| (1) | (xi) | The expense for product development activities was $2.8 million, $4.0 million and $5.7 million in 2003, 2002 and 2001,
respectively.
(1)(xii) The Company has become subject, as have others, to stringent air
and water quality control legislation. In general, the Company
has not experienced substantial difficulty complying with these
environmental regulations in the past, and does not anticipate
making any material capital expenditures for environmental
control facilities. While the Company expects that environmental
regulations may expand, and that its expenditures for air and
water quality control will continue, it cannot predict the
effect on its business of such expanded regulations. For
additional information regarding environmental matters see Note
10, Commitments and Contingencies, to the Consolidated Financial
Statements included in Part II, Item 8, "Financial Statements
and Supplementary Data."
(1)(xiii) As of December 31, 2003, the Company had approximately 17,500
employees.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations is included in
Note 14, Information by Segment and Geographic Area, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data." Export sales totaled $108.5 million, $76.6 million and
$84.3 million in 2003, 2002 and 2001, respectively.
ITEM 2. PROPERTIES
Information as to the principal plants owned and operated by the Company is
summarized in the following table:
LOCATION PRINCIPAL PRODUCTS
-----------------------------------------------------------------------------
Access Services Segment
-----------------------
Marion, Ohio Access Equipment Maintenance
Dosthill, United Kingdom Access Equipment Maintenance
Gas and Fluid Control Segment
-----------------------------
Catoosa, Oklahoma Heat Exchangers
Lockport, New York Valves
Niagara Falls, New York Valves
Washington, Pennsylvania Valves
Bloomfield, Iowa Propane Tanks
Fremont, Ohio Propane Tanks
Jesup, Georgia Propane Tanks
West Jordan, Utah Propane Tanks
Harrisburg, Pennsylvania High Pressure Cylinders
Huntsville, Alabama High Pressure Cylinders
Beijing, China Cryogenic Storage Vessels
Jesup, Georgia Cryogenic Storage Vessels
Kosice, Slovakia Cryogenic Storage Vessels
Shah Alam, Malaysia Cryogenic Storage Vessels
Theodore, Alabama Cryogenic Storage Vessels
Other Infrastructure Products and Services
------------------------------------------
("all other") Category
----------------------
Drakesboro, Kentucky Roofing Granules/Abrasives
Gary, Indiana Roofing Granules/Abrasives
Moundsville, West Virginia Roofing Granules/Abrasives
-6-
LOCATION PRINCIPAL PRODUCTS
-----------------------------------------------------------------------------
Brendale, Australia Railroad Equipment
Fairmont, Minnesota Railroad Equipment
Ludington, Michigan Railroad Equipment
West Columbia, South Carolina Railroad Equipment
Channelview, Texas Grating
Leeds, Alabama Grating
Nashville, Tennessee Grating
Queretaro, Mexico Grating
East Stroudsburg, Pennsylvania Process Equipment
=============================================================================
The Company also operates the following plants which are leased:
LOCATION PRINCIPAL PRODUCTS
-----------------------------------------------------------------------------
Access Services Segment
-----------------------
Maldon, United Kingdom Aluminum Access Products
DeLimiet, Netherlands Access Equipment Maintenance
Gas and Fluid Control Segment
-----------------------------
Cleveland, Ohio Brass Castings
Catoosa, Oklahoma Heat Exchangers
Sapulpa, Oklahoma Heat Exchangers
Pomona, California Composite Cylinders
Other Infrastructure Products and Services
------------------------------------------
("all other") Category
----------------------
Eastwood, United Kingdom Railroad Equipment
Marlboro, New Jersey Grating
Tulsa, Oklahoma Grating
=============================================================================
The Company operates from a number of other plants, branches, warehouses and
offices in addition to the above. The Company has approximately 160 locations
related to mill services in over 30 countries; however since these facilities
are on the property of the steel mill being serviced they are not listed. The
Company considers all of its properties at which operations are currently
performed to be in satisfactory condition and suitable for operations.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is included in Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II, Item 8,
"Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
covered by this report.
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF REGISTRANT (PURSUANT TO INSTRUCTION 3
TO ITEM 401(B) OF REGULATION S-K)
Set forth below, as of March 11, 2004, are the executive officers (this excludes
one corporate officer who is not deemed an "executive officer" within the
meaning of applicable Securities and Exchange Commission regulations) of the
Company and certain information with respect to each of them. The executive
officers were elected to their respective offices on April 29, 2003, or at
various times during the year as noted. All terms expire on April 27, 2004.
There are no family relationships between any of the executive officers.
-7-
NAME AGE PRINCIPAL OCCUPATION OR EMPLOYMENT
- ---- --- ----------------------------------
EXECUTIVE OFFICERS:
D. C. Hathaway 59 Chairman, President and Chief Executive Officer of
the Corporation since July 31, 2000. Chairman and
Chief Executive Officer from January 1, 1998 to
July 31, 2000. Served as Chairman, President and
Chief Executive Officer from April 1, 1994 to
December 31, 1997 and President and Chief Executive
Officer from January 1, 1994 to April 1, 1994.
Director since 1991. From 1991 to 1993, served as
President and Chief Operating Officer. From 1986 to
1991 served as Senior Vice President-Operations of
the Corporation. Served as Group Vice President
from 1984 to 1986 and as President of the Dartmouth
Division of the Corporation from 1979 until 1984.
G. D. H. Butler 57 Senior Vice President - Operations of the
Corporation effective September 26, 2000 and
Director since January 2002. Concurrently serves as
President of the MultiServ and SGB Divisions. From
September 2000 through December 2003, he was
President of the Heckett MultiServ International
and SGB Divisions. Was President of the Heckett
MultiServ-East Division from July 1, 1994, to
September 26, 2000. Served as Managing Director -
Eastern Region of the Heckett MultiServ Division
from January 1, 1994 to June 30, 1994. Served in
various officer positions within MultiServ
International, N. V. prior to 1994 and prior to
Harsco's acquisition of that corporation in August
1993.
S. D. Fazzolari 51 Senior Vice President, Chief Financial Officer and
Treasurer of the Corporation effective August 24,
1999 and Director since January 2002. Served as
Senior Vice President and Chief Financial Officer
from January 1998 to August 1999. Served as Vice
President and Controller from January 1994 to
December 1997 and as Controller from January 1993
to January 1994. Previously served as Director of
Auditing from 1985 to 1993 and served in various
auditing positions from 1980 to 1985.
R. W. Kaplan 52 Vice President of the Corporation effective January
1, 2004. Concurrently serves as President of the
Harsco Gas & Fluid Control Group. Served as Senior
Vice President - Operations of the Corporation from
July 1, 1998 to December 31, 2003. Prior to that,
he was President of the Taylor-Wharton Gas
Equipment Division from February 1, 1994 to
November 16, 1999. Served as Vice President and
Treasurer of the Corporation from January 1992 to
February 1994. Served as Treasurer of the
Corporation from May 1991 to December 1992.
Previously served as Vice President and General
Manager of the Plant City Steel/Taylor-Wharton
Division from 1987 to 1991 and Vice President and
Controller of the Division from 1985 to 1987.
Previously served in various Corporate
treasury/financial positions since 1979.
M. E. Kimmel 44 General Counsel and Corporate Secretary effective
January 1, 2004. Served as Corporate Secretary and
Assistant General Counsel from May 1, 2003 to
December 31, 2003. Held various legal positions
within the Corporation since he joined the Company
in August, 2001. Prior to joining Harsco, he was
Vice President, Administration and General Counsel,
New World Pasta Company from January 1, 1999 to
July 2001. Before joining New World Pasta, Mr.
Kimmel spent approximately 12 years in various
legal positions with Hershey Foods Corporation.
S. J. Schnoor 50 Vice President and Controller of the Corporation
effective May 15, 1998. Served as Vice President
and Controller of the Patent Construction Systems
Division from February 1996 to May 1998 and as
Controller of the Patent Construction Systems
Division from January 1993 to February 1996.
Previously served in various auditing positions for
the Corporation from 1988 to 1993. Prior to joining
Harsco, he served in various auditing positions for
Coopers & Lybrand from September 1985 to April
1988.
-8-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Harsco common stock is listed on the New York and Pacific Stock Exchanges, and
also trades on the Boston and Philadelphia Exchanges under the symbol HSC. At
the end of 2003, there were 40,866,470 shares outstanding. In 2003, the stock
traded in a range of $27.50 to $44.39 and closed at $43.82 at year-end. At
December 31, 2003 there were approximately 17,000 shareholders. There are no
significant limitations on the payment of dividends included in the Company's
loan agreements. For additional information regarding Harsco common stock market
price and dividends declared, see Dividend Action under Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Common Stock Price and Dividend Information under Part II,
Item 8, "Financial Statements and Supplementary Data."
ITEM 6. SELECTED FINANCIAL DATA (A)
FIVE-YEAR STATISTICAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE INFORMATION) 2003 2002 2001 2000(b) 1999
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT INFORMATION
Revenues from continuing operations $ 2,118,516 $ 1,976,732 $ 2,025,163 $ 1,904,691 $ 1,649,092
Income from continuing operations 86,999 88,410 74,642 94,343 86,391
Income (loss) from discontinued operations 5,218 1,696 (2,917) 2,460 4,322
Net income 92,217 90,106 71,725 96,803 90,713
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AND CASH FLOW INFORMATION
Working capital $ 269,276 $ 228,552 $ 231,156 $ 181,489 $ 174,147
Total assets 2,138,035 1,999,297 2,090,766 2,180,948 1,659,823
Long-term debt 584,425 605,613 720,133 774,448 418,504
Total debt 613,531 639,670 762,115 837,473 455,343
Depreciation and 2000, respectively.
| (1) | (xii) | The Company has become subject, as have others,amortization 168,935 155,661 176,531 159,099 135,853
Capital expenditures 143,824 114,340 156,073 180,048 175,248
Cash provided by operating activities 262,788 253,753 240,601 259,448 213,953
Cash used by investing activities (144,791) (53,929) (125,213) (459,052) (194,674)
Cash provided (used) by financing activities (125,501) (205,480) (99,190) 210,746 (8,928)
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS
Return on sales(c) 4.1% 4.5% 3.7% 5.0% 5.2%
Return on average equity(d) 12.2% 12.6% 11.1% 14.4% 13.3%
Current ratio 1.5:1 1.5:1 1.5:1 1.3:1 1.4:1
Total debt to stringent air and water quality control legislation. In general, the Company has not experienced substantial difficulty in complying with these environmental regulations in the past, and does not anticipate making any material capital expenditures for environmental control facilities. While the Company expects that environmental regulations may expand, and that its expenditures for air and water quality control will continue, it cannot predict the effect on its business of such expanded regulations. For additional information regarding environmental matters see Note 10,
|
| | | Commitments and Contingencies, to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
|
| (1) | (xiii) | As of December 31, 2002, the Company had approximately 17,500 employees.
|
(d) Financial Information about Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestictotal capital(e) 44.1% 49.8% 52.6% 55.4% 41.2%
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
Basic - Income from continuing operations is included in Note 14, Information by Segment and Geographic Area, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data.” Export sales totaled $76.6 million and $84.3 million in 2002 and 2001, respectively.
Item 2. Properties
Information as to the principal plants owned and operated by the Company is summarized in the following table:
|
Location | Principal Products |
|---|
| Access Services | | | | Marion, Ohio | | Access Equipment Maintenance | | Dosthill, United Kingdom | | Forms | | | Gas and Fluid Control | | Catoosa, Oklahoma | | Heat Exchangers | | Lockport, New York | | Valves | | Niagara Falls, New York | | Valves | | Washington, Pennsylvania | | Valves | | Bloomfield, Iowa | | Propane Tanks | | Fremont, Ohio | | Propane Tanks | | Jesup, Georgia | | Propane Tanks | | West Jordan, Utah | | Propane Tanks | | Harrisburg, Pennsylvania | | High Pressure Cylinders | | Huntsville, Alabama | | High Pressure Cylinders | | Beijing, China | | Cryogenic Storage Vessels | | Husum, Germany | | Cryogenic Storage Vessels | | Jesup, Georgia | | Cryogenic Storage Vessels | | Kosice, Slovakia | | Cryogenic Storage Vessels | | Shah Alam, Malaysia | | Cryogenic Storage Vessels | | Theodore, Alabama | | Cryogenic Storage Vessels | | | Other Infrastructure Products and Services | | Drakesboro, Kentucky | | Roofing Granules/Abrasives | | Gary, Indiana | | Roofing Granules/Abrasives | | Moundsville, West Virginia | | Roofing Granules/Abrasives | | Brendale, Australia | | Railroad Equipment | | Fairmont, Minnesota | | Railroad Equipment | | Ludington, Michigan | | Railroad Equipment | | West Columbia, South Carolina | | Railroad Equipment | | Channelview, Texas | | Grating | | Leeds, Alabama | | Grating | | Nashville, Tennessee | | Grating | | Queretaro, Mexico | | Grating | | East Stroudsburg, Pennsylvania | | Process Equipment | |
|
6
The Company also operates the following plants which are leased:
|
Location | Principal Products |
|---|
| | Access Services | | | | Maldon, United Kingdom | | Aluminum Access Products | | DeLimiet, Netherlands | | Powered Access Equipment | | | Gas and Fluid Control | | Cleveland, Ohio | | Brass Castings | | Catoosa, Oklahoma | | Heat Exchangers | | Sapulpa, Oklahoma | | Heat Exchangers | | Pomona, California | | Composite Cylinders | | | Other Infrastructure Products and Services | | Eastwood, United Kingdom | | Railroad Equipment | | Marlboro, New Jersey | | Grating | | Tulsa, Oklahoma | | Grating | |
|
The Company operates$ 2.14 $ 2.19 $ 1.87 $ 2.36 $ 2.11
- Income (loss) from adiscontinued operations 0.13 .04 (.07) .06 .11
- Net income 2.27 2.23 1.80 2.42 2.22
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted - Income from continuing operations 2.12 2.17 1.86 2.36 2.11
- Income (loss) from discontinued operations 0.13 .04 (.07) .06 .10
- Net income 2.25 2.21 1.79 2.42 2.21
Book value 19.01 15.90 17.16 16.94 16.22
Cash dividends declared 1.0625 1.0125 .97 .945 .91
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Diluted average number of other plants, branches, warehouses and offices in addition to the above. The Company has approximately 150 locations related to mill services in over 30 countries; however since these facilities are on the propertyshares outstanding 40,973 40,680 40,066 40,022 41,017
Number of the steel mill being serviced they are not listed. The Company considers all of its properties at whichemployees 17,500 17,500 18,700 19,700 15,700
Backlog from continuing operations are currently performed to be in satisfactory condition and suitable for operations.
Item 3. Legal Proceedings
Information regarding legal proceedings is included in Note 10, Commitments and Contingencies, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data.”
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters that were submitted during the fourth quarter of the year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
Supplementary Item. Executive Officers of Registrant (Pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
Set forth below, as of March 20, 2003, are the executive officers (this excludes one corporate officer who is not deemed an “executive officer” within the meaning of applicable Securities and Exchange Commission regulations) of the Company and certain information with respect to each of them. The executive officers were elected to their respective offices on April 30, 2002, or at various times during the year as noted. All terms expire on April 29, 2003. There are no family relationships between any of the executive officers.
| (f) $ 186,222 $ 157,777 $ 214,124 $ 256,745 $ 227,541
===================================================================================================================================
Name | | Age | | Principal Occupation or Employment
|
D. C. Hathaway | | 58 | | Chairman, President and Chief Executive Officer of the Corporation since July 31, 2000. Chairman and Chief Executive Officer from January 1, 1998 to July 31, 2000. Served as Chairman, President and Chief Executive Officer from April 1, 1994 to December 31, 1997 and President and Chief Executive Officer from January 1, 1994 to April 1, 1994. Director since 1991. From 1991 to 1993, served as President and Chief Operating Officer. From 1986 to 1991 served as Senior Vice President-Operations of the Corporation. Served as Group Vice President from 1984 to 1986 and as President of the Dartmouth Division of the Corporation from 1979 until 1984.
|
Name | | Age | | Principal Occupation or Employment
|
G. D. H. Butler | | 56 | | Senior Vice President - Operations of the Corporation effective September 26, 2000 and Director since January 2002. Concurrently serves as President of the Heckett MultiServ International Division and President of the SGB Division. Was President of the Heckett MultiServ-East Division from July 1, 1994, to September 26, 2000. Served as Managing Director - Eastern Region of the Heckett MultiServ Division from January 1, 1994 to June 30, 1994. Served in various officer positions within MultiServ International, N. V. prior to 1994 and prior to Harsco's acquisition of that corporation in August 1993.
|
P. C. Coppock | | 52 | | Senior Vice President, Chief Administrative Officer, General Counsel and Secretary of the Corporation effective January 1, 1994. Served as Vice President, General Counsel and Secretary of the Corporation from May 1, 1991 to December 31, 1993. From 1989 to 1991 served as Secretary and Corporate Counsel and as Assistant Secretary and Corporate Counsel from 1986 to 1989. Served in various Corporate Attorney positions for the Corporation since 1981.
|
S. D. Fazzolari | | 50 | | Senior Vice President, Chief Financial Officer and Treasurer of the Corporation effective August 24, 1999 and Director since January 2002. Served as Senior Vice President and Chief Financial Officer from January 1998 to August 1999. Served as Vice President and Controller from January 1994 to December 1997 and as Controller from January 1993 to January 1994. Previously served as Director of Auditing from 1985 to 1993 and served in various auditing positions from 1980 to 1985.
|
R. W. Kaplan | | 51 | | Senior Vice President - Operations of the Corporation effective July 1, 1998. Concurrently serves as President of the Harsco Gas & Fluid Control Group and was President of the Taylor-Wharton Gas Equipment Division from February 1, 1994 to November 16, 1999. Served as Vice President and Treasurer of the Corporation from January 1992 to February 1994. Served as Treasurer of the Corporation from May 1991 to December 1992. Previously served as Vice President and General Manager of the Plant City Steel/Taylor-Wharton Division from 1987 to 1991 and Vice President and Controller of the Division from 1985 to 1987. Previously served in various Corporate treasury/financial positions since 1979.
|
S. J. Schnoor | | 49 | | Vice President and Controller of the Corporation effective May 15, 1998. Served as Vice President and Controller of the Patent Construction Systems Division from February 1996 to May 1998 and as Controller of the Patent Construction Systems Division from January 1993 to February 1996. Previously served in various auditing positions for the Corporation from 1988 to 1993.
|
8
PART II
Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters
Harsco common stock is traded on the New York, Pacific, Boston and Philadelphia Stock Exchanges under the symbol HSC. At the end of 2002, there were 40,539,400 shares outstanding. In 2002, the stock traded in a range of $24.20 to $44.48 and closed at $31.89 at year-end. At December 31, 2002 there were approximately 17,000 shareholders. There are no significant limitations on the payment of dividends included in the Company’s loan agreements. For additional information regarding Harsco common stock market price and dividends declared, see Dividend Action under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Common Stock Price and Dividend Information under Part II, Item 8, “Financial Statements and Supplementary Data.”
Item 6. Selected Financial Data (a)
Five-Year Statistical Summary
|
| (In thousands, except per share and employee information) | 2002 | 2001 | 2000 (b) | 1999 | 1998 |
|---|
| | Income Statement Information | | | | | | | | | | | | | Revenues from continuing operations | | $ 1,976,732 | | $ 2,025,163 | | $ 1,904,691 | | $ 1,649,092 | | $ 1,651,502 | | | Income from continuing operations | | 88,410 | | 74,642 | | 94,343 | | 86,391 | | 103,285 | | | Income (loss) from discontinued operations | | 1,696 | | (2,917 | ) | 2,460 | | 4,322 | | 4,228 | | | Net income | | 90,106 | | 71,725 | | 96,803 | | 90,713 | | 107,513 | |
| | Financial Position and Cash Flow Information | | | Working capital | | $ 228,552 | | $ 231,156 | | $ 181,489 | | $ 174,147 | | $ 101,226 | | | Total assets | | 1,999,297 | | 2,090,766 | | 2,180,948 | | 1,659,823 | | 1,623,581 | | | Long-term debt | | 605,613 | | 720,133 | | 774,448 | | 418,504 | | 309,131 | | | Total debt | | 639,670 | | 762,115 | | 837,473 | | 455,343 | | 363,737 | | | Depreciation and amortization | | 155,661 | | 176,531 | | 159,099 | | 135,853 | | 131,381 | | | Capital expenditures | | 114,340 | | 156,073 | | 180,048 | | 175,248 | | 159,816 | | | Cash provided by operating activities | | 253,753 | | 240,601 | | 259,448 | | 213,953 | | 189,260 | | | Cash used by investing activities | | (53,929 | ) | (125,213 | ) | (459,052 | ) | (194,674 | ) | (233,490 | ) | | Cash provided (used) by financing activities | | (205,480 | ) | (99,190 | ) | 210,746 | | (8,928 | ) | (134,324 | ) |
| | Ratios | | | Return on sales(c) | | 4.5 | % | 3.7 | % | 5.0 | % | 5.2 | % | 6.3 | % | | Return on average equity(d) | | 12.6 | % | 11.1 | % | 14.4 | % | 13.3 | % | 13.7 | % | | Current ratio | | 1.5:1 | | 1.5:1 | | 1.3:1 | | 1.4:1 | | 1.2:1 | | | Total debt to total capital(e) | | 49.8 | % | 52.6 | % | 55.4 | % | 41.2 | % | 34.7 | % |
| | Per Share Information | | | Basic - Income from continuing operations | | $ 2.19 | | $ 1.87 | | $ 2.36 | | $ 2.11 | | $ 2.27 | | | - Income (loss) from discontinued operations | | .04 | | (.07 | ) | .06 | | .11 | | .09 | | | - Net income | | 2.23 | | 1.80 | | 2.42 | | 2.22 | | 2.36 | | | |
| | Diluted - Income from continuing operations | | 2.17 | | 1.86 | | 2.36 | | 2.11 | | 2.25 | | | - Income (loss) from discontinued operations | | .04 | | (.07 | ) | .06 | | .10 | | .09 | | | - Net income | | 2.21 | | 1.79 | | 2.42 | | 2.21 | | 2.34 | | | Book value | | 15.90 | | 17.16 | | 16.94 | | 16.22 | | 16.22 | | | Cash dividends declared | | 1.0125 | | .97 | | .945 | | .91 | | .885 | |
| | Other Information | | | Diluted average number of shares outstanding | | 40,680 | | 40,066 | | 40,022 | | 41,017 | | 45,911 | | | Number of employees | | 17,500 | | 18,700 | | 19,700 | | 15,700 | | 15,300 | | | Backlog from continuing operations (f) | | $ 157,777 | | $ 214,124 | | $ 256,745 | | $ 227,541 | | $ 185,422 | |
|
(a) | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001, 2000, 1999 and 1998 information has been reclassified for comparative purposes.
|
(b) | Includes SGB Group Plc since date of acquisition (June 16, 2000).
|
(c) | “Return on sales”
(a) In order to comply with the Financial Accounting Standards Board (FASB)
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," 2001, 2000 and 1999 information has been reclassified for
comparative purposes.
(b) Includes SGB Group Plc which was acquired June 16, 2000.
(c) "Return on sales" is calculated by dividing income from continuing
operations by revenues from continuing operations.
(d) "Return on average equity" is calculated by dividing income from continuing
operations by quarterly weighted average equity.
(e) "Total debt to total capital" is calculated by dividing the sum of debt
(short-term borrowings and long-term debt including current maturities) by
the sum of equity and debt.
(f) Excludes the estimated amount of long-term mill service contracts, which
had estimated future revenues of $3.4 billion at December 31, 2003. Also
excludes backlog of the Access Services Segment. These amounts are
generally not quantifiable due to the nature and timing of the products and
services provided.
-9-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, as discussed more
fully herein.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include statements
about our management confidence and strategies for performance; expectations for
new and existing products, technologies, and opportunities; and expectations
regarding growth, sales, cash flows, earnings and Economic Value Added (EVA(R)).
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 the valuation of the assets in the Company's
pension plans and the accounting for pension assets, liabilities and expense;
(4) changes in governmental laws and regulations, including taxes and import
tariffs; (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 which the
Company operates due to political instability, civil disobedience, armed
hostilities or other calamities; and (7) other risk factors listed from time to
time in the Company's SEC reports. The Company cautions that these factors may
not be exhaustive and that many of these factors are beyond the Company's
ability to control or predict. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The Company undertakes no
duty to update forward-looking statements.
EXECUTIVE OVERVIEW
The Company's full year 2003 revenues and net cash provided by operating
activities reached record levels at $2.1 billion and $262.8 million,
respectively. Driving the revenues increase were strong results from the Mill
Services Segment which showed year-over-year revenues growth of $130.7 million
or 19%. Also contributing to the achievement of record revenues were increases
in the Access Services Segment of $31.2 million or 5%, and in the Harsco Track
Technologies (HTT) Division of $15.9 million or 10%. The positive effect of
foreign currency translation increased revenues in the Mill Services and Access
Services Segments by $76.7 million and $46.3 million, respectively.
Additionally, the positive effect of foreign currency translation increased 2003
consolidated revenues by $126.2 million when compared with 2002.
This strong revenues growth was somewhat tempered by increased pension expense;
the continued slowdown in the non-residential construction markets served by the
Company, which negatively impacted the operating income of the Access Services
Segment; and a continued depressed manufacturing environment in the U.S., which
negatively impacted the operating income of the Gas and Fluid Control Segment
and the IKG Industries Division. These factors contributed to a reduction in
operating income and income from continuing operations of $2.1 million and $1.4
million, respectively, when compared with 2002.
REVENUES BY REGION
- ----------------------------------------------------------------------------------------
TOTAL REVENUES
TWELVE MONTHS ENDED PERCENTAGE GROWTH FROM
DECEMBER 31 2002 TO 2003
(DOLLARS IN MILLIONS) 2003 2002 VOLUME CURRENCY TOTAL
- ----------------------------------------------------------------------------------------
U.S. $ 902.4 $ 903.2 (0.1)% 0.0% (0.1)%
Europe 873.8 773.6 (0.8) 13.8 13.0
Latin America 100.3 94.5 13.5 (7.4) 6.1
Asia - Pacific 88.1 73.9 6.3 12.9 19.2
Other 153.9 131.5 4.2 12.8 17.0
- ----------------------------------------------------------------------------------------
Total $2,118.5 $1,976.7 0.8% 6.4% 7.2%
========================================================================================
-10-
2003 HIGHLIGHTS
On a macro basis, the following significant items impacted the Company during
2003 in comparison with 2002:
Company Wide:
- -------------
o Increased pre-tax defined benefit pension expense of $17.4 million due to
the decline in equity markets prior to 2003 and lower interest rates which
affected the SFAS No. 87 pension expense computation for 2003.
o The benefit of foreign currency translation resulted in an overall increase
in pre-tax income of $11.9 million.
o A pre-tax benefit of $4.9 million from the termination of certain
postretirement benefit plans.
Mill Services Segment:
- ----------------------
(IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Revenues $ 827.5 $ 696.8
Operating income 85.9 73.5
==========================================================================
o The benefit of foreign currency translation resulted in increased revenues
and operating income of $76.7 million and $10.2 million, respectively.
o Continued strong volume and new business increased revenues and operating
income $30.2 million and $6.3 million, respectively.
o The acquisition of the industrial services unit of C. J. Langenfelder and
Sons, Inc. increased Segment revenues by $23.1 million.
o Pre-tax defined benefit pension expense increased $6.2 million.
Access Services Segment:
- ------------------------
(IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Revenues $ 619.1 $ 587.9
Operating income 37.4 41.7
==========================================================================
o Pre-tax defined benefit pension expense increased $7.5 million.
o The continued slowdown in the non-residential construction markets served
by the Company, especially in the U.S., resulted in decreased revenues and
operating income of $19.9 million and $6.3 million, respectively. This
slowdown had a significant negative effect on rental rates on equipment
rentals, which is the highest margin product line of this Segment.
o The benefit of foreign currency translation resulted in increased revenues
and operating income of $46.3 million and $3.3 million, respectively.
Gas and Fluid Control Segment:
- ------------------------------
(IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Revenues $ 335.1 $ 350.6
Operating income 17.0 23.0
==========================================================================
o Increased competition (from both international and domestic competitors)
and decreased demand for certain valves and composite-wrapped cylinders
reduced revenues and operating income by $30.2 million and $8.2 million,
respectively.
o Increased demand for propane tanks, cryogenics and cylinders increased
revenues and operating income by $12.5 million and $3.0 million,
respectively.
o Pre-tax defined benefit pension expense increased $1.6 million.
-11-
Other Infrastructure Products and Services ("all other") Category:
- ------------------------------------------------------------------
(IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Revenues $ 336.8 $ 341.4
Operating income 34.0 37.6
==========================================================================
o Revenues and operating income from the IKG Division decreased due to the
depressed U.S. manufacturing environment and reorganization costs.
o Continued and consistent profitable results from the Reed Minerals and
Patterson-Kelley Divisions were attained.
o Improved international demand for rail equipment sales of the HTT Division
increased export sales by $30.8 million.
o Pre-tax defined benefit pension expense increased $1.9 million.
OUTLOOK, TRENDS AND STRATEGIES
Looking to 2004 and beyond, the following significant items, trends and
strategies are expected to affect the Company in comparison with 2003:
Company Wide:
- -------------
o A continued focus on expanding the higher-margin industrial services
businesses, with a particular emphasis on growing the Mill Services Segment
through additional services, new contracts and strategic acquisitions.
o Continued international diversification through growth in the Mill Services
Segment; targeted niche acquisitions in the Access Services Segment;
increased export sales in the manufacturing businesses; and increased
production at international manufacturing facilities.
o Continued focus on Economic Value Added (EVA(R))-positive investments and a
reduction in capital employed to improve EVA.
o A target of $280 million in cash provided by operating activities for 2004,
which would be another record.
o Reduction of debt to the extent possible. The Company has approximately $70
million of debt that can be paid prior to maturity. The balance of the
debt, principally the (pound)200 million notes and the $150 million notes,
cannot be paid until maturity in 2010 and 2013, respectively.
o Due to structural changes in the Company's pension plans, pension expense
is expected to stabilize or decrease slightly in 2004. These structural
changes include the replacement of the majority of the U.S. defined benefit
pension plans and certain international defined benefit pension plans with
defined contribution pension plans, effective January 1, 2004.
o A continued benefit from favorable foreign currency translation is
expected. However, should the U.S. dollar start to strengthen, particularly
in relationship to the euro or U.K. pound sterling, the effect of this
benefit would diminish.
o Reduced interest expense is expected due to the September 2003 refinancing
of the Company's $150 million ten-year notes at a lower interest rate. This
interest expense reduction may be offset due to the foreign currency
translation effect on international interest expense.
o Cost reductions and Six-Sigma continuous process improvement initiatives
across the Company should further enhance margins. This includes improved
supply chain management and outsourcing in the manufacturing businesses.
o An increase in general and administrative expenses is expected related to
external audit fees and internal costs for compliance with Section 404 of
the Sarbanes-Oxley Act of 2002.
o Higher fuel, transportation and material costs, particularly steel prices,
could increase the Company's operating costs and reduce profitability. To
the extent that such costs cannot be passed to customers, operating income
and results of operations may be adversely affected.
Mill Services Segment:
- ----------------------
o Global steel production is forecasted to rise in 2004, and bidding activity
for new mill services contracts and add-on services is strong.
o Increases in steel prices and worldwide demand could provide increased
production volumes and additional opportunities for mill services
contracts.
o The risk remains that certain Mill Services customers may file for
bankruptcy protection in the future which could have an adverse affect on
the Company's income.
Access Services Segment:
- ------------------------
o The outlook for non-residential construction spending is expected to
modestly improve. The benefits of this will likely affect late 2004 and
2005 results.
-12-
o There is continued concern over the competitive environment in the United
States. International competitors have invested heavily in the U.S. access
services market, substantially increasing the supply of certain types of
rental equipment.
o The international defined benefit pension expense has grown significantly
and disproportionately to the domestic defined benefit pension expense over
the past few years. Effective January 1, 2004, structural changes have been
made to several of the Company's pension plans whereby both domestic and
international employees of this Segment will have defined contribution
pension plans. This is expected to make future pension expense more
consistent with prior years and more predictable.
Gas and Fluid Control Segment:
- ------------------------------
o This Segment is expected to remain the Company's most challenging business
in 2004. However, an overall net improvement is expected to be led by the
propane tank product line along with modest improvements from the cryogenic
and composites product lines.
o Increases in steel prices and worldwide demand for steel could have an
adverse effect on raw material costs, and this Segment's ability to obtain
the necessary raw materials.
Other Infrastructure Products and Services ("all other") Category:
- ------------------------------------------------------------------
o A continued positive outlook is anticipated for railway track services and
equipment sales as international orders continue to grow.
o The IKG Industries industrial grating division is expected to return to
profitability.
o Increases in steel prices and worldwide demand for steel could have an
adverse effect on raw material costs, and both HTT's and IKG's ability to
obtain the necessary raw materials.
o Continued strong results are expected from the Reed Minerals and
Patterson-Kelley Divisions.
RESULTS OF OPERATIONS FOR 2003, 2002 AND 2001
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 2003 2002 2001 (A)
---------------------------------------------------------------------------------------------------
Revenues from continuing operations $ 2,118.5 $ 1,976.7 $ 2,025.2
Cost of services and products sold 1,604.4 1,481.8 1,516.4
Selling, general and administrative expenses 330.0 312.7 314.3
Other expenses 7.0 3.5 22.8
Operating income from continuing operations by sales.
(d) | “Return on average equity” is calculated by dividing173.9 176.0 167.7
Interest expense 40.5 43.3 53.2
Provision for income taxes from continuing operations by quarterly weighted average equity.
| 41.7 42.2 38.6
Income from continuing operations 87.0 88.4 74.6
Income (loss) from discontinued operations 5.2 1.7 (2.9)
Net income 92.2 90.1 71.7
Diluted earnings per common share 2.25 2.21 1.79
Effective income tax rate for continuing operations 30.7% 30.9% 32.6%
Consolidated effective income tax rate 31.0% 31.0% 32.5%
===================================================================================================
(a) In order to comply with the Financial Accounting Standards Board
(FASB) Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," 2001 information has been reclassified for
comparative purposes.
-13-
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
2003 vs. 2002
- -------------
Revenues for 2003 were up $141.8 million or 7% from 2002, to record levels. This
increase was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN REVENUES 2003 VS. 2002
---------------------------------------------------------------------------
$126.2 Effect of foreign currency translation.
30.2 Net increased volume, new contracts and price changes in
the Mill Services Segment.
20.4 Net effect of business acquisitions and dispositions.
Increased revenues of $23.1 and $6.4 million in the
Mill Services and Access Services Segments,
respectively, partially offset by decreased revenues of
$9.1 million in the Other Infrastructure Products and
Services ("all other") Category.
19.6 Net increased revenues in the Harsco Track Technologies
(HTT) Division due principally to rail equipment sales.
(19.9) Net decreased revenues in the Access Services Segment due
to continued slowdown in the non-residential
construction markets.
(19.3) Net decreased revenues in the Gas and Fluid Control
Segment due to increased competition and decreased
demand.
(18.3) Decreased revenues of the IKG Industries Division due to
decreased demand and to a lesser extent, the sale of
the bridge decking product line in January 2002.
2.9 Other (minor changes across the various units not already
mentioned).
---------------------------------------------------------------------------
$141.8 Total Change in Revenues 2003 vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Revenues for 2002 were down $48.5 million or 2% from 2001. This decrease was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN REVENUES 2002 VS. 2001
---------------------------------------------------------------------------
$(50.0) Net decreased revenues in the Gas and Fluid Control
Segment due to the continued recessionary environment
in the manufacturing sector, primarily in the United
States, that impacted most product lines of this
Segment. These decreases were only partially offset by
higher demand for valves.
(23.3) Net reduced revenues in the Access Services Segment due to
continued weakness in the non-residential construction
markets due to generally unsettled economic conditions.
(21.8) Decreased revenues of the IKG Industries Division due to
the sale of the bridge decking product line in January
2002 and decreased demand.
(6.6) Net reduced revenues in the HTT Division due principally
to decreased contracting services related primarily to
a maintenance contract with a U.S. railroad that was
completed in December 2001.
30.5 Effect of foreign currency translation.
24.5 Net increased volume, new contracts and price changes in
the Mill Services Segment. The overall increase is a
combination of increased international revenues
partially offset by decreased domestic revenues
principally due to steel mill customer plant closures
in 2001.
(1.8) Other (minor changes across the various units not already
mentioned).
---------------------------------------------------------------------------
$(48.5) Total Change in Revenues 2002 vs. 2001
===========================================================================
-14-
COST OF SERVICES AND PRODUCTS SOLD
2003 vs. 2002
- -------------
Cost of services and products sold for 2003 increased $122.6 million or 8% from
2002, slightly higher than the 7% increase in revenues. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN COST OF SERVICES AND PRODUCTS SOLD 2003 VS. 2002
---------------------------------------------------------------------------
$95.6 Effect of foreign currency translation.
17.5 Net effect of business acquisitions and dispositions.
11.8 Increased costs due to increased revenues (exclusive of
effect of foreign currency translation).
7.8 Increased defined benefit pension expense due to financial
market conditions and lower interest rates in 2001 and
2002 which affected the SFAS No. 87 pension expense
computation for 2003.
(10.1) Other (due to stringent cost controls, process
improvements, reorganization actions and minor changes
across the various units not already mentioned).
---------------------------------------------------------------------------
$122.6 Total Change in Cost of Services and Products Sold 2003
vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Cost of services and products sold for 2002 decreased $34.6 million or 2% from
2001, consistent with the 2% decrease in revenues. This decrease was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN COST OF SERVICES AND PRODUCTS SOLD 2002 VS. 2001
---------------------------------------------------------------------------
$(59.2) Reduced costs due to decreased revenues (exclusive of
effect of foreign currency translation).
(16.1) Elimination of goodwill amortization as a result of
implementing SFAS No. 142.
22.9 Effect of foreign currency translation.
10.5 Increased defined benefit pension expense due to financial
market conditions and lower interest rates in 2001
which affected the SFAS No. 87 pension expense
computation for 2002.
7.3 Other (due to product mix and minor changes across the
various units not already mentioned, partially offset
by decreased variable costs due to lower sales,
stringent cost controls, process improvements and
reorganization actions).
---------------------------------------------------------------------------
$(34.6) Total Change in Cost of Services and Products Sold 2002
vs. 2001
===========================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2003 vs. 2002
- -------------
Selling, general and administrative expenses for 2003 increased $17.3 million or
6% from 2002, less than the 7% increase in revenues. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS 2003 VS. 2002
---------------------------------------------------------------------------
$19.7 Effect of foreign currency translation.
9.9 Increased defined benefit pension expense due to financial
market conditions and lower interest rates in 2001 and
2002 which affected the SFAS No. 87 pension expense
computation for 2003. This increased pension expense
was spread across all operations, with $8.0 million of
the increase in the Access Services Segment.
(3.5) Reduction in provisions for uncollectible accounts
receivable due to significant charges in 2002 for Mill
Services customers that were experiencing financial
difficulties including bankruptcy.
(8.8) Other (due to continuing cost reduction, process
improvement and reorganization efforts).
