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 March 31,
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).
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding at April 30,
2009
|
Common
stock, par value $1.25 per share
|
|
80,293,445
|
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 -
20
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
- 36
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
36
|
|
|
|
Item
4.
|
Controls
and Procedures
|
36
|
|
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
37
|
|
|
|
Item
1A.
|
Risk
Factors
|
37
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
37
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
37
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
38
|
|
|
|
Item
5.
|
Other
Information
|
38
- 39
|
|
|
|
Item
6.
|
Exhibits
|
39
|
|
|
|
|
|
|
SIGNATURES
|
40
|
ITEM
1. FINANCIAL
STATEMENTS
HARSCO
CORPORATION
|
|
Three
Months Ended
March
31
|
|
(In
thousands, except per share amounts)
|
|
2009
|
|
|
2008
(a)
|
|
Revenues
from continuing operations:
|
|
|
|
|
|
|
Service
revenues
|
|
$ |
562,432 |
|
|
$ |
852,628 |
|
Product
revenues
|
|
|
134,458 |
|
|
|
135,162 |
|
Total revenues
|
|
|
696,890 |
|
|
|
987,790 |
|
|
|
|
|
|
|
|
|
|
Costs
and expenses from continuing operations:
|
|
|
|
|
|
|
|
|
Cost of services
sold
|
|
|
440,619 |
|
|
|
638,058 |
|
Cost of products
sold
|
|
|
96,266 |
|
|
|
92,947 |
|
Selling, general and
administrative expenses
|
|
|
124,997 |
|
|
|
156,632 |
|
Research and development
expenses
|
|
|
643 |
|
|
|
1,053 |
|
Other income
|
|
|
(2,806 |
) |
|
|
(280 |
) |
Total costs and
expenses
|
|
|
659,719 |
|
|
|
888,410 |
|
|
|
|
|
|
|
|
|
|
Operating income from
continuing operations
|
|
|
37,171 |
|
|
|
99,380 |
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
87 |
|
|
|
405 |
|
Interest
income
|
|
|
545 |
|
|
|
914 |
|
Interest
expense
|
|
|
(15,313 |
) |
|
|
(17,120 |
) |
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes
|
|
|
22,490 |
|
|
|
83,579 |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(1,511 |
) |
|
|
(24,188 |
) |
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
20,979 |
|
|
|
59,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
business
|
|
|
(1,754 |
) |
|
|
255 |
|
Income tax benefit
(expense)
|
|
|
530 |
|
|
|
(107 |
) |
Income
(loss) from discontinued operations
|
|
|
(1,224 |
) |
|
|
148 |
|
Net
Income
|
|
|
19,755 |
|
|
|
59,539 |
|
Less: Net income attributable
to noncontrolling interest
|
|
|
(1,163 |
) |
|
|
(2,500 |
) |
Net
income attributable to Harsco Corporation
|
|
$ |
18,592 |
|
|
$ |
57,039 |
|
|
|
|
|
|
|
|
|
|
Amounts
attributable to Harsco Corporation common stockholders:
|
|
|
|
|
|
|
|
|
Income from continuing
operations, net of tax
|
|
$ |
19,816 |
|
|
$ |
56,891 |
|
Income (loss) from discontinued
operations, net of tax
|
|
|
(1,224 |
) |
|
|
148 |
|
Net income
|
|
$ |
18,592 |
|
|
$ |
57,039 |
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding
|
|
|
80,249 |
|
|
|
84,374 |
|
Basic
earnings per share attributable to Harsco Corporation common
stockholders:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.25 |
|
|
$ |
0.67 |
|
Discontinued
operations
|
|
|
(0.02 |
) |
|
|
0.00 |
|
Basic
earnings per share attributable to Harsco Corporation common
stockholders
|
|
$ |
0.23 |
|
|
$ |
0.68 |
(b) |
|
|
|
|
|
|
|
|
|
Diluted
average shares of common stock outstanding
|
|
|
80,484 |
|
|
|
84,851 |
|
Diluted
earnings per share attributable to Harsco Corporation common
stockholders:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.25 |
|
|
$ |
0.67 |
|
Discontinued
operations
|
|
|
(0.02 |
) |
|
|
0.00 |
|
Diluted
earnings per share attributable to Harsco Corporation common
stockholders
|
|
$ |
0.23 |
|
|
$ |
0.67 |
|
Cash
dividends declared per common share
|
|
$ |
0.20 |
|
|
$ |
0.195 |
|
(a)
|
On
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51,” the provisions of which, among others, requires 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.
|
(b)
|
Does
not total due to rounding.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
(In
thousands)
|
|
March
31
2009
|
|
|
December
31
2008
(a)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
69,169 |
|
|
$ |
91,336 |
|
Trade accounts receivable,
net
|
|
|
611,559 |
|
|
|
648,880 |
|
Other receivables,
net
|
|
|
30,926 |
|
|
|
46,032 |
|
Inventories
|
|
|
308,233 |
|
|
|
309,530 |
|
Other current
assets
|
|
|
99,047 |
|
|
|
104,430 |
|
Assets
held-for-sale
|
|
|
2,284 |
|
|
|
5,280 |
|
Total current
assets
|
|
|
1,121,218 |
|
|
|
1,205,488 |
|
Property,
plant and equipment, net
|
|
|
1,406,395 |
|
|
|
1,482,833 |
|
Goodwill,
net
|
|
|
616,480 |
|
|
|
631,490 |
|
Intangible
assets, net
|
|
|
132,766 |
|
|
|
141,493 |
|
Other
assets
|
|
|
108,514 |
|
|
|
101,666 |
|
Total assets
|
|
$ |
3,385,373 |
|
|
$ |
3,562,970 |
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
107,709 |
|
|
$ |
117,854 |
|
Current maturities of long-term
debt
|
|
|
2,988 |
|
|
|
3,212 |
|
Accounts
payable
|
|
|
216,308 |
|
|
|
262,783 |
|
Accrued
compensation
|
|
|
63,716 |
|
|
|
85,237 |
|
Income taxes
payable
|
|
|
23,983 |
|
|
|
13,395 |
|
Dividends
payable
|
|
|
16,056 |
|
|
|
15,637 |
|
Insurance
liabilities
|
|
|
22,584 |
|
|
|
36,553 |
|
Advances on
contracts
|
|
|
149,175 |
|
|
|
144,237 |
|
Other current
liabilities
|
|
|
196,224 |
|
|
|
209,518 |
|
Total current
liabilities
|
|
|
798,743 |
|
|
|
888,426 |
|
Long-term
debt
|
|
|
885,078 |
|
|
|
891,817 |
|
Deferred
income taxes
|
|
|
30,359 |
|
|
|
35,442 |
|
Insurance
liabilities
|
|
|
62,233 |
|
|
|
60,663 |
|
Retirement
plan liabilities
|
|
|
182,236 |
|
|
|
190,153 |
|
Other
liabilities
|
|
|
45,284 |
|
|
|
46,497 |
|
Total liabilities
|
|
|
2,003,933 |
|
|
|
2,112,998 |
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Harsco Corporation
stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, Series A junior participating cumulative preferred
stock
|
|
|
— |
|
|
|
— |
|
Common stock
|
|
|
139,119 |
|
|
|
138,925 |
|
Additional paid-in
capital
|
|
|
137,877 |
|
|
|
137,083 |
|
Accumulated other comprehensive
loss
|
|
|
(279,015 |
) |
|
|
(208,299 |
) |
Retained earnings
|
|
|
2,081,708 |
|
|
|
2,079,170 |
|
Treasury stock
|
|
|
(734,696 |
) |
|
|
(733,203 |
) |
Total Harsco Corporation
stockholders’ equity
|
|
|
1,344,993 |
|
|
|
1,413,676 |
|
Noncontrolling
interest
|
|
|
36,447 |
|
|
|
36,296 |
|
Total equity
|
|
|
1,381,440 |
|
|
|
1,449,972 |
|
Total liabilities and
equity
|
|
$ |
3,385,373 |
|
|
$ |
3,562,970 |
|
(a)
|
On
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51,” the provisions of which, among others, requires that minority
interests be renamed noncontrolling interests and that a company present
such noncontrolling interests as equity for all periods
presented.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
|
|
Three
Months Ended
March
31
|
|
(In
thousands)
|
|
2009
|
|
|
2008
(a)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$ |
19,755 |
|
|
$ |
59,539 |
|
Adjustments to reconcile net
income to net
|
|
|
|
|
|
|
|
|
cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
67,701 |
|
|
|
76,622 |
|
Amortization
|
|
|
6,707 |
|
|
|
7,670 |
|
Equity in income of
unconsolidated entities, net
|
|
|
(87 |
) |
|
|
(405 |
) |
Other, net
|
|
|
(8,031 |
) |
|
|
(350 |
) |
Changes in assets and
liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
and dispositions of
businesses:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
28,719 |
|
|
|
(48,904 |
) |
Inventories
|
|
|
(5,885 |
) |
|
|
(42,027 |
) |
Accounts
payable
|
|
|
(44,191 |
) |
|
|
7,077 |
|
Accrued interest
payable
|
|
|
9,536 |
|
|
|
4,279 |
|
Accrued
compensation
|
|
|
(18,839 |
) |
|
|
(24,338 |
) |
Other assets and
liabilities
|
|
|
(15,785 |
) |
|
|
(7,208 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
39,600 |
|
|
|
31,955 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(36,042 |
) |
|
|
(119,820 |
) |
Purchase of businesses, net of
cash acquired
|
|
|
(108 |
) |
|
|
(4,022 |
) |
Proceeds from sales of
assets
|
|
|
5,988 |
|
|
|
1,967 |
|
Other investing
activities
|
|
|
(1,276 |
) |
|
|
14,796 |
|
|
|
|
|
|
|
|
|
|
Net cash used by investing
activities
|
|
|
(31,438 |
) |
|
|
(107,079 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Short-term borrowings,
net
|
|
|
(10,069 |
) |
|
|
112,219 |
|
Current maturities and long-term
debt:
|
|
|
|
|
|
|
|
|
Additions
|
|
|
116,857 |
|
|
|
139,152 |
|
Reductions
|
|
|
(117,712 |
) |
|
|
(157,871 |
) |
Cash dividends paid on common
stock
|
|
|
(15,633 |
) |
|
|
(16,471 |
) |
Common stock
issued-options
|
|
|
77 |
|
|
|
1,245 |
|
Common stock acquired for
treasury
|
|
|
— |
|
|
|
(16,858 |
) |
Other financing
activities
|
|
|
— |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
financing activities
|
|
|
(26,480 |
) |
|
|
61,380 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(3,849 |
) |
|
|
6,813 |
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(22,167 |
) |
|
|
(6,931 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
91,336 |
|
|
|
121,833 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
69,169 |
|
|
$ |
114,902 |
|
(a)
|
On
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51,” the provisions of which, among others, requires that minority
interests be renamed noncontrolling interests for all periods
presented.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
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
|
|
Issued
|
|
|
Treasury
|
|
Beginning
Balances, January 1, 2008
|
$ |
138,665 |
|
|
$ |
(603,169 |
) |
|
$ |
128,622 |
|
|
$ |
1,903,049 |
|
|
$ |
(129 |
) |
|
$ |
38,023 |
|
|
$ |
1,605,061 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,945 |
|
|
|
|
|
|
|
5,894 |
|
|
|
246,839 |
|
Cash
dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.78 per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,824 |
) |
|
|
|
|
|
|
|
|
|
|
(64,824 |
) |
Noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,595 |
) |
|
|
(5,595 |
) |
Translation
adjustments, net of deferred income taxes of $85,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154,572 |
) |
|
|
(2,026 |
) |
|
|
(156,598 |
) |
Cash
flow hedging instrument adjustments, net of deferred income taxes of
$(7,655)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,812 |
|
|
|
|
|
|
|
20,812 |
|
Pension
liability adjustments, net of deferred income taxes of
$29,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,340 |
) |
|
|
|
|
|
|
(74,340 |
) |
Marketable
securities unrealized gains, net of deferred income taxes of
$38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
(70 |
) |
Stock
options exercised, 121,176 shares
|
|
152 |
|
|
|
|
|
|
|
3,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,488 |
|
Net
issuance of stock – vesting of restricted stock units, 56,847
shares
|
|
108 |
|
|
|
(1,457 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,457 |
) |
Treasury
shares repurchased, 4,463,353 shares
|
|
|
|
|
|
(128,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,577 |
) |
Amortization
of unearned compensation on restricted stock units, net of
forfeitures
|
|
|
|
|
|
|
|
|
|
5,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,233 |
|
Balances,
December 31, 2008
|
$ |
138,925 |
|
|
$ |
(733,203 |
) |
|
$ |
137,083 |
|
|
$ |
2,079,170 |
|
|
$ |
(208,299 |
) |
|
$ |
