6.4 |
(a) |
|
$ |
(31.9 |
)
(a) |
(a) Does
not total due to rounding
Cash From Operating Activities –
Net cash provided by operating activities in the first nine months of
2009 was $276.7 million, a decrease of $105.3 million from the first nine months
of 2008. The decrease was primarily due to the
following:
·
|
Lower
net income in 2009 compared with
2008.
|
·
|
Higher
accounts payable payments due to reduced spending levels in
2009.
|
·
|
Reduction
in advances on contracts due to shipments in
2009.
|
These
decreases were partially offset by the following:
·
|
Reduction
in net trade receivables due to reduced sales
volume.
|
·
|
Initiatives
to reduce inventory levels coupled with reduced spending on inventory
throughout the Company based upon current market
demand.
|
Cash Used in Investing Activities –
In the first nine months of 2009, cash used in investing activities was
$127.3 million consisting primarily of capital investments of $123.1 million and
$12.7 million used in purchase of businesses offset by $11.5 million of net cash
received for the sale of non-core assets and businesses. Capital
investments declined $257.8 million compared with 2008, reflecting management’s
initiatives to conserve capital and enhance liquidity through prudent reduction
of capital investments. Growth capital constituted 60% of investments
made in the first nine months of 2009, with investments made predominantly in
the industrial services businesses. Throughout the remainder of 2009
and for 2010, the Company plans to continue to manage its balanced portfolio and
consider opportunities to invest in value creation projects including prudent,
targeted, bolt-on acquisitions, principally in the Harsco Infrastructure
business. Additionally, the Company intends to increase growth
investments into the All Other Category (Harsco Minerals & Rail) in the
remainder of 2009 and beyond, as this group continues to expand
globally.
Cash Used in Financing Activities –
The following table summarizes the Company’s debt and capital positions
at September 30, 2009 and December 31, 2008.
(Dollars
are in millions)
|
|
September
30
2009
|
|
|
December
31
2008
(a)
|
|
Notes
Payable and Current Maturities
|
|
$ |
42.6 |
|
|
$ |
121.1 |
|
Long-term
Debt
|
|
|
919.2 |
|
|
|
891.8 |
|
Total
Debt
|
|
|
961.8 |
|
|
|
1,012.9 |
|
Total
Equity
|
|
|
1,534.1 |
|
|
|
1,450.0 |
|
Total
Capital
|
|
$ |
2,495.9 |
|
|
$ |
2,462.9 |
|
Total
Debt to Total Capital
|
|
|
38.5 |
% |
|
|
41.1 |
% |
|
(a)
|
December
2008 Equity has been retroactively adjusted to include Noncontrolling
Interest as a component of Equity in accordance with changes issued by the
Financial Accounting Standards Board related to consolidation accounting
and reporting.
|
The
Company’s debt as a percent of total capital as of September 30, 2009 decreased
from December 31, 2008. The decrease results principally from
increased equity and a decline in overall debt, primarily due to lower capital
expenditures.
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%. At September 30, 2009, the Company was in
compliance with these covenants with a debt to capital ratio of 38.5% and total
net worth of $1.5 billion. Based on balances at September 30, 2009,
the Company could increase borrowings by approximately $1.3 billion and still be
within its debt covenants. Alternatively, keeping all other factors
constant, the Company’s equity could decrease by approximately $0.9 billion and
the Company would still be within its debt 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 continue 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 targeted, prudent investing for
strategic purposes for the foreseeable future, although 2009 capital investments
are significantly less than 2008 as existing investments are used more
efficiently. The long-term goal of this strategy is to improve the
Company’s EVA under the program adopted in 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 net periodic pension cost 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 nine months
of 2009, EVA was lower compared with the first nine months of 2008 due
principally to lower operating profits.
The
Company currently expects to continue paying dividends to
stockholders. The Company has increased the dividend rate for fifteen
consecutive years, and in August 2009, the Company paid its 237th
consecutive quarterly cash dividend. In September 2009, the Company
declared its 238th
consecutive quarterly cash dividend.