---------------------------------------------------------------------------
$17.3 Total Change in Selling, General and Administrative
Expenses 2003 vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Selling, general and administrative expenses for 2002 decreased $1.6 million or
0.5% from 2001, less than the 2% decrease in revenues. This decrease was
attributable to the following significant items:
---------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS 2002 VS. 2001
---------------------------------------------------------------------------
$(5.8) Reduction in provisions for uncollectible accounts
receivable due to significant charges in 2001 for Mill
Services customers that were experiencing financial
difficulties including bankruptcy.
9.2 Increased defined benefit pension expense due to financial
market conditions and lower interest rates in 2001
which affected the SFAS No. 87 pension expense
computation for 2002.
4.8 Effect of foreign currency translation.
(9.8) Other (due to continuing cost reduction, process
improvement and reorganization efforts).
---------------------------------------------------------------------------
$(1.6) Total Change in Selling, General and Administrative
Expenses 2002 vs. 2001
===========================================================================
-15-
OTHER EXPENSES
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. During 2003, the Company continued its
strategy to streamline operations. This strategy included the consolidation,
closure and sale of certain operating locations and continued headcount
reductions in both administrative and operating positions. These actions
resulted in net Other Expenses of $7.0 million in 2003 compared with $3.5
million in 2002 and $22.8 million in 2001.
2003 vs. 2002
- -------------
Other Expenses for 2003 increased $3.5 million or 100% from 2002. This increase
was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN OTHER EXPENSES 2003 VS. 2002
---------------------------------------------------------------------------
$3.5 Decline in net gains on disposals of non-core assets. This
decline was attributable to a $2.7 million net gain
that was realized in 2002 from the sale of an equity
investment within the Mill Services Segment and $1.9
million gain on the sale of a product line in the Other
Infrastructure Products and Services ("all other")
Category that were not repeated in 2003.
0.8 Increase in costs to exit activities.
0.3 Increase in other expenses.
(1.1) Decline in employee termination benefit costs.
---------------------------------------------------------------------------
$3.5 Total Change in Other Expenses 2003 vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Other Expenses for 2002 decreased $19.3 million or 85% from 2001. This decrease
was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN OTHER EXPENSES 2002 VS. 2001
---------------------------------------------------------------------------
$(15.0) Decline in impaired asset write-downs. Impaired asset
write-downs in 2001 included $8.0 million related to an
under-performing plant associated with the Company's
roofing granules business. The plant was sold in 2002.
In addition, 2001's expense included $4.8 million of
impaired asset write-downs in the Mill Services Segment
related to fixed plant and equipment associated with
steel mill customers which filed for reorganization
proceedings under local laws principally in the United
States and Asia.
(3.0) Decline in employee termination benefit costs.
(1.3) Decline in costs to exit activities, other expenses and
increased net gains on the disposal of non-core assets.
---------------------------------------------------------------------------
$(19.3) Total Change in Other Expenses 2002 vs. 2001
===========================================================================
For additional information, see Note 15, Other (Income) and Expenses, to the
Consolidated Financial Statements under Part II, Item 8, "Financial Statements
and Supplementary Data."
- --------------------------------------------------------------------------------
INTEREST EXPENSE
2003 vs. 2002
- -------------
Interest expense in 2003 was $2.8 million or 6% lower than in 2002. This decline
was due to approximately $58 million in reduced average annual borrowings and
lower average annual interest rates on certain borrowings (e.g., commercial
paper) partially offset by an increase of $2.3 million due to the effect of
foreign currency translation.
2002 vs. 2001
- -------------
Interest expense in 2002 was $9.9 million or 19% lower than in 2001. This
decline was due to approximately $110 million in reduced average annual
borrowings and lower average annual interest rates partially offset by an
increase of $1.1 million due to the effect of foreign currency translation.
- --------------------------------------------------------------------------------
-16-
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS
2003 vs. 2002
- -------------
The decrease in 2003 of $0.5 million or 1% in the provision for income taxes
from continuing operations was due to decreased earnings from continuing
operations for the reasons mentioned above and a decreased effective income tax
rate. The effective tax rate relating to continuing operations for 2003 was
30.7% versus 30.9% for 2002.
2002 vs. 2001
- -------------
The increase in 2002 of $3.6 million or 9% in the provision for income taxes
from continuing operations was due to increased earnings offset by a decreased
effective income tax rate. The effective income tax rate relating to continuing
operations for 2002 was 30.9% versus 32.6% for 2001. The decrease in the income
tax rate was due principally to the elimination of goodwill amortization for
book purposes in accordance with SFAS No. 142.
- --------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
2003 vs. 2002
- -------------
Income from continuing operations in 2003 was slightly below 2002 levels despite
increased revenues. This decrease of $1.4 million or 2% results from increased
pension expense and reduced interest income of $1.5 million. This reduced
interest income related to lower average annual interest rates. These items were
partially offset by the positive impact of foreign currency translation and the
termination of certain postretirement benefit plans.
2002 vs. 2001
- -------------
Income from continuing operations in 2002 was significantly above 2001 levels
despite a decrease in revenues. The increase of $13.8 million or 18% results
from the items discussed above, including decreased asset write-downs as well as
a reduced equity loss in affiliates. The reduced equity loss in affiliates was
due primarily to $2.9 million of pre-tax losses during 2001 associated with the
Company's S3Networks equity investment. This investment was disposed of in 2001.
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
2003 vs. 2002
- -------------
Income from discontinued operations for 2003 increased $3.5 million or 208% from
2002. This increase was attributable to the following significant items:
---------------------------------------------------------------------------
CHANGE IN INCOME (LOSS) FROM DISCONTINUED OPERATIONS
IN MILLIONS 2003 VS. 2002
---------------------------------------------------------------------------
$5.2 After-tax income due to favorable developments in the
Company's Federal Excise Tax (FET) litigation. For
additional information on the FET litigation see Note
10, Commitments and Contingencies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data."
(1.7) Decline in after-tax income related to the sale of the
Company's Capitol Manufacturing business during 2002.
---------------------------------------------------------------------------
$3.5 Total Change in Income (Loss) from Discontinued Operations
2003 vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Income from discontinued operations for 2002 was $4.6 million higher than 2001's
loss of $2.9 million. This increase was attributable to the following
significant items:
---------------------------------------------------------------------------
CHANGE IN INCOME (LOSS) FROM DISCONTINUED OPERATIONS
IN MILLIONS 2002 VS. 2001
---------------------------------------------------------------------------
$3.6 After-tax gain recognized on the sale of the Company's
Capitol Manufacturing business, of which a substantial
part of the assets was divested in the second quarter
of 2002.
1.0 Decline in after-tax loss from operations of the Company's
Capitol Manufacturing business, due to the sale in the
second quarter of 2002.
---------------------------------------------------------------------------
$4.6 Total Change in Income (Loss) from Discontinued Operations
2002 vs. 2001
===========================================================================
- --------------------------------------------------------------------------------
-17-
NET INCOME AND EARNINGS PER SHARE
2003 vs. 2002
- -------------
Net income of $92.2 million and diluted earnings per share of $2.25 in 2003
exceeded 2002 by $2.1 million and $0.04, respectively, due principally to
increased income from discontinued operations partially offset by decreased
income from continuing operations for the reasons described above.
2002 vs. 2001
- -------------
Net income of $90.1 million and diluted earnings per share of $2.21 in 2002
exceeded 2001 by $18.4 million and $0.42, respectively, due principally to
decreased provisions for uncollectible accounts receivable; decreased Other
expenses related to restructuring activities; decreased interest expense; and a
lower effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's principal sources of liquidity are cash from operations and
short-term borrowings under its various credit agreements, augmented by cash
proceeds from asset sales. Principal borrowings for working capital requirements
are commercial paper. During 2003, record cash flows from operations of $262.8
million enabled the Company to make significant progress toward its strategic
objectives. This included net cash payments to reduce debt of $86.2 million,
increased capital expenditures of $29.5 million for growth in the Company's
industrial services businesses and two industrial services acquisitions totaling
$23.5 million. Since peaking in mid-2000 in connection with the SGB acquisition,
the Company has reduced its total debt by almost $300 million or approximately
31% as of December 31, 2003.
The Company's strategic objectives for 2004 include generating a record $280
million in cash from operations, augmented by $30 million in targeted asset
sales. The Company's strategy is to redeploy excess or discretionary cash to
grow primarily the mill services business and to further reduce debt. The
Company has targeted $125 million for growth capital investments and
acquisitions and $40 million for debt reduction.
As of December 31, 2003 the Company had approximately $70 million of debt that
can be paid prior to maturity. The balance of the debt, principally, the
(pound)200 million notes and the $150 million notes, cannot be paid until
maturity in 2010 and 2013, respectively. The Company also plans to continue its
history of paying dividends to shareholders.
-18-
CASH REQUIREMENTS
The following summarizes the Company's expected future payments related to
contractual obligations and commercial commitments at December 31, 2003.
CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2003 (A)
(e) | “Total debt to total capital” is calculated by dividing the sum of debt (short-term borrowings and long-term debt including
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1-3 4-5 AFTER 5
(IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS
-----------------------------------------------------------------------------------------------------------------------------
Short-term Debt $ 14.9 $ 14.9 $ -- $ -- $ --
Long-term Debt
(including current maturities) by the sum of equity and debt. |
(f) | Excludes the estimated amount of long-term mill service contracts, which had estimated future revenues of $3.0 billion at December 31, 2002. Also excludes backlog of the Access Services Segment. These amounts are generally not quantifiable due to the nature and timing of the products and services provided.
|
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements provided under Part II, Item 8 of this Annual Report on Form 10-K. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein.
Forward-Looking Statements
The nature of the Company’s operations 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. These include statements about our management confidence and strategies for performance; expectations for new and existing products, technologies, and opportunities; and expectations for market segment and industry growth, sales, cash flows and earnings.
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, particularly in the mill services, steel, infrastructure, non-residential construction and industrial gas markets; (2) changes in currency exchange rates, interest ratesmaturities and
capital costs; (3)leases) 598.7 14.3 56.5 19.8 508.1
Pension and Other Post-
retirement Obligations (b) 154.4 24.4 47.8 44.3 37.9
Operating Leases 141.9 48.3 49.0 21.5 23.1
Purchase Obligations 88.0 84.4 3.0 0.6 --
Foreign Currency Forward
Exchange Contracts 78.4 78.4 -- -- --
Other Obligations (c) 0.1 0.1 -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $ 1,076.4 $ 264.8 $ 156.3 $ 86.2 $ 569.1
=============================================================================================================================
|
(a) See Note 6, Debt and Credit Agreements; Note 7, Leases; Note 8,
Employee Benefit Plans; and Note 13, Financial Instruments, to the
Consolidated Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data," for additional disclosures on
short-term and long-term debt; operating leases; pensions and other
postretirement benefits; and foreign currency forward exchange
contracts, respectively.
(b) The total obligation for Pension and Other Postretirement
Obligations is based on actuarial calculations and represents the
obligation recorded on the Company's balance sheet. Payments due by
period are based on the expected undiscounted amounts to be paid in
the years shown. The amount shown in the After 5 years column is the
remaining balance of the obligation as calculated at December 31,
2003. It is not practicable to estimate the actual amount to be paid
after five years.
(c) Other contractual obligations are not deemed to have a material
impact on the Company and are not discussed in detail.
COMMERCIAL COMMITMENTS - The following table summarizes the Company's
contingent commercial commitments at December 31, 2003. These amounts are not
included in the Company's Consolidated Balance Sheet since there are no current
circumstances known to management indicating that the Company will be required
to make payments on these contingent obligations.
COMMERCIAL COMMITMENTS AS OF DECEMBER 31, 2003
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
TOTAL AMOUNTS LESS THAN 1-3 4-5 OVER 5 INDEFINITE
(IN MILLIONS) COMMITTED 1 YEAR YEARS YEARS YEARS EXPIRATION
------------------------------------------------------------------------------------------------------------------------------
Standby Letters of Credit $ 88.5 $ 84.8 $ 3.3 $ 0.4 $ -- $ --
Guarantees 22.9 3.5 -- 0.4 0.1 18.9
Performance Bonds 107.8 96.4 1.6 -- -- 9.8
Other Commercial Commitments 11.1 -- -- -- -- 11.1
------------------------------------------------------------------------------------------------------------------------------
Total Commercial Commitments $ 230.3 $ 184.7 $ 4.9 $ 0.8 $ 0.1 $ 39.8
==============================================================================================================================
Performance bonds include an $80 million security bond and standby letters of
credit include a $9 million letter of credit both related to the Federal Excise
Tax litigation discussed in Note 10, Commitments and Contingencies, to the
-19-
Consolidated Financial Statements under Part II, Item 8, "Financial Statements
and Supplementary Data." Certain guarantees and performance bonds are of a
continuous nature and do not have a definite expiration date.
SOURCES AND USES OF CASH
The primary drivers of the Company's cash flow from operations are the Company's
strong sales and income, particularly in the services businesses. Additionally,
returns on capital investments made in prior years, for which no cash is
currently required, are a significant source of cash. Depreciation related to
these investments is a non-cash charge. The Company also continues to maintain
working capital at a manageable level.
Major uses of cash include payroll costs and related benefits; raw material
purchases for the manufacturing businesses; income tax payments; interest
payments; insurance premiums and payments of self-insured casualty losses; and
facility rental payments. Other primary uses of cash include capital
investments, principally in the industrial services businesses; debt payments;
and dividend payments.
RESOURCES AVAILABLE FOR CASH REQUIREMENTS - The Company has various credit
facilities and commercial paper programs available for use throughout the world.
The following chart illustrates the amounts outstanding on credit facilities and
commercial paper programs and available credit at December 31, 2003.
SUMMARY OF CREDIT FACILITIES AS OF DECEMBER 31, 2003
-----------------------------------------------------------------------------------
FACILITY OUTSTANDING AVAILABLE
(IN MILLIONS) LIMIT BALANCE CREDIT
-----------------------------------------------------------------------------------
U.S. commercial paper program $ 350.0 $ 9.3 $ 340.7
Euro commercial paper program 125.8 26.1 99.7
Revolving credit facility (a) 350.0 -- 350.0
Bilateral credit facility (b) 25.0 3.4 21.6
-----------------------------------------------------------------------------------
TOTALS AT DECEMBER 31, 2003 $ 850.8 $ 38.8 $ 812.0(C)
===================================================================================
(a) U.S.-based Program
(b) International-based Program
(c) Although the Company has significant available credit, it is the
Company's policy to limit aggregate commercial paper and credit
facility borrowings at any one time to a maximum of $375 million.
See Note 6, Debt and Credit Agreements, to the Consolidated Financial Statements
under Part II, Item 8, "Financial Statements and Supplementary Data," for more
information on the Company's credit facilities.
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at December 31, 2003:
U.S.-BASED
LONG-TERM NOTES COMMERCIAL PAPER OUTLOOK
---------------------------------------------------------------------------
Standard & Poor's (S&P) A- A-2 Stable
Moody's A3 P-2 Stable
Fitch (a) A- F-2 Stable
---------------------------------------------------------------------------
(a) The Company's (pound)200 million notes are not rated by Fitch.
The euro commercial paper market does not require commercial paper to be rated;
accordingly, the Company's euro-based commercial paper program has not been
rated. In the third quarter of 2003, S&P, Fitch and Moody's all reaffirmed their
stable outlooks for the Company. A downgrade to the Company's credit rating
would probably increase the costs to the Company to borrow funds. An improvement
in the Company's credit rating would probably decrease the costs to the Company
to borrow funds.
-20-
WORKING CAPITAL POSITION - Changes in the Company's working capital are
reflected in the following table:
DECEMBER 31 DECEMBER 31 INCREASE
(DOLLARS ARE IN MILLIONS) 2003 2002 (DECREASE)
-----------------------------------------------------------------------------------------
Current Assets $ 764.4 $ 702.4 $ 62.0
Less: Current Liabilities 495.1 473.8 21.3
-----------------------------------------------------------------------------------------
Working Capital $ 269.3 $ 228.6 $ 40.7
Current Ratio 1.5:1 1.5:1
=========================================================================================
Working capital increased 18% in 2003 due principally to the effect of foreign
currency translation. Foreign currency translation changes were due principally
to the weakening of the U.S. dollar in relation to the British pound sterling
and the euro. Also contributing to the increase in working capital was the
acquisition of the mill services unit of C. J. Langenfelder & Son, Inc.
CERTAINTY OF CASH FLOWS - The certainty of the Company's future cash flows
is strengthened by the long-term nature of the Company's mill services
contracts. At December 31, 2003, the Company's mill services contracts had
estimated future revenues of $3.4 billion. Of that amount, over $800 million is
projected for 2004 and approximately 60% is expected to be recognized by
December 31, 2006. In addition, the Company had an order backlog of $186.2
million for its manufacturing businesses and railway track services.
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 is among the top three companies
(relative to sales) in the industries the Company serves. Due to these factors,
the Company is confident in its future ability to generate positive cash flows
from operations.
CASH FLOW SUMMARY
The Company's cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statements of Cash Flows, are summarized in the
following table:
SUMMARIZED CASH FLOW INFORMATION
(IN MILLIONS) 2003 2002 2001
---------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $ 262.8 $ 253.7 $ 240.6
Investing activities (144.8) (53.9) (125.2)
Financing activities (125.5) (205.5) (99.2)
Effect of exchange rate changes on cash 17.6 8.4 (5.2)
---------------------------------------------------------------------------------------------
Net change in cash and cash equivalents $ 10.1 $ 2.7 $ 11.0
=============================================================================================
CASH FROM OPERATING ACTIVITIES - Cash provided by operations in 2003 was a
record $262.8 million, up $9.0 million from 2002. The increased cash from
operations in 2003 resulted from the following:
o Positive year-over-year changes in inventories due principally to
planned reductions in inventories at IKG Industries and
international mill services locations.
o Timing of accounts payable disbursements.
o Timing of funding of pension and insurance liabilities for which
expense was recorded during the year but for which payments will be
made in subsequent years.
o Partially offsetting these increases were recorded sales (accounts
receivable) for which cash will not be received until 2004. As an
example, the Harsco Track Technologies Division recorded a $21.1
million increase in sales in December 2003 compared with December
2002. A significant portion of those sales will be collected in
2004.
CASH USED IN INVESTING ACTIVITIES - Capital investments for 2003 were
$143.8 million, up $29.5 million from 2002. Investments were made predominantly
for the industrial services businesses with 60% in the Mill Services Segment.
The Company also invested $23.5 million on two industrial service acquisitions.
These acquisitions included the domestic mill
-21-
services unit of C.J. Langenfelder & Son, Inc. and a small product line for the
international access services business. Proceeds from sales of assets decreased
$40.9 million. This decrease, on a comparative basis, included the sale of
Capitol Manufacturing and a product line of the Harsco Track Technologies
Division in 2002. In 2004, the Company plans to continue to invest in
high-return projects, principally in the industrial services businesses.
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions at December 31, 2003.
DECEMBER 31 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Notes Payable and Current Maturities $ 29.1 $ 34.1
Long-term Debt 584.4 605.6
--------------------------------------------------------------------------
Total Debt 613.5 639.7
Total Equity 777.0 644.5
--------------------------------------------------------------------------
Total Capital $ 1,390.5 $ 1,284.2
Total Debt to Total Capital 44.1% 49.8%
==========================================================================
The Company's debt as a percent of total capital decreased in 2003 due
principally to the Company's continued debt reduction combined with the increase
in the cumulative translation adjustment equity account and increased retained
earnings. Due to the Company's significant net investments in Europe and the
United Kingdom, foreign currency translation increases in the euro and the pound
sterling had a positive effect on total equity.
DEBT COVENANTS
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Based on balances at December 31, 2003, the Company could
borrow approximately $550 million and still be within its debt covenants.
Alternatively, keeping all other factors constant, the Company's equity could
decrease by $300 million and the Company would still be within its covenants.
CASH AND VALUE-BASED MANAGEMENT
In 2004, the Company plans to continue with its strategy of selective investing
for strategic purposes. The goal of this strategy is to improve the Company's
Economic Value Added (EVA(R)) under the program that commenced January 1, 2002.
Under this program the Company evaluates strategic investments based upon the
investment's economic profit. EVA equals after-tax operating profits less a
charge for the use of the capital employed to create those profits (only the
service cost portion of pension expense is included for EVA purposes).
Therefore, value is created when a project or initiative produces a return above
the cost of capital. In 2003, the Company as a whole exceeded its EVA
improvement target by 125%.
Through the Company's use of EVA to evaluate all capital expenditures, the
Company targets its capital investments where management expects they will
create the greatest positive EVA. In 2003, the Company made approximately 60%
and 30% of its capital expenditures in the Mill Services and Access Services
Segments, respectively. The investments in these segments continue to show
positive results as the Mill Services and Access Services Segments generated
approximately 50% and 30% of the Company's 2003 cash from operations,
respectively. Additionally, both these Segments had improved EVA in 2003 when
compared with 2002. In 2004, the Company is again targeting the industrial
services businesses for the majority of its capital investments.
The Company is committed to continue paying dividends to shareholders. The
Company has increased the dividend rate for ten consecutive years, and in
February 2004, the Company paid its 215th consecutive quarterly cash dividend.
The Company also plans to continue paying down debt to the extent possible.
The Company's financial position and debt capacity should enable it to meet
current and future requirements. As additional resources are needed, the Company
should be able to obtain funds readily and at competitive costs. The Company is
well-positioned and intends to continue investing strategically in high-return
projects, reducing debt and paying cash dividends as a means to enhance
shareholder value.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and
-22-
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent liabilities. On an on-going basis
the Company evaluates its estimates, including those related to pensions and
other postretirement benefits, bad debts, goodwill, long-lived asset valuations,
inventory valuations, insurance accruals, contingencies and income taxes. The
impact of changes in these estimates, as necessary, is reflected in the
respective segment's operating income. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. Management has discussed the development and selection of
the critical accounting estimates described below with the Audit Committee of
the Board of Directors and the Audit Committee has reviewed the Company's
disclosure relating to these estimates in this Management's Discussion and
Analysis of Financial Condition and Results of Operations. These items should be
read in conjunction with Note 1, Summary of Significant Accounting Policies, to
the Consolidated Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data."
PENSION BENEFITS
The Company has noncontributory defined benefit pension plans throughout the
world. The largest of these plans are in the United Kingdom and the United
States. The Company's funding policy for these plans is to contribute amounts
sufficient to meet the minimum funding pursuant to U.K. and U.S. statutory
requirements, plus any additional amounts that the Company may determine to be
appropriate. The Company made cash contributions to its defined benefit pension
plans of $23.6 million and $10.1 million during 2003 and 2002, respectively.
Additionally, the Company expects to make $24.0 in cash contributions to its
defined benefit pension plans during 2004. The Company accounts for its defined
benefit pension plans in accordance with SFAS No. 87, "Employer's Accounting for
Pensions" (SFAS 87), which requires that amounts recognized in financial
statements be determined on an actuarial basis. A minimum liability is required
to be established on the Consolidated Balance Sheet representing the amount of
unfunded accumulated benefit obligation. The unfunded accumulated benefit
obligation is the difference between the accumulated benefit obligation and the
fair value of the plan assets at the measurement date. When it is necessary to
establish an additional minimum pension liability, an equal amount is recorded
as an intangible pension asset limited to unrecognized prior service cost. Any
excess amount is recorded as a reduction to shareholders' equity in accumulated
other comprehensive expense, net of deferred income taxes, in the Consolidated
Balance Sheet. At December 31, 2003 and 2002, the Company has a gross minimum
pension liability of $233.9 million and $236.2 million, respectively. These
adjustments impacted accumulated other comprehensive expense in the
shareholders' equity section of the Balance Sheet by $1.5 million of
comprehensive income, net of deferred income taxes, and $146.7 million of
comprehensive expense, net of deferred income taxes, at December 31, 2003 and
2002, respectively. When and if the fair market value of the pension plans'
assets exceed the accumulated benefit obligation, the reduction to shareholders'
equity would be fully restored to the Consolidated Balance Sheet.
Management has implemented a three-part strategy to deal with the adverse market
forces that have increased the unfunded benefit obligations over the last
several years. These strategies included pension plan design changes, a review
of funding policy alternatives and a review of the asset allocation policy and
investment manager structure. With regards to plan design, the Company amended a
majority of the U.S. defined benefit pension plans and certain international
defined benefit pension plans so that accrued service will no longer be granted
for periods after December 31, 2003, although compensation increases will
continue to be recognized on actual service to-date. In place of these plans,
the Company has established, effective January 1, 2004, defined contribution
pension plans providing for the Company to contribute a specified matching
amount for participating employees' contributions to the plan. Domestically,
this match will be made on employee contributions up to four percent of their
eligible compensation. Additionally, the Company may provide a discretionary
contribution of up to two percent of compensation for eligible employees.
Internationally, this match is up to six percent of eligible compensation with
an additional two percent going towards insurance and administrative costs. The
Company believes this new retirement benefit plan will provide a more
predictable and less volatile pension expense than existed under the defined
benefit plans.
CRITICAL ESTIMATE - PENSION BENEFITS
Accounting for pensions and other postretirement benefits requires the use of
actuarial assumptions. The principal assumptions used include the discount rate
and the expected long-term rate of return on plan assets. Each assumption is
reviewed annually and represents management's best estimate at that time. The
assumptions are selected to represent the performance of stock and bond markets, particularly in the United States and United Kingdom, that could affect the valuation of the assets in the Company’s pension plans and the accounting for pension assets, liabilities and expense; (4) changes in governmental laws and regulations, including taxes and import tariffs; (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 43 countries which the Company operates due to political instability, civil unrest, armed hostilities or other calamities; and (7) other risk factors listed from time to time in the Company’s SEC reports. The Company does not intend to update this information and disclaims any legal liability to the contrary.
Introduction
The economic slowdown in the United States that began in the fourth quarter of 2000 has resulted in a recessionary manufacturing environment during 2001 and 2002. As a result, on a comparative basis, the Company continued to suffer reduced demand for almost all of its manufactured products and mill services in North America in 2002. Several steel producers, including certain Company customers, have filed for bankruptcy protection or shut down operations during 2001 and 2002. The most recent significant occurrence was in July 2002 when a U.K. customer filed for the U.S. equivalent of bankruptcy protection. This resulted in the Company recording an additional provision for uncollectible accounts receivable of $2.8 million in June 2002 and $0.2 million in July 2002. Additionally, weakness in both the domestic and U.K. non-residential construction business and weak end markets were encountered in 2002, especially since the latter part of the second quarter. This has resulted in reduced rentals of access equipment. This is expected to persist in the near term and the prospects for significant improvement are uncertain until the emergence of much stronger confidence in the global economic outlook.
If the economic downturn persists, it could negatively affect the Company’s forecasts used in performing its goodwill impairment testing under SFAS No. 142. Therefore, there can be no assurance that future goodwill impairment tests will not result in a charge to earnings. A persistent slow economy could also affect the realizability of receivables across the Company’s businesses as it may affect the ability of the Company’s customers to meet their obligations on a timely basis and possibly result in additional bankruptcy filings by the Company’s customers.
In addition to the economic issues that directly affect the Company’s business, changes in the performance of stock and bond markets, particularly in the United States and United Kingdom, impact actuarial assumptions used in determining annual pension expense and in the valuation of the assets in the Company’s pension plans. The downturn in financial markets over the past two years has negatively impacted the Company’s pension expense and the accounting for pension assets and liabilities. This has resulted in an increase in pre-tax pension expense of approximately $20 million for calendar year 2002 compared with 2001, and it is expected to result in an additional pre-tax increase in pension expense of approximately $17.9 million in calendar year 2003 compared with 2002. Should the downward trend in capital markets continue, future unfunded obligations and pension expense would likely increase. This could result in an additional reduction to shareholders’ equity and increase the Company’s statutory funding requirements.
The Company has over 400 locations in 43 countries, including the United States. As a result of the Company’s global footprint, unforeseen business disruptions in one or more of these countries due to political instability, civil unrest, armed hostilities or other calamities could result in a material impact to the Company’s financial position or results of operations
10
or cash flows. The Company has operations in certain countries in the Middle East (Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar) which are geographically close to countries with a high risk of armed hostilities. During 2002, these countries contributed approximately $15 million to the Company’s operating income.
The current worldwide political and economic environment may increase the volatility of energy costs, both on a macro basis and for the Company specifically. To the extent that the Company cannot pass any increase in such costs to its customers, the Company’s operating income may be adversely affected. Historically, direct energy costs have approximated 2.5% to 3.5% of the Company’s revenue.
Application of Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an on-going basis the Company evaluates its estimates, including those related to pensions and other post-retirement benefits, bad debts, goodwill, asset valuations, inventory valuations, insurance accruals, contingencies and income taxes. The impact of changes in these estimates, as necessary, is reflected in the respective segment’s operating income. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Management has discussed the development and selection of the critical accounting estimates described below with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the Company’s disclosure relating to these estimates in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. These items should be read in conjunction with Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data.”
Pension Benefits –The Company has noncontributory defined benefit pension plans throughout the world. The largest of these plans are in the United Kingdom and the United States. Most of the Company’s employees in these two countries are covered by these plans. The Company’s funding policy for these plans is to contribute amounts sufficient to meet the minimum funding pursuant to U.K. and U.S. statutory requirements, plus any additional amounts that the Company may determine to be appropriate. The Company accounts for its defined benefit pension plans in accordance with SFAS No. 87, “Employer’s Accounting for Pensions” (SFAS 87), which requires that amounts recognized in financial statements be determined on an actuarial basis. A minimum liability is required to be established on the Consolidated Balance Sheet representing the amount of unfunded accumulated benefit obligation. The unfunded accumulated benefit obligation is the difference between the accumulated benefit obligation and the fair value of the plan assets at the measurement date. When it is necessary to establish an additional minimum pension liability, an equal amount is recorded as an intangible pension asset limited to unrecognized prior service cost. Any excess amount is recorded as a reduction to shareholders’ equity in accumulated other comprehensive expense, net of deferred income taxes, in the Consolidated Balance Sheet. At December 31, 2002 and 2001 the Company recorded gross minimum pension liability adjustments of $236.2 million and $15.0 million, respectively. The minimum liability increase in 2002 resulted from lower interest rates and unfavorable investment performance. These adjustments impacted accumulated other comprehensive expense in the shareholders’ equity section of the Balance Sheet by $146.7 million, net of deferred income taxes, and $3.8 million, net of deferred income taxes, at December 31, 2002 and 2001, respectively. When and if the fair market value of the pension plan assets exceeds the accumulated benefit obligation, the reduction to shareholders’ equity would be fully restored to the Consolidated Balance Sheet. The Company expects cash contributions to the plans in 2003 to exceed 2002 funding requirements by approximately $6 million. Funding requirements beyond 2003 are uncertain and will be greatly dependent upon future financial market conditions.
Management has implemented a three-part strategy in 2002 as a measured response to dealing with the extremely adverse market forces that have increased the unfunded benefit obligations These strategies included pension plan design changes, a review of funding policy alternatives and a review of the asset allocation policy and investment manager structure. Management is currently studying other policy alternatives in response to continuing adverse market conditions.
Accounting for pensions and other postretirement benefits requires the use of actuarial assumptions. The principal assumptions used include the discount rate and expected rate of return on plan assets. Each assumption is reviewed annually and represents management’s best estimate at that time. The assumptions are selected to represent the
11
average expected experience over time
and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of unfunded benefit obligation and the expense recognized. As part of the September 30, 2002 measurement date of the U.K. pension plan and the October 31, 2002 measurement date for the U.S. pension plans, the Company’s future benefit obligations were determined using discount rates of 5.75% and 6.75%, respectively. The weighted average of these assumed discount rates for year ending December 31, 2002 is 6.0%. The weighted average assumed discount rate at year-end 2002 compares with the weighted average assumed discount rates of 6.5% and 6.7% for the years ending December 31, 2001 and 2000, respectively. The expense under these plans is determined using the discount rate as of the beginning of the year, which for 2003 will be the 6.0% assumed weighted average discount rate. The expected return on plan assets is determined by evaluating the asset class return expectations with the Company’s advisors as well as actual, long-term, historical results of asset returns for the U.S. pension plans and the U.K. pension plan. The pension expense increases as the expected rate of return on assets decreases. For fiscal 2002 the weighted average expected rate of return on asset assumption was 8.5%. The weighted average basis of assumptions in the U.S. and U.K. has been lowered to 8.0% for fiscal 2003.
A comparative summary of these rates and the rates of compensation increase are as follows (2001 and 2000 rates are shown for comparative purposes):
|
| Global Weighted Average Actuarial Assumptions |
|---|
| December 31 |
|---|
|
|
|---|
| 2002 | 2001 | 2000 |
|---|
| | Weighted average assumed discount rates | | 6.0 | % | 6.5 | % | 6.7 | % | | Weighted average expected long-term rates of return | | | on plan assets | | 8.0 | % | 8.5 | % | 8.4 | % | | Rates of compensation increase | | 3.4 | % | 3.9 | % | 4.3 | % |
|
Based on these updated actuarial assumptions, the Company’s 2003 pre-tax pension expense is expected to increase from 2002 by approximately $17.9 million. This is in addition to an increase of approximately $20 million or $0.33 per share from 2001 to 2002. The increase from 2001 to 2002 resulted from lower interest rates and unfavorable investment performance. Changes in the related pension benefit costs may occur in the future due to changes in the assumptions and due to changes in returns on plan assets due to changes in capital
markets and the overall economy. These differences will impact the amount of
unfunded benefit obligation and the expense recognized.
-23-
The discount rates as of the September 30, 2003 measurement date for the U.K.
pension plan and the October 31, 2003 measurement date for the U.S. pension
plans were 5.7% and 6.25%, respectively. These rates were used in calculating
the Company's projected benefit obligations as of December 31, 2003. The
discount rates selected represent the average yield on high-quality corporate
bonds as of the measurement dates. The weighted average of these assumed
discount rates for the year ending December 31, 2003 was 5.9%. The weighted
average assumed discount rate at year-end 2003 compares with the weighted
average assumed discount rates of 6.0% and 6.5% for the years ending December
31, 2002 and 2001, respectively. Annual pension expense is determined using the
discount rate as of the beginning of the year, which for 2004 is the 5.9%
assumed weighted average discount rate. Pension expense and the projected
benefit obligation generally increase as the discount rate selected decreases.
The expected long-term rate of return on plan assets is determined by evaluating
the portfolios' asset class return expectations with the Company's advisors as
well as actual, long-term, historical results of asset returns for the U.S.
pension plans and the U.K. pension plan. The pension expense increases as the
expected long-term rate of return on assets decreases. For fiscal 2003 the
weighted average expected long-term rate of return on asset assumption was 8.0%.
The weighted average assumption for the U.S. and U.K. has been lowered to 7.9%
for fiscal 2004. This rate was determined based on a model of expected asset
returns for an actively managed portfolio.
Based on these updated actuarial assumptions and the structural changes in the
pension plans mentioned previously, the Company's 2004 pension expense is
expected to stabilize. This is in comparison to the increase in pension expense
from 2002 to 2003 of $20.4 million that resulted from lower interest rates and
unfavorable investment performance during 2000, 2001, and 2002. Additionally,
the increase in pension expense from 2001 to 2002 was approximately $20 million.
Changes in the related pension benefit costs may occur in the future due to
changes in the assumptions and due to changes in returns on plan assets
resulting from financial market conditions. Holding all other assumptions
constant, a one-half percent increase or decrease in the discount rate and the
expected long-term rate of return on plan assets would increase or decrease
annual fiscal 2004 pre-tax defined benefit pension expense as follows:
APPROXIMATE CHANGES IN PRE-TAX DEFINED BENEFIT
----------------------------------------------
PENSION EXPENSE
---------------
U.S. PLANS U.K. PLAN
---------- ---------
Discount rate
-------------
One-half percent increase Decrease of $2 million Decrease of $4 million
One-half percent decrease Increase of $2 million Increase of $4 million
Expected long-term rate of return on plan assets
would increase or decrease annual fiscal 2003 pre-tax expense as follows:
| Approximate Changes in Pre-tax Pension Expense | |
|---|
| U.S. Plans | | U.K. Plan | |
|---|
Discount rate | | | | | | | | | ------------------------------------------------
One-half percent increase | | Decrease of $4 million | | Decrease of $6 million | | One-half percent decrease | | Increase of $4 million | | Increase of $7 million | | | | Long-term expected rate of return on plan assets | | | | One-half percent increase | | Decrease of $1 million | | Decrease of $2 million | | | One-half percent decrease | | Increase of $1 million | | Increase of $2 million | |
Should circumstances change that affect these estimates, changes (either increases or decreases) to the unfunded obligations may be required and would be recorded in accordance with the provisions of SFAS 87. Additionally, certain events could result in the pension unfunded obligation changing at a time other than the annual measurement date. This would occur when the benefit plan is amended or when plan curtailments occur. See Note 8, Employee Benefit Plans, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data,” for additional disclosures related to these items.
Notes and Accounts Receivable –Notes and accounts receivable are stated at their net realizable value through the use of allowances for doubtful accounts. These allowances are maintained for estimated future losses resulting from the inability of customers to make required payments on notes or accounts receivable. The Company has policies and procedures in place requiring customers to be evaluated for creditworthiness prior to the execution of new service contracts or shipments of products. These reviews are structured to assist in minimizing the Company’s risk related to its receivables. Despite these policies and procedures, the Company may still experience collection problems and potential
12
bad debts due to economic conditions within certain industries (e.g., construction and steel industries) and countries and regions (e.g., U.S., U.K., Middle East, etc.) in which the Company operates.
A considerable amount of judgment is required in assessing the realization of receivables, including the current creditworthiness of each customer, related aging of the past due balances and the facts and circumstances surrounding any non-payment. The Company’s provisions for bad debts during 2002, 2001 and 2000 were $6.9 million, $12.6 million and $4.0 million, respectively. Included in these provisions for bad debts were provisions for steel mill customers of $1.9 million, $8.1 million and $0.6 million in 2002, 2001 and 2000, respectively. Additionally, the 2002 amount includes approximately $2 million in net reserve reductions related to changes in estimates during the year due principally to the recovery of receivables related to customers that had filed for bankruptcy protection. At December 31, 2002 and 2001, receivables of $388.9 million and $386.3 million, respectively, were net of reserves of $36.5 million and $32.5 million, respectively. The Company evaluates specific accounts when it becomes aware of a situation where a customer may not be able to meet its financial obligations due to a deterioration of its financial condition, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to the Company and are re-evaluated and adjusted as additional information is received. Reserves are also determined by using percentages (based upon historical results) applied to certain aged receivable categories.
If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Conversely, an improvement in a customer’s ability to make payments could result in a decrease of the allowance. Changes in the allowance related to both of these situations would be recorded through income in the period the change was determined.
Goodwill –The Company’s net goodwill balances were $377.2 million and $353.2 million, at December 31, 2002 and 2001, respectively. Goodwill is not amortized but tested for impairment at the reporting unit level on an annual basis, and between annual tests, whenever events or circumstances indicate that the carrying value of a reporting unit’s goodwill may exceed its fair value. A discounted cash flow model is used to estimate the fair value of a reporting unit. This model requires the use of long-term planning estimates and assumptions regarding industry-specific economic conditions that are outside the control of the Company. The Company’s annual goodwill impairment testing, performed as of October 1, 2002, indicated that the fair value of all reporting units tested exceeded their respective book values and therefore no goodwill impairment exists. Due to uncertain market conditions, it is possible that estimates used for goodwill impairment testing may change in the future. Therefore, there can be no assurance that future goodwill impairment tests will not result in a charge to earnings. See Note 5, Goodwill and Other Intangible Assets, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data” for additional information on goodwill and other intangible assets.