36,296 |
|
|
$ |
1,449,972 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,592 |
|
|
|
|
|
|
|
1,163 |
|
|
|
19,755 |
|
Cash
dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.20 per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,054 |
) |
|
|
|
|
|
|
|
|
|
|
(16,054 |
) |
Translation
adjustments, net of deferred income taxes of $4,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,059 |
) |
|
|
(1,012 |
) |
|
|
(65,071 |
) |
Cash
flow hedging instrument adjustments, net of deferred income taxes of
$2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,299 |
) |
|
|
|
|
|
|
(15,299 |
) |
Pension
liability adjustments, net of deferred income taxes of
$(3,974)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,662 |
|
|
|
|
|
|
|
8,662 |
|
Marketable
securities unrealized gains, net of deferred income taxes of
$11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
(20 |
) |
Stock
options exercised, 17,960 shares
|
|
22 |
|
|
|
(103 |
) |
|
|
(293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374 |
) |
Net
issuance of stock – vesting of restricted stock units, 84,254
shares
|
|
172 |
|
|
|
(1,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,218 |
) |
Amortization
of unearned compensation on restricted stock units, net of
forfeitures
|
|
|
|
|
|
|
|
|
|
1,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,087 |
|
Balances,
March 31, 2009
|
$ |
139,119 |
|
|
$ |
(734,696 |
) |
|
$ |
137,877 |
|
|
$ |
2,081,708 |
|
|
$ |
(279,015 |
) |
|
$ |
36,447 |
|
|
$ |
1,381,440 |
|
(a)
|
On
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51,” the provisions of which, among others, requires that minority
interests be renamed noncontrolling interests and be presented as a
component of Equity for all periods
presented.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HARSCO
CORPORATION
|
|
Three
Months Ended
March
31
|
|
(In
thousands)
|
|
2009
|
|
|
2008
(a)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
19,755 |
|
|
$ |
59,539 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
(65,071 |
) |
|
|
73,274 |
|
|
|
|
|
|
|
|
|
|
Net losses on cash flow hedging
instruments, net of deferred income taxes of $2,200 and $45 in 2009 and
2008, respectively
|
|
|
(15,296 |
) |
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
loss on cash flow hedging instruments included in net income, net of
deferred income taxes of $2 and $2 in 2009 and 2008,
respectively
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Pension liability adjustments,
net of deferred income taxes of $(3,974) and $(1,441) in 2009 and 2008,
respectively
|
|
|
8,662 |
|
|
|
3,588 |
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable
securities, net of deferred income taxes of $11 and $10 in 2009 and 2008,
respectively
|
|
|
(20 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss)
|
|
|
(71,728 |
) |
|
|
76,693 |
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (loss)
|
|
|
(51,973 |
) |
|
|
136,232 |
|
|
|
|
|
|
|
|
|
|
Less:
Comprehensive income attributable to noncontrolling
interests
|
|
|
(151 |
) |
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) attributable to Harsco Corporation
|
|
$ |
(52,124 |
) |
|
$ |
135,215 |
|
(a)
|
On
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51,” the provisions of which, among others, requires that minority
interests be renamed noncontrolling interests for all periods
presented.
|
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 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 and Condensed Consolidated Statements of Equity for the Year
Ended December 31, 2008 contained in this Form 10-Q were derived from 2008
audited financial statements, but do 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 months ended March 31, 2009 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009.
Effective
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that a noncontrolling interest be included
in the Condensed Consolidated Balance Sheets within equity separate from the
parent’s equity; and that consolidated net income 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 Condensed Consolidated Statements of
Income. As required by SFAS 160, prior year amounts were
retrospectively adjusted to conform with the current year
presentation.
B. Review
of Operations by Segment
|
|
Three
Months Ended
March
31, 2009
|
|
|
Three
Months Ended
March
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Infrastructure Segment
|
|
$ |
283,746 |
|
|
$ |
18,837 |
|
|
$ |
378,824 |
|
|
$ |
37,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Metals Segment
|
|
|
238,386 |
|
|
|
(2,815 |
) |
|
|
416,716 |
|
|
|
29,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Totals
|
|
|
522,132 |
|
|
|
16,022 |
|
|
|
795,540 |
|
|
|
67,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category - Harsco Minerals & Rail
|
|
|
174,698 |
|
|
|
23,441 |
|
|
|
192,190 |
|
|
|
33,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
60 |
|
|
|
(2,292 |
) |
|
|
60 |
|
|
|
(1,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
696,890 |
|
|
$ |
37,171 |
|
|
$ |
987,790 |
|
|
$ |
99,380 |
|
Reconciliation
of Segment Operating Income to Consolidated Income from Continuing Operations
Before
Income Taxes
|
|
Three
Months Ended
March
31
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Segment
Operating Income
|
|
$ |
16,022 |
|
|
$ |
67,045 |
|
|
|
|
|
|
|
|
|
|
All
Other Category - Harsco Minerals & Rail
|
|
|
23,441 |
|
|
|
33,942 |
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
(2,292 |
) |
|
|
(1,607 |
) |
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
37,171 |
|
|
|
99,380 |
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
87 |
|
|
|
405 |
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
545 |
|
|
|
914 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(15,313 |
) |
|
|
(17,120 |
) |
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
$ |
22,490 |
|
|
$ |
83,579 |
|
C. Accounts
Receivable and Inventories
At March
31, 2009 and December 31, 2008, Trade accounts receivable of $611.6 million and
$648.9 million, respectively, were net of an allowance for doubtful accounts of
$23.2 million and $27.9 million, respectively. The decrease in
accounts receivable from December 31, 2008 related principally to foreign
currency translation and lower sales levels in the March 2009
quarter. The provision for doubtful accounts was $2.0 million and
$1.4 million for the three months ended March 31, 2009 and 2008,
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)
|
|
March
31
2009
|
|
|
December
31
2008
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
150,436 |
|
|
$ |
156,490 |
|
Work-in-process
|
|
|
27,082 |
|
|
|
21,918 |
|
Raw
materials and purchased parts
|
|
|
84,894 |
|
|
|
83,372 |
|
Stores
and supplies
|
|
|
45,821 |
|
|
|
47,750 |
|
|
|
|
|
|
|
|
|
|
Total
inventories
|
|
$ |
308,233 |
|
|
$ |
309,530 |
|
D.
Property, Plant and Equipment
Property,
plant and equipment consists of the following:
(In
thousands)
|
|
March
31
2009
|
|
|
December
31
2008
|
|
Land
and improvements
|
|
$ |
40,723 |
|
|
$ |
41,913 |
|
Buildings
and improvements
|
|
|
178,128 |
|
|
|
167,606 |
|
Machinery
and equipment
|
|
|
2,823,996 |
|
|
|
2,905,398 |
|
Uncompleted
construction
|
|
|
63,881 |
|
|
|
75,210 |
|
Gross
property, plant and equipment
|
|
|
3,106,728 |
|
|
|
3,190,127 |
|
Less
accumulated depreciation
|
|
|
(1,700,333 |
) |
|
|
(1,707,294 |
) |
Net
property, plant and equipment
|
|
$ |
1,406,395 |
|
|
$ |
1,482,833 |
|
E.
Goodwill and Other Intangible Assets
The
following table reflects the changes in carrying amounts of goodwill by segment
for the three months ended March 31, 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, net of accumulated amortization
|
|
$ |
220,547 |
|
|
$ |
299,613 |
|
|
$ |
111,330 |
|
|
$ |
631,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
to goodwill
|
|
|
(276 |
) |
|
|
1,954 |
|
|
|
(346 |
) |
|
|
1,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
(7,242 |
) |
|
|
(8,112 |
) |
|
|
(988 |
) |
|
|
(16,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2009, net of accumulated amortization
|
|
$ |
213,029 |
|
|
$ |
293,455 |
|
|
$ |
109,996 |
|
|
$ |
616,480 |
|
Goodwill
is net of accumulated amortization of $93.9 million and $95.9 million at March
31, 2009 and December 31, 2008, respectively. The change in
accumulated amortization reflects foreign currency translation
adjustments.
The
following table reflects intangible assets by major category:
Intangible
Assets
|
|
|
|
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
(In
thousands)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Customer
relationships
|
|
$ |
135,697 |
|
|
$ |
44,628 |
|
|
$ |
138,752 |
|
|
$ |
40,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
1,377 |
|
|
|
1,213 |
|
|
|
1,414 |
|
|
|
1,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
6,677 |
|
|
|
4,156 |
|
|
|
6,316 |
|
|
|
4,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
59,613 |
|
|
|
20,601 |
|
|
|
60,495 |
|
|
|
19,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
203,364 |
|
|
$ |
70,598 |
|
|
$ |
206,977 |
|
|
$ |
65,442 |
|
During
the first three 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
|
|
|
|
|
|
|
Patents
|
|
|
425 |
|
None
|
15
years
|
|
|
|
|
|
|
|
Total
|
|
$ |
425 |
|
|
|
There
were no research and development assets acquired and written off in the first
three months of 2009 or 2008.
Amortization
expense for intangible assets was $6.2 million and $7.2 million for the three
months ended March 31, 2009 and 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)
|
|
$ |
24,400 |
|
|
$ |
24,000 |
|
|
$ |
23,200 |
|
|
$ |
11,000 |
|
|
$ |
9,600 |
|
(a) These
estimated amortization expense amounts do not reflect the potential effect of
future foreign currency exchange rate fluctuations.
F.
Dispositions and Assets Held for Sale
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. In accordance with SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No. 51,”
(“SFAS 160”), the acquisition of these joint venture partner interests will be
accounted for as equity transactions since the Company retained its controlling
interest in the subsidiaries. Related direct and incremental
transaction costs, such as professional fees, incurred for the acquisition of
the noncontrolling interests will be recorded as a deduction from
equity.
Dispositions
Consistent
with the Company’s strategic focus to grow and allocate financial resources to
its industrial services businesses, on December 7, 2007, the Company sold its
Gas Technologies 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. While the Company has
not received notification of actual 2008 results from Wind Point Partners, the
Company believes the thresholds for achieving the earnout for 2008 have not been
met. The Company recorded a $26.4 million after-tax gain on the sale
in the fourth quarter of 2007. There was $1.2 million in after-tax
working capital adjustments in the first quarter of 2009 related to a partial
settlement of working capital adjustment claims and other costs associated with
ongoing arbitration proceedings. The amount of the working capital
adjustments is not final at March 31, 2009, due to possible final adjustments,
as provided in the purchase agreement, and the potential earnout.