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 in high-return projects and acquisitions,
to reduce debt and pay cash dividends as a means to enhance stockholder
value.
Recently
Adopted and Recently Issued Accounting Standards
Information
on recently adopted and recently issued accounting standards is included in Note
J, “Recently Adopted and Recently Issued Accounting Standards,” in Part I, Item
1, Financial Statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Information
on quantitative and qualitative disclosures about market risk is included under
Part II, Item 1A, “Risk Factors.”
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 September 30, 2009. 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 third quarter of 2009.
PART II – OTHER
INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
Information
on legal proceedings is included in Note G, “Commitments and Contingencies,” in
Part I, Item 1, Financial Statements.
ITEM
1A. RISK
FACTORS
In the
normal course of business, the Company is routinely subjected to a variety of
risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectability of
receivables, volatility of the financial markets and their effect on pension
plans and global economic and political conditions.
The
global recession has continued to diminish certain customers’ credit
availability, restraining economic growth on a global
basis. Governments have taken unprecedented actions intended to
address these and other market conditions. While these conditions
have not impaired the Company’s ability to access credit markets and finance
operations, at this time, there can be no assurance that there will not be a
further deterioration in financial markets and confidence in major economies
which could lead to the inability to access credit markets.
For a
full disclosure of risk factors that affect the Company, see the Company’s 2008
Annual Report on Form 10-K (Part I, Item 1A).
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
|
|
|
|
|
|
July
1, 2009 – July 31, 2009
|
-
|
-
|
-
|
1,536,647
|
August
1, 2009 – August 31, 2009
|
-
|
-
|
-
|
1,536,647
|
September
1, 2009 – September 30, 2009
|
-
|
-
|
-
|
2,000,000
|
Total
|
-
|
-
|
-
|
|
The
Company’s share repurchase program was extended by the Board of Directors in
September 2009. At that time, the Board authorized an increase of
463,353 shares to the 1,536,647 remaining from the Board’s previous stock
repurchase authorization. The repurchase program expires January 31,
2011. As of September 30, 2009, there are 2,000,000 authorized shares
remaining in the program. When and if appropriate, repurchases are
made in open market transactions, depending on market
conditions. Repurchases may not be made and may be discontinued at
any time.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE BY SECURITY HOLDERS
None.
ITEM
5. OTHER
INFORMATION
On
September 22, 2009, the Company’s Board of Directors declared a quarterly cash
dividend of $0.20 per share, payable November 13, 2009, to stockholders of
record as of October 14, 2009.
COMMON STOCK OPTION
DISCLOSURE
In August
2009, in accordance with Securities and Exchange Commission Rule 10b5-1,
Salvatore D. Fazzolari, the Company’s Chairman and Chief Executive Officer
(“CEO”), adopted personal trading plans with regard to options to purchase
40,000 shares of the Company’s common stock that will expire in January
2010. Under the personal trading plans, if the Company’s stock
reaches a predetermined trading price prior to a predetermined date, the options
will be exercised and the stock issued upon such exercise will be
sold. If the Company’s stock does not reach the predetermined trading
price prior to the predetermined date, the options will be exercised in full in
a stock-for-stock exercise. Each plan provides for share withholding
to cover withholding taxes relating to such exercise. The trading
plans will expire in January 2010.
Rule
10b5-1 allows officers and directors, at a time when they are not in possession
of material non-public information, to adopt written plans to sell shares on a
regular basis under pre-arranged terms, regardless of any subsequent nonpublic
information they may receive. Exercises of stock options by the CEO
pursuant to the terms of his plans will be disclosed publicly through Form 144,
as applicable, and Form 4 filings with the Securities and Exchange
Commission.
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
|
November
5, 2009
|
|
/S/
Stephen J. Schnoor
|
|
|
|
|
Stephen
J. Schnoor
|
|
|
|
|
Senior
Vice President and
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
DATE
|
November
5, 2009
|
|
/S/
Richard M. Wagner
|
|
|
|
|
Richard
M. Wagner
|
|
|
|
|
Vice
President and Controller
|
|
|
|
|
|
|