Asset Impairment –Long-lived assets are reviewed for impairment when events and circumstances indicate that the book value of an asset may be impaired. The determination of an impairment loss involves significant judgments based upon short and long-term projections of future asset performance. Impairment loss estimates are based upon the difference between the book value and the fair value of the asset. The fair value is generally based upon the Company’s estimate of the amount that the assets could be bought or sold for in a current transaction between willing parties. At December 31, 2002 and 2001, the cumulative facilities impairment charge remaining on the balance sheet was $4.5 million and $13.4 million, respectively. The significant decrease during 2002 relates to the sale of impaired assets during the year. Regarding one of these assets, an $8.0 million impairment charge was recorded in 2001. When the asset was sold in April 2002, it was determined that this reserve was approximately $60 thousand higher than required which was included in income during that period. Should circumstances change that affect these estimates, additional impairment charges may be required and would be recorded through income in the period the change was determined.
Inventories –Inventories are stated at the lower of cost or market. Inventory balances are adjusted for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and its estimated market value. In assessing the ultimate realization of inventories, the Company is required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. If actual market conditions are determined to be less favorable than those projected by management, additional inventory write-downs may be required and would be recorded through income in the period the determination is made. Additionally, the Company records reserves to adjust a substantial portion of its U.S. inventory balances to the last-in, first-out (LIFO) method of inventory valuation. In adjusting these reserves throughout the year, the Company estimates its year-end inventory costs and quantities. At December 31 of each year, the reserves are adjusted to reflect actual year-end inventory costs and quantities. These adjustments resulted in income of $1.4 million and $2.7 million in 2002 and 2001, respectively. At December 31, 2002 and 2001, inventories of $181.7 million and $174.6 million, respectively, are net of lower of cost or market reserves of $4.8 million and $5.5 million, respectively, and LIFO reserves of $22.5 million and $24.2 million, respectively.
13
Insurance Reserves –The Company retains a significant portion of the risk for property, workers’ compensation, automobile, general and product liability losses. In consultation with third-party actuarial professionals, reserves have been recorded which reflect the undiscounted estimated liabilities for ultimate losses including claims incurred but not reported. Inherent in these estimates are assumptions 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 in insurance law. At December 31, 2002 and 2001 the Company has recorded liabilities of $65.0 million and $67.6 million, respectively, related to both asserted as well as unasserted insurance claims. 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. During 2002, 2001 and 2000, the Company recorded retrospective insurance reserve adjustments that decreased pre-tax insurance expense for self-insured programs by $5.9 million, $4.4 million and $4.5 million, respectively. The adjustments resulted from improved claims experience, better claims management programs and an improved focus on workplace safety.
Legal Contingencies –Reserves for contingent liabilities are recorded on the balance sheet when an event is determined to be both probable and can be reasonably estimated. Currently, the Company is involved in a claim regarding Federal Excise Tax related to a 1986 contract for the sale of five-ton trucks to the United States Army. The Company believes that payment of this claim is not probable; however, it is possible that resolution of this claim could result in the Company being required to remit taxes, penalties and interest payments to the Internal Revenue Service. If that should happen, the Company believes the payment will not have a material adverse effect on the Company’s
Should circumstances change that affect these estimates, changes (either
increases or decreases) to the unfunded obligations may be required and would be
recorded in accordance with the provisions of SFAS 87. Additionally, certain
events could result in the pension unfunded obligation changing at a time other
than the annual measurement date. This would occur when the benefit plan is
amended or when plan curtailments occur.
See Note 8, Employee Benefit Plans, to the Consolidated Financial Statements
under Part II, Item 8, "Financial Statements and Supplementary Data," for
additional disclosures related to these items.
NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable are stated at their net realizable value through
the use of allowances for doubtful accounts. These allowances are maintained for
estimated future losses resulting from the inability of customers to make
required payments on notes or accounts receivable. The Company has policies and
procedures in place requiring customers to be evaluated for creditworthiness
prior to the execution of new service contracts or shipments of products. These
reviews are structured to assist in minimizing the Company's risk related to
realizability of its receivables. Despite these policies and procedures, the
Company may still experience collection problems and potential bad debts due to
economic conditions within certain industries (e.g., construction and steel
industries) and countries and regions (e.g., U.S., U.K., Middle East, etc.) in
which the Company operates. At December 31, 2003 and 2002, receivables of $446.9
million and $388.9 million, respectively, were net of reserves of $24.6 million
and $36.5 million, respectively.
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CRITICAL ESTIMATE - NOTES AND ACCOUNTS RECEIVABLE
A considerable amount of judgment is required in assessing the realizability of
receivables, including the current creditworthiness of each customer, related
aging of the past due balances and the facts and circumstances surrounding any
non-payment. The Company's provisions for bad debts during 2003, 2002 and 2001
were $3.4 million, $6.9 million and $12.6 million, respectively. Included in
these provisions for bad debts were net (reversals) and provisions for steel
mill customers of $(1.5) million, $1.9 million and $8.1 million in 2003, 2002
and 2001, respectively. The 2003 amount includes approximately $1.9 million in
net reserve reductions related to changes in estimates during the year due
principally to the recovery of receivables related to a customer that had
previously filed for bankruptcy protection.
During the last three years, approximately 40 U.S. steelmakers and several
international steel producers have filed for bankruptcy-court protection, some
of which were the Company's customers. The Company evaluates its reserve
requirements for bankrupt steel customers based upon contractual rights and
obligations, the rights and obligations under the respective country's
bankruptcy laws, details of the proposed reorganization plan, and our history in
collecting pre-petition receivable amounts from bankrupt customers. The Company
has been successful in collecting substantially all of the pre-petition
receivable amounts in several cases where the customer has filed for
bankruptcy-court protection.
The Company evaluates specific accounts when it becomes aware of a situation
where a customer may not be able to meet its financial obligations due to a
deterioration of its financial condition, credit ratings or bankruptcy. The
reserve requirements are based on the best facts available to the Company and
are re-evaluated and adjusted as additional information is received. Reserves
are also determined by using percentages (based upon historical results) applied
to certain aged receivable categories.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Conversely, an improvement in a customer's ability
to make payments could result in a decrease of the allowance for doubtful
accounts. Changes in the allowance related to both of these situations would be
recorded through income in the period the change was determined.
The Company has not materially changed its methodology for calculating
allowances for doubtful accounts for the years presented.
GOODWILL
The Company's net goodwill balances were $407.8 million and $377.2 million, at
December 31, 2003 and 2002, respectively. Goodwill is not amortized but tested
for impairment at the reporting unit level on an annual basis, and between
annual tests whenever events or circumstances indicate that the carrying value
of a reporting unit's goodwill may exceed its fair value.
CRITICAL ESTIMATE - GOODWILL
A discounted cash flow model is used to estimate the fair value of a reporting
unit. This model requires the use of long-term planning estimates and
assumptions regarding industry-specific economic conditions that are outside the
control of the Company. The annual test for impairment includes the selection of
an appropriate discount rate to value cash flow information. The basis of this
discount rate calculation is derived from several internal and external factors.
These factors include, but are not limited to, the average market price of the
Company's stock, the number of shares of stock outstanding, the book value of
the Company's debt, a long-term risk free interest rate, and both market and
size specific risk premiums. The Company's annual goodwill impairment testing,
performed as of October 1, 2003, indicated that the fair value of all reporting
units tested exceeded their respective book values and therefore no additional
goodwill impairment testing was required. Due to uncertain market conditions, it
is possible that estimates used for goodwill impairment testing may change in
the future. Therefore, there can be no assurance that future goodwill impairment
tests will not result in a charge to earnings.
The Company has not materially changed its methodology for goodwill impairment
testing for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described above.
See Note 5, Goodwill and Other Intangible Assets, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data"
for additional information on goodwill and other intangible assets.
-25-
ASSET IMPAIRMENT
Long-lived assets are reviewed for impairment when events and circumstances
indicate that the book value of an asset may be impaired. At December 31, 2003
and 2002, the cumulative long-lived asset impairment valuation reserve was $4.3
million and $4.5 million, respectively.
CRITICAL ESTIMATE - ASSET IMPAIRMENT
The determination of a long-lived asset impairment loss involves significant
judgments based upon short and long-term projections of future asset
performance. Impairment loss estimates are based upon the difference between the
book value and the fair value of the asset. The fair value is generally based
upon the Company's estimate of the amount that the assets could be bought or
sold for in a current transaction between willing parties. Should circumstances
change that affect these estimates, additional impairment charges may be
required and would be recorded through income in the period the change was
determined.
The Company has not materially changed its methodology for calculating asset
impairments for the years presented. There are currently no known trends,
demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described
above.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventory balances are
adjusted for estimated obsolete or unmarketable inventory equal to the
difference between the cost of inventory and its estimated market value. At
December 31, 2003 and 2002, inventories of $190.2 million and $181.7 million,
respectively, are net of lower of cost or market reserves of $4.1 million and
$4.8 million, respectively.
CRITICAL ESTIMATE - INVENTORIES
In assessing the ultimate realization of inventory balance amounts, the Company
is required to make judgments as to future demand requirements and compare these
with the current or committed inventory levels. If actual market conditions are
determined to be less favorable than those projected by management, additional
inventory write-downs may be required and would be recorded through income in
the period the determination is made. Additionally, the Company records reserves
to adjust a substantial portion of its U.S. inventory balances to the last-in,
first-out (LIFO) method of inventory valuation. In adjusting these reserves
throughout the year, the Company estimates its year-end inventory costs and
quantities. At December 31 of each year, the reserves are adjusted to reflect
actual year-end inventory costs and quantities. During periods of inflation, the
LIFO expense usually increases and during periods of deflation it decreases.
These adjustments resulted in pre-tax income of $1.5 million and $1.4 million in
2003 and 2002, respectively.
The Company has not materially changed its methodology for calculating inventory
reserves for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described above.
INSURANCE RESERVES
The Company retains a significant portion of the risk for property, workers'
compensation, automobile, general and product liability losses. At December 31,
2003 and 2002 the Company has recorded liabilities of $69.3 million and $65.0
million, respectively, related to both asserted as well as unasserted insurance
claims.
CRITICAL ESTIMATE - INSURANCE RESERVES
Reserves have been recorded based upon actuarial calculations which 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
in the law. 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. During 2003,
2002 and 2001, the Company recorded retrospective insurance reserve adjustments
that decreased pre-tax insurance expense for self-insured programs by $5.7
million, $5.9 million and $4.4 million, respectively. The adjustments resulted
from improved claims experience, aggressive claim and insured litigation
management programs and an improved focus on workplace safety.
The Company has not materially changed its methodology for calculating insurance
reserves for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described above.
-26-
LEGAL AND OTHER CONTINGENCIES
Reserves for contingent liabilities are recorded on the balance sheet when an
event is determined to be both probable and can be reasonably estimated. These
reserves are recorded using the estimated amount of the most likely outcome. If
there is no best estimate within a range of possible outcomes, the estimated
amount at the lower end of the range is recorded.
CRITICAL ESTIMATE - LEGAL AND OTHER CONTINGENCIES
Currently, the Company is involved in a claim regarding Federal Excise Tax
related to a 1986 contract for the sale of five-ton trucks to the United States
Army. The Company believes that payment of this claim is not probable; however,
it is possible that resolution of this claim could result in the Company being
required to remit taxes, penalties and interest payments to the Internal Revenue
Service. If that should happen, the Company believes the payment will not have a
material adverse effect on the Company's financial position; however, it could
have a material effect on quarterly or annual results of operations and cash
flows. If the cargo trucks are ultimately held to be taxable, as of December 31,
2003, the Company's net maximum liability for this claim would be $5.8 million
plus penalties and applicable interest, currently estimated to be $12.4 million
and $70.6 million, respectively. However, should circumstances change with
regard to this or any other contingency, adjustments (either increases or
decreases) to reserves may be required and would be recorded through income in
the period the change was determined. During 2003, the Company adjusted an
accrual related to this matter resulting in $8.0 million in pre-tax income. This
adjustment was included in Income related to discontinued defense business on
the Company's Consolidated Statements of Income. The Company's current
expectation is that its future obligations for finalizing this matter will
approximate $0.8 million.
In addition to the above Federal Excise Tax contingency, the Company is involved
in certain environmental actions, as well as litigation related to its products
and services. When reserves are necessary, they are established based upon
consultation with legal counsel; consideration of the facts and circumstances
surrounding the contingency; our experience with similar matters; consideration
of contractual rights and obligations; and other relevant factors. Should
circumstances change with regards to such matters, adjustments (either increases
or decreases) to associated contingency reserves may be required and would be
recorded through income in the period the change was determined.
The Company has not materially changed its methodology for calculating legal and
other contingencies for the years presented. There are currently no known
trends, demands, commitments, events or uncertainties that are reasonably likely
to occur that would materially affect the methodology or assumptions described
above.
See Note 10, Commitments and Contingencies, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data"
for additional disclosure on this uncertainty and other contingencies.
INCOME TAXES
The Company is subject to various federal, state and local income taxes in the
taxing jurisdictions where the Company operates. At the end of each quarterly
period, the Company makes its best estimate of the annual effective income tax
rate and applies that rate to year-to-date pretax income to arrive at the
year-to-date income tax provision. At December 31, 2003, 2002 and 2001 the
Company's net effective income tax rate was 31.0%, 31.0% and 32.5%,
respectively.
A valuation allowance to reduce deferred tax assets is evaluated on a quarterly
basis. The valuation allowance is principally for tax loss carryforwards and
cumulative unrelieved foreign tax credits which are uncertain as to
realizability. The valuation allowance was $1.7 million and $2.7 million at
December 31, 2003 and 2002, respectively.
CRITICAL ESTIMATE - INCOME TAXES
The annual effective income tax rates are developed giving recognition to tax
rates, tax holidays, tax credits and capital losses, as well as certain exempt
income and non-deductible expenses in all of the jurisdictions where the Company
does business. The income tax provision for the quarterly period is the change
in the year-to-date provision from the previous quarterly period.
The Company considers future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance. In the
event the Company were to determine that it would more likely than not be able
to realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should the Company determine that
it would not be able to realize all or part of its net deferred tax assets in
the future, an adjustment to the deferred tax assets would decrease income in
the period in which such determination was made.
-27-
The Company has not materially changed its methodology for calculating income
tax expense for the years presented. There are currently no known trends,
demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described
above.
See Note 9, Income Taxes, to the Consolidated Financial Statements under Part
II, Item 8, "Financial Statements and Supplementary Data" for additional
disclosures related to these items.
NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
See Note 1, Summary of Significant Accounting Policies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data" for disclosures on new financial accounting standards issued
and their effect on the Company.
RESEARCH AND DEVELOPMENT
The Company invested $3.3 million in internal research and development programs
in 2003. Internal funding for the Mill Services Segment amounted to $1.3
million. Expenditures for the Other Infrastructure Products and Services ("all
other") Category, Gas and Fluid Control Segment and the Access Services Segment
were $0.9 million, $0.5 million and $0.5 million, respectively.
BACKLOG
As of December 31, 2003, the Company's order backlog, exclusive of long-term
mill services contracts and access services, was $186.2 million compared with
$157.8 million as of December 31, 2002, an 18% increase.
Mill services contracts have an estimated future value of $3.4 billion at
December 31, 2003 compared with $3.0 billion at December 31, 2002. Approximately
60% of these revenues are expected to be recognized by December 31, 2006. The
remaining revenues are expected to be recognized principally between January 1,
2007 and December 31, 2012.
Backlog for scaffolding, shoring and forming services of the Access Services
Segment is excluded from the above amounts. These amounts are generally not
quantifiable due to the nature and timing of the products and services provided.
The Gas and Fluid Control Segment backlog at December 31, 2003 of $36.5 million
was 11% below the December 31, 2002 backlog of $40.8 million. The decrease
reflects a reduced order backlog of valves. This decrease was partially offset
by an increase in the backlog of propane tanks and heat exchangers.
Order backlog for the Other Infrastructure Products and Services ("all other")
Category at December 31, 2003 was $149.7 million, an increase of 28% from the
December 31, 2002 backlog of $117.0 million. The increase is principally due to
an increase in backlog of railway track maintenance services. The railway track
maintenance services increase relates principally to a five-year contract
renewal for a minimum of $47.6 million with a major railroad. Backlog for
roofing granules and slag abrasives is excluded from the above amounts. These
amounts are generally not quantifiable due to the nature and timing of the
products provided.
DIVIDEND ACTION
The Company paid four quarterly cash dividends of $.2625 per share in 2003, for
an annual rate of $1.05. This is an increase of 5% from 2002. At the November
2003 meeting, the Board of Directors increased the dividend by 4.8% to an annual
rate of $1.10 per share. The Board normally reviews the dividend rate
periodically during the year and annually at its November meeting. There are no
material restrictions on the payment of dividends.
The February 2004 payment marked the 215th consecutive quarterly dividend paid
at the same or at an increased rate. In 2003, 46% of net earnings were paid out
in dividends. The Company is philosophically committed to maintaining or
increasing the dividend at a sustainable level. The Company has paid dividends
each year since 1939.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK.
In the normal course of business, the Company is routinely subjected to a
variety of risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
-28-
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE
COMPANY'S BUSINESS.
The Company's businesses are vulnerable to general economic slowdowns and
cyclical conditions in the industries served. In particular,
o The Company's mill services business may be adversely affected by
slowdowns in steel mill production, excess capacity, continued
consolidation or bankruptcy of steel producers or a reversal or slowing of
current outsourcing trends in the steel industry;
o The Company's access services business may be adversely affected by
slowdowns in non-residential construction and annual industrial and
building maintenance cycles;
o The Company's gas and fluid control business may be adversely affected by
slowdowns in demand for consumer barbecue grills, reduced industrial
production or lower demand for natural gas vehicles and products for the
natural gas drilling and transmission industry;
o The industrial grating business may be adversely affected by slowdowns in
non-residential construction and industrial production;
o The railway track maintenance business may be adversely affected by
developments in the railroad industry that lead to lower capital spending
or reduced maintenance spending; and
o The industrial abrasives and roofing granules business may be adversely
affected by slower home resales or economic conditions that slow the rate
of residential roof replacement.
THE COMPANY'S DEFINED BENEFIT PENSION EXPENSE IS DIRECTLY AFFECTED BY THE
EQUITY AND BOND MARKETS AND A DOWNWARD TREND IN THOSE MARKETS COULD
ADVERSELY AFFECT THE COMPANY'S FUTURE EARNINGS.
In addition to the economic issues that directly affect the Company's business,
changes in the performance of equity and bond markets, particularly in the
United Kingdom and the United States, impact actuarial assumptions used in
determining annual pension expense, pension liabilities and the valuation of the
assets in the Company's defined benefit pension plans. The downturn in financial
markets during 2000, 2001 and 2002 has negatively impacted the Company's pension
expense and the accounting for pension assets and liabilities. This has resulted
in an increase in pre-tax defined benefit pension expense from continuing
operations of approximately $17.7 million for calendar year 2003 compared with
2002. Should a downward trend in capital markets continue, future unfunded
obligations and pension expense would likely increase. This could result in an
additional reduction to shareholders' equity and increase the Company's
statutory funding requirements. If the financial markets improve, it would most
likely have a positive impact on the Company's pension expense and the
accounting for pension assets and liabilities. This could result in an increase
to shareholders' equity and a decrease in the Company's statutory funding
requirements.
In response to dealing with the adverse market conditions, during 2002 and 2003
the Company conducted a comprehensive global review of its pension plans in
order to formulate a plan to make its long-term pension costs more predictable
and affordable. The Company has implemented design changes for most of these
plans. The principal change involves converting future pension benefits for many
of the Company's non-union employees in both the U.K. and U.S. from defined
benefit plans to defined contribution plans as of January 1, 2004. This
conversion is expected to make the Company's pension expense more predictable
and affordable and less sensitive to changes in the financial markets. Overall,
pension expense is expected to stabilize in 2004.
THE COMPANY'S GLOBAL PRESENCE SUBJECTS IT TO A VARIETY OF RISKS ARISING
FROM DOING BUSINESS IN FOREIGN COUNTRIES.
The Company operates in over 400 locations in over 40 countries, including the
United States. The Company's global footprint exposes it to a variety of risks
that may adversely affect results of operations, cash flows or financial
position. These include:
o periodic economic downturns in the countries in which the Company
does business;
o fluctuations in currency exchange rates;
o customs matters and changes in trade policy or tariff regulations;
-29-
o imposition of or increases in currency exchange controls and hard
currency shortages;
o changes in regulatory requirements in the countries in which the
Company does business;
o higher tax rates and potentially adverse tax consequences including
restrictions on repatriating earnings, adverse tax withholding
requirements and "double taxation ";
o longer payment cycles and difficulty in collecting accounts
receivable;
o complications in complying with a variety of foreign laws and
regulations;
o political, economic and social instability, civil unrest and armed
hostilities in the countries in which the Company does business;
o inflation rates in the countries in which the Company does business;
o laws in various foreign jurisdictions that limit the right and
ability of foreign subsidiaries to pay dividends and remit earnings
to affiliated companies unless specified conditions are met; and,
o uncertainties arising from local business practices, cultural
considerations and international political and trade tensions.
If the Company is unable to successfully manage the risks associated with its
global business, the Company's financial condition and results of operations may
suffer.
The Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq and other countries with a continued high risk of
armed hostilities. During 2003 and 2002, these countries contributed
approximately $16.4 million and $14.6 million, respectively, to the Company's
operating income. Additionally, the Company has operations in and sales to
countries that have encountered outbreaks of communicable diseases (e.g., Severe
Acute Respiratory Syndrome (SARS) and Acquired Immune Deficiency Syndrome
(AIDS). Should these outbreaks 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.
EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS.
Fluctuations in foreign exchange rates between the U.S. dollar and the
approximately 35 other currencies in which the Company conducts business may
adversely affect the Company's operating income and income from continuing
operations in any given fiscal period. Approximately 57% and 54% of the
Company's sales and approximately 63% and 58% of the Company's operating income
from continuing operations for the years ended December 31, 2003 and 2002,
respectively, were derived from operations outside the United States. Given the
structure of the Company's revenues and expenses, an increase in the value of
the U.S. dollar relative to the foreign currencies in which the Company earns
its revenues generally has a negative impact on operating income, whereas a
decrease in the value of the U.S. dollar tends to have the opposite effect. The
Company's principal foreign currency exposures are to the British pound sterling
and the euro.
Compared with the corresponding period in 2002, the average values of major
currencies changed as follows in relation to the U.S. dollar during 2003,
impacting the Company's sales and income:
o British pound sterling Strengthened by 8%
o Euro Strengthened by 17%
o South African rand Strengthened by 28%
o Brazilian real Weakened by 5%
The Company's foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies change
materially in relation to the U.S. dollar, the Company's financial position,
results of operations, or cash flows may be materially affected.
To illustrate the effect of foreign currency exchange rate changes in certain
key markets of the Company, in 2003, revenues would have been approximately 6%
or $126.2 million less and income from continuing operations would have
-30-
been approximately 9% or $8.2 million less if the average exchange rates for
2002 were utilized. A similar comparison for 2002 would have decreased sales
approximately 2% or $30.5 million while income from continuing operations would
have been approximately 2% or $2.1 million less if the average exchange rates
for 2002 would have remained the same as 2001. If the weakening of the U.S.
dollar in relation to the euro and British pound sterling that started in the
second quarter of 2002 would continue, the Company would expect to see a
positive impact on future sales and net income as a result of foreign currency
translation.
Currency changes result in assets and liabilities denominated in local
currencies being translated into U.S. dollars at different amounts than at the
prior period end. These currency changes resulted in increased net assets of
$72.0 million and $39.3 million, at December 31, 2003 and 2002, respectively,
when compared with December 31, 2002 and 2001, respectively.
The Company seeks to reduce exposures to foreign currency transaction
fluctuations through the use of forward exchange contracts. At December 31,
2003, these contracts amounted to $78.4 million, and all will mature within the
first two months of 2004. The Company does not hold or issue financial
instruments for trading purposes, and it is the Company's policy to prohibit the
use of derivatives for speculative purposes.
Although the Company engages in forward exchange contracts and other hedging
strategies to mitigate foreign exchange risk, hedging strategies may not be
successful or may fail to offset the risk.
In addition, competitive conditions in the Company's manufacturing businesses
may limit the Company's ability to increase product price in the face of adverse
currency movements. Products manufactured in the United States for the domestic
and export markets may be affected by the value of the U.S. dollar relative to
other currencies. Any long-term strengthening of the U.S. dollar could depress
demand for these products and reduce sales and may cause translation losses due
to the revaluation of accounts payable, accounts receivable and other asset and
liability accounts. Conversely, any long-term weakening of the U.S. dollar could
improve demand for these products and increase sales and may cause translation
gains due to the revaluation of accounts payable, accounts receivable and other
asset and liability accounts.
NEGATIVE ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE ABILITY OF THE
COMPANY'S CUSTOMERS TO MEET THEIR OBLIGATIONS TO THE COMPANY ON A TIMELY
BASIS AND AFFECT THE VALUATION OF THE COMPANY'S ASSETS.
If a downturn in the economy persists, it may adversely affect the ability of
the Company's customers to meet their obligations to the Company on a timely
basis and could result in additional bankruptcy filings by them. If customers
are unable to meet their obligations on a timely basis, it could adversely
impact the realizability of receivables, the valuation of inventories and the
valuation of long-lived assets across the Company's businesses, as well as
negatively affect the forecasts used in performing the Company's goodwill
impairment testing under SFAS No. 142, "Goodwill and Other Intangible Assets."
If management determines that goodwill or assets are impaired or that
inventories or receivables cannot be realized at projected rates, the Company
will be required to record a write-down in the period of determination, which
will reduce net income for that period.
A NEGATIVE OUTCOME ON PERSONAL INJURY CLAIMS AGAINST THE COMPANY MAY
ADVERSELY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos. In their suits, the plaintiffs have named as defendants many
manufacturers, distributors and repairers of numerous types of equipment or
products that may involve asbestos. Most of these complaints contain a standard
claim for damages of $20 million or more against the named defendants. The
Company has not paid any amounts in settlement of these cases, with the
exception of two settlements totaling less than $10,000 paid by the insurance
carrier prior to 1998. However, if the Company was found to be liable in any of
these actions and the liability was to exceed the Company's insurance coverage,
results of operations, cash flows and financial condition could be adversely
affected. For more information concerning these litigations, see Note 10,
Commitments and Contingencies, to the Consolidated Financial Statements under
Part II, Item 8, "Financial Statements and Supplementary Data."
THE COMPANY MAY LOSE CUSTOMERS OR BE REQUIRED TO REDUCE PRICES AS A RESULT
OF COMPETITION.
The industries in which the Company operates are highly competitive. The
Company's manufacturing businesses compete with companies that manufacture
similar products both internationally and domestically. Certain international
competitors export their products into the United States and sell them at lower
prices due to lower labor costs and government subsidies for exports. Such
prices may limit the prices the Company can charge for its products and
-31-
services. Additionally, unfavorable foreign exchange rates can adversely impact
the Company's ability to match the prices charged by foreign competitors. If the
Company is unable to match the prices charged by foreign competitors, it may
lose customers. The Company's strategy to overcome this competition includes Six
Sigma continuous process improvement and cost reduction programs, international
customer focus and the diversification, streamlining and consolidation of
operations.
INCREASES IN ENERGY PRICES COULD INCREASE THE COMPANY'S OPERATING COSTS
AND REDUCE ITS PROFITABILITY.
Worldwide political and economic conditions, among other factors, may result in
an increase in the volatility of energy costs, both on a macro basis and for the
Company specifically. Historically, direct energy costs have approximated
between 2.5% to 3.5% of the Company's revenue. To the extent that such costs
cannot be passed to customers, operating income and results of operations may be
adversely affected.
INCREASES OR DECREASES IN PURCHASE PRICES OF STEEL OR OTHER MATERIALS MAY
AFFECT THE COMPANY'S PROFITABILITY.
The profitability of the Company's manufactured products are affected by
changing purchase prices of steel and other materials. If higher steel or other
material costs associated with the Company's manufactured products cannot be
passed on to the Company's customers, then operating income will be adversely
affected.
THE COMPANY IS SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND THE SUCCESS OF
EXISTING OR FUTURE ENVIRONMENTAL CLAIMS AGAINST IT COULD ADVERSELY AFFECT
THE COMPANY'S RESULTS OF OPERATIONS AND CASH FLOWS.
The Company's operations are subject to various federal, state, local and
foreign laws, regulations and ordinances relating to the protection of health,
safety and the environment, including those governing discharges to air and
water, handling and disposal practices for solid and hazardous wastes, the
cleaning up of contaminated sites and the maintenance of a safe work place.
These laws impose penalties, fines and other sanctions for non-compliance and
liability for response costs, property damages and personal injury resulting
from past and current spills, disposals or other releases of, or exposure to,
hazardous materials. The Company could incur substantial costs as a result of
non-compliance with or liability for cleanup or other costs or damages under
these laws. The Company may be subject to more stringent environmental laws in
the future, and compliance with more stringent environmental requirements may
require the Company to make material expenditures or subject it to liabilities
that the Company currently does not anticipate.
The Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a "potentially responsible party" for certain waste disposal sites
under the federal "Superfund" law. At several sites, the Company is currently
conducting environmental remediation, and it is probable that the Company will
agree to make payments toward funding certain other of these remediation
activities. It also is possible that some of these matters will be decided
unfavorably to the Company and that other sites requiring remediation will be
identified. Each of these matters is subject to various uncertainties and
financial exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Company has evaluated its potential liability and the consolidated balance sheet
at December 31, 2003 and 2002 includes an accrual of $3.3 million and $3.2
million, respectively, for environmental matters. The amounts charged against
pre-tax earnings related to environmental matters totaled $1.4 million and $1.2
million for the years ended December 31, 2003 and 2002, respectively. The
liability for future remediation costs is evaluated on a quarterly basis. Actual
costs to be incurred at identified sites in future periods may be greater than
the estimates, given inherent uncertainties in evaluating environmental
exposures.
RESTRICTIONS IMPOSED BY THE COMPANY'S CREDIT FACILITIES AND OUTSTANDING
NOTES MAY LIMIT THE COMPANY'S ABILITY TO OBTAIN ADDITIONAL FINANCING OR TO
PURSUE BUSINESS OPPORTUNITIES.
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. These covenants limit the amount of debt the Company may
incur, which could limit its ability to obtain additional financing or to pursue
business opportunities. In addition, the Company's ability to comply with these
ratios may be affected by events beyond its control. A breach of any of these
covenants or the inability to comply with the required financial ratios could
result in a default under these credit facilities. In the event of any default
under these credit facilities, the lenders under those facilities could elect to
declare all borrowings outstanding, together with accrued and unpaid interest
and other fees, to be due and payable, which would cause an event of default
under the notes. This could in turn trigger an event of default under the
cross-default provisions of the Company's other outstanding indebtedness. At
December 31, 2003, the Company was in compliance with these covenants and $362.9
million in indebtedness containing these covenants was outstanding.
-32-
HIGHER THAN EXPECTED CLAIMS UNDER INSURANCE POLICIES, UNDER WHICH THE
COMPANY RETAINS A PORTION OF RISK, COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS AND CASH FLOWS.
The Company retains a significant portion of the risk for property, workers'
compensation, automobile, general and product liability losses. Reserves have
been recorded which reflect the undiscounted estimated liabilities for ultimate
losses including claims incurred but not reported. Inherent in these estimates
are assumptions that are based on the Company's history of claims and losses, a
detailed analysis of existing claims with respect to potential value, and
current legal and legislative trends. At December 31, 2003 and 2002, the Company
had recorded liabilities of $69.3 million and $65.0 million, respectively,
related to both asserted and unasserted insurance claims. If actual claims are
higher than those projected by management, an increase to the Company's
insurance reserves may be required and would be recorded as a charge to income
in the period the need for the change was determined. Conversely, if actual
claims are lower than those projected by management, a decrease to the Company's
insurance reserves may be required and would be recorded as a reduction to
expense in the period the need for the change was determined.
THE SEASONALITY OF THE COMPANY'S BUSINESS MAY CAUSE ITS QUARTERLY RESULTS
TO FLUCTUATE.
The Company has historically generated the majority of its cash flows in the
third and fourth quarters (periods ending September 30 and December 31). This is
a direct result of traditionally higher sales and income during the second and
third quarters (periods ending June 30 and September 30) of the year, as the
Company's business tends to follow seasonal patterns. If the Company is unable
to successfully manage the cash flow and other effects of seasonality on the
business, its results of operations may suffer.
THE COMPANY'S CASH FLOWS AND EARNINGS ARE SUBJECT TO CHANGES IN INTEREST
RATES.
The Company's total debt as of December 31, 2003 was $613.5 million. Of this
amount, approximately 13% had variable rates of interest and 87% had fixed rates
of interest. The weighted average interest rate of total debt was approximately
6.1%. At current debt levels, a one-percentage increase/decrease in variable
interest rates would increase/decrease interest expense by approximately $0.8
million per year.
The future financial impact on the Company associated with the above risks
cannot be estimated.
-33-
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Data
Page
----
Consolidated Financial Statements of Harsco Corporation:
Management's Report on Financial Statements 35
Report of Independent Auditors 35
Consolidated Balance Sheets
December 31, 2003 and 2002 36
Consolidated Statements of Income
for the years 2003, 2002 and 2001 37
Consolidated Statements of Cash Flows
for the years 2003, 2002 and 2001 38
Consolidated Statements of Shareholders' Equity
for the years 2003, 2002 and 2001 39
Consolidated Statements of Comprehensive Income
for the years 2003, 2002 and 2001 40
Notes to Consolidated Financial Statements 41
Supplementary Data (Unaudited):
Two-Year Summary of Quarterly Results 73
Common Stock Price and Dividend Information 73
-34-
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
To the Shareholders of Harsco Corporation:
Primary responsibility for the integrity and objectivity of the Company's
financial statements rests with management. These statements are prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts that are based on management's best estimates and judgments.
Non-financial information included in this Form 10-K has also been prepared by
management and is consistent with the financial statements.
The Company's internal control framework maintains systems, supported by a code
of conduct, designed to provide reasonable assurance, at reasonable cost, that
its assets and resources are safeguarded against loss from unauthorized use or
disposition and that transactions are executed and recorded in accordance with
established procedures. These systems are implemented through clear and
accessible written policies and procedures, employee training and appropriate
delegation of authority and segregation of responsibilities. These systems of
internal control are reviewed, modified and improved as changes occur in
business conditions and operations and as a result of suggestions from managers,
internal auditors and independent accountants. These systems are the
responsibility of the management of the Company.
The independent accountants are engaged to perform an audit of the consolidated
financial statements in accordance with generally accepted auditing standards.
Their report appears below.
The Audit Committee of the Board of Directors is comprised entirely of
individuals who are independent of the Company. This Committee meets
periodically and privately with the independent accountants, with the internal
auditors and with the management of the Company to review matters relating to
the quality of the financial reporting, the internal control framework and the
scope and results of audits.
/s/ Derek C. Hathaway /s/ Salvatore D. Fazzolari
- ----------------------------- -----------------------------
Derek C. Hathaway Salvatore D. Fazzolari
Chairman, President and Chief Senior Vice President, Chief
Executive Officer Financial Officer and Treasurer
REPORT OF INDEPENDENT AUDITORS
PRICEWATERHOUSECOOPERS [LOGO]
- -----------------------------
To the Shareholders of Harsco Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity, comprehensive income
and cash flows present fairly, in all material respects, the financial position
of Harsco Corporation and Subsidiary Companies at December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in note 5 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangibles" effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 4, 2004
-35-
HARSCO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31 DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2003 2002 (a)
==================================================================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 80,210 $ 70,132
Accounts receivable, net 446,875 388,872
Inventories 190,221 181,712
Other current assets 47,045 61,686
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 764,351 702,402
- ----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 866,918 804,495
Goodwill, net 407,846 377,220
Other assets 97,483 102,493
Assets held for sale 1,437 12,687
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,138,035 $ 1,999,297
==================================================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 14,854 $ 22,362
Current maturities of long-term debt 14,252 11,695
Accounts payable 188,430 166,871
Accrued compensation 46,034 39,456
Income taxes 45,116 43,411
Dividends payable 11,238 10,642
Other current liabilities 175,151 179,413
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 495,075 473,850
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 584,425 605,613
Deferred income taxes 66,855 62,096
Insurance liabilities 47,897 44,090
Retirement plan liabilities 115,190 118,875
Other liabilities 50,707 48,194
Liabilities associated with assets held for sale 898 2,039
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,361,047 1,354,757
- ----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Series A junior participating cumulative preferred stock -- --
Common stock, par value $1.25, issued 67,357,447 and 67,034,010 shares as of
December 31, 2003 and 2002, the Company’srespectively 84,197 83,793
Additional paid-in capital 120,070 110,639
Accumulated other comprehensive expense (169,427) (242,978)
Retained earnings 1,345,787 1,296,855
- ----------------------------------------------------------------------------------------------------------------------------------
1,380,627 1,248,309
Treasury stock, at cost (26,490,977 and 26,494,610 shares, respectively) (603,639) (603,769)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 776,988 644,540
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,138,035 $ 1,999,297
==================================================================================================================================
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2002 information has been reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
-36-
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31 2003 2002 2001 (a)
==================================================================================================================================
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 1,493,942 $ 1,341,867 $ 1,324,233
Product sales 624,574 634,865 700,930
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,118,516 1,976,732 2,025,163
- ----------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 1,104,873 981,754 954,417
Cost of products sold 499,500 500,010 561,983
Selling, general and administrative expenses 329,983 312,704 314,268
Research and development expenses 3,313 2,820 3,973
Other expenses 6,955 3,473 22,786
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 1,944,624 1,800,761 1,857,427
==================================================================================================================================
OPERATING INCOME FROM CONTINUING OPERATIONS 173,892 175,971 167,736
Equity in income (loss) of affiliates, net maximum liability for this claim would be $5.8 million plus penalties and applicable321 363 (1,852)
Interest income 2,202 3,688 5,589
Interest expense (40,513) (43,323) (53,190)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST 135,902 136,699 118,283
Income tax expense (41,708) (42,240) (38,553)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 94,194 94,459 79,730
Minority interest currently estimatedin net income (7,195) (6,049) (5,088)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 86,999 88,410 74,642
- ----------------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued business (668) (2,952) (4,488)
Gain on disposal of discontinued business 765 5,606 --
Income related to be $12.4 million and $65.4 million, respectively. However, should circumstances change with regardsdiscontinued defense business 8,030 -- --
Income tax benefit (expense) (2,909) (958) 1,571
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 5,218 1,696 (2,917)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 92,217 $ 90,106 $ 71,725
==================================================================================================================================
Average shares of common stock outstanding 40,690 40,360 39,876
Basic earnings (loss) per common share:
Continuing operations $ 2.14 $ 2.19 $ 1.87
Discontinued operations .13 .04 (.07)
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ 2.27 $ 2.23 $ 1.80
==================================================================================================================================
Diluted average shares of common stock outstanding 40,973 40,680 40,066
Diluted earnings (loss) per common share:
Continuing operations $ 2.12 $ 2.17 $ 1.86
Discontinued operations .13 .04 (.07)
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 2.25 $ 2.21 $ 1.79
==================================================================================================================================
(a) In order to comply with the Financial Accounting Standards Board (FASB)
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," 2001 information has been reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
-37-
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31 2003 2002 2001 (a)
==================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 92,217 $ 90,106 $ 71,725
Adjustments to this or any other contingency, adjustments (either increases or decreases) to reserves may be required and would be recorded through income in the period the change was determined. See Note 10, Commitments and Contingencies, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data” for additional disclosure on this uncertainty and other contingencies.Income Taxes –At the end of each quarterly period, the Company makes its best estimate of the annual effective income tax rate and applies that rate to year-to-date pretaxreconcile net income to arrive at the year-to-date income tax provision. These estimates are developed giving recognition to tax rates, tax holidays, tax creditsnet
cash provided (used) by operating activities:
Depreciation 167,161 153,979 159,157
Amortization 1,774 1,682 17,374
Equity in (income) loss of affiliates, net (321) (363) 1,852
Dividends or distributions from affiliates 1,383 144 895
Other (income) and capital losses, as well as certain exempt income and non-deductible expenses in all of the jurisdictions where the Company does business. The income tax provision for the quarterly period is the change in the year-to-date provision from the previous quarterly period. At December 31, 2002, 2001 and 2000 the Company’s effective income tax rate was 31.0%, 32.5% and 31.5%, respectively.