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 March 31, 2009 and
December 31, 2008 include accruals of $3.1 million and $3.2 million,
respectively, for environmental matters. The amounts charged against
pre-tax income related to environmental matters totaled $0.4 million and $0.3
million for the first three months of 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.
Customer
Contract Breach
In the
first quarter of 2009, ArcelorMittal notified the Company that it would
unilaterally revise the fixed-fee provisions of certain contracts between the
parties with the intended effect resulting in a significant price reduction to
the Company. The Company subsequently notified ArcelorMittal that the
Company believes that ArcelorMittal’s actions are a breach of these contracts
and that the Company will take all necessary and appropriate actions to protect
its legal rights to collect all amounts, which have been invoiced strictly
according to the terms of valid and legally binding
contracts. Discussions between the parties continue but it is
possible that the parties may need to resort to third-party resolution of this
issue. Should discussions between the parties reach an impasse or
require third-party resolution, the collection of the unpaid fixed-fee component
of the Company’s billings could be delayed. As of March 31, 2009,
accounts receivable of approximately $4 million of fixed-fee billings, related
to this contractual breach, had not been approved for payment by
ArcelorMittal. The Company assesses the collectability of receivables
on a monthly basis and would be required to record an allowance against such
receivables if there comes a point when collectability is no longer reasonably
assured. Should the Company be required to record such an allowance, it
would have a negative impact on the results of operations for the specific
period in which the expense was recorded. Additionally, should the Company
reach the point that it believed collectability was not reasonably assured, it
would be required to adjust its revenue recognition practices to recognize
future amounts billed on a cash basis, rather than the accrual basis, until such
time as collectability once again became reasonably assured.
ArcelorMittal
represented approximately 10% of the Company’s sales in the years ended December
31, 2008, 2007 and 2006. Sales to ArcelorMittal were less than 10% of
the Company’s sales in the first quarter of 2009 due primarily to reduced steel
production levels; the Company’s exiting a number of underperforming contracts
with ArcelorMittal; and a stronger U.S. dollar. The Company expects
ArcelorMittal sales throughout 2009 to represent less than 10% of the Company’s
sales for similar reasons. It is possible that the eventual outcome
of this alleged breach of contract could negatively impact the Company’s
long-term relationship with this customer and, as a result, the Company’s
financial position, results of operations and cash flows could be negatively
impacted. Of all of the Company’s major customers in the Harsco
Metals Segment, the EVA on contracts with ArcelorMittal are the lowest in the
portfolio. Contracts with ArcelorMittal are long-term contracts, such
that any impact on the Company’s future results of operations would occur over a
number of years.
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
March 31, 2009, there are 26,282 pending asbestos personal injury claims filed
against the Company. Of these cases, 25,769 were pending in the New
York Supreme Court for New York County in New York State. The other
claims, totaling 513, 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
March 31, 2009, the Company has obtained dismissal by stipulation, or summary
judgment prior to trial, in 17,958 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 March 31, 2009, the Company has been listed as a defendant in 437 Active or
In Extremis asbestos cases in New York County. The Court’s Order has
been challenged by plaintiffs.
The
Company’s insurance carrier has paid all legal and settlement costs and expenses
to date. The Company has liability insurance coverage under various
primary and excess policies that the Company believes will be available, if
necessary, to substantially cover any liability that might ultimately be
incurred on these claims.
The
Company intends to continue its practice of vigorously defending these cases as
they are listed for trial. It is not possible to predict the ultimate
outcome of asbestos-related lawsuits, claims and proceedings due to the
unpredictable nature of personal injury litigation. Despite this
uncertainty, and although results of operations and cash flows for a given
period could be adversely affected by asbestos-related lawsuits, claims and
proceedings, management believes that the ultimate outcome of these cases will
not have a material adverse effect on the Company’s financial condition, results
of operations or cash flows.
The
Company is subject to various other claims and legal proceedings covering a wide
range of matters that arose in the ordinary course of business. In
the opinion of management, all such matters are adequately covered by insurance
or by accruals, and if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a material adverse effect on the
financial position, results of operations or cash flows of the
Company.
Insurance
liabilities are recorded in accordance with SFAS No. 5, “Accounting for
Contingencies.” Insurance reserves have been estimated based
primarily upon actuarial calculations and reflect the undiscounted estimated
liabilities for ultimate losses including claims incurred but not
reported. Inherent in these estimates are assumptions which are based
on the Company’s history of claims and losses, a detailed analysis of existing
claims with respect to potential value, and current legal and legislative
trends. If actual claims differ from those projected by management,
changes (either increases or decreases) to insurance reserves may be required
and would be recorded through income in the period the change was
determined. When a recognized liability is covered by third-party
insurance, the Company records an insurance claim receivable to reflect the
covered liability. Insurance claim receivables are included in Other
receivables in the Company’s 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.
As has
been indicated in previous disclosure filings, the working capital adjustments
associated with the Gas Technologies divestiture have not yet been
finalized. The Company has reflected a portion of the claimed amount
of the adjustment in the Company’s financial statements as of March 31,
2009. Any additional final adjustment amounts are not expected to be
material to the Company’s financial position, results of operations or cash
flows. As part of its effort to resolve the working capital
adjustment claims, the Company submitted this matter to arbitration in the first
quarter of 2009. In response to this filing, Taylor-Wharton
International, the purchaser of the business, submitted certain counter-claims
seeking damages in excess of $30 million, relating primarily to the alleged
breach of certain representations and warranties made by the Company under the
Purchase Agreement. The Company intends to vigorously defend against
the counter-claims. The Company believes that it will be successful
in its defense of these claims and does not believe that any amount it will have
to pay in connection with these claims would have a material adverse effect on
its financial position, results of operations or cash flows.
H.
Reconciliation of Basic and Diluted Shares
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
(In
thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Income
from continuing operations attributable to Harsco Corporation common
stockholders
|
|
$ |
19,816 |
|
|
$ |
56,891 |
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding used to compute basic earnings per
common share
|
|
|
80,249 |
|
|
|
84,374 |
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of stock-based compensation
|
|
|
235 |
|
|
|
477 |
|
|
|
|
|
|
|
|
|
|
Shares
used to compute dilutive effect of stock-based
compensation
|
|
|
80,484 |
|
|
|
84,851 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share from continuing operations
|
|
$ |
0.25 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share from continuing operations
|
|
$ |
0.25 |
|
|
$ |
0.67 |
|
At March
31, 2009, there were 85,883 restricted stock units outstanding that were not
included in the computation of diluted earnings per share because the effect was
antidilutive. All outstanding stock options at March 31, 2009 and all
outstanding stock options and restricted stock units at March 31, 2008 were
included in the computation of diluted earnings per share for their respective
periods.
I.
Employee Benefit Plans
|
|
Three
Months Ended
March
31
|
|
Defined
Benefit Pension Expense (Income)
|
|
U.
S. Plans
|
|
|
International
Plans
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
447 |
|
|
$ |
621 |
|
|
$ |
931 |
|
|
$ |
2,392 |
|
Interest cost
|
|
|
3,526 |
|
|
|
4,016 |
|
|
|
9,982 |
|
|
|
13,980 |
|
Expected return on plan
assets
|
|
|
(3,649 |
) |
|
|
(6,227 |
) |
|
|
(9,774 |
) |
|
|
(16,262 |
) |
Recognized prior service
costs
|
|
|
88 |
|
|
|
83 |
|
|
|
83 |
|
|
|
254 |
|
Recognized
losses
|
|
|
2,524 |
|
|
|
292 |
|
|
|
3,694 |
|
|
|
2,921 |
|
Amortization of transition
liability
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
9 |
|
Curtailment/settlement
gain
|
|
|
— |
|
|
|
(866 |
) |
|
|
— |
|
|
|
— |
|
Defined
benefit plans pension expense (income)
|
|
|
2,936 |
|
|
|
(2,081 |
) |
|
|
4,923 |
|
|
|
3,294 |
|
Less
Discontinued Operations included in above
|
|
|
— |
|
|
|
(694 |
) |
|
|
— |
|
|
|
— |
|
Defined
benefit plans pension expense (income) – continuing
operations
|
|
$ |
2,936 |
|
|
$ |
(1,387 |
) |
|
$ |
4,923 |
|
|
$ |
3,294 |
|
Defined
benefit pension expense in the first quarter of 2009 was $6.0 million higher
than the comparable 2008 period. 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 and an increase in recognized
actuarial losses.
In the
quarter ended March 31, 2009, the Company contributed $0.4 million and $6.5
million for the U.S. and international defined benefit pension plans,
respectively. The Company currently anticipates contributing an
additional $2.8 million and $27.0 million for the U.S. and international plans,
respectively, during the remainder of 2009.
In the
quarter ended March 31, 2009, the Company’s contributions to multi-employer and
defined contribution pension plans were $5.7 million and $2.5 million,
respectively.
J.
New Financial Accounting Standards Issued
SFAS
No. 157 “Fair Value Measurements” (“SFAS 157”)
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
157 which defines fair value, establishes a framework for measuring fair value
under GAAP, and expands fair value measurement disclosures. The
provisions of this standard apply to other accounting pronouncements that
require or permit fair value measurements and are to be applied prospectively
with limited exceptions. FSP No. 157-2, “Effective Date of FASB
Statement No. 157,” delayed the effective date of SFAS 157 for all nonrecurring
fair value measurements of nonfinancial assets and nonfinancial liabilities
until fiscal years beginning after November 15, 2008 (January 1, 2009 for the
Company).
On
January 1, 2009, the Company adopted SFAS 157 as it relates to nonrecurring fair
value measurements of nonfinancial assets and nonfinancial
liabilities. The adoption of SFAS 157, as it relates to nonfinancial
assets and nonfinancial liabilities, had no impact on the consolidated financial
statements. The provisions of SFAS 157 will be applied at such time
as 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 SFAS
157.
FSP
No. 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets”
(“FSP FAS 132(R)-1”)
In
December 2008, the FASB issued FASB Staff Position (“FSP”) 132(R)-1, which
amends FASB Statement No. 132 (revised 2003) (“SFAS 132(R)”), “Employers’
Disclosures about Pensions and Other Postretirement Benefits,” to 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. FSP FAS 132(R)-1 is effective for the Company’s year-end
December 31, 2009 consolidated financial statements. As FSP FAS
132(R)-1 only requires enhanced disclosures, this standard will only impact
notes to the consolidated financial statements.
FSP
No. 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial
Instruments” (“FSP FAS 107-1 and APB 28-1”)
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1 which amends SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments for interim reporting periods as well
as in annual financial statements. The FSP also amends APB Opinion
No. 28, “Interim Financial Reporting,” to require those disclosures in
summarized financial information at interim reporting periods. The
requirements include a presentation of 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, as required by SFAS
107. Previously, these disclosures were required only in annual
financial statements. FSP 107-1 and APB 28-1 becomes effective for
the Company for interim reporting periods ending after June 15,
2009. As FSP FAS 107-1 and APB 28-1 only requires additional
disclosures, this standard will only impact notes to the consolidated financial
statements.
FSP
No. FAS 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination that Arise from Contingencies” (“FSP FAS
141(R)-1”)
In April
2009, the FASB issued FSP FAS 141(R)-1 which amends and clarifies SFAS 141
(revised 2007), “Business Combinations (“SFAS 141(R)”), to address concerns
about the application of SFAS 141(R) to assets and liabilities arising from
contingencies in a business combination. The FSP establishes a model
similar to the one used under SFAS 141 to account for preacquisition
contingencies. Under the FSP, an acquirer is required to recognize at
fair value 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. If the
acquisition-date fair value cannot be determined, the acquirer applies the
recognition criteria in SFAS 5, “Accounting for Contingencies,” and FASB
Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss—an
interpretation of FASB Statement No. 5,” to determine whether the contingency
should be recognized as of the acquisition date or after it. FSP FAS
141(R)-1 is 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.
K. Derivative
Instruments and Hedging Activities
On
January 1, 2009, the Company adopted SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 requires enhanced disclosures about the use of
derivative instruments, the accounting for derivatives, and how derivatives
impact financial statements to enable investors to better understand their
effects on a company’s financial position, financial performance and cash
flows.
The
Company has used 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. 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 of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”), 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. 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 March 31, 2009 Condensed Consolidated Balance Sheet were as
follows:
(In
thousands)
|
Balance
Sheet Location
|
|
March
31, 2009
|
|
Asset Derivatives
|
|
|
|
|
Derivatives
designated as hedging instruments under SFAS 133:
|
|
|
|
|
Commodity
contracts
|
Other
current assets
|
|
$ |
3,119 |
|
Cross-currency
interest rate swap
|
Other
assets
|
|
|
42,278 |
|
Total
derivatives designated as hedging instruments under SFAS
133
|
|
|
$ |
45,397 |
|
Derivatives
not designated as hedging instruments under SFAS 133:
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
Other
current assets
|
|
$ |
2,925 |
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under SFAS 133:
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
Other
current liabilities
|
|
$ |
1,539 |
|
The
effect of derivative instruments on the Condensed Consolidated Statements of
Income for the three months ended March 31, 2009 was as follows:
Derivatives
Designated as Hedging Instruments
|
|
(In
thousands)
|
|
Amount
of Gain (Loss) Recognized in Other Comprehensive Income (“OCI”) on
Derivative (Effective Portion)
|
|
|
Location
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
Amount
of Gain (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)
|
|
Commodity
contracts
|
|
$ |
1,105 |
|
|
Service
Revenues
|
|
|
$ |
2,438 |
|
Service
Revenues
|
|
$ |
(17 |
) |
Cross-currency
interest rate swap
|
|
|
(19,583 |
) |
|
|
— |
|
|
|
— |
|
Cost
of services sold
|
|
|
12,428 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(18,478 |
) |
|
|
|
|
|
$ |
2,438 |
|
|
|
$ |
12,411 |
|
(a) The
gains offset currency fluctuation effects on the debt principal.
Derivatives
Not Designated as Hedging Instruments
|
|
(In
thousands)
|
Location
of Gain (Loss) Recognized in Income on Derivative
|
|
Amount
of Gain (Loss) Recognized in Income on Derivative
|
|
Foreign
currency forward exchange contracts
|
Cost
of services sold
|
|
$ |
(3,543 |
) |
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 March
31, 2009, the Company’s open commodity derivative contract positions qualified
as cash flow hedges under the requirements of SFAS 133 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 $8.3 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
SFAS 133, 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 many different 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 as a separate component of equity.
The
Company uses derivative instruments to hedge cash flows related to foreign
currency fluctuations. At March 31, 2009, the Company had $236.2
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 March 31, 2009
mature at various times within nine 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
March 31, 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 March 31, 2009
|
|
|
Type
|
|
U.S.
Dollar Equivalent
|
|
Maturity
|
|
Recognized
Gain (Loss)
|
|
British
pounds sterling
|
Sell
|
|
$ |
54,450 |
|
April
2009
|
|
$ |
907 |
|
British
pounds sterling
|
Buy
|
|
|
38,298 |
|
April
through May 2009
|
|
|
276 |
|
Euros
|
Sell
|
|
|
40,781 |
|
April
2009
|
|
|
375 |
|
Euros
|
Buy
|
|
|
97,596 |
|
April
through August 2009
|
|
|
(159 |
) |
Other
currencies
|
Sell
|
|
|
4,505 |
|
December
2009
|
|
|
6 |
|
Other
currencies
|
Buy
|
|
|
601 |
|
April
through December 2009
|
|
|
(19 |
) |
Total
|
|
|
$ |
236,231 |
|
|
|
$ |
1,386 |
|
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, 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
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 described below:
·
|
Level
1—Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
|
·
|
Level
2—Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly,
including quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
|
·
|
Level
3—Inputs that are both significant to the fair value measurement and
unobservable.
|
In
instances in which multiple levels of inputs are used to measure fair value,
hierarchy classification is based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company’s
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability.
The
following table presents information about the Company’s derivative assets and
liabilities measured at fair value on a recurring basis classified under the
appropriate level of the fair value hierarchy.
(In
thousands)
|
|
March
31
2009
|
|
|
December
31
2008
|
|
Assets:
|
|
|
|
|
|
|
Level
1
|
|
$ |
— |
|
|
$ |
— |
|
Level
2
|
|
|
48,322 |
|
|
|
61,244 |
|
Level
3
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
48,322 |
|
|
$ |
61,244 |
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Level
1
|
|
$ |
— |
|
|
$ |
— |
|
Level
2
|
|
|
1,539 |
|
|
|
3,954 |
|
Level
3
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
1,539 |
|
|
$ |
3,954 |
|
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.
L.
2008 Restructuring Program
As a
result of the deepening financial and economic crisis, in the fourth quarter of
2008 the Company initiated a restructuring program 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. 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 expenses, $5.8 million
reduction in services revenue, a net $1.5 million related to pension
curtailments and $0.8 million of other costs. These restructuring
actions are expected to be completed over the next nine months.
At March
31, 2009, the Company completed workforce reductions of 871 employees of a total
expected workforce reduction of 1,429 employees related to these
initiatives. The majority of the remaining workforce reductions and
exit activities are targeted for completion during 2009.
The
restructuring accrual at March 31, 2009 and the activity for the March 2009
quarter attributable to each segment is as follows:
(In
thousands)
|
|
Accrual
December
31
2008
|
|
|
Adjustments
to
Previously
Recorded
Restructuring
Charges*
|
|
|
Cash
Expenditures
|
|
|
Remaining
Accrual
March
31
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Infrastructure Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
$ |
1,806 |
|
|
$ |
— |
|
|
$ |
(1,003 |
) |
|
$ |
803 |
|
Cost
to exit activities
|
|
|
1,963 |
|
|
|
(376 |
) |
|
|
(498 |
) |
|
|
1,089 |
|
Total
Harsco Infrastructure Segment*
|
|
|
3,769 |
|
|
|
(376 |
) |
|
|
(1,501 |
) |
|
|
1,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harsco
Metals Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
|
9,888 |
|
|
|
— |
|
|
|
(4,421 |
) |
|
|
5,467 |
|
Cost
to exit activities
|
|
|
656 |
|
|
|
— |
|
|
|
— |
|
|
|
656 |
|
Total
Harsco Metals Segment
|
|
|
10,544 |
|
|
|
— |
|
|
|
(4,421 |
) |
|
|
6,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Category - Harsco Minerals & Rail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
|
531 |
|
|
|
215 |
|
|
|
(707 |
) |
|
|
39 |
|
Total
All Other Category - Harsco Minerals & Rail
|
|
|
531 |
|
|
|
215 |
|
|
|
(707 |
) |
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
|
113 |
|
|
|
— |
|
|
|
(113 |
) |
|
|
— |
|
Cost
to exit activities
|
|
|
2,448 |
|
|
|
— |
|
|
|
(229 |
) |
|
|
2,219 |
|
Total
Corporate
|
|
|
2,561 |
|
|
|
— |
|
|
|
(342 |
) |
|
|
2,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
17,405 |
|
|
$ |
(161 |
) |
|
$ |
(6,971 |
) |
|
$ |
10,273 |
|
*
|
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 $10.3 million related to the 2008
actions are expected to be paid within the next nine months.
|
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 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)
the integration of the Company’s strategic acquisitions; (9) the amount and
timing of repurchases of the Company’s common stock, if any; (10) 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; (11) 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 (12) 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
first quarter of 2009, the global financial and economic crisis significantly
impacted the Company’s results. The three most significant obstacles
impacting the Company were: the continued strengthening of the U.S. dollar;
unprecedented low global steel production; and a lack of available credit that
continued to adversely impact non-residential construction projects
worldwide. The Company does not anticipate any short-term improvement
in these business drivers and expects to encounter these challenges for the
remainder of 2009.
The
Company’s first quarter 2009 revenues from continuing operations totaled $696.9
million, a decrease of $290.9 million or 29% from the first 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. Foreign currency
translation decreased sales by $140 million and accounted for almost half of the
decline in sales. The Company’s geographic expansion strategy was
maintained as revenues from emerging markets were approximately 20% of total
revenues in the first quarter of 2009, compared with 20% for the first quarter
of 2008 and 21% for calendar year 2008. Operating income from continuing
operations was $37.2 million compared with $99.4 million in 2008, a decrease of
63%. Diluted earnings per share from continuing operations were
$0.25, a 63% decrease from 2008.
In
response to further deterioration of global markets in the first quarter of
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 will manifest themselves throughout 2009 and
beyond. Annualized benefits are now expected to approximate $100
million in total cost reductions. Among the Company’s actions to
minimize its cost structure include the 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; the LeanSigma continuous improvement initiative and prudent reductions
in capital spending.
The
Company continues to have significant available liquidity and remains
well-positioned from a financial flexibility perspective. Cash flow
from operations remained strong during the quarter, increasing by $7.6 million
or 24% from the first quarter 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. This
decreased level of capital expenditures compared with prior years will allow the
Company to further enhance its balance sheet and maintain its
dividend. The Company’s cash flows are further discussed in the
Liquidity and Capital Resources section.
Segment
Overview
The
Harsco Infrastructure Segment’s revenues in the first quarter of 2009 were
$283.7 million compared with $378.8 million in the first quarter of 2008, a 25%
decrease. Operating income decreased by 50% to $18.8 million, from
$37.8 million in the first quarter of 2008. Operating margins for the
segment declined by 340 basis points to 6.6% from 10.0% in the first quarter of
2008. The lower revenue and operating income in the quarter were due
principally to reduced end-market demand, particularly in the United Kingdom,
and negative foreign currency translation effects. The lower demand
is being driven by the continued lack of available credit that has resulted in
cancelled and delayed construction projects, as well as a significant decline in
export sales of infrastructure-related equipment. Harsco
Infrastructure accounted for 41% of the Company’s revenues and 51% of the
operating income for the first quarter of 2009.
Revenues
for the first quarter of 2009 for the Harsco Metals Segment were $238.4 million
compared with $416.7 million in the first quarter of 2008, a 43%
decrease. Unprecedented steel production cuts resulting from lower
end-market demand drove 25% of the reduction in year-over-year sales and
negative foreign currency translation contributed the remaining
18%. This Segment generated an operating loss of $2.8 million in the
first quarter of 2009, compared to operating income of $29.2 million in the
first quarter of 2008. Operating margins were (1.2%) for the first
quarter of 2009 compared to 7.0% last year. Harsco Metals accounted
for 34% of the Company’s revenues for the first quarter of 2009.
Revenues
in the first quarter of 2009 for the All Other Category (“Harsco Minerals &
Rail”) were $174.7 million compared with $192.2 million in the first quarter of
2008, a decrease of 9%. Operating income decreased by 31% to $23.4
million, from $33.9 million in the first quarter of 2008 due principally to
volume and commodity price declines in the reclamation and recycling services
business. Operating margins for the Segment decreased by 430 basis
points to 13.4% from 17.7% in the first quarter of 2008. The rail
services and air-cooled heat exchanger businesses recorded increased revenues
due to continued strong demand. All businesses except the air-cooled
heat exchangers business recorded lower operating income in the first quarter of
2009 compared with the first quarter of 2008. The reclamation and
recycling services business continued to be adversely impacted by a lack of
metals production and depressed commodity prices. The All Other
Category accounted for 25% of the Company’s revenues and 63% of the operating
income for the first quarter of 2009.