A valuation allowance to reduce deferred tax assets is evaluated on a quarterly basis. This valuation allowance is principally for tax loss carryforwards and cumulative unrelieved foreign tax credits which are uncertain as to realizability. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would more likely than not be able to realize its deferred tax assets in the future in excess of its(1,216) (273) 18,940
Other, net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would decrease income in the period in which such determination was made.
See Note 9, Income Taxes, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data” for additional disclosures related to these items.
New Financial Accounting Standards Issued –See Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data” for disclosures on new financial accounting standards issued and their effect on the Company.
Liquidity and Capital Resources
The Company’s principal sources of liquidity are cash from operations and short-term borrowings under its various credit agreements. During 2002, cash flows of $253.8 million generated from operations, $63.7 million from asset sales and a $41.7 million reduction in capital investments enabled the Company to make cash payments of $174.1 million to reduce debt. The Company surpassed its strategic objectives of generating $50 million from asset sales and reducing debt by $100 million. The Company’s strategic objective for 2003 again revolves around generating excess or discretionary cash and redeploying the cash to further reduce debt and to strategically grow primarily the service business. The Company’s strategies for generating discretionary cash flows for debt reduction and growth initiatives will come principally from reducing working capital employed, generating cash flows from the sale of underperforming assets and continuing the
14
strong cash flows from operations.(1,462) 8,776 (1,049)
Changes in the Company’s overall liquidity and capital resources from continuing operations are reflected in the following table:
| December 31 | December 31 | Increase |
|---|
| (Dollars are in millions) | 2002 | 2001 (a) | (Decrease) |
|---|
| | Current Assets | | $ 702.4 | | $ 696.8 | | $ 5.6 | | | Less: Current Liabilities | | 473.8 | | 465.7 | | 8.1 | |
| | Working Capital | | $ 228.6 | | $ 231.1 | | $ (2.5 | ) | | Current Ratio | | 1.5:1 | | 1.5:1 | |
| | Notes Payable and Current Maturities | | $ 34.1 | | $ 42.0 | | $ (7.9 | ) | | Long-term Debt | | 605.6 | | 720.1 | | (114.5 | ) |
| | Total Debt | | 639.7 | | 762.1 | | (122.4 | ) | | Total Equity | | 644.5 | | 686.2 | | (41.7 | ) |
| | Total Capital | | $1,284.2 | | $1,448.3 | | $(164.1 | ) | | Total Debt to Total Capital | | 49.8% | | 52.6% | | (2.8%) | |
|
(a) | | In order to comply with Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
Working Capital Position –Working capital decreased 1% in 2002 and the current ratio remained at 1.5:1. Current assets increased by $5.6 million due principally to a $7.1 million increase in inventories. The inventory increase was principally for railway track maintenance equipment that will be shipped in 2003 to fill a current backlog of orders. The increase in current assets was more than offset by an $8.1 million increase in current liabilities. The increase in current liabilities was principally due to an $8.4 million increase in accrued taxes due to higher income in 2002 than 2001 and a $4.4 million increase in accounts payable due to the timing of cash payments. This was partially offset by a $7.9 million decrease in short-term debt. In addition, the strengthening of the euro and the British pound sterling in relation to the U.S. dollar had the effect of increasing working capital as assets and liabilities, denominatednet of acquisitions
and dispositions of businesses:
Accounts receivable (21,211) 30,038 12,352
Inventories (2,078) (13,280) 11,893
Accounts payable 5,834 (13,055) (11,744)
Net disbursements related to discontinued defense business (1,328) (1,435) (1,328)
Other assets and liabilities 22,035 (2,566) (39,466)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 262,788 253,753 240,601
==================================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (143,824) (114,340) (156,073)
Purchase of businesses, net of cash acquired* (23,718) (3,332) (4,914)
Proceeds from sales of assets 22,794 63,731 35,668
Other investing activities (43) 12 106
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (144,791) (53,929) (125,213)
==================================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (20,013) (16,272) (15,181)
Current maturities and long-term debt:
Additions 323,366 136,970 195,678
Reductions (389,599) (294,799) (241,862)
Cash dividends paid on common stock (42,688) (40,286) (38,261)
Common stock issued-options 8,758 14,011 4,773
Common stock acquired for treasury -- -- (167)
Other financing activities (5,325) (5,104) (4,170)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (125,501) (205,480) (99,190)
==================================================================================================================================
Effect of exchange rate changes on cash 17,582 8,380 (5,211)
Net decrease in those currencies were translatedcash of discontinued operations -- 1 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 10,078 2,725 10,987
Cash and cash equivalents at higher amounts inbeginning of period 70,132 67,407 56,420
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,210 $ 70,132 $ 67,407
==================================================================================================================================
*PURCHASE OF BUSINESSES, NET OF CASH ACQUIRED
Working capital, other than cash $ (225) $ 250 $ (55)
Property, plant and equipment (16,694) (2,705) (5,151)
Other noncurrent assets and liabilities, net (6,799) (877) 292
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED TO ACQUIRE BUSINESSES $ (23,718) $ (3,332) $ (4,914)
==================================================================================================================================
|
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2001 information has been reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
-38-
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER
COMMON STOCK COMPREHENSIVE INCOME (EXPENSE)
------------------- ----------------------------------------------------------
UNREALIZED
ADDITIONAL CASH FLOW GAIN ON
(IN THOUSANDS, EXCEPT SHARE PAID-IN HEDGING PENSION MARKETABLE RETAINED
AND PER SHARE AMOUNTS) ISSUED TREASURY CAPITAL TRANSLATION INSTRUMENTS LIABILITY SECURITIES TOTAL EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 2001 $ 82,887 $(603,990) $ 90,000 $ (106,991) -- $ (2,386) -- $(109,377) $1,214,659
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 71,725
Cash dividends declared,
$.97 per share (38,704)
Translation adjustments (22,347) (22,347)
Cash flow hedging
instrument adjustments,
net of $47 deferred
income taxes (84) (84)
Pension liability
adjustments, net of
$2,039 deferred income
taxes (3,792) (3,792)
Marketable securities
adjustments, net of
$(182) deferred income
taxes 337 337
Acquired during the year,
10,451 shares (167)
Stock options exercised,
187,693 shares 219 149 4,590
Other, 2,435 shares 61 7
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2001 $ 83,106 $(603,947) $ 94,597 $ (129,338) $ (84) $ (6,178) $ 337 $(135,263) $1,247,680
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 90,106
Cash dividends declared,
$1.0125 per share (40,931)
Translation adjustments 39,311 39,311
Cash flow hedging instrument
adjustments, net of $(11)
deferred income taxes 22 22
Pension liability
adjustments, net of
$63,613 deferred income
taxes (146,709) (146,709)
Marketable securities
adjustments, net of $183
deferred income taxes (339) (339)
Stock options exercised,
552,101 shares 687 83 16,048
Other, 2,450 shares 95 (6)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2002 than in 2001.$ 83,793 $(603,769) $ 110,639 $ (90,027) $ (62) $(152,887) $ (2) $(242,978) $1,296,855
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 92,217
Cash Investing and Financing Activities –The Company’s debt as a percentdividends declared,
$1.0625 per share (43,285)
Translation adjustments 72,032 72,032
Cash flow hedging instrument
adjustments, net of total capital decreased in$4
deferred income taxes (8) (8)
Pension liability
adjustments, net of $(482)
deferred income taxes 1,523 1,523
Marketable securities
adjustments, net of $(2)
deferred income taxes 4 4
Stock options exercised,
325,480 shares 404 69 9,436
Other, 1,590 shares 61 (5)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2003 $ 84,197 $(603,639) $ 120,070 $ (17,995) $ (70) $(151,364) $ 2 $(169,427) $1,345,787
===================================================================================================================================
See accompanying notes to consolidated financial statements.
-39-
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31 2003 2002 due to the $122.4 million reduction in total debt. The decrease would have been even greater but for several factors. The total debt balance was affected by approximately $51.7 million due to the strengthening of the British pound sterling and the euro, which caused debt denominated in those currencies to be translated at higher amounts. Equity decreased due to a $146.7 million pension adjustment, partially offset by higher retained earnings of $49.2 million, higher foreign currency adjustments of $39.3 million and higher additional paid-in capital of $16.0 million. The pension adjustment was due to a downturn in the U.K. and U.S. financial markets. The foreign2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 92,217 $ 90,106 $ 71,725
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense):
Foreign currency translation adjustments were due to a 17.8% increase in the translated value of the euro, a 10.6% increase in the British pound sterling and a 39.9% increase in the South African rand, partially offset by a 34.7% decrease in the Brazilian real and an 11.9% decrease in the Mexican peso at December 31, 2002 when compared with the translated values at December 31, 2001. The increase in additional paid-in capital resulted principally from stock option exercises.Capital investments for 2002 were $114.3 million, down $41.7 million from 2001. This reduction in capital investments was achieved in part through the redeployment of mobile capital equipment in the Mill Services and Access Services Segments. Investments were made predominantly for the services businesses. The goal of selective investing for strategic purposes is to decrease debt and to improve the Company’s Economic Value Added (EVA®) under the program that commenced January 1, 2002. Under this program the Company evaluates strategic investments based upon the investment’s economic profit. EVA® equals after-tax operating profits less a charge for the use of the capital employed to create those profits. Therefore, value is created when a project or initiative produces a return above the cost of capital.
In 2002, the Company realized $63.7 million in72,032 39,311 (22,347)
Net gains (losses) on cash from asset sales and sales of businesses, including $17.3 million from the sale of the Company’s Capitol Manufacturing business and $10.0 million from the sale of a product line of the Harsco Track Technologies Division of Other Infrastructure Products and Services. This surpassed the Company’s 2002 strategic goal of realizing at least $50 million from the sale of underperforming assets. The positive operating cash flows and cash from the sale of underperforming assets enabled the Company to surpass its stated goal of $100 million in balance sheet debt reduction by year end. Since peaking in mid 2000 in connection with the SGB acquisition, the Company has reduced its total debt by approximately $256 million or 29% as of December 31, 2002.
15
Pension Plans –As a result of declines in the U.K. equity markets and interest rates, the Company’s U.K. pension plan was in an underfunded position as of September 30, 2002, the plan’s measurement date. At December 31, 2002, the Company recognized a net, after tax additional minimum pension liability of $146.7 million principally for its U.K. Plan that was recorded as a reduction to shareholders’ equity. This did not affect net income in 2002. The Company continues to be in compliance with its debt covenants. As a result of plan amendments, a re-measurement of the U.K. pension plan was made in the fourth quarter of 2002 that will result in the restoration to shareholders’ equity of approximately $20 million,flow hedging instruments, net of deferred income
taxes of the original $146.7 million reduction. SFAS 87 requires this re-measurement restoration to be recorded as$4, $(11) and $47 in 2003, 2002 and 2001, respectively (8) 22 (84)
Pension liability adjustments, net of March 31, 2003. See the Applicationdeferred income taxes of Critical Accounting Policies section above$(482),
$63,613 and Note 8, Employee Benefit Plans under Part II, Item 8, “Financial Statements$2,039 in 2003, 2002 and Supplementary Data,”2001, respectively 1,523 (146,709) (3,792)
Unrealized gain (loss) on marketable securities, net of this Form 10-Kdeferred income
taxes of $(1), $1 and $(182) in 2003, 2002 and 2001, respectively 2 (2) 337
Reclassification adjustment for additional disclosures related to these items.
Financial Statistics from Continuing Operations for the Year-ended December 31
| 2002 | 2001(a) |
|---|
| | Harsco stock price high-low | | $44.48-$24.20 | | $36.00 -$23.60 | | | | | | | | | | Return on average equity (b) | | 12.6% | | 11.1% | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
(b) | | Return on average equity is calculated by dividing income from continuing operations by quarterly weighted average equity.
|
The Company’s higher return on average equity was due to increased income in 2002 compared with 2001. The Company’s book value per share decreased to $15.90 per share at December 31, 2002 from $17.16 at December 31, 2001 due principally to the pension adjustment to shareholders’ equity, partially offset by an increase in retained earnings and increased equity from positive foreign currency translation adjustments. Foreign currency translation adjustments and the pension adjustment to shareholders’ equity are recorded as part of other comprehensive income or expense.
|
| (In millions) | 2002 | | 2001 | | 2000 | |
|---|
| | Net Cash Provided by Operations: | | $253.8 | | $240.6 | | $259.4 | |
|
Cash provided by operations in 2002 was $253.8 million, up $13.2 million from 2001, but less than the record $259.4 million in 2000. The increase in cash provided by operations is due principally to the increase in cash flows from the net change in Other assets and liabilities of $36.9 million, an increasegain included in net income, net of $18.4 milliondeferred
income taxes of $(1) and reduced accounts receivable growth$182 in 2003 and a change2002, respectively 2 (337) --
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense) 73,551 (107,715) (25,886)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (expense) $ 165,768 $ (17,609) $ 45,839
=================================================================================================================================
|
See accompanying notes to consolidated financial statements.
-40-
HARSCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Harsco Corporation
and its majority-owned subsidiaries (the "Company"). Additionally, the Company
consolidates three entities in which the Company owns a 20-50% interest and
exercises management control. These three entities had combined revenues of
approximately $35.5 million or 1.7% of the Company's total revenues in 2003.
Investments in unconsolidated entities (all of which are 20-50% owned) are
accounted for under the equity method. The Company does not have any
consolidated variable interest entities or off-balance sheet arrangements with
unconsolidated special-purpose entities.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform with
current year classifications. These reclassifications relate principally to
assets currently classified as held for sale in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," (SFAS 144) as
discussed in Note 2, "Acquisitions and Dispositions."
As a result of these reclassifications, several amounts presented for
comparative purposes from 2001 and 2002 may not individually agree to previously
filed Forms 10-K.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and short-term
investments which are highly liquid in nature and have an original maturity of
three months or less.
INVENTORIES
Inventories, which are principally located in the U.S., are stated at the lower
of cost or market. Inventories in the United States are accounted for using
principally the last-in, first-out (LIFO) method. Other inventories are
accounted for using the first-in, first-out (FIFO) or average cost methods.
DEPRECIATION
Property, plant and equipment is recorded at cost and depreciated over the
estimated useful lives of the assets using principally the straight-line method.
When property is retired from service, the cost of the retirement is generally
charged to the allowance for depreciation to the extent of the accumulated
depreciation and the balance is charged to income. Long-lived assets to be
disposed of by sale are not depreciated while they are held for sale.
GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist principally of goodwill. Goodwill is not amortized but
tested for impairment, at the reporting unit level, on an annual basis as of
October 1 and between annual tests whenever events or circumstances indicate
that the carrying value of a reporting unit's goodwill may exceed its fair
value. A discounted cash flow model is used to estimate the fair value of a
reporting unit. This model requires the use of long-term planning forecasts and
assumptions regarding industry specific economic conditions that are outside the
control of the Company. See Note 5, "Goodwill and Other Intangible Assets," for
additional information on intangible assets and goodwill impairment testing.
Finite-lived intangible assets are amortized on a straight-line basis over their
estimated useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS (OTHER THAN GOODWILL)
Long-lived assets are reviewed for impairment when events and circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's policy is to record an impairment loss when it is determined that the
carrying amount of the asset exceeds the sum of the expected undiscounted future
cash flows resulting from use of the asset and its eventual disposition.
Impairment losses are measured as the amount by which the carrying amount of the
asset exceeds its fair value. Long-lived assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
REVENUE RECOGNITION
Product sales and service sales are recognized when they are realized or
realizable and when earned. Revenue is realized or realizable and earned when
all of the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the Company's
price to the buyer is fixed or determinable and collectibility is reasonably
assured.
Mill Services Segment - This Segment provides services predominantly on a
long-term, volume-of-production contract basis. Contracts may include both fixed
monthly fees as well as variable fees based upon specific services provided to
-41-
the customer. The fixed-fee portion is recognized periodically as earned
(normally monthly) over the contractual period. The variable-fee portion is
recognized as services are performed and differs from period-to-period based
upon the actual provision of services.
Access Services Segment - This Segment rents equipment under month-to-month
rental contracts and provides services under both fixed-fee and
time-and-materials short-term contracts. Equipment rentals are recognized as
earned over the contractual rental period. Services provided on a fixed-fee
basis are recognized over the contractual period based upon the completion of
specific units of accounting (i.e., erection and dismantling of scaffolding).
Services provided on a time-and-materials basis are recognized when earned as
services are performed.
Gas and Fluid Control Segment - This Segment sells products under
customer-specific sales contracts. Product sales revenue is recognized when
title and risk of loss transfer, and when all of the revenue recognition
criteria detailed in Staff Accounting Bulletin 104 (SAB 104) have been met.
Title and risk of loss for domestic shipments transfers to the customer at the
point of shipment. For export sales, title and risk of loss transfer in
accordance with the international commercial terms included in the specific
customer contract.
Other Infrastructure Products and Services ("all other") Category - This
category includes the Harsco Track Technologies, Reed Minerals, IKG Industries
and Patterson-Kelley operating segments. These operating segments principally
sell products. The Harsco Track Technologies Division sells products and
provides services. Product sales revenue for each of these operating segments is
recognized generally when title and risk of loss transfer, and when all of the
revenue recognition criteria detailed in SAB 104 have been met. Title and risk
of loss for domestic shipments transfers to the customer at the point of
shipment. For export sales, title and risk of loss transfer in accordance with
the international commercial terms included in the specific customer contract.
Revenue may be recognized subsequent to the transfer of title and risk of loss
for certain product sales of the Harsco Track Technologies Division if the
specific sales contract includes a customer acceptance clause which provides for
different timing. In those situations revenue is recognized after transfer of
title and risk of loss and after customer acceptance. The Harsco Track
Technologies Division provides services predominantly on a long-term,
time-and-materials contract basis. Revenue is recognized when earned as services
are performed.
INCOME TAXES
United States federal and state income taxes and non-U.S. taxes are provided
currently on the undistributed earnings of international subsidiaries and
unconsolidated affiliated entities, giving recognition to current tax rates and
applicable foreign tax credits, except when management has specific plans for
reinvestment of undistributed earnings which will result in the indefinite
postponement of their remittance. Deferred taxes are provided using the asset
and liability method for temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
ACCRUED INSURANCE AND LOSS RESERVES
The Company retains a significant portion of the risk for workers' compensation,
automobile, general and product liability losses. During 2003, 2002 and 2001,
the Company recorded insurance expense related to these lines of coverage of
approximately $34 million, $31 million and $29 million, respectively. Reserves
have been recorded which reflect the undiscounted estimated liabilities
including claims incurred but not reported. Changes in the estimates of the
reserves are included in net income in the period determined. During 2003, 2002
and 2001, the Company recorded retrospective insurance reserve adjustments that
decreased pre-tax insurance expense for self-insured programs by $5.7 million,
$5.9 million and $4.4 million, respectively. At December 31, 2003 and 2002 the
Company has recorded liabilities of $69.3 million and $65.0 million,
respectively, related to both asserted as well as unasserted insurance claims.
Amounts estimated to be paid within one year have been classified as Other
current liabilities, with the remainder included in Insurance liabilities.
WARRANTIES
The Company has recorded product warranty reserves of $2.8 million, $2.2 million
and $2.8 million as of December 31, 2003, 2002 and 2001, respectively. The
Company provides for warranties of certain products as they are sold in
accordance with SFAS No. 5, "Accounting for Contingencies." The following table
summarizes the warranty activity for the years ended December 31, 2003, 2002 and
2001.
-42-
WARRANTY ACTIVITY
--------------------------------------------------------------------------
(IN THOUSANDS) 2003 2002 2001
--------------------------------------------------------------------------
Balance at the beginning of the period $ 2,248 $ 2,753 $ 3,593
Accruals for warranties issued during the period 2,125 1,673 1,807
Reductions related to pre-existing warranties (233) (418) (88)
Warranties paid (1,344) (1,831) (2,409)
Other (principally foreign currency translation
and acquired businesses) (8) 71 (150)
--------------------------------------------------------------------------
Balance at end of the period $ 2,788 $ 2,248 $ 2,753
==========================================================================
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's subsidiaries outside the United
States, except for those subsidiaries located in highly inflationary economies
and those entities for which the U.S. dollar is the currency of the primary
economic environment in which the entity operates, are measured using the local
currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the exchange rates as of the balance sheet date.
Resulting translation adjustments are recorded in the cumulative translation
adjustment account, a separate component of Other comprehensive income
(expense). Income and expense items are translated at average monthly exchange
rates. Gains and losses from foreign currency transactions are included in net
income. For subsidiaries operating in highly inflationary economies, and those
entities for which the U.S. dollar is the currency of the primary economic
environment in which the entity operates, gains and losses on foreign currency
transactions and balance sheet translation adjustments are included in net
income.
FINANCIAL INSTRUMENTS AND HEDGING
The Company has subsidiaries operating in North America, South America, Europe,
Africa and Asia-Pacific. These operations are exposed to fluctuations in related
foreign currencies in the normal course of business. The Company seeks to reduce
exposure to foreign currency fluctuations through the use of forward exchange
contracts. The Company does not hold or issue financial instruments for trading
purposes, and it is the Company's policy to prohibit the use of derivatives for
speculative purposes. The Company has a Foreign Currency Risk Management
Committee that meets periodically to monitor foreign currency risks.
The Company executes foreign currency forward exchange contracts to hedge
transactions of its non-U.S. subsidiaries for firm purchase commitments, to
hedge variable cash flows of forecasted transactions and for export sales
denominated in foreign currencies. These contracts are generally for 90 to 180
days or less. For those contracts that are designated as qualified cash flow
hedges under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), gains or losses are recorded in other comprehensive
income (expense).
Amounts recorded in other comprehensive income (expense) are reclassified into
income in the same period or periods during which the hedged forecasted
transaction affects income. The cash flows from these contracts are classified
consistent with the timing of receipts of $17.7 million. Increases in cash flows from the transaction being hedged (e.g., the cash
flows related to contracts to hedge the purchase of fixed assets are included in
cash flows from investing activities, etc.). The Company also enters into
certain forward exchange contracts not designated as hedges under SFAS 133.
Gains and losses on these contracts are recognized in income based on fair
market value. For fair value hedges of a firm commitment, the gain or loss on
the derivative and the offsetting gain or loss on the hedged firm commitment are
recognized currently in income.
OPTIONS FOR COMMON STOCK
The Company uses the intrinsic value method to account for options granted to
employees for the purchase of common stock. No compensation expense is
recognized on the grant date, since at that date, the option price equals the
market price of the underlying common stock.
The Company's net income and net income per common share would have been reduced
to the pro forma amounts indicated below if compensation cost for the Company's
stock option plan had been determined based on the fair value at the grant date
for awards in accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
-43-
PRO FORMA IMPACT OF SFAS 123 ON EARNINGS
-------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE) 2003 2002 2001
-------------------------------------------------------------------------
Net income:
As reported $ 92,217 $ 90,106 $ 71,725
Compensation expense (a) (1,673) (2,300) (3,692)
------------------------------
Pro forma $ 90,544 $ 87,806 $ 68,033
==============================
Basic earnings per share:
As reported $ 2.27 $ 2.23 $ 1.80
Pro forma 2.23 2.18 1.71
Diluted earnings per share:
As reported 2.25 2.21 1.79
Pro forma 2.21 2.16 1.70
-------------------------------------------------------------------------
(a) Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related income tax effects.
During 2003, stock options were only granted to non-employee directors. See Note
12, "Stock-Based Compensation," for additional information on options for common
stock.
EARNINGS PER SHARE
Basic earnings per share are calculated using the average shares of common stock
outstanding, while diluted earnings per share reflect the potential dilution
that could occur if stock options were exercised. See Note 11, "Capital Stock,"
for additional information on earnings per share.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
- -------------------------------------------------------------------------------
Activities" (SFAS 149)
- ----------------------
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS 149
which amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The Company adopted SFAS 149 on July 1, 2003. The adoption
of SFAS 149 did not have a material effect on the Company's financial position,
results of operations or cash flows.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
- --------------------------------------------------------------------------------
of both Liabilities and Equity" (SFAS 150)
- ------------------------------------------
In May 2003, the FASB issued SFAS 150 which requires that certain financial
instruments, which under previous guidance were accounted for as equity, must
now be accounted for as liabilities. The financial instruments affected include
mandatorily redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. SFAS
150 is effective for all financial instruments entered into or modified after
May 31, 2003 and must be applied to the Company's existing financial instruments
effective July 1, 2003, the beginning of the first fiscal period after June 15,
2003. The Company adopted SFAS 150 on June 1, 2003. The adoption of SFAS 150 did
not have a material effect on the Company's financial position, results of
operations or cash flows.
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
- -----------------------------------------------------------------------------
Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106"
- -----------------------------------------------------------------------------
(SFAS 132R)
- -----------
In December 2003, the FASB issued SFAS 132R which replaced SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," (SFAS
132). SFAS 132R retains the disclosure requirements of SFAS 132 and requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The disclosure requirements of SFAS 132R are generally
effective for fiscal years ending after December 15, 2003 (as of December 31,
-44-
2003 for the Company). Disclosure of the estimated future benefit payments and
certain information about foreign plans shall be effective for fiscal years
ending after June 15, 2004 (as of December 31, 2004 for the Company). The
interim-period disclosures required by this Statement shall be effective for
interim periods beginning after December 15, 2003 (commencing January 1, 2004
for the Company).
The Company has incorporated the required disclosures of SFAS 132 in Note 8,
"Employee Benefit Plans." Disclosures related to the estimated future benefit
payments and foreign plans shall be incorporated into the footnotes to the
Company's 2004 financial statements. The adoption of SFAS 132R did not have a
material impact on the Company's financial position, results of operations, or
cash flows.
FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable
- ------------------------------------------------------------------------------
Interest Entities, an interpretation of ARB No. 51" (FIN 46R)
- -------------------------------------------------------------
In December 2003, the FASB issued FIN 46R which replaced FASB Interpretation 46,
"Consolidation of Variable Interest Entities," and clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. The disclosure requirements of FIN 46R are effective for financial
statements issued after December 31, 2003. The initial recognition provisions of
FIN 46R are to be implemented no later than the end of the first reporting
period that ends after March 15, 2004 (as of March 31, 2004 for the Company).
The Company has adopted FIN 46R as of December 31, 2003. The Company has
determined that it does have an interest in a variable interest entity (VIE).
This VIE is a small joint venture of the Company's Mill Services Segment. The
entity markets and sells steel slag with revenues of approximately $1.5 million
and $0.5 million in 2003 and 2002, respectively. The entity is a VIE because the
equity investment at risk is less than ten percent of the entity's total assets.
However, the Company is not the primary beneficiary and therefore consolidation
of this entity is not required.
The adoption of FIN 46R did not have a material impact on the Company's
financial position, results of operations, or cash flows.
Emerging Issues Task Force Issue No. 00-21, "Accounting for Revenue Arrangements
- --------------------------------------------------------------------------------
with Multiple Deliverables" (EITF 00-21)
- ----------------------------------------
In November 2002, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus on EITF 00-21 which
provides guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes. It further states, that if
this division is required, the arrangement consideration should be allocated
among the separate units of accounting. The guidance in the consensus is
effective for revenue arrangements entered into in fiscal periods that begin
after June 15, 2003. The Company adopted EITF 00-21 effective July 1, 2003. The
adoption of EITF 00-21 did not have a material effect on the Company's financial
position, results of operations or cash flows.
Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB 104)
- ------------------------------------------------------------------
In December 2003, the Securities and Exchange Commission issued SAB 104, which
supersedes SAB No. 101, "Revenue Recognition in Financial Statements," and
updates portions of the interpretative guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting guidance. The
principal revisions relate to the deletion of interpretive material no longer
necessary because of private sector developments in U.S. generally accepted
accounting principles, and the incorporation of certain sections of the Staff's
"Revenue Recognition in Financial Statements -- Frequently Asked Questions and
Answers" document into Topic 13. The Company had previously adopted the
necessary changes incorporated into SAB 104 without any material effect on the
Company's financial position, results of operations or cash flows.
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
In June 2003, the Company completed the acquisition of the domestic mill
services unit of C.J. Langenfelder & Son, Inc., an industrial services company.
This acquisition gives the Company an expanded presence with two major North
American steel producers. In June 2003, the Company also acquired a small
product line for the Company's international access services business. The
proforma impact of these acquisitions is not material.
-45-
During 2002, the Company did not acquire any businesses that individually or
when aggregated together had a material impact on the Company's net assets,
sales or net income.
DISPOSITIONS - ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
In management's ongoing strategic efforts to increase the Company's focus on
core industrial services, certain manufacturing operations have been divested.
Effective March 21, 2002, the Board of Directors authorized the sale of the
Capitol Manufacturing business, a business unit of the Gas and Fluid Control
Segment. A significant portion of the Capitol Manufacturing business was sold on
June 28, 2002. The Company continues to recognize income from inventory
consigned to the buyer in accordance with the sale agreement and when all
revenue recognition criteria have been met. This business has been included in
Discontinued operations and the assets and liabilities have been separately
identified on the Balance Sheet as held for sale for all periods presented.
There were no sales from discontinued operations for the year ended December 31,
2003. The sales from discontinued operations for the years ended December 31,
2002 and 2001 were $35.5 million and $83.3 million, respectively. These sales
were excluded from revenues from continuing operations reported on the income
statement. The income (loss) from discontinued operations does not include any
charges to reduce the book value of the business held for sale to its fair
market value less cost to sell, since the fair value of the business exceeded
the book value.
Throughout 2002 and 2003, management approved the sale of certain long-lived
assets (primarily land and buildings) of the Access Services and Mill Services
Segments. Accordingly, these assets have been separately identified on the
balance sheet as Assets held for sale for all periods presented. Several of
these assets were sold during 2003 resulting in the decrease noted below.
The major classes of assets and liabilities "held for sale" included in the
Consolidated Balance Sheet are as follows:
(IN THOUSANDS)
AS OF DECEMBER 31 2003 2002
- -----------------------------------------------------------------------------
ASSETS
Accounts receivable, net $ 411 $ 595
Inventories 222 727
Other current assets 20 21
Property, plant and equipment, net 784 11,344
- -----------------------------------------------------------------------------
TOTAL ASSETS "HELD FOR SALE" $ 1,437 $ 12,687
=============================================================================
LIABILITIES
Accounts payable $ 512 $ 463
Income taxes -- 958
Other current liabilities 386 618
- -----------------------------------------------------------------------------
TOTAL LIABILITIES ASSOCIATED WITH ASSETS
"HELD FOR SALE" $ 898 $ 2,039
=============================================================================
DISCONTINUED DEFENSE BUSINESS
In January 1994, FMC Corporation and the Company combined certain assets and
liabilities of FMC's Defense Systems Group and the Company's BMY-Combat Systems
Division to form United Defense, L.P. United Defense supplies ground combat and
naval weapons systems for the U.S. and military customers worldwide. On August
25, 1997, the Company and FMC Corporation signed an agreement to sell United
Defense, L.P. for $850 million, and the sale was completed on October 6, 1997.
Prior to the sale, FMC had been the managing general partner and 60% owner of
United Defense, L.P., while the Company owned the balance of 40% as the limited
partner. These transactions did not include any of the assets or liabilities of
the Company's BMY-Wheeled Vehicles Division, which were retained by the Company.
This division, which was exited by the Company in 1995, sold five-ton trucks to
the United States Army under a completed 1986 contract that is the subject of a
federal excise tax dispute as more fully discussed in Note 10, "Commitments and
Contingencies."
Income and cash flows related to the discontinued defense business, principally
accrual adjustments and legal fees, are shown separately on the Consolidated
Statements of Income and Cash Flows, respectively.
-46-
3. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable are net of an allowance for doubtful accounts of $24.6
million and $36.5 million at December 31, 2003 and 2002, respectively. The
decrease from December 31, 2002 relates principally to write-offs of previously
reserved accounts receivable and a $1.7 million reversal of bad debt expense in
the Mill Services Segment due to a change in estimate. The provision for
doubtful accounts was $3.4 million, $6.9 million and $12.6 million for 2003,
2002 and 2001, respectively.
Inventories consist of:
(IN THOUSANDS) 2003 2002
- -----------------------------------------------------------------------------
Finished goods $ 59,739 $ 58,906
Work-in-process 32,121 24,287
Raw materials and purchased parts 74,231 74,775
Stores and supplies 24,130 23,744
- -----------------------------------------------------------------------------
$ 190,221 $ 181,712
=============================================================================
Valued at lower of cost or market:
Last-in, first out (LIFO) basis $ 109,821 $ 107,205
First-in, first out (FIFO) basis 8,430 10,103
Average cost basis 71,970 64,404
- -----------------------------------------------------------------------------
$ 190,221 $ 181,712
=============================================================================
Inventories valued on the LIFO basis at December 31, 2003 and 2002 were
approximately $17.9 million and $19.3 million, respectively, less than the
amounts of such inventories valued at current costs.
As a result of reducing certain inventory quantities valued on the LIFO basis,
net income increased from that which would have been recorded under the FIFO
basis of valuation by $1.1 million, $2.3 million and $0.7 million in 2003, 2002
and 2001, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
(IN THOUSANDS) 2003 2002 (a)
- -------------------------------------------------------------------------------
Land and improvements $ 39,741 $ 36,444
Buildings and improvements 178,110 167,184
Machinery and equipment 1,803,867 1,590,890
Uncompleted construction 37,505 20,078
- -------------------------------------------------------------------------------
2,059,223 1,814,596
Less accumulated depreciation and
facilities valuation allowance (1,192,305) (1,010,101)
- -------------------------------------------------------------------------------
$ 866,918 $ 804,495
===============================================================================
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2002 information has been reclassified for comparative purposes.
The estimated useful lives of different types of assets are generally:
Land improvements 5 to 20 years
Buildings and improvements 10 to 50 years
Certain plant, buildings and installations
(Principally Mill Services Segment) 3 to 10 years
Machinery and equipment 3 to 20 years
-47-
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," (SFAS
142) on January 1, 2002. Under this standard, goodwill and intangible assets
with indefinite useful lives are no longer amortized. Goodwill is tested for
impairment at the reporting unit level on an annual basis, and between annual
tests, whenever events or circumstances indicate that the carrying value of a
reporting unit's goodwill may exceed its fair value. This impairment testing is
a two-step process as outlined in SFAS 142. Step one is a comparison of each
reporting unit's fair value to its book value. If the fair value of the
reporting unit exceeds the book value, step two of the test is not required.
Step two requires the allocation of fair values to assets and liabilities as if
the reporting unit had just been purchased resulting in the implied fair value
of goodwill. If the carrying value of the goodwill exceeds the implied fair
value, a write down to the implied fair value would be required.
The Company uses a discounted cash flow model to estimate the fair value of a
reporting unit in performing step one of the testing. This model requires the
use of long-term planning estimates and assumptions regarding industry-specific
economic conditions that are outside the control of the Company. In accordance
with SFAS 142, the Company completed transitional goodwill impairment testing by
June 30, 2002. All reporting units of the Company passed step one of the
transitional testing thereby indicating that no goodwill impairment exists.
Additionally, no reclassification of goodwill or intangible assets was necessary
as a result of the adoption of SFAS 142. The Company also performed required
annual testing for goodwill impairment as of October 1, 2003 and 2002 and all
reporting units of the Company passed the step 1 testing thereby indicating that
no goodwill impairment exists. However, there can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
The following table illustrates the effects of adopting SFAS 142 as it relates
to net income, basic earnings per share (EPS) and diluted earnings per share
(EPS) for the years ended December 31, 2003, 2002 and 2001.
(IN THOUSANDS, NET INCOME BASIC EPS DILUTED EPS
EXCEPT PER SHARE AMOUNTS)
2003 2002 2001 2003 2002 2001 2002 2001 2001
- ------------------------------------------------------------------------------------------------------------------
Reported net change in Other assets and liabilities are principally due to approximately $24 million from the timing of payments for insurance, payroll and other miscellaneous liabilities and approximately $15 million related to increased pension liabilities due to higher pension expense in 2002 and the timing of funding that expense. Partially offsetting the positive changes were $25.2 million due to the timing of cash used for inventories, a $19.2 million change in the amount used for Other (income) and expenses and $15.7 million less amortization expense in 2002 than in 2001 due principally to the elimination ofincome $ 92,217 $ 90,106 $ 71,725 $ 2.27 $ 2.23 $ 1.80 $ 2.25 $ 2.21 $ 1.79
Add: goodwill
amortization, in accordance with SFAS No. 142.The $25.2 million change in cash flows due to the timing of cash used for inventories is principally due to approximately $8 million related to new international orders of railway maintenance-of-way equipment in 2002 and approximately $12 million related to the planned reduction of inventories in 2001 across all divisions which did not recur in 2002.
The $19.2 million negative variance in the Other (income) and expenses component of cash from operations is principally due to $15.6 million in non-cash charges, net of gains, recorded in the fourth quarter of 2001. Thesetax -- -- 10,878 -- -- .27 -- -- .27
- ------------------------------------------------------------------------------------------------------------------
Adjusted net charges are related principally to plant and facility closures and asset write-downs, net of gains on the sale of underperforming product lines.