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 mill production
and capacity utilization; industrial production volume and maintenance activity;
and the general business trend towards the outsourcing of
services. The overall outlook for 2009 for most of these business
drivers remains challenging due to the impact of the global
recession. While some recovery may begin in 2009, it appears more
substantial benefits of a general economic upswing and government stimulus
packages may be delayed into 2010.
The
substantial strengthening of the U.S. dollar in the fourth quarter of 2008, and
its continued appreciation in the first quarter of 2009, is expected to have a
significant adverse impact on the Company’s performance in
2009. Additionally, the Company’s pension plans’ assets declined in
value at December 31, 2008, consistent with the weakening economy and will
result in significantly increased defined benefit pension expense of
approximately $24 million during 2009.
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 from certain
underperforming contracts with customers, 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 in the first quarter of
2009. The combination of the 2008 and 2009 countermeasures will
manifest themselves throughout 2009 and beyond. Annualized benefits
are now expected to approximate $100 million in total cost
reductions. 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 accretive, 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 recession. 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, and 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; and enterprise
business optimization opportunities including new technology applications,
consolidated procurement and logistics; and LeanSigma continuous improvement
initiatives.
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 extremely challenging due
to the global recession which has deeply cut into demand for steel and
associated steel production. Steel demand is expected to begin to
stabilize in the latter half of 2009, leading to a mild recovery in
2010. It is expected that some of this impact will be mitigated by
lower fuel costs, improved overall contract performance, new contract signings,
and cost optimization initiatives the Company is currently
implementing. The Segment continues to engage in enterprise business
optimization initiatives including active engagement of 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 however,
for the reclamation and recycling services business, which recovers and recycles
high-value metals, is negatively impacted by a significant decline in production
volume and metal prices that has carried over from 2008. The Company
continues to experience strong bidding activity in its railway track maintenance
services and equipment business and the large China order from 2007 will
underpin its strength through 2011. Longer term, the Company also
anticipates new contract opportunities for its minerals and recycling
technologies business, and potential geographic expansion opportunities within
its industrial products businesses.
Revenues
by Region
|
|
|
Total
Revenues
Three
Months Ended
March
31
|
|
|
Percentage
Change From
2008
to 2009
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
Volume
|
|
|
Currency
|
|
|
Total
|
|
Western
Europe
|
|
$ |
289.5 |
|
|
$ |
462.8 |
|
|
|
(16.4 |
)% |
|
|
(21.0 |
)% |
|
|
(37.4 |
)% |
North
America
|
|
|
269.6 |
|
|
|
323.7 |
|
|
|
(15.1 |
) |
|
|
(1.6 |
) |
|
|
(16.7 |
) |
Latin
America (a)
|
|
|
39.1 |
|
|
|
61.1 |
|
|
|
(12.3 |
) |
|
|
(23.7 |
) |
|
|
(36.0 |
) |
Middle
East and Africa
|
|
|
55.0 |
|
|
|
60.3 |
|
|
|
(3.9 |
) |
|
|
(4.9 |
) |
|
|
(8.8 |
) |
Eastern
Europe
|
|
|
22.8 |
|
|
|
44.4 |
|
|
|
(21.2 |
) |
|
|
(27.5 |
) |
|
|
(48.7 |
) |
Asia/Pacific
|
|
|
20.9 |
|
|
|
35.5 |
|
|
|
(17.7 |
) |
|
|
(23.5 |
) |
|
|
(41.2 |
) |
Total
|
|
$ |
696.9 |
|
|
$ |
987.8 |
|
|
|
(15.3 |
)% |
|
|
(14.2 |
)% |
|
|
(29.5 |
)% |
2009
Quarterly Highlights
The
following significant items affected the Company overall during the first
quarter of 2009 in comparison with the first quarter of 2008:
Company
Wide:
·
|
Revenues
and operating income were impacted by the economic turbulence of the
global recession: the value of the U.S. dollar increased significantly,
accounting for 48% of the sales decline and 23% of the decline in
operating income; global steel production, which declined in the latter
part of 2008, remained at unprecedentedly low levels; and lending and
credit practices in response to the ongoing financial crisis continued to
adversely affect non-residential construction projects
world-wide.
|
·
|
During
the first quarter 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 enacted during the first quarter of 2009
targeting expense reduction, revenue enhancement and asset
optimization. The combination of the 2008 and 2009
countermeasures will manifest themselves throughout 2009 and beyond with
annualized benefits that are now expected to approximate $100 million in
total cost reductions.
|
·
|
Defined
benefit pension expense increased $6.0 million due to lower plan assets at
the 2008 plan measurement date which resulted in a decrease in expected
return on plan assets and an increase in recognized actuarial losses in
2009.
|
·
|
Major
currency declines occurred in the British pound sterling (28%), the euro
(15%) and Poland’s zloty (35%), as well as most other significant
currencies, reducing both revenues and operating income during the first
quarter of 2009.
|
·
|
The
Company’s debt declined by $17.1 million during the first quarter of 2009,
due to reductions in growth capital expenditures during the quarter and
the effect of foreign currency
translation.
|
·
|
Cash
flow from operations remained strong during the quarter, increasing by
$7.6 million or 24% from the first quarter of
2008.
|
Harsco Infrastructure
Segment:
|
|
Three
Months
Ended
March 31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
283.7 |
|
|
$ |
378.8 |
|
Operating
income
|
|
|
18.8 |
|
|
|
37.8 |
|
Operating
margin percent
|
|
|
6.6 |
% |
|
|
10.0 |
% |
Harsco
Infrastructure Segment – Significant Impacts on Revenues
|
|
Three
Months
Ended
March 31
|
|
(In
millions)
|
|
|
|
Revenues
– 2008
|
|
$ |
378.8 |
|
Impact
of foreign currency translation
|
|
|
(59.2 |
) |
Net
decreased volume
|
|
|
(37.6 |
) |
Acquisitions
|
|
|
1.7 |
|
Revenues
– 2009
|
|
$ |
283.7 |
|
Harsco
Infrastructure Segment – Significant Impacts on Operating Income:
·
|
In
the first quarter of 2009, the Segment’s operating results decreased due
to reduced non-residential, commercial and infrastructure construction
spending, particularly in the United Kingdom. This was
partially offset by improvements in emerging economies in the Middle East
and Latin America regions, as well as global industrial
maintenance. The Company has benefited from its capital
investments made in these markets and its ability to easily redeploy
equipment throughout the globe.
|
·
|
Defined
benefit pension expense increased $2.5 million in the first quarter of
2009 compared to the first quarter of
2008.
|
·
|
Foreign
currency translation in the first quarter of 2009 decreased operating
income for this Segment by $5.9 million, compared with the first quarter
of 2008.
|
Harsco Metals
Segment:
|
|
Three
Months
Ended
March 31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
238.4 |
|
|
$ |
416.7 |
|
Operating
income (loss)
|
|
|
(2.8 |
) |
|
|
29.2 |
|
Operating
margin percent
|
|
|
(1.2 |
)% |
|
|
7.0 |
% |
Harsco
Metals Segment – Significant Impacts on Revenues
|
|
Three
Months Ended March 31
|
|
(In
millions)
|
|
|
|
Revenues
– 2008
|
|
$ |
416.7 |
|
Net
decreased volume
|
|
|
(104.7 |
) |
Impact
of foreign currency translation
|
|
|
(73.6 |
) |
Revenues
– 2009
|
|
$ |
238.4 |
|
Harsco
Metals Segment – Significant Effects on Operating Income:
·
|
Revenues,
operating income and margins for the first quarter of 2009 were negatively
affected by unprecedented declines in global steel production and the
strong U.S. dollar.
|
·
|
Foreign
currency translation in the first quarter of 2009 decreased operating
income for this Segment by $7.0 million, compared with the first quarter
of 2008.
|
·
|
During
the first quarter 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 the first quarter of 2009
targeting expense reduction, revenue enhancement and asset
optimization.
|
All Other Category – Harsco
Minerals & Rail:
|
|
Three
Months
Ended
March 31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
174.7 |
|
|
$ |
192.2 |
|
Operating
income
|
|
|
23.4 |
|
|
|
33.9 |
|
Operating
margin percent
|
|
|
13.4 |
% |
|
|
17.7 |
% |
All
Other Category – Harsco Minerals & Rail –
Significant
Impacts on Revenues
|
|
Three
Months
Ended
March 31
|
|
(In
millions)
|
|
|
|
Revenues
– 2008
|
|
$ |
192.2 |
|
Minerals
and recycling technologies
|
|
|
(13.0 |
) |
Impact
of foreign currency translation
|
|
|
(7.6 |
) |
Industrial
grating products
|
|
|
(6.0 |
) |
Air-cooled
heat exchangers
|
|
|
5.1 |
|
Railway
track maintenance services and equipment
|
|
|
4.8 |
|
Other
changes not individually discussed
|
|
|
(0.8 |
) |
Revenues
– 2009
|
|
$ |
174.7 |
|
All
Other Category – Harsco Minerals & Rail – Significant Impacts on Operating
Income:
·
|
The
railway track maintenance services and equipment business operating income
decreased from 2008 due principally to the timing of equipment
sales.
|
·
|
Operating
income for reclamation and recycling services was lower in 2009 due to
significantly lower metal prices, continued steel mill production declines
and product mix.
|
·
|
Strong
demand in the natural gas market resulted in increased volume and
operating income for the air-cooled heat exchangers
business.
|
·
|
The
economic downturn, customer decreases in inventory levels and increased
steel prices compared to 2008 contributed to a reduction in operating
income for the industrial grating products
business.
|
·
|
Operating
income for the boiler and process equipment business was below 2008 levels
due principally to a gain on the sale of an asset in the first quarter of
2008 that was not repeated in 2009.
|
·
|
Operating
income for the roofing granules and abrasives business was slightly below
the first quarter of 2008 due to decreased sales
volume.
|
·
|
Foreign
currency translation in the first quarter of 2009 decreased operating
income for the All Other Category by $0.9 million compared with the first
quarter of 2008.
|
Outlook,
Trends and Strategies
Company
Wide:
The
global recession has created uncertainty and anxiety throughout the
world. A strengthened U.S. dollar compared to 2008; unprecedented
reductions in global steel production; and the cancellation and deferral of
certain construction projects and sales due to the tightening of credit have
caused the Company’s near-term prospects to become more
difficult. The year 2009 is expected to be very
challenging. The major challenges facing the Company include the
following:
·
|
Overall
instability of the global financial markets and economies – the global
economic recovery previously anticipated to begin in the second half of
2009 cannot now be predicted with any
certainty.
|
·
|
Continued
strengthening of the U.S. dollar.
|
·
|
Tightened
credit markets that limit the ability of the Company’s customers to obtain
financing.
|
·
|
Substantial
and unprecedented reductions in global steel
production.
|
·
|
Depressed
commodity prices, particularly high-value
metals.
|
In
response to this global financial and economic crisis, the Company has and will
continue to proactively and aggressively implement a number of countermeasures
to reinforce 2009 and future performance, including:
·
|
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 from certain underperforming contracts with customers,
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 in the first quarter of
2009. The combination of the 2008 and 2009 countermeasures will
manifest themselves throughout 2009 and beyond. Additional
countermeasures will be implemented as necessary. Annualized
benefits are now expected to approximate $100 million in total cost
reductions.
|
·
|
Cutting
costs across the enterprise, including reducing or eliminating
discretionary spending to match market
conditions.
|
·
|
Prudently
reducing growth capital expenditures in 2009 while redeploying equipment
from slowing markets to new projects in strategically important and
economically strong areas such as the Middle East and Africa,
Asia-Pacific, and several other key
regions.
|
·
|
Accelerating
growth initiatives, particularly in emerging
markets.
|
·
|
Targeted,
bolt-on, prudent strategic
acquisitions.
|
While the
global economic conditions remain uncertain and turbulent, the Company believes
it is well-positioned to capitalize on opportunities and execute strategic
initiatives based upon its strong balance sheet, available liquidity and its
ability to generate strong operating cash flows. The Company is
confident that the previously mentioned actions along with its LeanSigma
continuous improvement program will significantly reduce the Company’s cost
structure, further enhancing its financial strength. Additionally,
the Company’s global footprint; diversity of services and products; 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,
further deterioration of the 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, trends and
strategies are expected to affect the Company:
·
|
The
Company will continue its disciplined focus on expanding its industrial
services businesses, with a particular emphasis on prudently growing the
Harsco Infrastructure Segment, especially in emerging economies and other
targeted markets. Growth is expected to be achieved through the
provision of additional services to existing customers, new contracts in
both developed and emerging markets, and targeted, strategic, bolt-on
acquisitions. 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.
|
·
|
The
Company anticipates global government stimulus packages to fund much
needed infrastructure projects throughout the world. The Harsco
Infrastructure Segment, as well as the Harsco Rail business, are well
positioned with their engineering expertise and the capital investment
base to take advantage of these expected
opportunities.
|
·
|
Continued
global implementation of the Company’s enterprise-wide LeanSigma
continuous improvement program, which was initiated in 2008, 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 to implement
enterprise-wide business optimization initiatives to further enhance
margins for most businesses. These initiatives include improved
supply-chain and logistics management; capital employed 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, within the next three to five years,
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 three
years and closer to 40% in the longer-term. Revenues in these
markets were approximately 20% of the Company’s total revenues for both
the first quarter of 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
operating costs and its ability to obtain necessary raw
materials. Cost increases could result in reduced operating
income for certain products and services, to the extent that such costs
cannot be passed on to customers. Cost decreases could result
in increased operating income to the extent that such cost savings do not
need to be passed to customers. However, increased 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. As part of its on-going enterprise-wide optimization
initiatives noted above, the Company is implementing programs to help
mitigate these costs.
|
·
|
The
continued strengthening of the U.S. dollar in the first quarter of 2009
created a negative effect on the Company’s sales, operating income and
equity from foreign currency translation. If the U.S. dollar
continues to strengthen in 2009, particularly in relationship to the euro,
British pound sterling or the Eastern European currencies, the impact on
the Company would generally be negative in terms of reduced revenue,
operating income and equity. Additionally, even if the U.S.
dollar remains at its current value as of March 31, 2009, the Company’s
revenue and operating income will be negatively impacted in comparison to
2008. 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.
|
·
|
Since
December 2007, the Company has reduced variable rate debt from 49% of its
total borrowings to 11% at March 31, 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 an
additional reduction in commercial paper and other borrowings during the
first quarter 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 March 31, 2009, a one
percentage point change in variable interest rates would change interest
expense by approximately $1.1 million per year. Strategies to
further reduce related risks are under
consideration.
|
·
|
Total
defined benefit 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. In an effort 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 is no longer granted for periods
after December 31, 2008. This action was part of the Company’s
overall strategy to reduce 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 for
continuing operations in the first quarter of 2009 was 6.7% compared to
29.0% in the first quarter of 2008. The decrease in the
effective income tax rate for the first quarter of 2009 was due to net
discrete tax benefits recognized in the March 2009 quarter, coupled with a
decline in earnings in jurisdictions with higher tax rates. The
net discrete benefits related primarily to a change in the Company’s
decision to permanently reinvest additional earnings for certain non-U.S.
subsidiaries which were previously not considered permanently
reinvested. For the remaining quarters of 2009, the effective
income tax rate is expected to be in the area of
26%.
|
·
|
Building
on the record 2008 operating cash flows, the Company expects continued
strong cash flows from operating activities in 2009; albeit not at record
levels. The Company also plans to significantly reduce the
amount of cash invested for capital expenditures during 2009 to
approximately $150 million compared to 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.
|
·
|
The
Company performed required annual testing for goodwill impairment as of
October 1, 2008 and all reporting units of the Company passed the step one
testing thereby indicating that no goodwill impairment
exists. Additionally, the Company determined that as of March
31, 2009 no interim impairment testing was necessary. However,
there can be no assurance that future goodwill impairment tests will not
result in a charge to earnings.
|
·
|
The
Company has operations in and sales to countries that have encountered
certain public health issues such as the swine flu outbreak. Should
these public health issues worsen or spread to other countries, the
Company may be negatively impacted through reduced sales to and within
these countries and other countries affected by such
diseases.
|
Harsco Infrastructure
Segment:
·
|
A
stronger U.S. dollar would continue to adversely impact sales and
operating income of the Harsco Infrastructure Segment, as approximately
80% of this business operates outside the United States. The
near-term outlook for the Harsco Infrastructure Segment will be negatively
impacted by continued uncertainty in the global credit markets, which has
deferred certain equipment sales and some construction
projects. The current weakness in the commercial construction
market, particularly in Western Europe and the United States, is being
partially offset by a steady level of activity from the Company’s
infrastructure maintenance services, institutional and global
infrastructure projects, and continued overall growth 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
Company will continue to diversify this business, focusing on growth in
institutional and global infrastructure projects and infrastructure
maintenance projects.
|
·
|
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.
|
·
|
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.
|
Harsco Metals
Segment:
·
|
A
stronger U.S. dollar would continue to adversely impact the sales and
operating income of the Harsco Metals Segment, as approximately 80% of
this business operates outside the United States. As economic
uncertainties that started in mid-2008 have developed into a global
recession, steel demand has declined and, globally, steel companies have
significantly scaled back production. These customer
actions had a significant negative impact on the Harsco Metals Segment’s
results in the first quarter of 2009. While global demand for
steel remains weak, steel production cuts of this depth and breadth are
not expected to be sustainable for long periods of
time. However, the Company does not foresee any measurable
pick-up in this Segment’s operations until at least the second half of
2009.
|
·
|
Benefits
from the restructuring program implemented in the fourth quarter of 2008
and additional countermeasures implemented in the first quarter of 2009
should improve the operational efficiency and enhance profitability of the
Harsco Metals Segment in 2009 and beyond. Initiatives included
the exit of underperforming contracts with customers and underperforming
operations; defined benefit pension plan design changes; overall reduction
in global workforce; and substantially reducing discretionary
spending.
|
·
|
The
Company will continue to place significant emphasis on improving operating
margins of this Segment. Margin improvements are most likely to
be achieved as a result of cost reduction initiatives, renegotiating or
exiting contracts with lower-than-acceptable returns, principally in North
America; internal enterprise business optimization efforts; divesting
low-margin product lines; continuing to execute a geographic expansion
strategy in the Middle East and Africa, Latin America and Asia/Pacific;
and implementing continuous improvement initiatives including LeanSigma
projects, global procurement initiatives, site efficiency programs,
technology enhancements, maintenance best practices programs and
reorganization actions.
|
·
|
The
Company will continue to diversify its customer base by reallocating
assets to new customers in emerging
markets.
|
·
|
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 would result in an
increase in concentration of revenues and credit risk for the
Company. If a large customer were to experience financial
difficulty, or file for bankruptcy protection, it could adversely impact
the Company’s income, cash flows and asset valuations. As part
of its credit risk management practices, the Company closely monitors the
credit standing and accounts receivable position of its customer
base. Further consolidation may also increase pricing pressure
on the Company and the competitive risk of services contracts which are
due for renewal. Conversely, such consolidation may provide
additional service opportunities for the Company as the Company believes
it is well-positioned competitively. As a result of this
customer concentration, a key strategy of the Company is to diversify its
customer base.
|
·
|
In
the first quarter of 2009, ArcelorMittal notified the Company that it
would unilaterally revise the fixed-fee provisions of certain contracts
between the parties with the intended effect resulting in a significant
price reduction to the Company. The Company subsequently
notified ArcelorMittal that the Company believes that ArcelorMittal’s
actions are a breach of these contracts and that the Company will take all
necessary and appropriate actions to protect its legal rights to collect
all amounts, which have been invoiced strictly according to the terms of
valid and legally binding contracts. Discussions between the
parties continue but it is possible that the parties may need to resort to
third-party resolution of this issue. Should discussions
between the parties reach an impasse or require third-party resolution,
the collection of the unpaid fixed-fee component of the Company’s billings
could be delayed. As of March 31, 2009,
|
|
accounts
receivable of approximately $4 million of fixed fee billings, related to
this contractual breach, had not been approved for payment by
ArcelorMittal. The Company assesses the collectability of
receivables on a monthly basis and would be required to record an
allowance against such receivables if there comes a point when
collectability is no longer reasonably assured. Should the Company
be required to record such an allowance, it would have a negative impact
on the results of operations for the specific period in which the expense
was recorded. Additionally, should the Company reach the point that
it believed collectability was not reasonably assured, it would be
required to adjust its revenue recognition practices to recognize future
amounts billed on a cash basis, rather than the accrual basis, until such
time as collectability once again became reasonably
assured. ArcelorMittal represented approximately 10% of the
Company’s sales in the years ended December 31, 2008, 2007 and
2006. Sales to ArcelorMittal were less than 10% of the
Company’s sales in the first quarter of 2009 due primarily to reduced
steel production levels; the Company’s exiting a number of underperforming
contracts with ArcelorMittal; and a stronger U.S. dollar. The
Company expects ArcelorMittal sales throughout 2009 to continue to
represent less than 10% of the Company’s sales for similar
reasons. It is possible that the eventual outcome of this
alleged breach of contract could negatively impact the Company’s long-term
relationship with this customer and, as a result, the Company’s financial
position, results of operations and cash flows could be negatively
impacted. Of all of the Company’s major customers in the Harsco
Metals Segment, the EVA on contracts with ArcelorMittal are the lowest in
the portfolio. Contracts with ArcelorMittal are long-term
contracts, such that any impact on the Company’s future results of
operations would occur over a number of
years.
|
All Other
Category – Harsco Minerals
& Rail:
·
|
The
Company will emphasize prudent global expansion of its reclamation and
recycling value-added services for extracting high-value metallic content
from slag and responsibly handling and recycling residual
materials.
|
·
|
Low
metal prices and historical low production levels will continue to have a
negative effect on certain reclamation and recycling services in 2009,
which may adversely affect the revenues, operating income, cash flows and
asset valuations of this business.
|
·
|
Certain
businesses in this Category are dependant 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 arise from
the American Recovery and Reinvestment Act of 2009 as many states have
started listing 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. A large
multi-year equipment order with China is an example of the underlying
strength of the international markets. Due to long lead-times,
this order, signed in 2007, is expected to generate most of its revenues
during 2009 through 2011. 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 expected in the second half of
2009. Overall sales are expected to be negatively impacted by a
lower level of industrial demand for natural gas expected throughout 2009
and possibly into 2010 as a result of the global
recession.