16
Contractual Obligations and Commercial Commitments –The following summarizes the Company’s expected future payments related to contractual obligations and commercial commitments at December 31, 2002.
income $ 92,217 $ 90,106 $ 82,603 $ 2.27 $ 2.23 $ 2.07 $ 2.25 $ 2.21 $ 2.06
==================================================================================================================
| Contractual Obligations | Payments Due by Period | |
|---|
| | Less than | | 1-3 | | 4-5 | | After 5 | |
|---|
| December 31 (In millions) | Total | | 1 year | | years | | years | | years | |
|---|
| | Short-term Debt | | | $ | 22.4 | | $ | 22.4 | | $ | — | | $ | — | | $ | — | | | | | Long-term Debt | | | | (including current maturities | | | | and capital leases) | | | | 617.3 | | | 11.7 | | | 260.1 | | | 11.1 | | | 334.4 | | | | | Operating Leases | | | | 129.8 | | | 37.8 | | | 52.2 | | | 15.9 | | | 23.9 | | | | | Purchase Obligations | | | | 71.0 | | | 59.9 | | | 11.1 | | | — | | | — | | | | | Foreign Currency Forward Exchange | | | | Contracts | | | | 2.9 | | | 2.9 | | | — | | | — | | | — | | | | | Other Obligations | | | | 0.6 | | | 0.6 | | | — | | | — | | | — | |
| | | | Total Contractual Obligations | | | $ | 844.0 | | $ | 135.3 | | $ | 323.4 | | $ | 27.0 | | $ | 358.3 | |
|
-48-
The following table reflects the changes in carrying amounts of goodwill by
segment for the year ended December 31, 2003:
See Note 6, Debt and Credit Agreements, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data,” for additional disclosures on short-term and long-term debt. See Note 7, Leases, to the Consolidated Financial Statements, under Part II, Item 8, “Financial Statements and Supplementary Data,” for additional disclosures on operating leases. Other contractual obligations are not deemed to have a material impact on the Company and are not discussed in detail.
Commercial Commitments –The following table summarizes the Company’s contingent commercial commitments at December 31, 2002. These amounts are not included in the Company’s Consolidated
OTHER
INFRASTRUCTURE
GAS AND PRODUCTS AND
MILL ACCESS FLUID SERVICES
SERVICES SERVICES CONTROL ("ALL OTHER") CONSOLIDATED
(IN THOUSANDS) SEGMENT SEGMENT SEGMENT CATEGORY TOTALS
- -------------------------------------------------------------------------------------------------------------------
Balance Sheet since there are no current circumstances known to management indicating that the Company will be required to make payments on these contingent obligations.
|
| Amount of Commitment Expiration Per Period | |
|---|
| Total | | Less | | | | | | | | | |
|---|
| Amounts | | Than | | 1-3 | | 4-5 | | Over 5 | | Indefinite | |
|---|
| December 31 (In millions) | Committed | | 1 Year | | Years | | Years | | Years | | Expiration | |
|---|
| | | | Standby Letters of Credit | | | $ | 62.9 | | $ | 56.7 | | $ | 5.7 | | $ | 0.5 | | $ | — | | $ | — | | | | | Guarantees | | | | 25.9 | | | 4.6 | | | 1.4 | | | 0.2 | | | 0.1 | | | 19.6 | | | | | Performance Bonds | | | | 110.6 | | | — | | | 99.5 | | | 0.1 | | | — | | | 11.0 | | | | | Other Commercial Commitments | | | | 10.2 | | | — | | | — | | | — | | | 10.2 | | | — | |
| | | | Total Commercial Commitments | | | $ | 209.6 | | $ | 61.3 | | $ | 106.6 | | $ | 0.8 | | $ | 10.3 | | $ | 30.6 | |
|
Performance bonds include an $80 million security bond related to the Federal Excise Tax litigation discussed in Note 10, Commitments and Contingencies, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data.” Certain guarantees and performance bonds are of a continuous nature and do not have a definite expiration date.
Credit and Equity Financing Facilities –The Company has various credit facilities and commercial paper programs available for use throughout the world. The following chart illustrates the amounts outstanding on credit facilities and commercial paper programs and available credit at December 31, 2002. The Company limits the aggregate commercial paper and credit facility borrowings at any one time to a maximum of $425 million.
17
|
| | Outstanding | | Available | |
|---|
| Facility Limit at | | Balance at | | Credit at | |
|---|
| (In millions) | December 31, 2002 | | December 31, 2002 | | December 31, 2002 | |
|---|
| | | | U.S. commercial paper program | | | $ | 350.0 | | $ | 44.4 | | $ | 305.6 | | | | | Euro commercial paper programs | | | | 340.6 | | | 37.5 | | | 303.1 | | | | | Revolving credit facility(a) | | | | 350.0 | | | — | | | 350.0 | | | | | Bilateral credit facility(b) | | | | 50.0 | | | 5.0 | | | 45.0 | |
| | | | Totals at December 31, 2002 | | | $ | 1,090.6 | | $ | 86.9 | | $ | $1,003.7 | (c) |
|
(a) | | U.S.-Based Program
| (b) | | International-Based Program
| (c) | | Although the Company has significant available credit, it is the Company’s policy to limit aggregate commercial paper and credit facility borrowings at any one time to a maximum of $425 million.
|
The Company has a U.S. commercial paper borrowing program under which it can issue up to $350 million of short-term notes in the U.S. commercial paper market. In addition, the Company has a 74.4 million euro commercial paper program equivalent to approximately $78.1 million at December 31, 2002 which is used to fund the Company’s international operations. In June 2001, the Company supplemented its initial euro commercial paper program by adding a 250 million euro program, equivalent to approximately $262.5 million at December 31, 2002. The Company limits the aggregate commercial paper and syndicated credit facility and bilateral facility borrowings at any one time to a maximum of $425 million. Commercial paper interest rates, which are based on market conditions, have been lower than comparable rates available under the credit facility. At December 31, 2002 and 2001, the Company had $44.4 million and $161.8 million of U.S. commercial paper outstanding, respectively, and $37.5 million and $60.1 million outstanding, respectively, under its European-based commercial paper programs. Commercial paper is classified as long-term debt at December 31, 2002 and 2001, because the Company has the ability and intent to refinance it on a long-term basis through existing long-term credit facilities.
The Company has a revolving credit facility in the amount of $350 million through a syndicate of 14 banks. This facility serves as back-up to the Company’s commercial paper programs. The facility is in two parts. One part amounts to $131.3 million and is a 364-day credit agreement that permits borrowings outstanding at expiration (September 26, 2003) to be repaid no later than September 26, 2004. The second part is for $218.8 million and is a five-year credit agreement that expires on September 29, 2005, at which time all borrowings are due. The 364-day part of the facility was renegotiated in September 2002 to extend the expiration date to September 26, 2003. Interest rates are either negotiated, based upon the U.S. federal funds interbank market prime rate, or based upon the London Interbank Offered Rate (LIBOR) plus a margin. The Company pays a facility fee (.0825% per annum as of December 31, 2002) that varies based upon its credit ratings. At December 31, 2002 and 2001, there were no borrowings outstanding under either facility.
In the first quarternet
of 2002, the Company renewed two $50 million bilateral credit facility agreements with European-based banks. These agreements serveaccumulated amortization (a) $ 180,656 $ 125,119 $ 37,778 $ 9,668 $ 353,221
Goodwill acquired during year -- 1,628 -- -- 1,628
Goodwill written off related to sale
of business -- -- -- (1,496) (1,496)
Other (principally foreign currency
translation) 12,465 12,477 (1,085) 10 23,867
- -------------------------------------------------------------------------------------------------------------------
Balance as back-up to the Company’s commercial paper programs and also help finance the Company’s European operations. Borrowings under these facilities, which expired in December 2002 and January 2003, were available in most major currencies with active markets at interest rates based upon LIBOR plus a margin. Subsequent to December 31, 2002, the Company renewed the facility that expired in December 2002, but for a lower amount of $25 million since the Company’s financing needs have decreased. Borrowings outstanding at expiration may be repaid over the succeeding 12 months. The facility that expired in January 2003 was not renewed since it was considered excess to the Company’s current financing needs. As of December 31, 2002, there was $5.0 million outstanding on these credit facilities.
On October 27, 2000, the Company issued 200 million British pound sterling (U.S. $317.8 million) 7.25% notes due 2010. The net
proceeds of the issue were used to refinance certain bank debt that was used to fund the acquisition of SGB Group.
The Company has on file with the Securities and Exchange Commission a Form S-3 shelf registration for the possible issuance of up to an additional $200 million of new debt securities, preferred stock, or common stock. The Company is
18
not obligated to issue these securities. The Company intends to refinance its $150 million, 6.0% notes due September 15,accumulated amortization $ 193,121 $ 139,224 $ 36,693 $ 8,182 $ 377,220
- -------------------------------------------------------------------------------------------------------------------
Goodwill acquired during year -- 441 -- -- 441
Other (principally foreign currency
translation) 15,597 14,633 -- (45) 30,185
- -------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2003,
and may use this shelf registration for the refinancing.
Short-term debt amounted to $22.4 million and $29.6NET OF ACCUMULATED AMORTIZATION $ 208,718 $ 154,298 $ 36,693 $ 8,137 $ 407,846
===================================================================================================================
|
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2001 information has been reclassified for comparative purposes.
Goodwill is net of accumulated amortization of $105.2 million and $100.8 million
at December 31, 2003 and 2002, respectively.
Intangible assets, which are included principally in Other assets on the
Consolidated Balance Sheets, totaled $10.4 million, net of accumulated
amortization of $8.4 million at December 31, 2003 and $3.2 million, net of
accumulated amortization of $7.1 million at December 31, 2002. The following
chart reflects these intangible assets by major category.
DECEMBER 31, 2003 DECEMBER 31, 2002
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ----------------------------------------------------------------------------------------------
Customer relationships $ 6,373 $ 196 $ 559 $ 6
Non-compete agreements 4,863 3,671 4,150 3,346
Patents 4,304 3,351 4,063 2,908
Other 3,313 1,197 1,514 833
- ----------------------------------------------------------------------------------------------
Total $ 18,853 $ 8,415 $ 10,286 $ 7,093
==============================================================================================
The increase in intangible assets is due principally to the acquisitions
discussed in Note 2, "Acquisitions and Dispositions." As part of these
transactions, the Company acquired the following intangible assets (by major
class) which are subject to amortization:
-49-
ACQUIRED INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
(IN THOUSANDS) GROSS CARRYING RESIDUAL WEIGHTED-AVERAGE
AMOUNT VALUE AMORTIZATION PERIOD
- --------------------------------------------------------------------------------
Customer relationships $ 5,734 None 29 years
Non-compete agreements 686 None 3 years
Other 1,435 None 5 years
--------
Total $ 7,855
========
There were no research and development assets acquired and written off in 2003
or 2002.
Amortization expense for intangible assets was $1.2 million, $0.9 million and
$1.1 million for the years ended December 31, 2003, 2002 and 2001, respectively.
The following chart shows the estimated amortization expense for the next five
fiscal years based on current intangible assets.
(IN THOUSANDS) 2004 2005 2006 2007 2008
- -------------------------------------------------------------------------------
Estimated Amortization Expense $1,499 $1,311 $1,080 $ 885 $ 701
6. DEBT AND CREDIT AGREEMENTS
The Company has various credit facilities and commercial paper programs
available for use throughout the world. The following chart illustrates the
amounts outstanding on credit facilities and commercial paper programs and
available credit at December 31, 2003. The Company limits the aggregate
commercial paper, syndicated credit facility and bilateral credit facility
borrowings at any one time to a maximum of $375 million. This reduction of $50
million from the $425 million self-imposed limit at December 31, 2002 was made
in conjunction with the Company's decision in January 2003 not to renew one of
the $50 million bilateral credit facilities, as noted below. These credit
facilities and programs are described in more detail below the chart.
SUMMARY OF CREDIT FACILITIES AS OF DECEMBER 31, 2003
- ----------------------------------------------------------------------------
(IN THOUSANDS) FACILITY OUTSTANDING AVAILABLE
LIMIT BALANCE CREDIT
- ----------------------------------------------------------------------------
U.S. commercial paper program $ 350,000 $ 9,299 $ 340,701
Euro commercial paper program 125,790 26,048 99,742
Revolving credit facility 350,000 -- 350,000
Bilateral credit facility 25,000 3,412 21,588
- ----------------------------------------------------------------------------
TOTALS AT DECEMBER 31, 2003 $ 850,790 $ 38,759 $ 812,031 (a)
============================================================================
(a) Although the Company has significant available credit, it is the Company's
policy to limit aggregate commercial paper and credit facility borrowings
at any one time to a maximum of $375 million.
The Company has a U.S. commercial paper borrowing program under which it can
issue up to $350 million of short-term notes in the U.S. commercial paper
market. In addition, the Company has a 100 million euro commercial paper program
equivalent to approximately $125.8 million at December 31, 2003 which is used to
fund the Company's international operations. This program, which commenced in
October 2003, replaced the Company's 74.4 million euro commercial paper program.
Additionally, the Company discontinued its 250 million euro commercial paper
program in the second quarter of 2003 since it was excess to the Company's
credit needs. If needed in the future, the Company has the ability to reinstate
the program. Commercial paper interest rates, which are based on market
conditions, have been lower than comparable rates available under the credit
facility. At December 31, 2003 and 2002, the Company had $9.3 million and $44.4
million of U.S. commercial paper outstanding, respectively, and $26.0 million
and $37.5 million outstanding, respectively, under its European-based commercial
paper program. Commercial paper is classified as long-term debt at December 31,
-50-
2003 and 2002, because the Company has the ability and intent to refinance it on
a long-term basis through existing long-term credit facilities.
The Company has a revolving credit facility in the amount of $350 million
through a syndicate of 13 banks. This facility serves as back-up to the
Company's commercial paper programs. The facility is in two parts. One part
amounts to $131.3 million and is a 364-day credit agreement that permits
borrowings outstanding at expiration (August 12, 2004) to be repaid no later
than August 12, 2005. The second part is for $218.8 million and is a five-year
credit agreement that expires on September 29, 2005 at which time all borrowings
are due. The 364-day part of the facility was renegotiated in August of 2003 to
extend the expiration date to August 12, 2004. Interest rates are either
negotiated, based upon the U.S. federal funds interbank market, prime rate, or
based upon the London Interbank Offered Rate (LIBOR) plus a margin. The Company
pays a facility fee (.0825% per annum as of December 31, 2003) that varies based
upon its credit ratings. At December 31, 2003 and 2002, there were no borrowings
outstanding under either part of the facility.
In the first quarter of 2003, the Company chose not to renew one of its two $50
million bilateral credit facilities with European-based banks. The other $50
million bilateral credit facility was renewed, in the first quarter of 2003, but
for a lower amount of $25 million since the Company's financing needs have
decreased. This agreement was renewed again in December 2003. The facility
serves as back-up to the Company's commercial paper programs and also helps
finance the Company's European operations. Borrowings under this facility, which
expires in December 2004, are available in most major currencies with active
markets at interest rates based upon LIBOR plus a margin. Borrowings outstanding
at expiration may be repaid over the succeeding 12 months. As of December 31,
2003 and 2002, there was $3.4 million and $5.0 million outstanding on this
credit facility, respectively.
In September 2003, the Company issued $150 million, 5.125% notes due in 2013.
The net proceeds from this issuance were used to repay the Company's $150
million, 6% notes that were due on September 15, 2003. The notes were issued at
99.713% of face value and had a balance of $148.6 million at December 31, 2003.
Short-term debt amounted to $14.9 million and $22.4 million at December 31, 2003
and 2002, respectively. The weighted average interest rate for short-term
borrowings at December 31, 2003 and 2002 was 2.9% and 4.0%, respectively.
Long-term debt consists of:
(IN THOUSANDS) 2003 2002
and 2001 was 4.0% and 5.5%, respectively.The credit facility and certain notes payable agreements contain covenants requiring a minimum net worth of $475 million and a maximum debt to capital ratio of 60%. Additionally, the Company’s- ---------------------------------------------------------------------------------------------------------
7.25% British pound sterling-denominated notes due October 27, 2010 include a covenant that permits the note holders to redeem their$ 353,018 $ 317,781
5.125% notes at par, in the event of a change of control of the Company. At December 31, 2002, the Company was in compliance with these covenants.
Credit Ratings and Outlook –The Company’s outstanding long-termdue September 15, 2013 148,627 --
6.0% notes (both U.S. and International) are rated A- by Standard & Poor’s, A- by Fitch and A-3 by Moody’s. The Company’s U.S.-based commercialmatured September 15, 2003 (a) -- 150,000
Commercial paper is rated A-2 by Standard & Poor’s, F-2 by Fitch and P-2 by Moody’s and the Company’s London-based commercial paper program is rated A-2 by Standard & Poor’s and P-2 by Moody’s. A downgrade to the Company’s credit rating would probably increase the costs to the Company to borrow funds. An improvement in the Company’s credit rating would probably decrease the costs to the Company to borrow funds.
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 to continue to reduce debt, invest strategically in high return projects and to pay cash dividends as a means to enhance shareholder value. The Company intends to use future discretionary cash flows for investment in high return projects and for debt reduction.
RESULTS OF OPERATIONS for 2002, 2001 and 2000
| (Dollars are in millions, except per share) | 2002 | | 2001 (a) | | 2000 (a) | |
|---|
| | Revenues | | | $ | 1,976.7 | | $ | 2,025.2 | | $ | 1,904.7 | | | | | Cost of services and products sold | | | | 1,481.8 | | | 1,516.4 | | | 1,442.2 | | | | | Selling, general and administrative expenses | | | | 312.7 | | | 314.3 | | | 264.0 | | | | | Other expenses | | | | 3.5 | | | 22.8 | | | 2.0 | | | | | Operating income from continuing operations | | | | 176.0 | | | 167.7 | | | 190.8 | | | | | Interest expense | | | | 43.3 | | | 53.2 | | | 50.1 | | | | | Provision for income taxes from continuing operations | | | | 42.2 | | | 38.6 | | | 45.4 | | | | | Income from continuing operations | | | | 88.4 | | | 74.6 | | | 94.3 | | | | | Income (loss) from discontinued operations | | | | 1.7 | | | (2.9 | ) | | 2.5 | | | | | Net income | | | | 90.1 | | | 71.7 | | | 96.8 | | | | | Diluted earnings per common share | | | | 2.21 | | | 1.79 | | | 2.42 | | | | | Effective income tax rate for continuing operations | | | | 30.9 | % | | 32.6 | % | | 31.4 | % | | | | Consolidated effective income tax rate | | | | 31.0 | % | | 32.5 | % | | 31.5 | % |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 and 2000 information has been reclassified for comparative purposes.
|
Summary Analysis of Results — 2002 Compared with 2001
Revenues for 2002 declined $48.5 million from 2001 while operating income from continuing operations improved $8.2 million. One of the primary reasons for the increased income from continuing operations in 2002 when compared with 2001 was a net reduction of $19.3 million in expenses related to restructuring activities. The effect of the recessionary environment in the domestic manufacturing sector that began in the fourth quarter of 2000 continued to negatively impact the Company in 2002. This impact was most pronounced in both the Gas and Fluid Control and Mill Services (principally U.S.) Segments. Additionally, continued weakness in the non-residential construction business in the U.S. and the U.K.
19
that began in the second quarter of 2002 negatively impacted 2002 results for the Access Services Segment. This weakness is expected to persist in the near term. The Company does not anticipate a rebound in the access services market until the emergence of stronger confidence in the economic outlook. These weaknesses were somewhat mitigated during 2002 by the continued strong performance of the international mill services business and the domestic abrasives and roofing granules businesses. Additionally, the benefit of the elimination of $16.1 million in goodwill amortization as a result of the implementation of SFAS No. 142 in 2002 was more than offset by approximately $20 million in increased pension expense. In 2002, the Company was positively impacted by the weakening of the U.S. dollar in relation to the British pound sterling and the euro. These were partially offset by the strengthening of the U.S. dollar in relation to the South African rand and the Brazilian real. The overall impact of foreign currency translation resulted in increased sales and operating income in 2002 of approximately $31 million and $3 million, respectively, when compared with 2001.
Summary Analysis of Results — 2001 Compared with 2000
Revenues for 2001 improved $120.5 million from 2000 while operating income from continuing operations declined $23.1 million. During 2001, the Company continued to see the effect of the recessionary environment in the domestic manufacturing sector that began in the fourth quarter of 2000. This resulted in reduced demand for the Company’s manufactured products as well as mill services in North America. Several of the Company’s steel mill customers in the U.S. filed for bankruptcy protection resulting in an increase of $4.3 million in provisions for uncollectible accounts receivable. Additionally, there was an increase of $3.4 million in the international Mill Services Segment for provisions for uncollectible accounts receivable related to an international customer that filed for the U.S. equivalent of bankruptcy protection. The Company’s acquisition of SGB in June of 2000 increased the Company’s 2001 sales and operating income by $183.7 million and $17.7 million, respectively, when compared to 2000. An overall increase in Other expense of $20.8 million had a significant negative impact on the Company’s net income. These expenses related primarily to impaired asset write-downs and employee termination benefit costs. The Company was also negatively impacted in 2001 by the strengthening of the U.S. dollar in relation to the Brazilian real, the South African rand, the British pound sterling, the euro and other currencies. This impact of foreign currency translation resulted in decreased sales and operating income in 2001 of approximately $40 million and $7 million, respectively, when compared with 2000.
Comparative Analysis of Consolidated Results
Revenues
2002 vs. 2001
Revenues for 2002 were down $48.5 million or 2% from 2001. This is attributable to decreased revenue in all segments except Mill Services, as discussed below in the Segment Analysis section. Increased revenues due to acquisitions were more than offset by decreased revenues due to divestitures. The decreased revenues were partially offset by the favorable effect of foreign currency translation which increased 2002 revenues $30.5 million when compared with 2001.
2001 vs. 2000
Revenues for 2001 were up $120.5 million or 6% from 2000. This is attributable to the acquisition of the Company’s SGB Group scaffolding and access services business in June 2000, which increased 2001 revenues by $183.7 million when compared to 2000. This increase was augmented by increased rentals in the existing Patent Construction Systems domestic scaffolding services business. Additionally, abrasives and roofing granules sales increased. These increases were somewhat offset by decreases in railway track maintenance equipment sales, most product lines of the Gas and Fluid Control Segment and the Mill Services Segment. The increased revenues were partially offset by the unfavorable effect of foreign currency translation which decreased 2001 revenues $40.4 million when compared with 2000.
Cost of Services and Products Sold
2002 vs. 2001
Cost of services and products sold for 2002 decreased $34.6 million or 2% from 2001, consistent with the percent decrease in revenues. This decrease resulted from decreased variable costs due to lower sales, stringent cost controls, process improvements, reorganization actions and the elimination of $16.1 million in goodwill amortization as a result of implementing SFAS No. 142. These decreases were partially offset by $10.5 million in increased pension expense due to financial market conditions and lower interest rates which affected the SFAS No. 87 pension expense computation. Approximately $3.2 million of the overall decrease was due to the net effect of business acquisitions and dispositions.
2001 vs. 2000
Cost of services and products sold for 2001 increased $74.2 million or 5%, a lower rate than the increase in revenues. Approximately $122 million of the increase was due to the net effect of business acquisitions and dispositions, principally the acquisition of SGB Group. This increase was partially offset by decreased costs in the Gas and Fluid Control
20
Segment due to reduced sales, and a general decline in costs due to stringent cost controls, process improvements and reorganization actions.
Selling, General and Administrative Expenses
2002 vs. 2001
Selling, general and administrative expenses for 2002 decreased $1.6 million or 0.5% as a result of several offsetting factors. On a comparative basis, 2002 was positively impacted by a $5.8 million reduction in provisions for uncollectible accounts receivable due to significant charges in 2001 for Mill Services customers that were experiencing financial difficulties including bankruptcy. Additionally, sales commissions decreased by $3.3 million as a result of decreased sales. There were also decreases in advertising expense, franchise taxes and professional fees of approximately $2.1 million in total. These decreases were mostly offset by a $9.2 million increase in pension expense due to the downturn in the financial markets and lower interest rates which affected the SFAS No. 87 pension expense computation. The Company’s continuing cost reduction, process improvement and reorganization efforts helped contain overall selling, general and administrative expenses. The net effect of business acquisitions and dispositions increased 2002 selling, general and administrative expense by $1.7 million when compared to 2001. The effect of foreign currency translation increased 2002 selling, general and administrative expenses by approximately $4.8 million when compared with 2001.
2001 vs. 2000
Selling, general and administrative expenses for 2001 increased $50.3 million or 19% due to the costs related to acquired companies, principally SGB Group. On a comparative basis, 2001 was negatively impacted by a $9.3 million increase in provisions for uncollectible accounts receivable, particularly in the Mill Services Segment where several customers in the steel industry experienced financial difficulties including bankruptcies. The Company’s continuing cost reduction, process improvement and reorganization efforts helped contain overall selling, general and administrative expenses. The effect of foreign currency translation decreased 2001 selling, general and administrative expenses by approximately $6.3 million when compared with 2000.
Other Expenses
This income statement classification principally 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. During 2002, the Company continued its strategy to streamline operations that was commenced in 2001. This strategy included the consolidation, closure and sale of certain operating locations, as well as the exit from several underperforming product lines. Management also continued headcount reductions in both administrative and operating positions. These actions resulted in net other expenses of $3.5 million in 2002 compared to $22.8 million in 2001 and $2.0 million in 2000.
During 2002, the significant decrease in Other Expense when compared with 2001 related primarily to a $15.0 million decline in impaired asset write-downs. Impaired asset write-downs in 2001 included $8.0 million related to an under-performing plant associated with the Company’s roofing granules business. The plant was sold in 2002. In addition, 2001‘s expense included $4.8 million of impaired asset write-downs in the Mill Services Segment related to fixed plant and equipment associated with steel mill customers which filed for reorganization proceedings under local laws in principally the United States and Asia. There was also a $3.0 million decline in employee termination benefit costs, a $0.7 million decline in costs to exit activities, a $0.5 million decline in other costs and a $0.2 million increase in net gains when compared with 2001.
For additional information, see Note 15, Other (Income) and Expenses, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data.”
Interest Expense
2002 vs. 2001
Interest expense in 2002 was $9.9 million or 19% lower than in 2001 due to approximately $110 million in reduced average annual borrowings, and lower average annual interest rates.
2001 vs. 2000
Interest expense in 2001 was $3.1 million or 6% higher than in 2000 due to approximately $145 million in increased average annual borrowings offset by lower average annual interest rates. The increased borrowings in 2001 related principally to the financing of the 2000 SGB Group acquisition.
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Provision for Income Taxes from Continuing Operations
2002 vs. 2001
The increase in 2002 of $3.6 million or 9% in the provision for income taxes from continuing operations was due to increased earnings offset by a decreased effective income tax rate. The effective income tax rate relating to continuing operations for 2002 was 30.9% versus 32.6% for 2001. The decrease in the income tax rate was due principally to the elimination of goodwill amortization for book purposes in accordance with SFAS No. 142.
2001 vs. 2000
The decrease in 2001 in the provision for income taxes from continuing operations of $6.8 million or 15% was due to decreased earnings from 2000 offset by an increased effective income tax rate. The effective income tax rate relating to continuing operations for 2001 was 32.6% versus 31.4% for 2000. The increase in the income tax rate was due principally to higher effective income tax rates on domestic earnings.
Income from Continuing Operations
2002 vs. 2001
Income from continuing operations in 2002 was significantly above 2001 levels despite a decrease in revenues. The increase of $13.8 million or 18% results from the elimination of goodwill amortization as a result of implementing SFAS No. 142; reduced provisions for uncollectible accounts receivable; reduced Other expense related to restructuring activities; reduced interest expense; and a lower effective income tax rate; as well as a reduced equity loss in affiliates. The reduced equity loss in affiliates was due primarily to $2.9 million of pre-tax losses during 2001 associated with the Company’s S3Networks equity investment. This investment was disposed of in 2001. These reductions in expense were partially offset by increased pension expense due to financial market conditions and lower interest rates which affected the SFAS 87 pension expense computation.
2001 vs. 2000
Income from continuing operations in 2001 was significantly below 2000 levels despite an increase in revenues. The decrease of $19.7 million or 21% was a result of increased provisions for uncollectible accounts receivable; increased Other expenses related to restructuring activities; increased interest expense; and a higher effective income tax rate.
Income (Loss) from Discontinued Operations
2002 vs. 2001
Income from discontinued operations for 2002 was $4.6 million higher than 2001‘s loss of $2.9 million. This is a result of the $3.6 million after-tax gain recognized on the sale of the Company’s Capitol Manufacturing business, of which a substantial part of the assets were divested in the second quarter of 2002. This gain was partially offset by the costs of activities related to the collection of the remaining receivables and the sale of inventory consigned to the purchaser of the business.
2001 vs. 2000
The loss from discontinued operations for 2001 was $5.4 million lower than 2000‘s income of $2.5 million as a result of the downturn in the Company’s Capitol Manufacturing business. The continued long-term downturn was one of the key factors in the Company’s decision to sell this business in 2002.
Net Income and Earnings Per Share
2002 vs. 2001
Net income of $90.1 million and diluted earnings per share of $2.21 in 2002 were above 2001 by $18.4 million and $0.42, respectively, due principally to decreased provisions for uncollectible accounts receivable; decreased Other expenses related to restructuring activities; decreased interest expense; and a lower effective income tax rate.
2001 vs. 2000
Net income of $71.7 million and diluted earnings per share of $1.79 in 2001 were below 2000 by $25.1 million and $0.63, respectively, due principally to increased provisions for uncollectible accounts receivable; increased Other expenses related to restructuring activities; increased interest expense; and a higher effective income tax rate.
Segment Analysis
Due to reorganization changes, the Company has adopted a new segment reporting structure for its operations as of December 31, 2002. Historical information by segment has been reclassified for comparative purposes. See Note 14,
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Information by Segment and Geographic Area, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data” for additional information on the Company’s segments.
Mill Services Segment
|
| (In millions) | 2002 | | 2001 | | 2000 | |
|---|
| | Sales | | | $ | 696.8 | | $ | 664.7 | | $ | 694.8 | | | | | Operating income | | | | 73.5 | | | 57.5 | | | 81.3 | |
|
2002 vs. 2001
During 2002, sales of the Mill Services Segment increased $32.1 million or 5% from 2001 due to the continued strong performance of the international mill services business. The improvement includes increased volumes at existing sites and new customer contracts for certain locations. The increase was partially reduced by decreased revenue in the Company’s U.S. mill services business, principally due to steel mill customer plant closures in 2001. Certain of these steel mill plants have started to operate under new ownership providing the opportunity for the segment to increase future sales. The effect of foreign currency translation increased 2002 period sales by approximately $7.6 million compared with 2001.
Operating income of the Mill Services Segment in 2002 increased $16.0 million or 28% from 2001. The year 2002 was positively affected by decreased Other expenses of $8.2 million related to significant charges recorded in 2001 due to impaired asset write-downs and employee termination benefit costs not being repeated in 2002; the elimination of $8.1 million in goodwill amortization as a result of the implementation of SFAS No. 142; decreased provisions for doubtful accounts receivable of $6.1 million, despite a $3.0 million charge relating to a U.K. customer that filed for the U.S. equivalent of bankruptcy protection in July 2002; a $2.7 million gain on the sale of an equity investment in India; and new business opportunities primarily in the international markets. These benefits were partially offset by $8.8 million in increased pension expense. The effect of foreign currency translation increased 2002 period operating income by approximately $0.5 million.
2001 vs. 2000
During 2001, sales of the Mill Services Segment decreased $30.1 million or 4% from 2000. A combination of strong production volumes and new contracts in the Company’s international mill services operations in 2001 partially offset the unfavorable effects of reduced steel mill production and steel mill closures and their impact on capacity utilization at many mills in North America. This adversely affected the volume of services provided by the Company. The unfavorable effect of foreign currency translation, reduced 2001 sales $35.8 million when compared to 2000.
Operating income of the Mill Services Segment in 2001 decreased $23.8 million or 29% from 2000. This decrease was principally due to lower income in the United States and the effect of foreign currency translation. The downturn in North American steel production also contributed to customer financial difficulties that resulted in an increase of $4.3 million compared with 2000 in provisions for uncollectible accounts receivable during the 2001 period for customers in the United States who filed for bankruptcy protection or shut down operations. Internationally, there was an increase of $3.4 million in provisions for uncollectible accounts receivable during 2001 compared to 2000 related to an international customer that filed for the U.S. equivalent of bankruptcy protection. Additionally, operating income in 2001 was negatively impacted by $9.6 million of increased charges for impaired asset write-downs and employee termination benefit costs compared with 2000.
Access Services Segment
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| (In millions) | 2002 | | 2001 | | 2000 | |
|---|
| | Sales | | | $ | 587.9 | | $ | 583.4 | | $ | 382.3 | | | | | Operating income | | | | 41.7 | | | 59.1 | | | 43.1 | |
|
2002 vs. 2001
During 2002, sales of the Access Services Segment increased $4.5 million or 1% from 2001 due to the positive effect of foreign currency translation, which increased sales by approximately $20.9 million from 2001. This increase was mostly offset by decreased volume in both the domestic and international access businesses, which is a direct result of continued weakness in the non-residential construction markets due to the generally unsettled economic conditions.
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Operating income of the Access Services Segment in 2002 decreased $17.4 million or 29% due principally to a reduction in the high-margin access equipment rental business in 2002. This reduction results from a continued decline in non-residential construction activity and industry overcapacity. In 2002, the benefit of the elimination of $4.3 million in goodwill amortization resulting from the implementation of SFAS No. 142 was more than offset by $7.7 million of increased pension expense. The effect of foreign currency translation increased 2002 operating income by approximately $2.1 million.
2001 vs. 2000
During 2001, sales and operating income were above 2000 by $201.1 million or 53% and $16.0 million or 37%, respectively, primarily due to the June 2000 acquisition of SGB Group. This increase was augmented by increased rentals in the existing domestic scaffolding services business.
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Gas and Fluid Control Segment
| (In millions) | 2002 | | 2001 (a) | | 2000 (a) | |
|---|
| | Sales | | | $ | 350.6 | | $ | 400.1 | | $ | 437.6 | | | | | Operating income | | | | 23.0 | | | 24.3 | | | 38.8 | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 and 2000 information has been reclassified for comparative purposes.
|
2002 vs. 2001
In 2002, sales and operating income of the Gas and Fluid Control Segment were below 2001 by $49.5 million or 12% and $1.3 million or 5%, respectively. These reductions are due to continued recessionary environment in the manufacturing sector, primarily in the United States. In 2002, the segment was principally affected by the decline in the natural gas transmission market. Additionally, declines in most other gas control and containment equipment product lines negatively impacted the segment as well. These declines were partially offset by increased demand for valves, most notably in the liquid propane gas (LPG) product line. The smaller relative decline in operating income (5%) as compared to the relative decline in sales (12%) is due to decreased Other expenses of $2.7 million related to charges recorded in 2001 for employee termination benefit costs which were not repeated in 2002. In 2002, the benefit of the elimination of $2.5 million in goodwill amortization as a result of the implementation of SFAS No. 142 was partially offset by $1.2 million in increased pension expense.
2001 vs. 2000
During 2001, sales and operating income were below 2000 by $37.5 million or 9% and $14.5 million or 37%, respectively, due to a continued downturn in the United States manufacturing sector that started in the fourth quarter of 2000 and resulted in a recessionary environment during 2001. This affected demand for most gas control and containment equipment product lines. These decreases were partially offset by higher sales and operating income for heat exchangers, reflecting improvement in the natural gas industry. The 2001 operating income reflects the impact of other expenses of $3.5 million relating primarily to employee termination benefit costs.
Other Infrastructure Products and Services
|
| (In millions) | 2002 | | 2001 | | 2000 | |
|---|
| | Sales | | | $ | 341.4 | | $ | 377.0 | | $ | 390.0 | | | | | Operating income | | | | 37.6 | | | 23.1 | | | 28.9 | |
|
2002 vs. 2001
In 2002, sales of Other Infrastructure Products and Services decreased by $35.6 million or 9% from 2001 due to declines in most businesses. The businesses with declines include process equipment sales, railway contracting services and grating sales (primarily bridge decking due to the product line’s sale in January 2002). The decrease in U.S. railway contracting services related primarily to a maintenance contract with a U.S. railroad that was completed in December 2001. These decreases were only minimally offset by increased sales in the roofing granules and abrasives business. The effect of foreign currency translation increased 2002 period sales by approximately $1.7 million.
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Operating income of Other Infrastructure Products and Services in 2002 increased $14.5 million or 63% despite decreased sales. This principally results from an $8.0 million impairment charge recorded in 2001 related to an underperforming plant in the United States associated with the Company’s roofing granules business which did not recur in 2002. This plant was sold in 2002. The sale of the plant also increased profitability of this business by approximately $2.4 million. In 2002, the benefit of the elimination of $1.2 million in goodwill amortization as a result of the implementation of SFAS No. 142 and a $1.9 million gain on the sale of a product line of the Harsco Track Technologies business were partially offset by $1.0 million of increased pension expense.
2001 vs. 2000
In 2001, sales and operating income of Other Infrastructure Products and Services decreased by $13.0 million or 3% and $5.8 million or 20%, respectively, from 2000 due to declines in rail track maintenance equipment and repair part sales as well as industrial grating sales. These decreases reflect the downturn in the United States manufacturing sector that started in the fourth quarter of 2000 and resulted in a recessionary environment during 2001. These decreases were only partially offset by increased sales of the roofing granules and abrasives business and the process equipment business. The larger relative decline in operating income (20%) compared with the relative decline in sales (3%) is due to increased Other expenses of $8.0 million. The increase in Other expenses was related to an impairment charge for an underperforming plant in the United States associated with the Company’s roofing granules business.
Industrial Services and Engineered Products Analysis
The Company is a diversified industrial services and engineered products company. Sales and operating income for 2002, 2001 and 2000 are presented in the following table:
|
| 2002 | | 2001 (a) | | 2000 (a) | |
|---|
| | (Dollars are in millions) | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
|---|
| | Sales | | | | | | | | | | | | | | | | | | | | | | Industrial services | | | $ | 1,341.9 | | | 68 | % | $ | 1,324.3 | | | 65 | % | $ | 1,142.0 | | | 60 | % | | | | Engineered products | | | | 634.8 | | | 32 | | | 700.9 | | | 35 | | | 762.7 | | | 40 | |
| | | | Total sales | | | $ | 1,976.7 | | | 100 | % | $ | 2,025.2 | | | 100 | % | $ | 1,904.7 | | | 100 | % |
| | | | Operating Income (b) | | | | Industrial services | | | $ | 126.3 | | | 72 | % | $ | 126.0 | | | 77 | % | $ | 122.7 | | | 64 | % | | | | Engineered products | | | | 49.5 | | | 28 | | | 38.0 | | | 23 | | | 69.4 | | | 36 | |
| | | | Total segment operating income | | | $ | 175.8 | | | 100 | % | $ | 164.0 | | | 100 | % | $ | 192.1 | | | 100 | % |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 and 2000 information has been reclassified for comparative purposes.
| | (b) | | Operating income excludes income/(expenses) of $0.2 million, $3.7 million and ($1.3) million for 2002, 2001 and 2000, respectively, related to unallocated general corporate overhead.
|
2002 vs. 2001
In 2002, sales and operating income for industrial services increased from the comparable period in 2001. This was due to the positive effect of foreign currency translation that increased sales by approximately $29 million and increased operating income by approximately $3 million. These positive effects of foreign currency translation were partially offset by declines in the Access Services Segment and domestic operations of the Mill Services Segment.
In 2002, sales of engineered products decreased significantly from 2001 as a result of the previously discussed recessionary manufacturing environment particularly in the United States. Engineered products operating income in 2002 increased significantly from 2001 principally as a result of an $8.0 million impairment charge recorded in 2001 related to an underperforming plant in the United States associated with the Company’s roofing granules business. This plant was sold in 2002 and there were no similar charges recorded in 2002.