|
Results
of Operations
|
|
Three
Months
Ended
March 31
|
|
(Dollars
are in millions, except per share and percentages)
|
|
2009
|
|
|
2008
(a)
|
|
Revenues
from continuing operations
|
|
$ |
696.9 |
|
|
$ |
987.8 |
|
Cost
of services and products sold
|
|
|
536.9 |
|
|
|
731.0 |
|
Selling,
general and administrative expenses
|
|
|
125.0 |
|
|
|
156.6 |
|
Other
income
|
|
|
(2.8 |
) |
|
|
(0.3 |
) |
Operating
income from continuing operations
|
|
|
37.2 |
|
|
|
99.4 |
|
Interest
expense
|
|
|
15.3 |
|
|
|
17.1 |
|
Income
tax expense from continuing operations
|
|
|
1.5 |
|
|
|
24.2 |
|
Income
from continuing operations
|
|
|
21.0 |
|
|
|
59.4 |
|
Income
(loss) from discontinued operations
|
|
|
(1.2 |
) |
|
|
0.1 |
|
Net
income attributable to Harsco Corporation
|
|
|
18.6 |
|
|
|
57.0 |
|
Diluted
earnings per common share from continuing operations
|
|
|
0.2 |
5 |
|
|
0.6 |
7 |
Diluted
earnings per common share
|
|
|
0.2 |
3 |
|
|
0.6 |
7 |
Effective
income tax rate for continuing operations
|
|
|
6.7 |
% |
|
|
29.0 |
% |
(a)
|
On
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Statements-an
amendment
to ARB No. 51,” that required 2008 to be retrospectively adjusted for
comparative purposes.
|
Comparative
Analysis of Consolidated Results
Revenues
Revenues
for the first quarter of 2009 decreased $290.9 million or 29% from the first
quarter of 2008. The decrease was attributable to the following
significant items:
Changes
in Revenues – 2009 vs. 2008
|
|
First
Quarter
|
|
(In
millions)
|
|
|
|
Effect
of foreign currency translation.
|
|
$ |
(140.4 |
) |
Net
decreased volume (excluding acquisitions) in the Harsco Metals Segment
principally due to the deterioration of the global steel markets and
decline in steel production.
|
|
|
(104.7 |
) |
Net
decreased volume (excluding acquisitions) in the Harsco Infrastructure
Segment principally due to weaker demand in the United
Kingdom.
|
|
|
(37.6 |
) |
Decreased
revenues of the reclamation and recycling business due to commodity
pricing.
|
|
|
(13.0 |
) |
Decreased
revenues in the industrial grating products business due to weaker
demand.
|
|
|
(6.0 |
) |
Increased
revenues of the air-cooled heat exchangers business due to a strong
natural gas market.
|
|
|
5.1 |
|
Effect
of business acquisitions in the Harsco Infrastructure
Segment.
|
|
|
1.7 |
|
Other
(minor changes across the various units not already
mentioned).
|
|
|
4.0 |
|
Total
Change in Revenues – 2009 vs. 2008
|
|
$ |
(290.9 |
) |
Cost
of Services and Products Sold
Cost of
services and products sold for the first quarter of 2009 decreased $194.1
million, or 27%, from the first quarter of 2008. This decrease was
attributable to the following significant items:
Changes
in Cost of Services and Products Sold – 2009 vs. 2008
|
|
First
Quarter
|
|
(In
millions)
|
|
|
|
Effect
of foreign currency translation.
|
|
$ |
(103.0 |
) |
Decreased
costs due to lower revenues, reduced spending and cost containment
(exclusive of the effect of foreign currency translation and business
acquisitions, and including the impact of increased commodity costs
included in selling prices).
|
|
|
(104.4 |
) |
Effect
of business acquisitions.
|
|
|
1.1 |
|
Other
(product/service mix and increased equipment maintenance costs, partially
offset by enterprise business optimization initiatives and volume-related
efficiencies).
|
|
|
12.2 |
|
Total
Change in Cost of Services and Products Sold – 2009 vs.
2008
|
|
$ |
(194.1 |
) |
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the first quarter of 2009 decreased
$31.6 million or 20% from the first quarter of 2008. The decrease was
attributable to the following significant items:
Changes
in Selling, General and Administrative
Expenses
– 2009 vs. 2008
|
|
First
Quarter
|
|
(In
millions)
|
|
|
|
Effect
of foreign currency translation.
|
|
$ |
(23.4 |
) |
Reduced
travel expenses due to discretionary spending reductions.
|
|
|
(2.5 |
) |
Decreased
compensation expense due principally to lower employee incentive plan
costs and restructuring actions.
|
|
|
(2.4 |
) |
Lower
professional fees.
|
|
|
(1.5 |
) |
Decreased
commissions resulting from change in price/mix of products
sold.
|
|
|
(1.0 |
) |
Effect
of business acquisitions.
|
|
|
0.5 |
|
Other
(due to spending reductions).
|
|
|
(1.3 |
) |
Total
Change in Selling, General and Administrative Expenses – 2009 vs.
2008
|
|
$ |
(31.6 |
) |
Other
Income
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 income increased from $0.3
million in the first quarter of 2008 to $2.8 million in the first quarter of
2009 due principally to a $3.3 million increase in gains on the sale of non-core
assets.
Interest
Expense
Interest
expense for the first quarter of 2009 decreased $1.8 million or 11% from the
first quarter of 2008. This decrease was principally due to foreign
currency translation that lowered interest expense by $2.3 million.
Income
Tax Expense from Continuing Operations
Income
tax expense from continuing operations decreased $22.7 million or 94% for the
first quarter of 2009 compared with the first quarter of 2008. This
was due to decreased earnings from continuing operations and a decrease in the
effective income tax rate from continuing operations to 6.7% for the first
quarter of 2009 compared with 29.0% for the first quarter of
2008. The decrease in the effective income tax rate for the first
quarter of 2009 was due in part to a decline in earnings in jurisdictions with
higher tax rates. The effective tax rate also reflects net discrete
benefits of $4.2 million that related primarily to a change in the Company’s
decision to permanently reinvest additional earnings for certain non-US
subsidiaries which were previously not considered permanently
reinvested.
Income
from Continuing Operations
Income
from continuing operations decreased $38.4 million or 65% in the first quarter
of 2009 compared with the first quarter of 2008. This decrease
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.
Income
(loss) from Discontinued Operations
The loss
from discontinued operations totaled $1.2 million in the first quarter of 2009
compared to income of $0.1 million in the first quarter of
2008. Discontinued operations consisted of the Company’s Gas
Technologies Segment, the sale of which was completed in December
2007.
Net
Income Attributable to Harsco Corporation and Earnings Per Share
Net
income attributable to Harsco Corporation of $18.6 million and diluted earnings
per share of $0.23 in the first quarter of 2009 were lower than the first
quarter of 2008 by $38.4 million or 67% and $0.44 or 66%,
respectively. These decreases are primarily due to decreased income
from continuing operations for the reasons described above.
Liquidity
and Capital Resources
Overview
Global
financial markets have been under stress due to poor lending and investment
practices and sharp declines in real estate values. As a result,
broad-based tightening of credit conditions has occurred which has restrained
economic growth. In response to these changes in the 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. Despite the tightening of credit markets
around the world, the Company continues to have significant 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 quarter of 2009, the Company generated $39.6 million in operating
cash, 24% higher than the $32.0 million in the first quarter of
2008. This increase was primarily due to lower receivables as a
result of reduced sales volume and improved collection efforts, coupled with
reduced spending on inventory based on current market demand. These
increases were partially offset by lower net income and reduced spending levels
resulting in lower accounts payable.
In the
first quarter of 2009, the Company invested $36.0 million in capital
expenditures (49% of which were for revenue-growth projects) and paid $15.6
million in stockholder dividends.
The
Company’s net cash borrowings decreased $10.9 million in the first quarter of
2009. Balance sheet debt, which is affected by foreign currency
translation, decreased $17.1 million from December 31, 2008. The debt
to total capital ratio increased from 41.1% at December 31, 2008 to 41.9% at
March 31, 2009 as a result of lower equity due to the effects of foreign
currency translation.
Despite
global economic conditions, the Company’s strategic objectives for 2009 include
the continued generation of strong operating cash flows. 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, particularly in the
services businesses. 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 operating
cash. Depreciation expense related to these investments is a non-cash
charge. The Company also continues to maintain working capital at a
manageable level based upon the requirements and seasonality of the
business.
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 also available
throughout the world. The company expects to utilize both the public debt
markets and bank facilities to meet its cash requirements in the
future.
The
following table illustrates the amounts outstanding under credit facilities and
commercial paper programs and available credit as of March 31,
2009:
Summary
of Credit Facilities and Commercial Paper Programs
|
|
|
|
(In
millions)
|
|
Facility
Limit
|
|
|
Outstanding
Balance
|
|
|
Available
Credit
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
commercial paper program
|
|
$ |
550.0 |
|
|
$ |
75.7 |
|
|
$ |
474.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
commercial paper program
|
|
|
263.9 |
|
|
|
6.6 |
|
|
|
257.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-year
revolving credit facility (a)
|
|
|
450.0 |
|
|
|
— |
|
|
|
450.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
364-day
revolving credit facility (a)
|
|
|
220.0 |
|
|
|
— |
|
|
|
220.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bilateral
credit facility (b)
|
|
|
30.0 |
|
|
|
— |
|
|
|
30.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
at March 31, 2009
|
|
$ |
1,513.9 |
|
|
$ |
82.3 |
|
|
$ |
1,431.6 |
(c) |
|
(a)
|
U.S.
– based program.
|
|
(b)
|
International-based
program.
|
|
(c)
|
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 as of March 31,
2009:
|
Long-term
Notes
|
U.S.–Based
Commercial Paper
|
Outlook
|
|
|
|
|
Standard
& Poor’s (“S&P”)
|
A-
|
A-2
|
Stable
|
Moody’s
|
A3
|
P-2
|
Negative
|
Fitch
|
A-
|
F2
|
Stable
|
The
Company’s euro-based commercial paper program has not been rated since the euro
market does not require it. Fitch and Standard & Poor’s ratings
were reaffirmed in August 2008 and April 2009, respectively. In
January 2009, Moody’s reaffirmed the Company’s long-term notes and U.S. based
commercial paper ratings, but changed its outlook from stable to
negative. Any continued tightening of the credit markets, which began
during 2007 and significantly accelerated in 2008, may adversely impact the
Company’s access to capital and the associated costs of borrowing; however this
is somewhat mitigated by the Company’s strong financial position. A
downgrade to the Company’s credit ratings would probably increase borrowing
costs to the Company, while an improvement in the Company’s credit ratings would
probably decrease borrowing costs to the Company. 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)
|
|
March
31
2009
|
|
|
December
31
2008
|
|
|
Increase
(Decrease)
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
69.2 |
|
|
$ |
91.3 |
|
|
$ |
(22.1 |
) |
Trade
accounts receivable, net
|
|
|
611.6 |
|
|
|
648.9 |
|
|
|
(37.3 |
) |
Other
receivables, net
|
|
|
30.9 |
|
|
|
46.0 |
|
|
|
(15.1 |
) |
Inventories
|
|
|
308.2 |
|
|
|
309.5 |
|
|
|
(1.3 |
) |
Other
current assets
|
|
|
99.0 |
|
|
|
104.5 |
|
|
|
(5.5 |
) |
Assets
held-for-sale
|
|
|
2.3 |
|
|
|
5.3 |
|
|
|
(3.0 |
) |
Total
current assets
|
|
|
1,121.2 |
|
|
|
1,205.5 |
|
|
|
(84.3 |
) |
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable and current maturities
|
|
|
110.7 |
|
|
|
121.1 |
|
|
|
(10.4 |
) |
Accounts
payable
|
|
|
216.3 |
|
|
|
262.8 |
|
|
|
(46.5 |
) |
Accrued
compensation
|
|
|
63.7 |
|
|
|
85.2 |
|
|
|
(21.5 |
) |
Income
taxes payable
|
|
|
24.0 |
|
|
|
13.4 |
|
|
|
10.6 |
|
Other
current liabilities
|
|
|
384.0 |
|
|
|
405.9 |
|
|
|
(21.9 |
) |
Total
current liabilities
|
|
|
798.7 |
|
|
|
888.4 |
|
|
|
(89.7 |
) |
Working
Capital
|
|
$ |
322.5 |
|
|
$ |
317.1 |
|
|
$ |
5.4 |
|
Current
Ratio
|
|
1.4:1
|
|
|
1.4:1
|
|
|
|
|
|
Working
capital increased 2% in the first quarter of 2009 due principally to the
following factors:
·
|
Cash
decreased $22.1 million principally due to the Company’s objective to
efficiently use cash by reducing global cash balances to pay debt, as well
as foreign currency translation.