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2001 vs. 2000
Industrial services sales and operating income in 2001 increased from 2000. The increase reflects principally the SGB Group acquisition, as well as improvement in certain international markets served by the Company and the favorable effects of cost reductions, process improvements and reorganization efforts.
Engineered products sales and operating income in 2001 decreased significantly from 2000. The decrease resulted from the previously discussed recessionary manufacturing environment in the United States.
Research and Development
The Company invested $2.8 million in internal research and development programs in 2002. Internal funding for the Mill Services Segment amounted to $1.2 million. Expenditures for the Other Infrastructure Products and Services and Access Services Segments were $1.0 million and $0.4 million, respectively.
Backlog
As of December 31, 2002, the Company’s order backlog, exclusive of long-term mill services contracts and access services, was $157.8 million compared with $215.9 million as of December 31, 2001, a 27% decrease. The December 31, 2001 amount included $21.9 million related to businesses that have been divested in 2002, most of which are not considered discontinued operations under SFAS No. 144. The backlog from continuing operations at December 31, 2001 was $214.1 million.
Mill services contracts have an estimated future value of $3.0 billion at December 31, 2002 and December 31, 2001. Over 50% of these revenues are expected to be recognized by December 31, 2005. The remaining revenues are expected to be recognized principally between January 1, 2006 and December 31, 2010.
Backlog for scaffolding, shoring and forming services of the Access Services Segment is excluded from the above amounts. These amounts are generally not quantifiable due to the nature and timing of the products and services provided.
The Gas and Fluid Control Segment backlog at December 31, 2002 of $40.8 million was 29% below the December 31, 2001 backlog of $57.8 million. The decrease reflects reduced backlog for several product lines principally heat exchangers, composite pressure vessels and structures and high pressure gas cylinders. These decreases were partially offset by an increase in the backlog for valves, propane tanks and cryogenic equipment. The industrial pipe fittings product line of the Gas and Fluid Control Segment was disposed of in 2002 and is excluded from the disclosed backlog amounts noted above.
Other Infrastructure Products and Services’ order backlog at December 31, 2002 was $117.0 million, a decrease of 14% from the December 31, 2001 backlog of $136.2 million excluding divested product lines. The decrease is principally due to a decrease in backlog for railway track maintenance services which was partially offset by an increase in orders for railway track maintenance equipment.
Dividend Action
The Company paid four quarterly cash dividends of $.25 per share in 2002, for an annual rate of $1.00. This is an increase of 4.2% from 2001. At the November 2002 meeting, the Board of Directors increased the dividend by 5.0% to an annual rate of $1.05 per share. The Board normally reviews the dividend rate periodically during the year and annually at its November meeting. There are no material restrictions on the payment of dividends.
The Company is proud of its history of paying dividends. The Company has paid dividends each year since 1939. The February 2003 payment marked the 211th consecutive quarterly dividend paid at the same or at an increased rate. In 2002, 45% of net earnings were paid out in dividends. The Company is philosophically committed to maintaining or increasing the dividend at a sustainable level.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to foreign currency risk in its international operations. The Company conducts business in 35 currencies. Approximately 54%, 50% and 44% of the Company’s sales from continuing operations for 2002, 2001 and 2000, respectively, were derived from the Company’s operations outside the United States. Compared to the corresponding period in 2001, the values of the following major currencies changed in relation to the U.S. dollar in 2002, impacting the Company’s sales and income:
|
| • | Brazilian real
| Weakened
| 24%
| | | • | South African rand
| Weakened
| 19%
| | | • | euro
| Strengthened
| 6%
| | | • | British pound sterling
| Strengthened
| 5%
| |
Such foreign currency exposures increase the risk of income statement, balance sheet and cash flow volatility which could result in a material impact to the Company’s financial position, results of operations, or cash flows in the future if the above currencies would materially change in relation to the U.S. dollar.
The Company is exposed to market risk arising from changes in foreign exchange rates. Competitive conditions in the Company’s manufacturing businesses may limit its ability to increase product price in the face of adverse currency movements. Products manufactured in the U.S. for both the domestic as well as the export market may be affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress demand for these products and reduce sales.
To illustrate the effect of foreign currency exchange rate changes in certain key markets of the Company, in 2002, sales would have been approximately 1.5% or $30.5 million less using the average exchange rates for 2001. A similar comparison for 2001 would have increased sales approximately 2.0% or $40.4 million if the average exchange rates for 2000 would have remained the same in 2001. If the weakening of the U.S. dollar in relation to the euro and British pound sterling that started in the second quarter of 2002 would continue, the Company would expect to see a positive impact on sales and net income as a result of foreign currency translation.
Currency changes result in assets and liabilities denominated in local currencies being translated into U.S. dollars at different amounts than at the prior year-end. These currency changes resulted in increased net assets of $39.3 million and decreased net assets of $22.4 million, at December 31, 2002 and 2001, respectively.
The Company seeks to reduce exposures to foreign currency transaction fluctuations through the use of forward exchange contracts. At December 31, 2002, these contracts amounted to $2.9 million, and all mature within 2003. The Company does not hold or issue financial instruments for trading purposes, and it is the Company’s policy to prohibit the use of derivatives for speculative purposes.
The Company’s cash flows and earnings are subject to changes in interest rates. Total debt of $639.7 million as of December 31, 2002 was approximately 22% at variable rates of interest and 78% at fixed interest rates. The weighted average interest rate
of total debt was approximately 6.03%. At current debt levels, a one-percentage increase/decrease in interest rates would increase/decrease interest expense by approximately $1.4 million per year.
The economic slowdown in the United States that began in the fourth quarter of 2000 has resulted in a recessionary manufacturing environment during 20011.9% and 2002. As a result, on a comparative basis, the Company continued to suffer reduced demand for almost all of its manufactured products and mill services in North America in 2002. Several steel producers, including certain Company customers, have filed for bankruptcy protection or shut down operations during 2001 and 2002. The most recent significant occurrence was in July 2002 when a U.K. customer filed for the U.S. equivalent of bankruptcy protection. This resulted in the Company recording an additional provision for uncollectible accounts receivable of $2.8 million in June 2002 and $0.2 million in July 2002. Additionally, weakness in both the domestic and U.K. non-residential construction business and weak end markets were encountered in 2002, especially since the latter part of the second quarter. This has resulted in reduced rentals of access equipment. This is expected to persist in the near term and the prospects for significant improvement are uncertain until the emergence of much stronger confidence in the global economic outlook.
If the economic downturn persists, it could negatively affect the Company’s forecasts used in performing its goodwill impairment testing under SFAS No. 142. Therefore, there can be no assurance that future goodwill impairment tests will not result in a charge to earnings. A persistent slow economy could also affect the realizability of receivables across the Company’s businesses as it may affect the ability of the Company’s customers to meet their obligations on a timely basis and possibly result in additional bankruptcy filings by the Company’s customers.
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In addition to the economic issues that directly affect the Company’s business, changes in the performance of stock and bond markets, particularly in the United States and United Kingdom, impact actuarial assumptions used in determining annual pension expense and in the valuation of the assets in the Company’s pension plans. As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above, the downturn in financial markets over the past two years has negatively impacted the Company’s pension expense and the accounting for pension assets and liabilities. This has resulted in an increase in pre-tax pension expense of approximately $20 million for calendar year 2002 compared with 2001, and it is expected to result in an additional pre-tax increase in pension expense of approximately $17.9 million in calendar year 2003 compared with 2002. Should the downward trend in capital markets continue, future unfunded obligations and pension expense would likely increase. This could result in an additional reduction to shareholders’ equity and increase the Company’s statutory funding requirements.
The Company has over 400 locations in 43 countries, including the United States. As a result of the Company’s global footprint, unforeseen business disruptions in one or more of these countries due to political instability, civil unrest, armed hostilities or other calamities could result in a material impact to the Company’s financial position or results of operations or cash flows. The Company has operations in certain countries in the Middle East (Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar) which are geographically close to countries with a high risk of armed hostilities. During 2002, these countries contributed approximately $15 million to the Company’s operating income.
The current worldwide political and economic environment may increase the volatility of energy costs, both on a macro basis and for the Company specifically. To the extent that the Company cannot pass any increase in such costs to its customers, the Company’s operating income may be adversely affected. Historically, direct energy costs have approximated 2.5% to 3.5% of the Company’s revenue.
The future financial impact on the Company associated with the above risks cannot be estimated.
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PART II
Item 8. Financial Statements and Supplementary Data
|
| Index to Consolidated Financial Statements and Supplementary Data | | | | | | | | | | | Page | | | Consolidated Financial Statements of Harsco Corporation: | | | | | | | | Management's Report on Financial Statements | | | | 30 | | | | | | | Report of Independent Accountants | | | | 30 | | | | | | | Consolidated Balance Sheets | | | | December 31, 2002 and 2001 | | | | 31 | | | | | | | Consolidated Statements of Income | | | | for the years 2002, 2001 and 2000 | | | | 32 | | | | | | | Consolidated Statements of Cash Flows | | | | for the years 2002, 2001 and 2000 | | | | 33 | | | | | | | Consolidated Statements of Shareholders' Equity | | | | for the years 2002, 2001 and 2000 | | | | 34 | | | | | | | Consolidated Statements of Comprehensive Income | | | | for the years 2002, 2001 and 2000 | | | | 35 | | | | | | | Notes to Consolidated Financial Statements | | | | 36 | | | | | | | Supplementary Data (Unaudited): | | | | | | | | Two-Year Summary of Quarterly Results | | | | 64 | | | | | | | Common Stock Price and Dividend Information | | | | 64 | |
29
MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS
To the Shareholders of Harsco Corporation:
Primary responsibility for the integrity and objectivity of the Company’s financial statements rests with management. These statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management’s best estimates and judgments. Non-financial information included in this Form 10-K has also been prepared by management and is consistent with the financial statements.
The Company’s internal control framework maintains systems, supported by a code of conduct, designed to provide reasonable assurance, at reasonable cost, that its assets and resources are safeguarded against loss from unauthorized use or disposition and that transactions are executed and recorded in accordance with established procedures. These systems are implemented through clear and accessible written policies and procedures, employee training and appropriate delegation of authority and segregation of responsibilities. These systems of internal control are reviewed, modified and improved as changes occur in business conditions and operations and as a result of suggestions from managers, internal auditors and independent accountants. These systems are the responsibility of the management of the Company.
The independent accountants are engaged to perform an audit of the consolidated financial statements in accordance with generally accepted auditing standards. Their report appears below.
The Audit Committee of the Board of Directors is comprised entirely of individuals who are not employees of the Company. This Committee meets periodically and privately with the independent accountants, with the internal auditors and with the management of the Company to review matters relating to the quality of the financial reporting, the internal control framework and the scope and results of audits.
|
/s/ Derek C. Hathaway | | /s/ Salvatore D. Fazzolari | |
| |
| | Derek C. Hathaway | | Salvatore D. Fazzolari | | Chairman, President and Chief | | Senior Vice President, Chief | | Executive Officer | | Financial Officer and Treasurer | | | | | |
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Harsco Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders’ equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Harsco Corporation and Subsidiary Companies at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 5 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” effective January 1, 2002.
|
/s/ PricewaterhouseCoopers LLP | | | |
| | | | PricewaterhouseCoopers LLP | | | | Philadelphia, Pennsylvania | | | | January 30, 2003 | | | | | | | |
30
HARSCO CORPORATION
CONSOLIDATED BALANCE SHEETS
|
| December 31 | | December 31 | |
|---|
| (In thousands, except share and per share amounts) | 2002 | | 2001 (a) | |
|---|
| | ASSETS | | | | | | | | | | Current assets: | | | | Cash and cash equivalents | | | $ | 70,132 | | $ | 67,407 | | | Accounts receivable, net | | | | 388,872 | | | 386,252 | | | Inventories | | | | 181,712 | | | 174,644 | | | Other current assets | | | | 61,686 | | | 68,546 | |
| | Total current assets | | | | 702,402 | | | 696,849 | |
| | Property, plant and equipment, net | | | | 807,935 | | | 822,080 | | | Goodwill, net | | | | 377,220 | | | 353,221 | | | Other assets | | | | 102,493 | | | 180,439 | | | Assets held for sale | | | | 9,247 | | | 38,177 | |
| | Total assets | | | $ | 1,999,297 | | $ | 2,090,766 | |
| | LIABILITIES | | | | Current liabilities: | | | | Short-term borrowings | | | $ | 22,362 | | $ | 29,560 | | | Current maturities of long-term debt | | | | 11,695 | | | 12,422 | | | Accounts payable | | | | 166,871 | | | 162,481 | | | Accrued compensation | | | | 39,456 | | | 37,245 | | | Income taxes | | | | 43,411 | | | 35,061 | | | Dividends payable | | | | 10,642 | | | 9,996 | | | Other current liabilities | | | | 179,413 | | | 178,928 | |
| | Total current liabilities | | | | 473,850 | | | 465,693 | |
| | Long-term debt | | | | 605,613 | | | 720,133 | | | Deferred income taxes | | | | 62,096 | | | 103,082 | | | Insurance liabilities | | | | 44,090 | | | 49,019 | | | Other liabilities | | | | 167,069 | | | 57,621 | | | Liabilities associated with assets held for sale | | | | 2,039 | | | 9,045 | |
| | Total liabilities | | | | 1,354,757 | | | 1,404,593 | |
| | COMMITMENTS AND CONTINGENCIES | | | | SHAREHOLDERS’ EQUITY | | | | Preferred stock, Series A junior participating cumulative preferred stock | | | | — | | | — | | | Common stock, par value $1.25, issued 67,034,010 and 66,484,633 shares as of | | | | December 31, 2002 and 2001, respectively | | | | 83,793 | | | 83,106 | | | Additional paid-in capital | | | | 110,639 | | | 94,597 | | | Accumulated other comprehensive expense | | | | (242,978 | ) | | (135,263 | ) | | Retained earnings | | | | 1,296,855 | | | 1,247,680 | |
| | | | | | 1,248,309 | | | 1,290,120 | | | Treasury stock, at cost (26,494,610 and 26,499,784 shares, respectively) | | | | (603,769 | ) | | (603,947 | ) |
| | Total shareholders’ equity | | | | 644,540 | | | 686,173 | |
| | Total liabilities and shareholders’ equity | | | $ | 1,999,297 | | $ | 2,090,766 | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
See accompanying notes to consolidated financial statements.
31
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
| (In thousands, except per share amounts) | | | |
|---|
| Years ended December 31 | 2002 | | 2001 (a) | | 2000 (a) | |
|---|
| | Revenues from continuing operations: | | | | | | | | | | | | | Service sales | | | $ | 1,341,867 | | $ | 1,324,233 | | $ | 1,142,036 | | | Product sales | | | | 634,865 | | | 700,930 | | | 762,655 | |
| | Total revenues | | | | 1,976,732 | | | 2,025,163 | | | 1,904,691 | |
| | Costs and expenses from continuing operations: | | | | Cost of services sold | | | | 981,754 | | | 954,417 | | | 840,501 | | | Cost of products sold | | | | 500,010 | | | 561,983 | | | 601,701 | | | Selling, general and administrative expenses | | | | 312,704 | | | 314,268 | | | 263,991 | | | Research and development expenses | | | | 2,820 | | | 3,973 | | | 5,662 | | | Other expenses | | | | 3,473 | | | 22,786 | | | 1,997 | |
| | Total costs and expenses | | | | 1,800,761 | | | 1,857,427 | | | 1,713,852 | |
| | Operating income from continuing operations | | | | 175,971 | | | 167,736 | | | 190,839 | | | Equity in income (loss) of affiliates, net | | | | 363 | | | (1,852 | ) | | (2,020 | ) | | Interest income | | | | 3,688 | | | 5,589 | | | 5,987 | | | Interest expense | | | | (43,323 | ) | | (53,190 | ) | | (50,082 | ) |
| | Income from continuing operations before income taxes and | | | | minority interest | | | | 136,699 | | | 118,283 | | | 144,724 | | | Income tax expense | | | | (42,240 | ) | | (38,553 | ) | | (45,398 | ) |
| | Income from continuing operations before minority interest | | | | 94,459 | | | 79,730 | | | 99,326 | | | Minority interest in net income | | | | (6,049 | ) | | (5,088 | ) | | (4,983 | ) |
| | Income from continuing operations | | | | 88,410 | | | 74,642 | | | 94,343 | |
| | Discontinued operations: | | | | Income (loss) from operations of discontinued businesses | | | | (2,952 | ) | | (4,488 | ) | | 3,867 | | | Gain on disposal of discontinued businesses | | | | 5,606 | | | — | | | — | | | Income tax benefit (expense) | | | | (958 | ) | | 1,571 | | | (1,407 | ) |
| | Income (loss) from discontinued operations | | | | 1,696 | | | (2,917 | ) | | 2,460 | |
| | Net Income | | | $ | 90,106 | | $ | 71,725 | | $ | 96,803 | |
| | Average shares of common stock outstanding | | | | 40,360 | | | 39,876 | | | 39,964 | | | Basic earnings (loss) per common share: | | | | Continuing operations | | | $ | 2.19 | | $ | 1.87 | | $ | 2.36 | | | Discontinued operations | | | | .04 | | | (.07 | ) | | .06 | |
| | Basic earnings per common share | | | $ | 2.23 | | $ | 1.80 | | $ | 2.42 | |
| | Diluted average shares of common shares outstanding | | | | 40,680 | | | 40,066 | | | 40,022 | | | Diluted earnings (loss) per common share: | | | | Continuing operations | | | $ | 2.17 | | $ | 1.86 | | $ | 2.36 | | | Discontinued operations | | | | .04 | | | (.07 | ) | | .06 | |
| | Diluted earnings per common share | | | $ | 2.21 | | $ | 1.79 | | $ | 2.42 | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 and 2000 information has been reclassified for comparative purposes.
|
See accompanying notes to consolidated financial statements.
32
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years ended December 31 | 2002 | | 2001(a) | | 2000(a) | |
|---|
| | Cash flows from operating activities: | | | | | | | | | | | | | Net income | | | $ | 90,106 | | $ | 71,725 | | $ | 96,803 | | | Adjustments to reconcile net income to net | | | | cash provided (used) by operating activities: | | | | Depreciation | | | | 153,979 | | | 159,157 | | | 141,128 | | | Amortization | | | | 1,682 | | | 17,374 | | | 17,971 | | | Equity in (income) loss of affiliates, net | | | | (363 | ) | | 1,852 | | | 2,020 | | | Dividends or distributions from affiliates | | | | 144 | | | 895 | | | 1,729 | | | Other (income) and expenses | | | | (273 | ) | | 18,940 | | | 3,397 | | | Other, net | | | | 8,776 | | | (1,049 | ) | | (804 | ) | | Changes in assets and liabilities, net of acquisitions | | | | and dispositions of businesses: | | | | Accounts receivable | | | | 30,038 | | | 12,352 | | | 17,811 | | | Inventories | | | | (13,280 | ) | | 11,893 | | | 966 | | | Accounts payable | | | | (13,055 | ) | | (11,744 | ) | | 10,193 | | | Net disbursements related to discontinued defense business | | | | (1,435 | ) | | (1,328 | ) | | (12,012 | ) | | Other assets and liabilities | | | | (2,566 | ) | | (39,466 | ) | | (19,754 | ) |
| | Net cash provided by operating activities | | | | 253,753 | | | 240,601 | | | 259,448 | |
| | Cash flows from investing activities: | | | | Purchases of property, plant and equipment | | | | (114,340 | ) | | (156,073 | ) | | (180,048 | ) | | Purchase of businesses, net of cash acquired* | | | | (3,332 | ) | | (4,914 | ) | | (302,461 | ) | | Proceeds from sales of assets | | | | 63,731 | | | 35,668 | | | 22,469 | | | Other investing activities | | | | 12 | | | 106 | | | 988 | |
| | Net cash used by investing activities | | | | (53,929 | ) | | (125,213 | ) | | (459,052 | ) |
| | Cash flows from financing activities: | | | | Short-term borrowings, net | | | | (16,272 | ) | | (15,181 | ) | | 146,552 | | | Current maturities and long-term debt: | | | | Additions | | | | 136,970 | | | 195,678 | | | 562,993 | | | Reductions | | | | (294,799 | ) | | (241,862 | ) | | (448,366 | ) | | Cash dividends paid on common stock | | | | (40,286 | ) | | (38,261 | ) | | (37,594 | ) | | Common stock issued-options | | | | 14,011 | | | 4,773 | | | 1,792 | | | Common stock acquired for treasury | | | | — | | | (167 | ) | | (7,917 | ) | | Other financing activities | | | | (5,104 | ) | | (4,170 | ) | | (6,714 | ) |
| | Net cash provided (used) by financing activities | | | | (205,480 | ) | | (99,190 | ) | | 210,746 | |
| | Effect of exchange rate changes on cash | | | | 8,380 | | | (5,211 | ) | | (5,986 | ) | | Net decrease in cash of discontinued operations | | | | 1 | | | — | | | 9 | |
| | Net increase in cash and cash equivalents | | | | 2,725 | | | 10,987 | | | 5,165 | | | Cash and cash equivalents at beginning of period | | | | 67,407 | | | 56,420 | | | 51,255 | |
| | Cash and cash equivalents at end of period | | | $ | 70,132 | | $ | 67,407 | | $ | 56,420 | |
| | *Purchase of businesses, net of cash acquired | | | | Working capital, other than cash | | | $ | 250 | | $ | (55 | ) | $ | (20,249 | ) | | Property, plant and equipment | | | | (2,705 | ) | | (5,151 | ) | | (215,065 | ) | | Other noncurrent assets and liabilities, net | | | | (877 | ) | | 292 | | | (67,147 | ) |
| | Net cash used to acquire businesses | | | $ | (3,332 | ) | $ | (4,914 | ) | $ | (302,461 | ) |
|
(a) | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 and 2000 information has been reclassified for comparative purposes.
|
See accompanying notes to consolidated financial statements.
33
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
| | | | Accumulated Other | | |
|---|
| Common Stock | | | Comprehensive Income (Expense) | | |
|---|
|
| | |
| | |
|---|
| | | | | | | Unrealized | | | |
|---|
| | | Additional | | | Cash Flow | | | Gain on | | | |
|---|
| (in thousands, except share | | | Paid-in | | | Hedging | | Pension | | Marketable | | | Retained | |
|---|
| and per share amounts) | Issued | | Treasury | | Capital | | Translation | | Instruments | | Liability | | Securities | | Total | | Earnings | |
|---|
| | Balances, January 1, 2000 | | | $ | 82,777 | | $ | (595,805 | ) | $ | 88,101 | | $ | (78,664 | ) | $ | | | $ | (1,874 | ) | $ | | | $ | (80,538 | ) | $ | 1,155,586 | |
| | Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | 96,803 | | | Cash dividends declared, $.945 | | | | per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | (37,730 | ) | | Translation adjustments | | | | | | | | | | | | | (28,327 | ) | | | | | | | | | | | (28,327 | ) | | | | | Pension liability adjustments, | | | | net of $295 deferred income | | | | taxes | | | | | | | | | | | | | | | | | | | (512 | ) | | | | | (512 | ) | | | | | Acquired during the year, | | | | 355,695 shares | | | | | | | (8,209 | ) | | Stock options exercised, | | | | 88,107 shares | | | | 110 | | | | | | 1,900 | | | Other, 975 shares | | | | | | | 24 | | | (1 | ) |
| | Balances, December 31, 2000 | | | $ | 82,887 | | $ | (603,990 | ) | $ | 90,000 | | $ | (106,991 | ) | $ | | | $ | (2,386 | ) | $ | | | $ | (109,377 | ) | $ | 1,214,659 | |
| | Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | 71,725 | | | Cash dividends declared, $.97 | | | | per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | (38,704 | ) | | Translation adjustments | | | | | | | | | | | | | (22,347 | ) | | | | | | | | | | | (22,347 | ) | | Cash flow hedging instrument | | | | adjustments, net of $47 | | | | deferred income taxes | | | | | | | | | | | | | | | | (84 | ) | | | | | | | | (84 | ) | | Pension liability adjustments, | | | | net of $2,039 deferred | | | | income taxes | | | | | | | | | | | | | | | | | | | (3,792 | ) | | | | | (3,792 | ) | | Marketable securities adjustments, | | | | net of $(182) | | | | deferred income taxes | | | | | | | | | | | | | | | | | | | | | | 337 | | | 337 | | | Acquired during the year, | | | | 10,451 shares | | | | | | | (167 | ) | | Stock options exercised, | | | | 187,693 shares | | | | 219 | | | 149 | | | 4,590 | | | Other, 2,435 shares | | | | | | | 61 | | | 7 | |
| | Balances, December 31, 2001 | | | $ | 83,106 | | $ | (603,947 | ) | $ | 94,597 | | $ | (129,338 | ) | $ | (84 | ) | $ | (6,178 | ) | $ | 337 | | $ | (135,263 | ) | $ | 1,247,680 | |
| | Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | 90,106 | | | Cash dividends declared, | | | | $1.0125 per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | (40,931 | ) | | Translation adjustments | | | | | | | | | | | | | 39,311 | | | | | | | | | | | | 39,311 | | | Cash flow hedging instrument | | | | adjustments, net of $(11) | | | | deferred income taxes | | | | | | | | | | | | | | | | 22 | | | | | | | | | 22 | | | Pension liability adjustments, | | | | net of $63,613 deferred | | | | income taxes | | | | | | | | | | | | | | | | | | | (146,709 | ) | | | | | (146,709 | ) | | Marketable securities | | | | adjustments, net of $183 | | | | deferred income taxes | | | | | | | | | | | | | | | | | | | | | | (339 | ) | | (339 | ) | | Stock options exercised, | | | | 552,101 shares | | | | 687 | | | 83 | | | 16,048 | | | Other, 2,450 shares | | | | | | | 95 | | | (6 | ) |
| | Balances, December 31, 2002 | | | $ | 83,793 | | $ | (603,769 | ) | $ | 110,639 | | $ | (90,027 | ) | $ | (62 | ) | $ | (152,887 | ) | $ | (2 | ) | $ | (242,978 | ) | $ | 1,296,855 | |
|
See accompanying notes to consolidated financial statements.
34
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| (In thousands) | | | |
|---|
| Years ended December 31 | 2002 | | 2001 | | 2000 | |
|---|
| | Net Income | | | $ | 90,106 | | $ | 71,725 | | $ | 96,803 | |
| | Other comprehensive income (expense): | | | | Foreign currency translation adjustments | | | | 39,311 | | | (22,347 | ) | | (28,327 | ) | | Net gains (losses) on cash flow hedging instruments, net of | | | | deferred income taxes of $(11) and $47 in 2002 and 2001, | | | | respectively | | | | 22 | | | (84 | ) | | — | | | Pension liability adjustments, net of deferred income taxes of | | | | $63,613, $2,039 and $295 in 2002, 2001 and 2000, respectively | | | | (146,709 | ) | | (3,792 | ) | | (512 | ) | | Unrealized gain (loss) on marketable securities, net of deferred | | | | income taxes of $1 and $(182) in 2002 and 2001, respectively | | | | (2 | ) | | 337 | | | — | | | Reclassification adjustment for gain included in net income, net of | | | | deferred income taxes of $182 in 2002 | | | | (337 | ) | | — | | | — | |
| | Other comprehensive expense | | | | (107,715 | ) | | (25,886 | ) | | (28,839 | ) |
| | Total comprehensive income (expense) | | | $ | (17,609 | ) | $ | 45,839 | | $ | 67,964 | |
|
See accompanying notes to consolidated financial statements.
35
HARSCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Harsco Corporation and its majority-owned subsidiaries (the “Company”). Additionally, the Company fully consolidates entities in which the Company owns a 20-50% interest and exercises management control. Investments in unconsolidated entities (all of which are 20-50% owned) are accounted for under the equity method. The Company does not have off balance sheet arrangements with unconsolidated special-purpose entities.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications. These reclassifications relate principally to assets and liabilities currently classified as held for sale or operations currently classified as discontinued operations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS 144) as discussed in Note 2, Acquisitions and Dispositions.
As a result of these reclassifications, several amounts presented for comparative purposes from 2000 and 2001 will not individually agree to previously filed Forms 10-K or 10-Q.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term investments which are highly liquid in nature and have an original maturity of three months or less.
Inventories
Inventories, which are principally located in the U.S., are stated at the lower of cost or market. Inventories in the United States are accounted for using principally the last-in, first-out (LIFO) method. Other inventories are accounted for using the first-in, first-out (FIFO) or average cost methods.
Depreciation
Property, plant and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method. When property is retired from service, the cost of the retirement is generally charged to the allowance for depreciation to the extent of the accumulated depreciation and the balance is charged to income. Long-lived assets to be disposed of by sale are not depreciated while they are held for sale.
Goodwill and Intangible Assets
Intangible assets consist principally of goodwill. Goodwill is not amortized but tested for impairment, at the reporting unit level, on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit’s goodwill may exceed its fair value. A discounted cash flow model is used to estimate the fair value of a reporting unit. This model requires the use of long-term planning forecasts and assumptions regarding industry specific economic conditions that are outside the control of the Company. See Note 5, Goodwill and Other Intangible Assets, for additional information on intangible assets and goodwill impairment testing. Finite lived intangible assets are amortized on a straight line basis over their estimated useful lives, none of which currently exceeds 10 years.
Impairment of Long-Lived Assets (Other than Goodwill)
Long-lived assets are reviewed for impairment when events and circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the asset exceeds the sum of the expected undiscounted future cash flows resulting from use of the asset and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds its fair value. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Revenue Recognition
Revenue is recognized for product sales generally when title and risk of loss transfer. Service sales are generally recognized over the contractual period or as services are performed. Both product sales and service revenues are recognized when they are realized or realizable and when earned. Revenue generally is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company’s price to the buyer is fixed or determinable and collectibility is reasonably assured.
36
Income Taxes
United States federal and state income taxes and non-U.S. taxes are provided currently on the undistributed earnings of international subsidiaries and unconsolidated affiliated entities, giving recognition to current tax rates and applicable foreign tax credits, except when management has specific plans for reinvestment of undistributed earnings which will result in the indefinite postponement of their remittance. Deferred taxes are provided using the asset and liability method for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Accrued Insurance and Loss Reserves
The Company retains a significant portion of the risk for workers’ compensation, automobile, general and product liability losses. Reserves have been recorded which reflect the undiscounted estimated liabilities including claims incurred but not reported. Changes in the estimates of the reserves are included in net income in the period determined. Amounts estimated to be paid within one year have been classified as Other current liabilities, with the remainder included in Insurance liabilities.
Warranties
The Company has recorded product warranty accruals of $2.2 million, $2.8 million and $3.6 million2.3% as of December 31, 2003 and 2002, 2001 and 2000, respectively. The Company provides for warranties of certain products as they are sold in accordancerespectively 35,347 81,944
Faber Prest loan notes due October 31, 2008 with SFAS No. 5, “Accounting for Contingencies.” These accruals have been declining as the Company has changed its focus from manufactured products to industrial services. The following table summarizes the warranty activity for the years ended December 31, 2002, 2001 and 2000.
|
| (In thousands) | 2002 | | 2001 | | 2000 | |
|---|
| | Balance at the beginning of the period | | | $ | 2,753 | | $ | 3,593 | | $ | 5,158 | | | Accruals for warranties issued during the period | | | | 1,673 | | | 1,807 | | | 1,001 | | | Reductions related to pre-existing warranties | | | | (418 | ) | | (88 | ) | | (172 | ) | | Warranties paid | | | | (1,831 | ) | | (2,409 | ) | | (2,588 | ) | | Other (principally foreign currency translation | | | | and acquired businesses) | | | | 71 | | | (150 | ) | | 194 | |
| | Balance at end of the period | | | $ | 2,248 | | $ | 2,753 | | $ | 3,593 | |
|
Foreign Currency Translation
The financial statements of the Company’s subsidiaries outside the United States, except for those subsidiaries located in highly inflationary economies and those entities for which the U.S. dollar is the currency of the primary economic environment in which the entity operates, are principally measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates as of the balance sheet date. Resulting translation adjustments are recorded in the cumulative translation adjustment account, a separate component of Other comprehensive income (expense). Income and expense items are translated at average monthly exchange rates. Gains and losses from foreign currency transactions are included in net income. For subsidiaries operating in highly inflationary economies, and those entities for which the U.S. dollar is the currency of the primary economic environment in which the entity operates, gains and losses on foreign currency transactions and balance sheet translation adjustments are included in net income.
Financial Instruments and Hedging
The Company has subsidiaries principally operating in North America, South America, Europe, Africa and Asia-Pacific. These operations are exposed to fluctuations in related foreign currencies in the normal course of business. The Company seeks to reduce exposure to foreign currency fluctuations through the use of forward exchange contracts. The Company does not hold or issue financial instruments for trading purposes, and it is the Company’s policy to prohibit the use of derivatives for speculative purposes. The Company has a Foreign Currency Risk Management Committee that meets periodically to monitor foreign currency risks.
The Company executes foreign currency forward exchange contracts to hedge transactions of its non-U.S. subsidiaries for firm purchase commitments, to hedge variable cash flows of forecasted transactions and for export sales denominated in foreign currencies. These contracts are generally for 90 to 180 days or less. For those contracts that are designated
37
as qualified cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), gains or losses are recorded in other comprehensive income (expense).
Amounts recorded in other comprehensive income (expense) are reclassified into income in the same period or periods during which the hedged forecasted transaction affects income. The cash flows from these contracts are classified consistent with the cash flows from the transaction being hedged. The Company also enters into certain forward exchange contracts not designated as hedges under SFAS 133. Gains and losses on these contracts are recognized in incomeinterest based on
fair market value. For fair value hedges of a firm commitment, the gain or loss on the derivativesterling LIBOR minus .75% (3.4% and the offsetting gain or loss on the hedged firm commitment are recognized currently in income.
Options for Common Stock
The Company uses the intrinsic value method to account for options granted to employees for the purchase of common stock. No compensation expense is recognized on the grant date, since at that date, the option price equals the market price of the underlying common stock.
The Company’s net income and net income per common share would have been reduced to the pro forma amounts indicated below if compensation cost for the Company’s stock option plan had been determined based on the fair value at the grant date for awards in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).
|
| (In thousands, except per share) | 2002 | | 2001 | | 2000 | |
|---|
| | Net income: | | | | | | | | | | | | | As reported | | | $ | 90,106 | | $ | 71,725 | | $ | 96,803 | | | Compensation expense (a) | | | | (2,300 | ) | | (3,692 | ) | | (2,408 | ) | | |
| | Pro forma | | | $ | 87,806 | | $ | 68,033 | | $ | 94,395 | | | |
| | Basic earnings per share: | | | | As reported | | | $ | 2.23 | | $ | 1.80 | | $ | 2.42 | | | Pro forma | | | | 2.18 | | | 1.71 | | | 2.36 | | | Diluted earnings per share: | | | | As reported | | | | 2.21 | | | 1.79 | | | 2.42 | | | Pro forma | | | | 2.16 | | | 1.70 | | | 2.36 | |
|
(a) | | Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects.
|
See Note 12, Stock-Based Compensation, for additional information on options for common stock.
Earnings Per Share
Basic earnings per share are calculated using the average shares of common stock outstanding, while diluted earnings per share reflects the potential dilution that could occur if stock options were exercised. See Note 11, Capital Stock, for additional information on earnings per share.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Financial Accounting Standards Issued
SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143)
In August 2001, the FASB issued SFAS 143, which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. The standard is effective for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. The Company adopted this statement effective January 1, 2003. The adoption of SFAS 143 did not have a material impact on the Company’s financial position, results of operations or cash flows.
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SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002” (SFAS 145)
In May 2002, the FASB issued SFAS 145 which, among other things, rescinds various pronouncements regarding early extinguishment of debt. It allows extraordinary accounting treatment for early extinguishment of debt only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The Company adopted this statement effective January 1, 2003. The adoption of SFAS 145 did not have a material impact on the Company’s financial position, results of operations or cash flows.
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146)
In July 2002, the FASB issued SFAS 146 which addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities. These activities include restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. The Company adopted this statement effective January 1, 2003. The adoption of SFAS 146 did not have a material impact on the Company’s financial position, results of operations, or cash flows; however, this statement may impact the timing of when the Company recognizes costs related to employee termination benefits.
SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure an amendment of FASB Statement No. 123” (SFAS 148)
In December 2002, the FASB issued SFAS 148 which amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. It also amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. The Company has adopted the disclosure requirements of SFAS 148 in this Form 10-K for the fiscal year ended December 31, 2002. The required disclosures are included in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data.” Additionally, the company will consider adopting the expense recognition provisions of SFAS 123 during 2003. If the company decides to adopt SFAS 123, it will be adopted in accordance with the transition provisions of SFAS 148.
FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others” (FIN 45)
In November 2002, the FASB issued FIN 45 which elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for financial statements for periods ending after December 15, 2002. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has adopted the disclosure requirements of FIN 45 related to direct guarantees of third parties for this Form 10-K issued for the fiscal year ended December 31, 2002 and has adopted the initial recognition and measurement provisions for any guarantees issued or modified starting January 1, 2003. The full impact of the initial recognition and initial measurement provisions of FIN 45 has not yet been determined. The Company is in the process of determining the fair value of its obligation to stand ready to perform on these guarantees and will recognize the appropriate liability when the guarantees renew. Based upon the nature of these guarantees the recognition of this obligation will also result in a reduction to the Company’s net income. The Company does not expect any impact on cash flows.
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46)
In January 2003, the FASB issued FIN 46 which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a
39
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of FIN 46 are effective for financial statements issued after January 31, 2003. The initial recognition provisions of FIN 46 are applicable immediately to new variable interests in variable interest entities created after January 31, 2003. For a variable interest in a variable interest entity created before February 1, 2003, the initial recognition provisions of FIN 46 are to be implemented no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The Company has determined that it does not have any variable interests in any variable interest entities. Therefore, no disclosure is required for this Form 10-K issued for the fiscal year ended December 31, 2002 and the adoption of the initial recognition provisions of FIN 46 is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.
2. Acquisitions and Dispositions
Acquisitions
During 2002 or 2001 the Company did not acquire any businesses that individually or when aggregated together represent more than 2% of the Company’s net assets, sales, or net income.
Dispositions – Assets Held for Sale and Discontinued Operations
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), which the Company adopted January 1, 2002. When a component of an entity is classified as “held for sale,” SFAS 144 requires that the income statement for current and prior periods reflect the results of operations of that component in discontinued operations. The income or loss from discontinued operations should include impairment charges, to the extent necessary, to reduce the book value of the business to fair value less costs to sell. Additionally, long-lived assets and liabilities (asset groups) that are “held for sale” should be separately identified on the balance sheet.
In management’s ongoing strategic effort to increase the Company’s focus on core industrial services, certain manufacturing operations have been divested. Effective March 21, 2002, the Board of Directors authorized the sale of the Capitol Manufacturing business, a business unit of the Gas and Fluid Control Segment. A significant portion of the Capitol Manufacturing business was sold on June 28, 2002. The Company continues to recognize income from inventory consigned to the buyer in accordance with the sale agreement and when all revenue recognition criteria have been met. This business has been included in discontinued operations and the assets and liabilities have been separately identified on the balance sheet as “held for sale” for all periods presented. The sales from discontinued operations for the years ended December 31, 2002, 2001 and 2000 were $35.5 million, $83.3 million and $100.0 million, respectively. These sales are excluded from revenues from continuing operations reported on the income statement. The income (loss) from discontinued operations does not include any charges to reduce the book value of the business held for sale to its fair market value less cost to sell, since the fair value of the business exceeded the book value.