|
·
|
Net
trade accounts receivable decreased $37.3 million primarily due to foreign
currency translation, improved collection efforts and reduced sales volume
in the first quarter of 2009.
|
·
|
Other
receivables, net, decreased $15.1 million primarily due to collections of
insurance proceeds related to insured claims settled during the first
quarter of 2009.
|
·
|
Notes
payable and current maturities decreased $10.4 million due to reduced
levels of short-term commercial paper borrowings, other short-term
borrowings, and foreign currency
translation.
|
·
|
Accounts
payable decreased $46.5 million primarily due to reduced spending levels
and foreign currency translation.
|
·
|
Accrued
compensation decreased $21.5 million due principally to the payment of
incentive compensation earned during
2008.
|
·
|
Other
current liabilities decreased $21.9 million due principally to payments
for insurance settlements; utilization or payments on existing accruals
and foreign currency translation; partially offset by advances on
contracts within the railway track maintenance services and equipment
business and accrued interest.
|
Certainty of Cash Flows – The
certainty of the Company’s future cash flows is underpinned by the long-term
nature of the Company’s metals services contracts and the strong discretionary
cash flows (operating cash flows in excess of the amounts necessary for capital
expenditures to maintain current revenue levels) generated by the
Company. Traditionally the Company has utilized these discretionary
cash flows for growth-related capital expenditures. At December 31,
2008, the Company’s metals services contracts had estimated future revenues of
$4.1 billion. In addition, as of March 31, 2009, the Company had an
order backlog of $597.9 million in its All Other Category (Harsco Minerals &
Rail). This compares with $639.7 million as of December 31,
2008. The railway track maintenance services and equipment business
backlog includes a significant portion that will not be realized until later in
2009 and 2010 due to the long lead-time necessary to build certain equipment,
and the long-term nature of certain service contracts. Order backlog
for scaffolding, shoring and forming services; for roofing granules and slag
abrasives; and the reclamation and recycling services of high-value content from
steelmaking slag is excluded from the above amounts. These amounts
are generally not quantifiable due to the short order lead times for certain
services, the nature and timing of the products and services provided and
equipment rentals with the ultimate length of the rental period
unknown.
The types
of products and services that the Company provides are not subject to rapid
technological change, which increases the stability of related cash
flows. Additionally, each of the Company’s businesses, in its
balanced portfolio, is among the top three companies (relative to sales) in the
industries 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
|
|
Three
Months Ended
March
31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
39.6 |
|
|
$ |
32.0 |
|
Investing
activities
|
|
|
(31.4 |
) |
|
|
(107.1 |
) |
Financing
activities
|
|
|
(26.5 |
) |
|
|
61.4 |
|
Effect of exchange rate changes on
cash
|
|
|
(3.8 |
) |
|
|
6.8 |
|
Net change in cash and cash
equivalents
|
|
$ |
(22.2 |
)
(a) |
|
$ |
(6.9 |
) |
(a) Does
not total due to rounding
Cash From Operating Activities
– Net cash provided by operating activities in the first quarter of 2009
was $39.6 million, an increase of $7.6 million from 2008. The
increase was primarily due to the following:
·
|
Improved
collection efforts on trade receivables coupled with reduced sales
volume.
|
·
|
Reducing
spending on inventory throughout the Company based upon current market
demand.
|
These
benefits were partially offset by the following:
·
|
Lower
net income in 2009 as compared with
2008.
|
·
|
Increased
net accounts payable payments in
2009.
|
Cash Used in Investing Activities
– In the first quarter of 2009, cash used in investing activities was
$31.4 million consisting primarily of capital investments of $36.0
million. Capital investments declined $83.8 million compared to 2008,
reflecting management’s initiatives to conserve capital and enhance liquidity
through prudent reduction of capital investments. Growth capital
constituted 49% of investments made in the first quarter of 2009, with
investments made predominantly in the industrial services
businesses. Throughout the remainder of 2009, 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 will shift more 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
as of March 31, 2009 and December 31, 2008.
(Dollars
are in millions)
|
|
March
31
2009
|
|
|
December
31
2008
(a)
|
|
Notes
Payable and Current Maturities
|
|
$ |
110.7 |
|
|
$ |
121.1 |
|
Long-term
Debt
|
|
|
885.1 |
|
|
|
891.8 |
|
Total
Debt
|
|
|
995.8 |
|
|
|
1,012.9 |
|
Total
Equity
|
|
|
1,381.4 |
|
|
|
1,450.0 |
|
Total
Capital
|
|
$ |
2,377.2 |
|
|
$ |
2,462.9 |
|
Total
Debt to Total Capital
|
|
|
41.9 |
% |
|
|
41.1 |
% |
(a)
December 2008 Equity has been retrospectively adjusted in accordance
with FAS 160 to include Noncontrolling Interest as a component of
Equity.
The
Company’s debt as a percent of total capital as of March 31, 2009 increased from
December 31, 2008. The increase results principally from a decline in
total equity due to negative foreign currency translation effects from the
strengthening U.S. dollar, partially offset by the reduction in debt during the
March 2009 quarter. Overall debt decreased primarily due to lower
capital expenditures for growth initiatives, and to a lesser extent, due to
foreign currency translation resulting from the strengthening of the U.S. dollar
in comparison with the euro and the British pound sterling.
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 March 31, 2009, the Company was in
compliance with these covenants with a debt to capital ratio of 41.9% and total
net worth of $1.4 billion. Based on balances at March 31, 2009, the
Company could increase borrowings by approximately $1,075.9 million and still be
within its debt covenants. Alternatively, keeping all other factors
constant, the Company’s equity could decrease by approximately $717.6 million
and the Company would still be within its covenants. Additionally,
the Company’s 7.25% British pound sterling-denominated notes, due
October 27, 2010, and its 5.75% notes, due May 2018, also include
covenants that permit the note holders to redeem their notes, at par and 101% of
par, respectively, in the event of a change of control of the Company or
disposition of a significant portion of the Company’s assets in combination with
the Company’s credit rating downgraded to non-investment grade. The
Company expects to 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 expected to significantly decline from 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 pension expense is included for EVA
purposes). Therefore, value is created when a project or initiative
produces a return above the cost of capital. In the first quarter of
2009, EVA was lower compared with the first quarter of 2008 due 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 February 2009, the Company paid its 235th
consecutive quarterly cash dividend. In February 2009, the Company
declared its 236th
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.
New
Financial Accounting Standards Issued
Information
on new financial accounting standards issued is included in Note J, “New
Financial Accounting Standards Issued,” in Part I, Item 1, Financial
Statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See Part
II, Item 1A, “Risk Factors,” for quantitative and qualitative disclosures about
market risk.
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 March 31, 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 first quarter of 2009.
Information
on legal proceedings is included under Part I, Item 1, Note G labeled
“Commitments and Contingencies.”
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 severely diminished liquidity and 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
|
|
|
|
|
|
|
|
|
|
January
1, 2009 – January 31, 2009
|
|
—
|
|
—
|
|
—
|
|
1,536,647
|
February
1, 2009 – February 28, 2009
|
|
—
|
|
—
|
|
—
|
|
1,536,647
|
March
1, 2009 – March 31, 2009
|
|
—
|
|
—
|
|
—
|
|
1,536,647
|
|
|
|
|
|
|
|
|
|
Total
|
|
—
|
|
—
|
|
—
|
|
|
The
Company’s share repurchase program was extended by the Board of Directors in
September 2008. At that time, the Board authorized an increase of
4,000,000 shares to the 946,367 remaining from the Board’s previous stock
repurchase authorization. The repurchase program expires January 31,
2010.
None.
The
annual meeting of stockholders was held on April 28,
2009. Stockholders voted on the following matters:
·
|
Ten
nominees were elected to the Board of Directors to terms expiring in 2010
under the declassified Board structure approved at the 2005 annual
meeting:
|
|
Name
|
For
No. of Shares
|
Withheld
No. of Shares
|
|
G.
D. H. Butler
|
64,917,625
|
5,375,244
|
|
K.
G. Eddy
|
69,400,696
|
892,173
|
|
S.
D. Fazzolari
|
65,062,684
|
5,230,185
|
|
S.
E. Graham
|
67,298,916
|
2,993,953
|
|
T.
D. Growcock
|
69,468,410
|
824,459
|
|
H.
W. Knueppel
|
67,462,250
|
2,830,619
|
|
D.
H. Pierce
|
69,600,299
|
692,570
|
|
J.
I. Scheiner
|
65,267,697
|
5,025,172
|
|
A.
J. Sordoni, III
|
58,326,758
|
11,966,111
|
|
R.
C. Wilburn
|
58,268,112
|
12,024,757
|
·
|
The
material terms for performance-based awards for Section 162(m) purposes
under the Amended and Restated 1995 Executive Incentive Compensation Plan,
as amended to date, were
reapproved:
|
|
For
No. of Shares
|
Against
No. of Shares
|
Abstentions
No. of Shares
|
|
58,861,611
|
3,430,403
|
548,491
|
·
|
The
appointment by the Audit Committee of the Board of Directors of
PricewaterhouseCoopers LLP as independent auditors to audit the accounts
of the Company for the fiscal year ending December 31, 2009, was
ratified:
|
|
For
No. of Shares
|
Against
No. of Shares
|
Abstentions
No. of Shares
|
|
64,776,216
|
5,115,968
|
400,684
|
DIVIDEND
INFORMATION
On
February 24, 2009, the Company’s Board of Directors declared a quarterly cash
dividend of $0.20 per share, payable May 15, 2009, to stockholders of record as
of April 15, 2009.
ELECTION OF CHAIRMAN OF THE
BOARD
Following
the Annual Meeting of Stockholders on April 28, 2009, the Company’s Board of
Directors re-elected Salvatore D. Fazzolari as Chairman and CEO of the
Company.
COMMON STOCK OPTION
DISCLOSURE
Salvatore
D. Fazzolari, the Company’s Chairman and CEO, holds options to purchase 40,000
shares of the Company’s common stock that will expire in January 2010. The
Company anticipates that Mr. Fazzolari will take steps to exercise such options
prior to their expiration date.
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)
|
|
|
|
|
|
|
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
|
May
7, 2009
|
|
/S/
Stephen J. Schnoor
|
|
|
|
|
Stephen
J. Schnoor
|
|
|
|
|
Senior
Vice President and
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
DATE
|
May
7, 2009
|
|
/S/
Richard M. Wagner
|
|
|
|
|
Richard
M. Wagner
|
|
|
|
|
Vice
President and Controller
|
|
|
|
|
|
|