Effective June 25, 2002, the Board of Directors authorized the sale of the IKG Industries business (IKG), a business unit of Other Infrastructure Products and Services. This business was included in discontinued operations and the assets and liabilities were classified as “held for sale” as of June 30, 2002. In August 2002, the transaction to sell IKG was terminated and the Company ceased marketing the business. Accordingly, IKG has been included in continuing operations for all periods presented and the assets and liabilities are no longer classified as “held for sale.”
Throughout the year, management has approved the sale of certain long-lived assets (primarily land and buildings) of the Access Services and Mill Services Segments. Accordingly, these assets have been separately identified on the balance sheet as “held for sale” for all periods presented.
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The major classes of assets and liabilities “held for sale” included in the Consolidated Balance Sheet are as follows:
|
| (In thousands) | | |
|---|
| As of December 31 | 2002 | | 2001 | |
|---|
| | ASSETS | | | | | | | | | | Cash and cash equivalents | | | $ | — | | $ | 1 | | | Accounts receivable, net | | | | 595 | | | 9,933 | | | Inventories | | | | 727 | | | 9,168 | | | Other current assets | | | | 21 | | | 116 | | | Property, plant and equipment, net | | | | 7,904 | | | 18,409 | | | Goodwill | | | | — | | | 343 | | | Other assets | | | | — | | | 207 | |
| | Total assets “held for sale” | | | $ | 9,247 | | $ | 38,177 | |
| | | | (In thousands) | | |
|---|
| As of December 31 | 2002 | | 2001 | |
|---|
| | LIABILITIES | | | | Current maturities of long-term debt | | | $ | — | | $ | 49 | | | Accounts payable | | | | 463 | | | 6,953 | | | Accrued compensation | | | | — | | | 512 | | | Income taxes | | | | 958 | | | 462 | | | Other current liabilities | | | | 618 | | | 1,005 | | | Long-term debt | | | | — | | | 64 | |
| | Total liabilities associated with assets “held | | | | | | | | | | for sale” | | | $ | 2,039 | | $ | 9,045 | |
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Other Dispositions
On April 13, 2001, the Company divested its 49% interest in S3Networks, LLC. In 2001 the Company recorded $2.9 million in losses related to its investment in S3Networks. The divesture eliminated any future dilution to the Company’s earnings as a result of S3Networks.
Discontinued Defense Business
On August 25, 1997, the Company and FMC Corporation signed an agreement to sell United Defense, L.P. for $850 million, and the sale was completed on October 6, 1997. Prior to the sale, FMC had been the managing general partner and 60% owner of United Defense, L.P., while the Company owned the balance of 40% as the limited partner. United Defense supplies ground combat and naval weapons systems for the U.S. and military customers worldwide.
Disbursements related to the discontinued defense business, principally claim settlements and legal fees, are shown separately on the Consolidated Statement of Cash Flows for 2002, 2001 and 2000.
3. Accounts Receivable and Inventories
Accounts receivable are net of an allowance for doubtful accounts of $36.5 million and $32.5 million3.2% at December 31, 2003
and 2002, respectively) 9,991 10,207
Industrial development bonds, payable in varying amounts from 2004
to 2011 with a weighted average interest rate of 2.1% and 2001, respectively. The provision for doubtful accounts was $6.9 million, $12.6 million and $4.0 million for 2002, 2001 and 2000, respectively.
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Inventories consist of:
|
| (In thousands) | 2002 | | 2001 (a) | |
|---|
| | Finished goods | | | $ | 58,906 | | $ | 62,315 | | | Work-in-process | | | | 24,287 | | | 24,682 | | | Raw materials and purchased parts | | | | 74,775 | | | 67,190 | | | Stores and supplies | | | | 23,744 | | | 20,457 | |
| | | | | $ | 181,712 | | $ | 174,644 | |
| | | | Valued at lower of cost or market: | | | | LIFO basis | | | $ | 107,205 | | $ | 108,414 | | | FIFO basis | | | | 10,103 | | | 9,226 | | | Average cost basis | | | | 64,404 | | | 57,004 | |
| | | | | $ | 181,712 | | $ | 174,644 | |
|
(a) | | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
Inventories valued on the LIFO basis at December 31, 2002 and 2001 were approximately $19.3 million and $20.7 million, respectively, less than the amounts of such inventories valued at current costs.
As a result of reducing certain inventory quantities valued on the LIFO basis, net income increased from that which would have been recorded under the FIFO basis of valuation by $2.3 million, $0.7 million and $0.03 million in 2002, 2001 and 2000, respectively.
4. Property, Plant and Equipment
Property, plant and equipment consists of:
|
| (In thousands) | 2002 | | 2001 (a) | |
|---|
| | Land and improvements | | | $ | 36,444 | | $ | 36,778 | | | Buildings and improvements | | | | 167,184 | | | 164,075 | | | Machinery and equipment | | | | 1,594,858 | | | 1,497,494 | | | Uncompleted construction | | | | 20,078 | | | 40,445 | |
| | | | | | 1,818,564 | | | 1,738,792 | | | Less accumulated depreciation and facilities valuation allowance | | | | (1,010,629 | ) | | (916,712 | ) |
| | | | | $ | 807,935 | | $ | 822,080 | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
The estimated useful lives of different types of assets are generally:
|
Land improvements | | | | 5 to 20 years | | | Buildings and improvements | | | | 10 to 50 years | | | Certain plant, buildings and installations | | | (Principally Mill Services Segment) | | | | 3 to 10 years | | | Machinery and equipment | | | | 3 to 20 years | |
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5. Goodwill and Other Intangible Assets
The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142) on January 1, 2002. Under this standard, goodwill and intangible assets with indefinite useful lives are no longer amortized. Goodwill is tested for impairment, at the reporting unit level, on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit’s goodwill may exceed its fair value. This impairment testing is a two-step process as outlined in SFAS 142. Step 1 is a comparison of fair value to book value. If the fair value exceeds the book value, Step 2 of the test is not required as no impairment of goodwill exists. Step 2 requires the allocation of fair values to assets (including goodwill) and liabilities as if the reporting unit had just been purchased. If goodwill is determined to be impaired, a write down to fair value would be required.
The Company uses a discounted cash flow model to estimate the fair value of a reporting unit in performing Step 1 of the testing. This model requires the use of long-term planning estimates and assumptions regarding industry -specific economic conditions that are outside the control of the Company. In accordance with SFAS 142, the Company completed transitional goodwill impairment testing by June 30, 2002. All reporting units of the Company passed Step 1 of the transitional testing thereby indicating that no goodwill impairment exists. Additionally, no reclassification of goodwill or intangible assets was necessary as a result of the adoption of SFAS 142. The Company also performed required annual testing for goodwill impairment as of October 1, 2002 and all reporting units of the Company passed the Step 1 testing thereby indicating that no goodwill impairment exists. However, there can be no assurance that future goodwill impairment tests will not result in a charge to earnings.
The following table illustrates the effects of adopting SFAS 142 as it relates to net income, basic earnings per share (EPS) and diluted earnings per share (EPS) for the years ended December 31, 2002, 2001 and 2000.
|
| (In thousands, | Net Income | | Basic EPS | | Diluted EPS | |
|---|
| except per share amounts) | 2002 | | 2001 | | 2000 | | 2002 | | 2001 | | 2000 | | 2002 | | 2001 | | 2000 | |
|---|
| | Reported net income | | | $ | 90,106 | | $ | 71,725 | | $ | 96,803 | | $ | 2.23 | | $ | 1.80 | | $ | 2.42 | | | 2.21 | | $ | 1.79 | | $ | 2.42 | | | Add: goodwill amortization, net of | | | | tax | | | | — | | | 10,878 | | | 9,866 | | | — | | | .27 | | | .25 | | | — | | | .27 | | | .25 | |
| | Adjusted net income | | | $ | 90,106 | | $ | 82,603 | | $ | 106,669 | | $ | 2.23 | | $ | 2.07 | | $ | 2.67 | | $ | 2.21 | | $ | 2.06 | | $ | 2.67 | |
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The following table reflects the changes in carrying amounts of goodwill by segment for the year ended December 31, 2002:
|
| | | | Other | | |
|---|
| | | Gas and | | Infrastructure | | | |
|---|
| Mill | | Access | | Fluid | | Products and | | Consolidated | |
|---|
| (In thousands) | Services | | Services | | Control | | Services | | Totals | |
|---|
| | Balance as of December 31, 2001, net of | | | | | | | | | | | | | | | | | | | accumulated amortization (a) | | | $ | 180,656 | | $ | 125,119 | | $ | 37,778 | | $ | 9,668 | | $ | 353,221 | | | Goodwill acquired during year | | | | — | | | 1,628 | | | — | | | — | | | 1,628 | | | Goodwill written off related to sale of business | | | | — | | | — | | | — | | | (1,496 | ) | | (1,496 | ) | | Other (principally foreign currency translation) | | | | 12,465 | | | 12,477 | | | (1,085 | ) | | 10 | | | 23,867 | |
| | Balance as of December 31, 2002, net of | | | | | | | | | | | | | | | | | | | accumulated amortization | | | $ | 193,121 | | $ | 139,224 | | $ | 36,693 | | $ | 8,182 | | $ | 377,220 | | | | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
Goodwill is net of accumulated amortization of $100.8 million and $107.1 million at December 31, 2002 and 2001, respectively.
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Intangible assets, which are included in Other assets on the Consolidated Balance Sheet, totaled $3.2 million and $4.2 million, net of accumulated amortization of $7.1 million and $10.6 million at December 31, 2002 and 2001, respectively. All intangible assets have been classified as finite-lived and are subject to amortization. The following chart reflects these intangible assets by major category.
|
| December 31, 2002 | | December 31, 2001 | |
|---|
| Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | |
|---|
| (In thousands) | Amount | | Amortization | | Amount | | Amortization | |
|---|
| | Non-compete agreements | | | $ | 4,150 | | $ | 3,346 | | $ | 5,430 | | $ | 4,057 | | | Patents | | | | 4,063 | | | 2,908 | | | 7,111 | | | 5,764 | | | Other | | | | 2,073 | | | 839 | | | 2,251 | | | 747 | |
| | Total | | | $ | 10,286 | | $ | 7,093 | | $ | 14,792 | | $ | 10,568 | |
|
Amortization expense for intangible assets was $0.9 million and $1.1 million for the years ended December 31, 2002 and 2001, respectively. The following chart shows the estimated amortization expense for the next five fiscal years based on current intangible assets.
|
| (In thousands) | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | |
|---|
| | Estimated Amortization Expense | | | $ | 684 | | $ | 618 | | $ | 543 | | $ | 426 | | $ | 307 | |
6. Debt and Credit Agreements
The Company has a U.S. commercial paper borrowing program under which it can issue up to $350 million of short-term notes in the U.S. commercial paper market. In addition, the Company has a 74.4 million euro commercial paper program equivalent to approximately $78.1 million at December 31, 2002 which is used to fund the Company’s international operations. In June 2001, the Company supplemented its initial euro commercial paper program by adding a 250 million euro program, equivalent to approximately $262.5 million at December 31, 2002. The Company limits the aggregate commercial paper and syndicated credit facility and bilateral facility borrowings at any one time to a maximum of $425 million. Commercial paper interest rates, which are based on market conditions, have been lower than comparable rates available under the credit facility. At December 31, 2002 and 2001, the Company had $44.4 million and $161.8 million of U.S. commercial paper outstanding, respectively, and $37.5 million and $60.1 million outstanding, respectively, under its European-based commercial paper programs. Commercial paper is classified as long-term debt at December 31, 2002 and 2001, because the Company has the ability and intent to refinance it on a long-term basis through existing long-term credit facilities.
The Company has a revolving credit facility in the amount of $350 million through a syndicate of 14 banks. This facility serves as back-up to the Company’s commercial paper programs. The facility is in two parts. One part amounts to $131.3 million and is a 364-day credit agreement that permits borrowings outstanding at expiration (September 26, 2003) to be repaid no later than September 26, 2004. The second part is for $218.8 million and is a five-year credit agreement that expires on September 29, 2005 at which time all borrowings are due. The 364-day part of the facility was renegotiated in September of 2002 to extend the expiration date to September 26, 2003. Interest rates are either negotiated, based upon the U.S. federal funds interbank market, prime rate, or based upon the London Interbank Offered Rate (LIBOR) plus a margin. The Company pays a facility fee (.0825% per annum2.4%
as of December 31, 2002) that varies based upon its credit ratings. At December 31,2003 and 2002, and 2001, there were no borrowings outstanding under either facility.
In the first quarter of 2002, the Company renewed two $50 million bilateral credit facility agreementsrespectively 10,000 10,000
Other financing payable in varying amounts to 2008 with European-based banks. These agreements serve as back-up to the Company’s commercial paper programs and also help finance the Company’s European operations. Borrowings under these facilities, which expired in December 2002 and January 2003, were available in most major currencies with active markets at interest rates based upon LIBOR plus a margin. Subsequent to December 31, 2002, the Company renewed the facility that expired in December 2002, but for a lower amount of $25 million since the Company’s financing needs have decreased. Borrowings outstanding at expiration may be repaid over the succeeding 12 months. The facility that expired in January 2003 was not renewed since it was considered excess to the Company’s current financing needs. As of December 31, 2002, there was $5.0 million outstanding on these credit facilities.
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On October 27, 2000, the Company issued 200 million British pound sterling (U.S. $317.8 million) 7.25% notes due 2010. The net proceeds of the issue were used to refinance certain bank debt that was used to fund the acquisition of SGB Group.
The Company has on file with the Securities and Exchange Commission a Form S-3 shelf registration for the possible issuance of up to an additional $200 million of new debt securities, preferred stock, or common stock. The Company is not obligated to issue these securities.
Short-term debt amounted to $22.4 million and $29.6 million at December 31, 2002 and 2001, respectively. The weighted
average interest rate for short-term borrowings at December 31, 2002of 5.4% and 2001 was 4.0% and 5.5%, respectively.
Long-term debt consists of:
|
| (In thousands) | 2002 | | 2001 (a) | |
|---|
| | 7.25% British pound sterling-denominated notes due October 27, 2010 | | | $ | 317,781 | | $ | 287,097 | | | 6.0% notes due September 15, 2003 (b) | | | | 150,000 | | | 150,000 | | | Commercial paper borrowings, with a weighted average interest rate of 2.3% | | | | as of December 31, 2002 | | | | 81,944 | | | 221,919 | | | Faber Prest loan notes due October 31, 2008 with interest based on sterling | | | | LIBOR minus .75% (3.2% at December 31, 2002) | | | | 10,207 | | | 11,109 | | | Industrial development bonds, payable in varying amounts from 2004 to | | | | 2011 with a weighted average interest rate of 2.4% as of December | | | | 31, 2002 | | | | 10,000 | | | 11,400 | | | Other financing payable in varying amounts to 2007 with a weighted average | | | | interest rate of 6.0% as of December 31, 2002 | | | | 47,376 | | | 51,030 | |
| | | | | | 617,308 | | | 732,555 | | | Less: current maturities | | | | 11,695 | | | 12,422 | |
| | | | | $ | 605,613 | | $ | 720,133 | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal6.0% as of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
(b) | | 6% notes are classified as long-term because the Company has the ability and intent to refinance them on a long-term basis through existing long-term credit facilities.
|
The credit facility and certain notes payable agreements contain covenants requiring a minimum net worth of $475 million and a maximum debt to capital ratio of 60%. Additionally, the Company’s 7.25% British pound sterling-denominated notes due October 27, 2010 include a covenant that permits the note holders to redeem their notes, at par, in the event of a change of control of the Company. At December 31, 2002, the Company was in compliance with these covenants.
The maturities of long-term debt for the four years following December 31, 2003
are:
|
| (In thousands) | |
|---|
| | 2004 | | | $ | 12,367 | | | 2005 | | | | 247,690 | | | 2006 | | | | 3,447 | | | 2007 | | | | 7,622 | |
Cash payments for interest on all debt from continuing operations were $42.3 million, $53.4 million and $44.6 million in 2002, 2001 and 2000, respectively.
7. Leases
The Company leases certain property and equipment under noncancelable operating leases. Rental expense (for both continuing and discontinued operations) under such operating leases was $46.6 million, $41.3 million and $30.3 million in
45
2002, 2001 and 2000, respectively. Approximately $9.0 million of the increase for 2001 is due to the inclusion of SGB as of June 2000.
Future minimum payments under operating leases with noncancelable terms are:
| respectively 41,694 47,376
- ---------------------------------------------------------------------------------------------------------
598,677 617,308
Less: current maturities (14,252) (11,695)
- ---------------------------------------------------------------------------------------------------------
$ 584,425 $ 605,613
=========================================================================================================
| (In thousands) | |
|---|
| | 2003 | | | $ | 37,787 | | | 2004 | | | | 36,095 | | | 2005 | | | | 16,107 | | | 2006 | | | | 9,131 | | | 2007 | | | | 6,777 | | | After 2007 | | | | 23,893 | |
8. Employee Benefit Plans
Pension Benefits
The Company has pension and profit sharing retirement plans, most of which are noncontributory, covering substantially all of its employees. The benefits for salaried employees generally are based on years of service and the employee’s level of compensation during specified periods of employment. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The multi-employer plans in which the Company participates provide benefits to certain unionized employees. The Company’s funding policy for qualified plans is consistent with statutory regulations and customarily equals the amount deducted for income tax purposes. The Company’s
(a) 6% notes were classified as long-term because the Company had the ability
and intent to refinance them on a long-term basis through existing
long-term credit facilities.
The 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%. Additionally, the Company's 7.25% British pound
sterling-denominated notes due October 27, 2010 include a covenant that permits
the note holders to redeem their notes, at par, in the event of a change of
control of the Company. At December 31, 2003, the Company was in compliance with
these covenants.
-51-
The maturities of long-term debt for the four years following December 31, 2004
are:
(IN THOUSANDS)
-----------------------------------
2005 $ 52,226
2006 4,254
2007 9,455
2008 10,343
Cash payments for interest on all debt from continuing operations were $40.1
million, $42.3 million and $53.4 million in 2003, 2002 and 2001, respectively.
7. LEASES
The Company leases certain property and equipment under noncancelable operating
leases. Rental expense (for both continuing and discontinued operations) under
such operating leases was $48.5 million, $46.6 million and $41.3 million in
2003, 2002 and 2001, respectively.
Future minimum payments under operating leases with noncancelable terms are:
(IN THOUSANDS)
-----------------------------------
2004 $ 48,331
2005 30,355
2006 18,634
2007 13,111
2008 8,367
After 2008 23,128
Total minimum rentals to be received in the future under non-cancelable
subleases as of December 31, 2003 are $10.5 million.
8. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
The Company has pension and profit sharing retirement plans covering
substantially all of its employees. The benefits for salaried employees
generally are based on years of service and the employee's level of compensation
during specified periods of employment. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service. The
multi-employer plans in which the Company participates provide benefits to
certain unionized employees. The Company's funding policy for qualified plans is
consistent with statutory regulations and customarily equals the amount deducted
for income tax purposes. The Company's policy is to amortize prior service costs
of defined benefit pension plans over the average future service period of
active plan participants. The Company uses an October 31 measurement date for
its United States defined benefit pension plans and a September 30 measurement
date for international defined benefit pension plans.
-52-
For a majority of the U.S. defined benefit pension plans and certain
international defined benefit pension plans, accrued service will no longer be
granted for periods after December 31, 2003. To replace this benefit, the
Company has established, effective January 1, 2004, a defined contribution
pension plan pursuant to which the Company will contribute a specified matching
contribution for participating employees' contributions to the plan of up to
four percent of their eligible compensation. Additionally, the Company may
provide a discretionary contribution of up to two percent of compensation for
eligible employees. The Company believes this new retirement benefit plan will
provide a more predictable and less volatile pension expense than exists under
the defined benefit plans.
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) U. S. PLANS INTERNATIONAL PLANS
- ----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
PENSION EXPENSE (INCOME)
Defined benefit plans:
Service cost $ 7,339 $ 8,375 $ 8,206 $ 10,439 $ 9,980 $ 10,457
Interest cost 13,201 13,034 12,763 32,627 28,393 25,615
Expected return on plan assets (15,758) (19,845) (22,713) (34,083) (35,542) (41,846)
Recognized prior service costs over the average future service period726 1,442 1,429 1,117 991 942
Recognized (gains) or losses 4,409 822 (1,357) 9,813 4,090 (1,964)
Amortization of active plan participants.transition asset (1,466) (1,684) (1,789) (626) (572) (549)
Settlement/Curtailment loss 36 918 454 8 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension
expense (income) 8,487 3,062 (3,007) 19,295 7,340 (7,345)
Multi-employer plans 6,020 4,705 3,780 1,599 1,186 956
Defined contribution plans 527 753 1,768 6,191 4,688 5,599
- ----------------------------------------------------------------------------------------------------------------------------------
Pension expense (income) $ 15,034 $ 8,520 $ 2,541 $ 27,085 $ 13,214 $ (790)
==================================================================================================================================
| | (In thousands) | U. S. Plans | | International Plans | |
|---|
| | 2002 | | 2001 | | 2000 | | 2002 | | 2001 | | 2000 | |
|---|
| Pension Expense (Income) | | | | | | | | | | | | | | | | | | | | | | Defined benefit plans: | | | | Service cost | | | $ | 8,375 | | $ | 8,206 | | $ | 8,017 | | $ | 9,980 | | $ | 10,457 | | $ | 8,559 | | | Interest cost | | | | 13,034 | | | 12,763 | | | 12,069 | | | 28,393 | | | 25,615 | | | 18,727 | | | Expected return on plan assets | | | | (19,845 | ) | | (22,713 | ) | | (22,448 | ) | | (35,542 | ) | | (41,846 | ) | | (30,054 | ) | | Recognized prior service costs | | | | 1,442 | | | 1,429 | | | 1,368 | | | 991 | | | 942 | | | 949 | | | Recognized (gains) or losses | | | | 822 | | | (1,357 | ) | | (1,853 | ) | | 4,090 | | | (1,964 | ) | | (953 | ) | | Amortization of transition asset | | | | (1,684 | ) | | (1,789 | ) | | (1,834 | ) | | (572 | ) | | (549 | ) | | (567 | ) | | Settlement/Curtailment loss | | | | 918 | | | 454 | | | 360 | | | — | | | — | | | — | |
| | Defined benefit plans pension expense | | | | 3,062 | | | (3,007 | ) | | (4,321 | ) | | 7,340 | | | (7,345 | ) | | (3,339 | ) | | (income) | | | | Multi-employer plans | | | | 4,705 | | | 3,780 | | | 4,334 | | | 1,186 | | | 956 | | | 1,039 | | | Defined contribution plans | | | | 753 | | | 1,768 | | | 1,401 | | | 4,688 | | | 5,599 | | | 4,386 | |
| | Pension expense (income) | | | $ | 8,520 | | $ | 2,541 | | $ | 1,414 | | $ | 13,214 | | $ | (790 | ) | $ | 2,086 | |
|
46
-53-
The change in the financial status of the pension plans and amounts recognized
in the Consolidated Balance Sheets at December 31, 2003 and 2002 are as follows:
PENSION BENEFITS U. S. PLANS INTERNATIONAL PLANS
-------------------------- --------------------------
(IN THOUSANDS) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of the pensionyear $ 199,959 $ 183,254 $ 561,509 $ 429,114
Service cost 7,339 8,375 10,439 9,980
Interest cost 13,201 13,034 32,627 28,393
Plan participants' contributions -- -- 4,044 3,916
Amendments 226 (3,198) 188 (68)
Actuarial loss 19,066 14,549 9,661 43,532
Settlements/curtailments (5,148) (349) (401) --
Benefits paid (12,948) (15,706) (30,301) (23,672)
Obligations of added plans and amounts recognized in the Consolidated Balance Sheet-- -- 3,823 22,481
Effect of foreign currency -- -- 68,852 47,833
- ------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31, 2002 and 2001 are:
| Pension Benefits | U. S. Plans | | International Plans | |
|---|
| (In thousands) | 2002 | | 2001 | | 2002 | | 2001 | |
|---|
| | Change in benefit obligation: | | | | | | | | | | | | | | | | Benefit obligation at beginning of year | | | $ | 183,254 | | $ | 163,264 | | $ | 429,114 | | $ | 433,851 | | | Service cost | | | | 8,375 | | | 8,206 | | | 9,980 | | | 10,457 | | | Interest cost | | | | 13,034 | | | 12,763 | | | 28,393 | | | 25,615 | | | Plan participants' contributions | | | | — | | | — | | | 3,916 | | | 3,467 | | | Amendments | | | | (3,198 | ) | | 1,456 | | | (68 | ) | | 307 | | | Actuarial loss (gain) | | | | 14,549 | | | 5,287 | | | 43,532 | | | (13,895 | ) | | Settlements | | | | (349 | ) | | (819 | ) | | — | | | — | | | Benefits paid | | | | (15,706 | ) | | (6,903 | ) | | (23,672 | ) | | (19,540 | ) | | Obligations of added plans | | | | — | | | — | | | 22,481 | | | — | | | Effect of foreign currency | | | | — | | | — | | | 47,833 | | | (11,148 | ) |
| | Benefit obligation at end of year | | | $ | 199,959 | | $ | 183,254 | | $ | 561,509 | | $ | 429,114 | |
| | Change in plan assets: | | | | Fair value of plan assets at beginning of year | | | $ | 211,499 | | $ | 241,573 | | $ | 426,414 | | $ | 556,862 | | | Actual return on plan assets | | | | (17,781 | ) | | (25,173 | ) | | (60,764 | ) | | (104,610 | ) | | Employer contributions | | | | 2,614 | | | 2,821 | | | 7,515 | | | 4,151 | | | Plan participants' contributions | | | | — | | | — | | | 3,916 | | | 3,467 | | | Benefits paid | | | | (15,706 | ) | | (6,903 | ) | | (23,177 | ) | | (19,373 | ) | | Settlements | | | | (349 | ) | | (819 | ) | | — | | | — | | | Plan assets of added plans | | | | — | | | — | | | 20,258 | | | — | | | Effect of foreign currency | | | | — | | | — | | | 43,840 | | | (14,083 | ) |
| | Fair value of plan assets at end of year | | | $ | 180,277 | | $ | 211,499 | | $ | 418,002 | | $ | 426,414 | |
| | Funded status: | | | | Funded status at end of year | | | $ | (19,682 | ) | $ | 28,245 | | $ | (143,507 | ) | $ | (2,700 | ) | | Unrecognized net loss | | | | 63,015 | | | 11,639 | | | 233,148 | | | 85,789 | | | Unrecognized transition (asset) | | | | (4,749 | ) | | (6,439 | ) | | (666 | ) | | (1,651 | ) | | Unrecognized prior service cost | | | | 5,279 | | | 10,728 | | | 11,809 | | | 11,701 | |
| | Net amount recognized | | | $ | 43,863 | | $ | 44,173 | | $ | 100,784 | | $ | 93,139 | |
| | Amounts recognized in the Consolidated | | | | Balance Sheet consist of: | | | | Prepaid benefit cost | | | $ | 49,577 | | $ | 51,332 | | $ | — | | $ | 97,526 | | | Accrued benefit liability | | | | (28,717 | ) | | (20,199 | ) | | (112,400 | ) | | (6,321 | ) | | Intangible asset | | | | 4,683 | | | 4,669 | | | 11,630 | | | 776 | | | Accumulated other comprehensive expense | | | | 18,320 | | | 8,371 | | | 201,554 | | | 1,158 | |
| | Net amount recognized | | | $ | 43,863 | | $ | 44,173 | | $ | 100,784 | | $ | 93,139 | |
|
Plan assets include equity and fixed-income securities. At December 31, 2002 and 2001, 732,640 sharesend of the Company’s common stock with a fair market value of $23.4 million and $25.1 million, respectively, are included in the U.S. plan assets. Dividends paid on such stock amounted to $0.7 million in both 2002 and 2001.
47
The actuarial assumptions used for the defined benefit pension plans are:
|
| Global Weighted Average | | |
|---|
| December 31 | | |
|---|
| |
| | |
|---|
| 2002 | | 2001 | | 2000 | |
|---|
| | Weighted average assumed discount rates | | | | 6.0 | % | | 6.5 | % | | 6.7 | % | | | | | Weighted average expected long-term rates of return | | | | on plan assets | | | | 8.0 | % | | 8.5 | % | | 8.4 | % | | | | Rates of compensation increase | | | | 3.4 | % | | 3.9 | % | | 4.3 | % | |
|
| U. S. Plans | | International Plans | |
|---|
| December 31 | | December 31 | |
|---|
| 2002 | | 2001 | | 2000 | | 2002 | | 2001 | | 2000 | |
|---|
| | Weighted average assumed discount rates | | | | 6.75 | % | | 7.25 | % | | 8.0 | % | | 5.8 | % | | 6.2 | % | | 6.2 | % | | | | Weighted average expected long-term rates of return | | | | on plan assets | | | | 8.9 | % | | 9.5 | % | | 9.5 | % | | 7.6 | % | | 8.0 | % | | 7.9 | % | | | | Rates of compensation increase | | | | 3.8 | % | | 3.7 | % | | 4.0 | % | | 3.3 | % | | 4.0 | % | | 4.4 | % |
|
For the U.S. plans, the projected benefit obligation, accumulated benefit obligation and fairyear $ 221,695 $ 199,959 $ 660,441 $ 561,509
============================================================================================================
CHANGE IN PLAN ASSETS:
Fair value of plan assets for pension plans with accumulated benefit obligations in excessat beginning of year $ 180,277 $ 211,499 $ 418,002 $ 426,414
Actual return on plan assets were $60.0 million, $59.2 million and $31.0 million, respectively, as37,917 (17,781) 60,088 (60,764)
Employer contributions 3,884 2,614 19,749 7,515
Plan participants' contributions -- -- 4,044 3,916
Benefits paid (12,948) (15,706) (29,993) (23,177)
Settlements/curtailments -- (349) -- --
Plan assets of December 31, 2002, and $45.6 million, $43.7 million and $24.8 million, respectively, asadded plans -- -- 1,724 20,258
Effect of December 31, 2001.
For the international plans, the projected benefit obligation, accumulated benefit obligation and fairforeign currency -- -- 48,571 43,840
- ------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 209,130 $ 180,277 $ 522,185 $ 418,002
============================================================================================================
FUNDED STATUS:
Funded status at end of year $ (12,565) $ (19,682) $ (138,256) $ (143,507)
Unrecognized net loss 50,365 63,015 234,273 233,148
Unrecognized transition asset (3,283) (4,749) (80) (666)
Unrecognized prior service cost 4,743 5,279 13,055 11,809
- ------------------------------------------------------------------------------------------------------------
Net amount recognized $ 39,260 $ 43,863 $ 108,992 $ 100,784
============================================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSIST OF:
Prepaid benefit cost $ 46,359 $ 49,577 $ -- $ --
Accrued benefit liability (29,566) (28,717) (102,432) (112,400)
Intangible asset 3,935 4,683 12,088 11,630
Accumulated other comprehensive expense 18,532 18,320 199,336 201,554
- ------------------------------------------------------------------------------------------------------------
Net amount recognized $ 39,260 $ 43,863 $ 108,992 $ 100,784
============================================================================================================
|
The Company's best estimate of expected contributions to be paid in year 2004
for the U.S. plans is $2.6 million and for international plans is $21.4 million.
-54-
NET PERIODIC PENSION EXPENSE ASSUMPTIONS
The weighted-average actuarial assumptions used to determine the net periodic
pension expense for the years ended December 31 were as follows:
GLOBAL WEIGHTED AVERAGE
DECEMBER 31
------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------
Discount rates 6.0% 6.5% 6.7%
Expected long-term rates of return on plan assets 8.0% 8.5% 8.4%
Rates of compensation increase 3.4% 3.9% 4.3%
U. S. PLANS INTERNATIONAL PLANS
DECEMBER 31 DECEMBER 31
------------------------------ ------------------------------
2003 2002 2001 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Discount rates 6.75% 7.25% 8.0% 5.8% 6.2% 6.2%
Expected long-term rates of return on plan assets 8.9% 9.5% 9.5% 7.6% 8.0% 7.9%
Rates of compensation increase 3.8% 3.7% 4.0% 3.3% 4.0% 4.4%
================================================================================
DEFINED BENEFIT PENSION OBLIGATION ASSUMPTIONS
The weighted-average actuarial assumptions used to determine the defined benefit
pension plan obligations at December 31 were as follows:
GLOBAL WEIGHTED AVERAGE
DECEMBER 31
------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------
Discount rates 5.9% 6.0% 6.5%
Rates of compensation increase 3.5% 3.4% 3.9%
U. S. PLANS INTERNATIONAL PLANS
DECEMBER 31 DECEMBER 31
------------------------------ ------------------------------
2003 2002 2001 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Discount rates 6.25% 6.75% 7.25% 5.7% 5.8% 6.2%
Rates of compensation increase 4.0% 3.8% 3.7% 3.4% 3.3% 4.0%
================================================================================
ACCUMULATED BENEFIT OBLIGATIONS
The accumulated benefit obligation for all defined benefit pension plans at
December 31 was as follows:
INTERNATIONAL
(IN MILLIONS) U.S. PLANS PLANS
- --------------------------------------------------------------------------------
2003 $211.3 $622.0
2002 191.4 526.5
================================================================================
PLANS WITH ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets at December 31 were as follows:
U. S. PLANS INTERNATIONAL PLANS
------------------ ------------------
(IN MILLIONS) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------
Projected benefit obligation $ 68.6 $ 60.0 $652.7 $559.2
Accumulated benefit obligation 67.3 59.2 616.5 524.3
Fair value of plan assets were $559.2 million, $524.3 million and $415.5 million, respectively, as of December 31, 2002, and $10.5 million, $9.8 million and $4.1 million, respectively, as of December 31, 2001.Postretirement Benefits
The Company has postretirement life insurance benefits for a number of employees, and postretirement health care benefits for a limited number of employees mainly under plans related to acquired companies. The cost of life insurance and health care benefits are accrued for current and future retirees and are recognized as determined under the projected unit credit actuarial method. Under this method, the Company’s obligation for postretirement benefits is to be fully accrued by the date employees attain full eligibility for such benefits. The Company’s postretirement health care and life insurance plans are unfunded.
The postretirement benefit expense (health care and life insurance) was $0.3 million in 2002, $0.1 million of income in 2001 and expense of $0.7 million in 2000. The components of these expenses and income are not shown separately as they are not material.
48
The changes in the postretirement benefit liability recorded in the Consolidated Balance Sheet are:
38.3 31.0 511.5 415.5
| Postretirement Benefits | | |
|---|
| (In thousands) | 2002 | | 2001 | |
|---|
| | Change in benefit obligation: | | | | | | | | | | Benefit obligation at beginning of year | | | $ | 10,808 | | $ | 11,253 | | | Service cost | | | | 66 | | | 150 | | | Interest cost | | | | 743 | | | 812 | | | Actuarial loss | | | | 795 | | | 730 | | | Plan participants contributions | | | | 29 | | | 38 | | | Benefits paid | | | | (628 | ) | | (689 | ) | | Plan amendments | | | | 3 | | | (527 | ) | | Curtailment | | | | (177 | ) | | (959 | ) |
| | Benefit obligation at end of year | | | $ | 11,639 | | $ | 10,808 | |
| | Funded status: | | | | Funded status at end of year | | | $ | (11,639 | ) | $ | (10,808 | ) | | Unrecognized prior service cost | | | | 362 | | | (187 | ) | | Unrecognized net actuarial (gain) loss | | | | 532 | | | (41 | ) |
| | Net amount recognized as accrued benefit liability | | | $ | (10,745 | ) | $ | (11,036 | ) |
|
The actuarial assumptions used for postretirement benefit plans are:
|
| (Dollars in thousands) | 2002 | | 2001 | | 2000 | |
|---|
| | Assumed discount rate | | | | 6.75 | % | | 7.25 | % | | 8.00 | % | | Health care cost trend rate | | | | 12.00 | % | | 9.00 | % | | 7.50 | % | | Decreasing to ultimate rate | | | | 5.00 | % | | 5.00 | % | | 6.50 | % | | Effect of one percent increase in health care | | | | cost trend rate: | | | | On cost components | | | $ | 28 | | $ | 49 | | $ | 41 | | | On accumulated benefit obligation | | | $ | 422 | | $ | 386 | | $ | 510 | |
|
For 2002, a one percent decrease in the health care cost trend rate would decrease the cost component by $29 thousand and decrease the accumulated benefit obligation by $382 thousand.
It is anticipated that the health care cost trend rate will decrease from 12.0% in 2003 to 5.0% in the year 2007.
Savings Plan
The Company has a 401(k) savings plan which covers substantially all U.S. employees with the exception of employees represented by a collective bargaining agreement, unless the agreement expressly provides otherwise. Employee contributions are generally determined as a percentage of covered employees’ compensation. The expense from continuing and discontinued operations for contributions to the plan by the Company was $3.8 million, $3.8 million and $4.9
-55-
The decrease in the minimum liability included in other comprehensive income
(expense) was $2.0 million in 2003. The increase in the minimum liability
included in other comprehensive income (expense) was ($210.3) million in 2002.
The asset allocations attributable to the Company's U.S. pension plans at
October 31, 2003 and 2002 and the target allocation of plan assets for 2004, by
asset category, are as follows (as permitted by SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB Statements No. 87, 88, and 106," the Company has deferred
reporting of this information for international plan assets):
- ----------------------------------------------------------------------------
PERCENTAGE OF PLAN
ASSETS AT OCTOBER 31
TARGET 2004 --------------------
ASSET CATEGORY ALLOCATION 2003 2002
- ----------------------------------------------------------------------------
Domestic Equity Securities 51% - 61% 60.0% 52.1%
International Equity Securities 5% - 15% 9.8% 8.8%
Fixed Income Securities 27% - 37% 28.5% 36.5%
Cash & Cash Equivalents 0% - 5% 1.7% 2.6%
Plan assets are allocated among various categories of equities, fixed income,
cash and cash equivalents with professional investment managers whose
performance is actively monitored. The primary investment objective is long-term
growth of assets in order to meet present and future benefit obligations. The
Company periodically conducts an asset/liability modeling study to ensure the
investment strategy is aligned with the profile of benefit obligations.
The Company lowered its expected return on asset assumption from 9.5% in 2002 to
8.9% in 2003 due to changes in capital market expectations. The Company reviews
the long-term expected return on asset assumption on a periodic basis taking
into account a variety of factors including the historical investment returns
achieved over a long-term period, the targeted allocation of plan assets and
future expectations based on a model of asset returns for an actively managed
portfolio. For 2004, the expected return assumption is 8.75%.
The U.S. pension plans owned shares of the Company's stock valued at $27.6
million and $18.3 million on October 31, 2003 and 2002, respectively,
representing 13.2% and 10.2%, respectively, of total plan assets. The Board of
Directors has approved the rebalancing of the pension fund to further diversify
the plan assets. Dividends paid to the pension plans on the Company stock
amounted to $0.7 million in both 2003 and 2002.
POSTRETIREMENT BENEFITS
The Company has postretirement health care benefits for a limited number of
employees mainly under plans related to acquired companies and postretirement
life insurance benefits for certain hourly employees. The costs of health care
and life insurance benefits are accrued for current and future retirees and are
recognized as determined under the projected unit credit actuarial method. Under
this method, the Company's obligation for postretirement benefits is to be fully
accrued by the date employees attain full eligibility for such benefits. The
Company's postretirement health care and life insurance plans are unfunded. The
Company uses an October 31 measurement date for its postretirement benefit
plans.
(IN THOUSANDS) 2003 2002 2001
- -------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS EXPENSE (INCOME)
Service cost $ 21 $ 66 $ 150
Interest cost 553 743 812
Recognized prior service costs 32 (16) 27
Recognized (gains) or losses 66 (18) (131)
Settlement/Curtailment gain (4,898) (467) (959)
- -------------------------------------------------------------------------------
Postretirement benefit expense (income) $ (4,226) $ 308 $ (101)
===============================================================================
The income of $4.2 million for 2003 was due principally to the termination of
certain retiree life insurance and health care plans.
-56-
The benefit obligation noted below does not give recognition to the recently
enacted (December 8, 2003) Medicare Prescription Drug, Improvement and
Modernization Act of 2003. In accordance with the provisions of Financial
Accounting Standards Board Staff Position No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" (FSP FAS 106-1), the Company has deferred any
re-measurement of its benefit obligation until authoritative guidance on the
accounting for this federal subsidy is issued. The postretirement health care
plans of the Company will be reviewed during 2004 to determine the impact of
this U.S. legislation. The changes in the postretirement benefit liability
recorded in the Consolidated Balance Sheets are as follows:
POSTRETIREMENT BENEFITS
(IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 11,639 $ 10,808
Service cost 21 66
Interest cost 553 743
Actuarial loss 74 795
Plan participants' contributions 36 29
Benefits paid (424) (628)
Plan amendments -- 3
Curtailment (4,494) (177)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $ 7,405 $ 11,639
===============================================================================
FUNDED STATUS:
Funded status at end of year $ (7,405) $ (11,639)
Unrecognized prior service cost 330 362
Unrecognized net actuarial loss 943 532
- -------------------------------------------------------------------------------
Net amount recognized as accrued benefit liability $ (6,132) $ (10,745)
===============================================================================
The actuarial assumptions used to determine the postretirement benefit
obligation are as follows:
(DOLLARS IN THOUSANDS) 2003 2002 2001
- -------------------------------------------------------------------------------
Assumed discount rate 6.25% 6.75% 7.25%
Health care cost trend rate 12.00% 12.00% 9.00%
Decreasing to ultimate rate 5.00% 5.00% 5.00%
Effect of one percent increase in health
care cost trend rate:
On cost components $ 24 $ 28 $ 49
On accumulated benefit obligation $ 373 $ 422 $ 386
Effect of one percent decrease in health
care cost trend rate:
On cost components $ (21) $ (29) $ (45)
On accumulated benefit obligation $ (336) $ (382) $ (348)
- -------------------------------------------------------------------------------
It is anticipated that the health care cost trend rate will decrease from 12.0%
in 2004 to 5.0% in the year 2008.
The assumed discount rates to determine the postretirement benefit expense for
the years 2003, 2002, 2001 were 6.75%, 7.25% and 8.0%, respectively.
SAVINGS PLAN
The Company has a 401(k) savings plan which covers substantially all U.S.
employees with the exception of employees represented by a collective bargaining
agreement, unless the agreement expressly provides otherwise. Employee
contributions are generally determined as a percentage of covered employees'
compensation. The expense from continuing and discontinued operations for
contributions to the plan by the Company was $3.5 million, $3.8 million and $3.8
million for 2003, 2002 and 2001 respectively. At December 31, 2003, 2002 and
2001, 2,143,820 shares, 2,352,286 shares and 2,519,045 shares, respectively, of
the Company's common stock with a fair market value of $93.9 million, $75.0
million and $86.4 million, respectively, are included in the savings plan.
-57-
EXECUTIVE INCENTIVE COMPENSATION PLAN
The amended 1995 Executive Incentive Compensation Plan, as approved by the
Management Development and Compensation Committee of the Board of Directors,
provides the basis for determination of annual incentive compensation awards.
Actual awards are paid in February of the following year. The Company accrues
amounts reflecting the estimated value of incentive compensation anticipated to
be earned for the year. Compensation expense relating to these awards was $4.0
million, $3.6 million and $2.5 million in 2003, 2002 and 2001, respectively.
9. INCOME TAXES
Income before income taxes and minority interest for both continuing and
discontinued operations in the Consolidated Statements of Income consists of:
(IN THOUSANDS) 2003 2002 2001
and 2000 respectively. At December 31, 2002, 2001 and 2000, 2,352,286 shares, 2,519,045 shares and 2,633,984 shares, respectively, of the Company’s common stock with a fair market value of $75.0 million, $86.4 million and $65.0 million, respectively, are included in the savings plan.Other Employee Benefit Plans
The Company offers various other benefit plans to its employees. In 2002, 2001 and 2000, the Company amended certain plans in the- -------------------------------------------------------------------------------
United States which resulted in pre-tax cost reductions of approximately $0.3 million, $1.3 million and $5.3 million, respectively.
Executive Incentive Compensation Plan
The amended 1995 Executive Incentive Compensation Plan, as approved by the Management Development and Compensation Committee of the Board of Directors, provides the basis for determination of annual incentive compensation awards. Actual awards are paid in February of the following year. The Company accrues amounts
49
reflecting the estimated value of incentive compensation anticipated to be earned for the year. Compensation expense relating to these awards was $3.6 million, $2.5 million and $5.6 million in 2002, 2001 and 2000, respectively.
9. Income Taxes
Income before income taxes and minority interest for both continuing and discontinued operations in the Consolidated Statement of Income consists of:
| (In thousands) | 2002 | | 2001 | | 2000 | |
|---|
| | United States | | | $ | 35,214 | | $ | 23,875 | | $ | 68,000 | | | International | | | | 104,139 | | | 89,920 | | | 80,591 | |
| | | | | $ | 139,353 | | $ | 113,795 | | $ | 148,591 | |
| | Provision for income taxes: | | | | Currently payable: | | | | Federal | | | $ | 1,053 | | $ | 1,597 | | $ | 5,113 | | | State | | | | (1,718 | ) | | 1,036 | | | (536 | ) | | International | | | | 24,897 | | | 18,753 | | | 21,803 | |
| | | | | | 24,232 | | | 21,386 | | | 26,380 | | | Deferred federal and state | | | | 13,048 | | | 7,207 | | | 17,375 | | | Deferred international | | | | 5,918 | | | 8,389 | | | 3,050 | |
| | | | | $ | 43,198 | | $ | 36,982 | | $ | 46,805 | |
| | Continuing Operations | | | $ | 42,240 | | $ | 38,553 | | $ | 45,398 | | | Discontinued Operations | | | | 958 | | | (1,571 | ) | | 1,407 | |
| | | | | $ | 43,198 | | $ | 36,982 | | $ | 46,805 | |
|
Cash payments$ 53,549 $ 35,214 $ 23,875
International 90,480 104,139 89,920
- -------------------------------------------------------------------------------
$ 144,029 $ 139,353 $ 113,795
===============================================================================
Provision for income taxes were $18.7 million, $19.8 milliontaxes:
Currently payable:
Federal $ 5,275 $ 1,053 $ 1,597
State (961) (1,718) 1,036
International 24,233 24,897 18,753
- -------------------------------------------------------------------------------
28,547 24,232 21,386
Deferred federal and $19.3 million, for 2002, 2001 and 2000, respectively.
The following is a reconciliation of the normal expected statutory U.S. federal income tax rate to the effective rate as a percentage of Income before income taxes and minority interest for both continuing and discontinued operations as reported in the Consolidated Statement of Income:
|
| 2002 | | 2001 | | 2000 | |
|---|
| | U.S. federal income tax rate | | | | 35.0 | % | | 35.0 | % | | 35.0 | % | | State income taxes, net of federal income tax benefit | | | | 0.3 | | | 0.4 | | | 0.4 | | | Export sales corporation benefit | | | | (0.9 | ) | | (0.4 | ) | | (0.3 | ) | | Deductible 401(k) dividends | | | | (0.9 | ) | | — | | | — | | | Losses for which no tax benefit was recorded | | | | 0.4 | | | 0.2 | | | 1.3 | | | Difference in effective tax rates on international earnings and remittances | | | | (2.2 | ) | | (4.5 | ) | | (5.7 | ) | | Nondeductible acquisition costs | | | | — | | | 2.5 | | | 1.9 | | | Other, net | | | | (0.7 | ) | | (0.7 | ) | | (1.1 | ) |
| | Effective income tax rate | | | | 31.0 | % | | 32.5 | % | | 31.5 | % |
|
50
The tax effects of the primary temporary differences giving rise to the Company’s deferred tax assets and liabilities for the years ended December 31, 2002 and 2001 are:
|
| (In thousands) | 2002 | | 2001 | |
|---|
| Deferred income taxes | Asset | | Liability | | Asset | | Liability | |
|---|
| | Depreciation | | | $ | — | | $ | 75,547 | | $ | — | | $ | 61,066 | | | Expense accruals | | | | 21,212 | | | — | | | 29,240 | | | — | | | Inventories | | | | 2,681 | | | — | | | 2,987 | | | — | | | Provision for receivables | | | | 3,525 | | | — | | | 3,977 | | | — | | | Postretirement benefits | | | | 3,683 | | | — | | | 3,869 | | | — | | | Deferred revenue | | | | — | | | 3,571 | | | — | | | 4,192 | | | Unrelieved foreign tax credits | | | | — | | | — | | | 3,156 | | | — | | | Unrelieved foreign tax losses | | | | 6,075 | | | — | | | 5,916 | | | — | | | Unrelieved domestic tax losses | | | | — | | | — | | | 1,713 | | | — | | | Pensions | | | | 36,446 | | | — | | | — | | | 41,065 | | | Other | | | | — | | | 11,463 | | | — | | | 4,744 | |
| | | | | | 73,622 | | | 90,581 | | | 50,858 | | | 111,067 | | | Valuation allowance | | | | (2,681 | ) | | — | | | (8,048 | ) | | — | |
| | Total deferred income taxes | | | $ | 70,941 | | $ | 90,581 | | $ | 42,810 | | $ | 111,067 | |
|
At December 31, 2002 and 2001, Other current assets included deferred income tax benefits of $29.4 million and $32.8 million, respectively.
At December 31, 2002, certain of the Company’s subsidiaries had total available net operating loss carryforwards (“NOLs”) of approximately $16.5 million, of which approximately $12.8 million may be carried forward indefinitely and $3.7 million have varying expiration dates. Included in the total are $4.0 million of preacquisition NOLs.
During 2002 and 2001, $0.6 million and $1.0 million, respectively, of preacquisition NOLs were utilized by the Company, resulting in tax benefits of $0.2 million and $0.3 million respectively.
The valuation allowance of $2.7 million and $8.0 million at December 31, 2002 and 2001, respectively, relates principally to cumulative unrelieved foreign tax credits and tax losses which are uncertain as to realizability. To the extent that the preacquisition NOLs are utilized in the future and the associated valuation allowance reduced, the tax benefit will be allocated to reduce goodwill.
The change in the valuation allowances for 2002 and 2001 results primarily from the utilization ofstate 12,255 13,048 7,207
Deferred international tax loss carryforwards and foreign tax credit carryforwards and the release of valuation allowances in certain international jurisdictions based on the Company’s revaluation of the realizability of future benefits. The release of valuation allowances in certain jurisdictions was allocated to reduce goodwill by $0 and $23 thousand in 2002 and 2001, respectively.
10. Commitments and Contingencies
Federal Excise Tax and Other Matters Related to the Five-Ton Truck Contract
In 1995, the Company, the United States Army (“Army”), and the United States Department of Justice concluded a settlement of Harsco’s previously reported claims against the Army relating to Federal Excise Tax (“FET”) arising under a completed 1986 contract for the sale of five-ton trucks to the Army. On September 27, 1995, the Army paid the Company $49 million in accordance with the settlement terms. The Company released the Army from any further liability for those claims, and the Department of Justice released the Company from a threatened action for damages and civil penalties based on an investigation conducted by the Department’s Commercial Litigation Branch that had been pending for several years.
The settlement preserves the rights of the parties to assert claims and defenses under the Internal Revenue Code, and rights of the Army and the Company to claim certain amounts that may be owed by either party to reconcile possible underpayments or overpayments on the truck contract as part of the formal contract close-out process.
51
The settlement does not resolve the claim by the Internal Revenue Service (“IRS”) that, contrary to the Company’s position, certain cargo truck models sold by the Company should be considered to have gross vehicle weights in excess of the 33,000 pound threshold under FET law, are not entitled to an exemption from FET under any other theory, and therefore are taxable. In 1999, the IRS assessed an increase in FET of $30.4 million plus penalties and applicable interest currently estimated to be $12.4 million and $65.4 million, respectively. In October 1999, the Company posted an $80 million bond required as security by the IRS. This increase in FET takes into account offsetting credits of $9.2 million, based on a partial allowance of the Company’s $31.9 million claim that certain truck components are exempt from FET. The IRS disallowed in full the Company’s additional claim that it is entitled to the entire $52 million of FET (plus applicable interest currently estimated by the Company to be $58.2 million) the Company has paid on the five-ton trucks, on the grounds that such trucks qualify for the FET exemption applicable to certain vehicles specially designed for the primary function of off-highway transportation. In the event that the Company ultimately receives from the IRS a refund of tax (including applicable interest) with respect to which the Company has already received reimbursement from the Army, the refund would be allocated between the Company and the Army. In August 2000, the Company filed legal action against the Government in the U.S. Court of Federal Claims challenging the assessment and seeking a refund of all FET that the Company has paid on five-ton trucks. That action is proceeding and management expects the trial to be scheduled to commence prior to the end of the third quarter of 2003. Although there is risk of an adverse outcome, both the Company and the Army believe that the cargo trucks are not taxable. No recognition has been given in the accompanying financial statements for the Company’s claims for refund from the IRS.
The settlement agreement with the Army preserved the Company’s right to seek reimbursement of after-imposed tax from the Army in the event that the cargo trucks are determined to be taxable, but the agreement limited the reimbursement to a maximum of $21 million. Additionally, in an earlier contract modification, the Army accepted responsibility for $3.6 million of the potential tax, bringing its total potential responsibility up to $24.6 million. As of September 30, 2000, the Army paid the Company this entire amount and the Company paid those funds to the IRS, subject to its pending refund claim. Thus, the Company has satisfied a portion of the disputed tax assessment. If the Company succeeds in its refund claim against the IRS, it will owe the Army the amount recovered that corresponds to the $24.6 million.
Even if the cargo trucks are ultimately held to be taxable, the Army’s contribution of $24.6 million toward payment of the tax (but not interest or penalty, if any), would result in a net maximum liability for the Company of $5.8 million plus penalties and applicable interest currently estimated to be $12.4 million and $65.4 million, respectively. The Company believes it is unlikely that resolution of this matter will have a material adverse effect on the Company’s financial position; however, it could have a material effect on quarterly or annual results of operations and cash flows.
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 Sheet at December 31, 2002 and December 31, 2001 includes an accrual of $3.2 million and $3.0 million, respectively, for environmental matters. The amounts charged against pre-tax earnings related to environmental matters totaled $1.2 million, $1.5 million and $1.8 million in 2002, 2001 and 2000, respectively.
The liability for future remediation costs is evaluated on a quarterly basis. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. The Company does not expect that any sum it may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse effect on its financial position or results of operations or cash flows.
In January 2002, the New Jersey Department of Environmental Protection issued Notices of Civil Administrative Penalty Assessment to the Company for violations of the New Jersey Air Pollution Control Act. The Notices allege that the Company operated a slag processing plant in violation of the emission permit for control of slag dust. The Agency has assessed civil administrative penalties totaling approximately $298,000 and the Company has filed an appeal with the Agency. The Company ceased operations at the plant in the fourth quarter of 2001 for unrelated reasons.
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. In their suits, the plaintiffs have named as defendants many manufacturers, distributors and repairers of numerous types of equipment or products that involved any asbestos.
52
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 product of the Company which might be alleged to cause asbestos exposure would have been purchased from a supplier. Based on scientific evidence, the Company believes that its products have never presented any harmful airborne asbestos exposure, and moreover, the type of asbestos contained in any component that was used in those products is protectively encapsulated in other materials and is not associated with the types of injuries alleged. Finally, in almost all of the complaints and depositions to date, the plaintiffs have failed to identify any contact that they have had with any products of the Company that might include an asbestos containing component.
As of December 31, 2002, the Company has obtained dismissal by stipulation, or summary judgment prior to trial, in all cases that have proceeded to trial (approximately 648 dismissals). The Company has not paid any amounts in settlement of these cases, with the exception of two settlements totaling less than $10,000 paid by the insurance company prior to 1998. The Company’s insurance carrier has paid all legal costs and expenses to date. The Company has liability insurance coverage available under various primary and excess policies that the Company believes will be available if necessary to substantially cover any liability that might ultimately be incurred on these claims.
As of December 31, 2002, there were approximately 32,220 open personal injury claims of which approximately 7,520 were filed in the quarter ended December 31, 2002. Approximately 24,995 of these cases are filed in the New York state court for New York County. Almost all of these complaints contain a standard claim for damages of $20 million or $25 million against the approximately 90 defendants, regardless of the individual’s alleged medical condition, and without identifying any product of the Company. Approximately 6,925 of these cases are filed in the state courts of various counties in Mississippi. Almost all of these complaints contain a standard claim for an unstated amount of damages against the numerous defendants (typically 240 to 270), without identifying any product of the Company. The other claims totaling approximately 300 are filed in various counties in a number of state courts, and in U.S. Federal District Court for the Eastern District of Pennsylvania, and the complaints assert lesser amounts than the New York County cases or do not state any amount claimed.
In view of the current litigation climate, which as of yet has not been sufficiently addressed either politically or legally, the Company expects to continue to receive further claims. However, there were developments during the fourth quarter of 2002 that could have a favorable effect for the Company regarding pending and future claims in New York County, and future claims in Mississippi. In December 2002, the court in New York County issued an order which created a Deferred Docket for all pending and future asbestos claims of plaintiffs who do not meet minimum criteria for discernible physical impairment, and an Active Docket for plaintiffs who meet the minimum criteria. Each claim on the Deferred Docket will remain inactive unless the plaintiff can show to the court impairment which meets the minimum criteria for placement on the Active Docket. The list of claims placed on the Deferred Docket is scheduled to be issued in May 2003. The Company expects that a substantial majority of the 24,995 claims against it in New York County will be placed on the Deferred Docket. Also, in the fourth quarter of 2002, Mississippi enacted tort reform legislation that made changes in the law favorable to the Company’s defense, which will apply to all cases filed on or after January 1, 2003. Almost all of the approximately 6,925 claims pending against the Company in Mississippi were filed in the fourth quarter of 2002, in advance of this more restrictive legislation taking effect.
The Company intends to continue its practice of vigorously defending these cases as they are listed for trial and expects the insurance carriers to continue to pay the legal costs and expenses. Management believes that the 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 or results of operations of the Company.
11. Capital Stock
The authorized capital stock consists of 150,000,000 shares of common stock and 4,000,000 shares of preferred stock, both having a par value of $1.25 per share. The preferred stock is issuable in series with terms as fixed by the Board of Directors. None of the preferred stock has been issued. On June 24, 1997, the Company adopted a revised Shareholder Rights Plan. Under the new Plan, the Board declared a dividend to shareholders of record on September 28, 1997, of one right for each share of common stock. The rights may only be exercised if, among other things, a person or group has acquired 15% or more, or intends to commence a tender offer for 20% or more, of the Company’s common stock. Each right entitles the holder to purchase 1/100th share of a new Harsco Junior Participating Cumulative Preferred Stock
53
at an exercise price of $150. Once the rights become exercisable, if any person acquires 20% or more of the Company’s common stock, the holder of a right will be entitled to receive common stock calculated to have a value of two times the exercise price of the right. The rights, which expire on September 28, 2007, do not have voting power, and may be redeemed by the Company at a price of $.05 per right at any time until the 10th business day following public announcement that a person or group has accumulated 15% or more of the Company’s common stock. At December 31, 2002, 750,000 shares of $1.25 par value preferred stock were reserved for issuance upon exercise of the rights.
The Board of Directors has authorized the repurchase of shares as follows:
| 3,815 5,918 8,389
- -------------------------------------------------------------------------------
$ 44,617 $ 43,198 $ 36,982
===============================================================================
Continuing Operations $ 41,708 $ 42,240 $ 38,553
Discontinued Operations 2,909 958 (1,571)
- -------------------------------------------------------------------------------
$ 44,617 $ 43,198 $ 36,982
===============================================================================
| No. of Shares Authorized | No. of Shares | Remaining No. of Shares |
|---|
| to be Purchased | Purchased | Authorized for Purchase |
|---|
| | 2000 | | | | 856,354 | | | 351,200 | | | 505,154 | | | 2001 | | | | 505,154 | | | 6,000 | | | 499,154 | | | 2002 | | | | 499,154 | | | — | | | 499,154 | |
|
In January 2003, the Board of Directors extended the share purchase authorization through January 31, 2004 for the 499,154 shares still remaining from the original authorization.
In 2002 and 2001, additional issuances of 5,174 shares and 10,695 shares, respectively, net of purchases, were made for SGB stock option exercises and employee service awards. In 2000, additional share purchases of 3,520, net of issuances, were made principally as part of the 1995 Executive Compensation Plan.
The following chart summarizes the Company’s common stock:
|
| Balances Outstanding | Shares Issued | | Treasury Shares | | Shares | |
|---|
| | December 31, 2000 | | | | 66,309,651 | | | 26,504,479 | | | 39,805,172 | | | December 31, 2001 | | | | 66,484,633 | | | 26,499,784 | | | 39,984,849 | | | December 31, 2002 | | | | 67,034,010 | | | 26,494,610 | | | 40,539,400 | |
|
Cash payments for income taxes were $23.5 million, $18.7 million and $19.8
million, for 2003, 2002 and 2001, respectively.
The following is a reconciliation of the normal expected statutory U.S. federal
income tax rate to the effective rate as a percentage of Income before income
taxes and minority interest for both continuing and discontinued operations as
reported in the Consolidated Statements of Income:
2003 2002 2001
- -------------------------------------------------------------------------------
U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 0.3 0.3 0.4
Export sales corporation benefit (0.7) (0.9) (0.4)
Deductible 401(k) dividends (0.6) (0.9) --
Losses for which no tax benefit was recorded 0.1 0.4 0.2
Difference in effective tax rates on international
earnings and remittances (2.2) (2.2) (4.5)
Nondeductible acquisition costs -- -- 2.5
Other, net (0.9) (0.7) (0.7)
- -------------------------------------------------------------------------------
Effective income tax rate 31.0% 31.0% 32.5%
===============================================================================
-58-
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax assets and liabilities for the years ended December 31,
2003 and 2002 are:
(IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
DEFERRED INCOME TAXES ASSET LIABILITY ASSET LIABILITY
- --------------------------------------------------------------------------------
Depreciation $ -- $ 79,254 $ -- $ 75,547
Expense accruals 14,820 -- 21,212 --
Inventories 2,772 -- 2,681 --
Provision for receivables 3,854 -- 3,525 --
Postretirement benefits 2,175 -- 3,683 --
Deferred revenue -- 3,167 -- 3,571
Unrelieved foreign tax losses 4,130 -- 6,075 --
Pensions 24,566 7,935 23,170 9,444
Other 3,719 2,177 11,257 --
- --------------------------------------------------------------------------------
56,036 92,533 71,603 88,562
Valuation allowance (1,718) -- (2,681) --
- --------------------------------------------------------------------------------
Total deferred income taxes $ 54,318 $ 92,533 $ 68,922 $ 88,562
================================================================================
At December 31, 2003 and 2002, Other current assets included deferred income tax
benefits of $22.9 million and $29.4 million, respectively.
At December 31, 2003, certain of the Company's subsidiaries had total available
net operating loss carryforwards ("NOLs") of approximately $11.6 million, of
which approximately $9.1 million may be carried forward indefinitely and $2.5
million have varying expiration dates. Included in the total are $3.5 million of
preacquisition NOLs.
During 2003 and 2002, $0.5 million and $0.6 million, respectively, of
preacquisition NOLs were utilized by the Company, resulting in tax benefits of
$0.2 million and $0.2 million, respectively.
The valuation allowance of $1.7 million and $2.7 million at December 31, 2003
and 2002, respectively, relates principally to foreign tax losses which are
uncertain as to realizability. To the extent that the preacquisition NOLs are
utilized in the future and the associated valuation allowance reduced, the tax
benefit will be allocated to reduce goodwill.
The change in the valuation allowances for 2003 and 2002 results primarily from
the utilization of international tax loss carryforwards and the release of
valuation allowances in certain international jurisdictions based on the
Company's revaluation of the realizability of future benefits.
10. COMMITMENTS AND CONTINGENCIES
FEDERAL EXCISE TAX AND OTHER MATTERS RELATED TO THE FIVE-TON TRUCK CONTRACT
In 1995, the Company, the United States Army ("Army"), and the United States
Department of Justice concluded a settlement of Harsco's previously reported
claims against the Army relating to Federal Excise Tax ("FET") arising under a
completed 1986 contract for the sale of five-ton trucks to the Army. On
September 27, 1995, the Army paid the Company $49 million in accordance with the
settlement terms. The Company released the Army from any further liability for
those claims, and the Department of Justice released the Company from a
threatened action for damages and civil penalties based on an investigation
conducted by the Department's Commercial Litigation Branch that had been pending
for several years.
The settlement preserves the rights of the parties to assert claims and defenses
under the Internal Revenue Code, and rights of the Army and the Company to claim
certain amounts that may be owed by either party to reconcile possible
underpayments or overpayments on the truck contract as part of the formal
contract close-out process.
The settlement does not resolve the claim by the Internal Revenue Service
("IRS") that, contrary to the Company's position, certain cargo truck models
sold by the Company should be considered to have gross vehicle weights in excess
of the 33,000 pound threshold under FET law, are not entitled to an exemption
from FET under any other theory, and therefore are taxable. In 1999, the IRS
assessed an increase in FET of $30.4 million plus penalties and applicable
interest currently estimated to be $12.4 million and $70.6 million,
respectively, as of December 31, 2003. In October 1999, the Company posted an
$80 million bond required as security by the IRS. This increase in FET takes
-59-
into account offsetting credits of $9.2 million, based on a partial allowance of
the Company's $31.9 million claim that certain truck components are exempt from
FET. The IRS disallowed in full the Company's additional claim that it is
entitled to the entire $52 million of FET (plus applicable interest estimated by
the Company to be $61.1 million as of December 31, 2003) the Company has paid on
the five-ton trucks, on the grounds that such trucks qualify for the FET
exemption applicable to certain vehicles specially designed for the primary
function of off-highway transportation. In the event that the Company ultimately
receives from the IRS a refund of tax (including applicable interest) with
respect to which the Company has already received reimbursement from the Army,
the refund would be allocated between the Company and the Army. In August 2000,
the Company filed legal action against the Government in the U.S. Court of
Federal Claims challenging the assessment and seeking a refund of all FET that
the Company has paid on five-ton trucks. Although there is risk of an adverse
outcome, both the Company and the Army believe that the cargo trucks are not
taxable.
The settlement agreement with the Army preserved the Company's right to seek
reimbursement of after-imposed tax from the Army in the event that the cargo
trucks are determined to be taxable, but the agreement limited the reimbursement
to a maximum of $21 million. Additionally, in an earlier contract modification,
the Army accepted responsibility for $3.6 million of the potential tax, bringing
its total potential responsibility up to $24.6 million. As of September 30,
2000, the Army paid the Company this entire amount and the Company paid those
funds to the IRS, subject to its pending refund claim plus applicable interest.
Thus, the Company has satisfied a portion of the disputed tax assessment.
Even if the cargo trucks are ultimately held to be taxable, the Army's
contribution of $24.6 million toward payment of the tax (but not interest or
penalty, if any), would result in a net maximum liability for the Company of
$5.8 million plus penalties and applicable interest estimated as of December 31,
2003, to be $12.4 million and $70.6 million, respectively. The Company believes
it is unlikely that resolution of this matter will have a material adverse
effect on the Company's financial position; however, it could have a material
effect on quarterly or annual results of operations and cash flows.
During the third quarter of 2003, several significant developments occurred with
respect to this matter. On July 16, 2003, the Court denied entirely the
Government's motion for summary judgment. Shortly after the ruling and at the
urging of the Court, the Government and the Company commenced settlement
negotiations. These settlement negotiations progressed significantly during the
months of August and September. At a status conference on September 30, 2003,
the Court suspended further proceedings in the litigation pending the outcome of
the settlement discussions. Since September, continued progress has been made
toward finalizing a settlement. The Company has been notified that the U.S.
Internal Revenue Service's Chief Counsel Office and the Court of Federal Claims
Section of the U.S. Department of Justice (Tax Division) have recommended for
approval a Company-sponsored settlement proposal in this matter. The settlement
proposal, which still requires approval by several levels within the U.S.
Department of Justice, would result in a refund to Harsco of an estimated $12
million to $13 million in taxes and interest. Final approval by the Department
of Justice may take several months.
As a result of these developments during the third quarter of 2003, the Company
adjusted an accrual related to this matter. This adjustment is included as
Income related to discontinued defense business on the Company's Consolidated
Statements of Income for the year ended December 31, 2003. The Company's current
expectation is that its future obligations for finalizing this matter will
approximate $0.8 million. No recognition has been given in the accompanying
financial statements for the outcome of the ongoing settlement discussions with
respect to the Company's claim for a tax refund or the proposed settlement.
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 December 31, 2003 and 2002 include accruals of
$3.3 million and $3.2 million, respectively, for environmental matters. The
amounts charged against pre-tax income related to environmental matters totaled
$1.4 million $1.2 million and $1.5 million in 2003, 2002 and 2001, respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position,
results of operations or cash flows.
-60-
In January 2002, the New Jersey Department of Environmental Protection ("NJDEP")
issued Notices of Civil Administrative Penalty Assessment to the Company for
violations of the New Jersey Air Pollution Control Act. The Notices allege that
the Company operated a slag processing plant in violation of the emission permit
for control of slag dust. The Agency assessed civil administrative penalties
totaling approximately $311,000 and the Company filed an appeal with the Agency.
In March 2003, NJDEP amended its assessment and reduced the proposed penalty to
$146,000. This amended order has been appealed. The Company ceased operations at
the plant in the fourth quarter of 2001 for unrelated reasons.
CUSTOMER RESTRUCTURING
On January 29, 2004, a customer of the Company announced that it had obtained an
order to initiate a Court-supervised restructuring under Canada's Companies'
Creditors Arrangement Act (the Act). The Company is actively monitoring this
restructuring to determine the Company's potential loss exposure, if any. The
Company's net receivable balance with the customer as of January 29, 2004 was
approximately $5.3 million. The Company intends to vigorously pursue collection
of the entire receivable balance pursuant to our rights and obligations under
the Act. The Company has been successful in collecting substantially all of the
pre-petition receivable amounts in several similar cases where the customer has
filed for bankruptcy-court protection. Accordingly, no reserve has been
recognized as of December 31, 2003.
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 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 airborne asbestos exposure, and
moreover, the type of asbestos contained in any component that was used in those
products is protectively encapsulated in other materials and is not associated
with the types of injuries alleged. Finally, in most of the depositions taken of
plaintiffs to date in the litigation against the Company, plaintiffs have failed
to identify any Company products as the source of their asbestos exposure.
The majority of the asbestos complaints have been filed in either New York or
Mississippi. 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's alleged medical condition, and without
identifying any Company product as the source of plaintiff's asbestos exposure.
With respect to the Mississippi complaints, most contain a standard claim for an
unstated amount of damages against the numerous defendants (typically 240 to
270), without identifying any Company product as the source of plaintiff's
asbestos exposure.
The Company has not paid any amounts in settlement of these cases, with the
exception of two settlements totaling less than $10,000 paid in 1998 from
insurance proceeds. The Company's insurance carrier has paid all legal costs and
expenses to date. The Company has liability insurance coverage available under
various primary and excess policies that the Company believes will be available
if necessary to substantially cover any liability that might ultimately be
incurred on these claims.
During the fourth quarter of 2003, there was no significant increase in the
number of pending cases, either in total or in any particular jurisdiction.
There are approximately 39,800 pending asbestos personal injury claims filed
against the Company. Approximately 25,000 of these cases were pending in the New
York Supreme Court for various counties in New York State and approximately
14,500 of the cases were pending in state courts of various counties in
Mississippi. The other claims totaling approximately 300 are filed in various
counties in a number of state courts, and in U.S. Federal District Court for the
Eastern District of Pennsylvania, and those complaints assert lesser amounts of
damages than the New York cases or do not state any amount claimed.
As of December 31, 2003, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in all cases that have proceeded to trial.
Further, we reached agreement with one plaintiff's counsel in Mississippi to
dismiss the Company from approximately 2,900 cases in that state. We are
awaiting entry by the Mississippi courts of the appropriate orders of dismissal
of those 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 were developments
during the fourth quarter of 2002 that could have a favorable effect for the
Company regarding the pending claims and the number of future claims filed in
-61-
counties within New York City and in Mississippi state courts after 2002. On
December 19, 2002, the New York Supreme Court responsible for managing all
asbestos cases pending in the counties within New York City issued an Order
which 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 discernible physical impairment, and an Active Docket for
plaintiffs who are able to show such medical conditions. Of the thousands of
cases that were filed in 1997 and 1998 and still remained on the Court's docket,
only approximately 245 cases have been placed on the Active Docket to date,
while all others will remain deferred until such time as those plaintiffs can
show by appropriate medical evidence that they have a qualifying malignant
condition or physical impairment as defined by the court. Cases filed since 1998
are currently under review to determine which will be placed on the Inactive
Docket and which will be placed on the Active Docket.
Also, in the fourth quarter of 2002, Mississippi enacted tort reform legislation
that made various changes in the law favorable to the Company's defense and that
will apply to all cases filed on or after January 1, 2003. The majority of the
claims pending against the Company in Mississippi were filed in the fourth
quarter of 2002, in advance of the effective date of this more restrictive
legislation.
The Company intends to continue its practice of vigorously defending these cases
as they are listed for trial and expects the insurance carriers to continue to
pay the legal costs and expenses. Management believes that the 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.
11. CAPITAL STOCK
The authorized capital stock consists of 150,000,000 shares of common stock and
4,000,000 shares of preferred stock, both having a par value of $1.25 per share.
The preferred stock is issuable in series with terms as fixed by the Board of
Directors. None of the preferred stock has been issued. On June 24, 1997, the
Company adopted a revised Shareholder Rights Plan. Under the new Plan, the Board
declared a dividend to shareholders of record on September 28, 1997, of one
right for each share of common stock. The rights may only be exercised if, among
other things, a person or group has acquired 15% or more, or intends to commence
a tender offer for 20% or more, of the Company's common stock. Each right
entitles the holder to purchase 1/100th share of a new Harsco Junior
Participating Cumulative Preferred Stock at an exercise price of $150. Once the
rights become exercisable, if any person acquires 20% or more of the Company's
common stock, the holder of a right will be entitled to receive common stock
calculated to have a value of two times the exercise price of the right. The
rights, which expire on September 28, 2007, do not have voting power, and may be
redeemed by the Company at a price of $.05 per right at any time until the 10th
business day following public announcement that a person or group has
accumulated 15% or more of the Company's common stock. At December 31, 2003,
750,000 shares of $1.25 par value preferred stock were reserved for issuance
upon exercise of the rights.
The Board of Directors has authorized the repurchase of shares as follows:
NO. OF SHARES ADDITIONAL SHARES REMAINING NO. OF
AUTHORIZED TO BE NO. OF SHARES AUTHORIZED SHARES AUTHORIZED
PURCHASED PURCHASED FOR PURCHASE FOR PURCHASE
- --------------------------------------------------------------------------------
2001 505,154 6,000 -- 499,154
2002 499,154 -- -- 499,154
2003 499,154 -- 500,846 1,000,000
================================================================================
On June 24, 2003, the Board of Directors increased the share repurchase
authorization to 1,000,000 shares. In January 2004, the Board of Directors
extended the share purchase authorization through January 31, 2005 for the
1,000,000 shares still remaining from the June 2003 authorization.
In 2003, 2002 and 2001, additional issuances of 3,633 shares, 5,174 shares and
10,695 shares, respectively, net of purchases, were made for SGB stock option
exercises and employee service awards.
-62-
The following chart summarizes the Company's common stock:
BALANCES OUTSTANDING SHARES ISSUED TREASURY SHARES OUTSTANDING SHARES
- --------------------------------------------------------------------------------
December 31, 2001 66,484,633 26,499,784 39,984,849
December 31, 2002 67,034,010 26,494,610 40,539,400
DECEMBER 31, 2003 67,357,447 26,490,977 40,866,470
================================================================================
The following is a reconciliation of the average shares of common stock used to
compute basic earnings per common share to the shares used to compute diluted
earnings per common share as shown on the Consolidated Statements of Income:
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------
Income from continuing operations $ 86,999 $ 88,410 $ 74,642
===================================================================================================
Average shares of common stock outstanding used to compute
basic earnings per common share 40,690 40,360 39,876
Additional common shares to thebe issued assuming exercise of
stock options, net of shares assumed reacquired 283 320 190
- ---------------------------------------------------------------------------------------------------
Shares used to compute diluteddilutive effect of stock options 40,973 40,680 40,066
===================================================================================================
Basic earnings per common share as shown on the Consolidated Statement of Income:
| (Amounts in thousands, except per share data) | 2002 | | 2001 | | 2000 | |
|---|
| | Income from continuing operations | | | $ | 88,410 | | $ | 74,642 | | $ | 94,343 | |
| | Average shares of common stock outstanding used to compute | | | | 40,360 | | | 39,876 | | | 39,964 | | | basic earnings per common share | | | | Additional common shares to be issued assuming exercise of | | | | stock options, net of shares assumed reacquired | | | | 320 | | | 190 | | | 58 | |
| | Shares used to compute dilutive effect of stock options | | | | 40,680 | | | 40,066 | | | 40,022 | |
| | Basic earnings per common share from continuing operations | | | $ | 2.19 | | $ | 1.87 | | $ | 2.36 | |
| | Diluted earnings per common share from continuing operations | | | $ | 2.17 | | $ | 1.86 | | $ | 2.36 | |
|
Options to purchase 1,369,954 shares, 416,856 shares and 1,555,212 shares were outstanding at December 31, 2002, 2001 and 2000, respectively, but were not included in the computation of dilutedfrom continuing operations $ 2.14 $ 2.19 $ 1.87
===================================================================================================
Diluted earnings per common share because the effect was antidilutive.
54
12. Stock-Based Compensation
The fair value of stock options granted during 2002, 2001 and 2000 is estimated on the date of grant using the binomial option pricing model. The Company discloses the pro forma effect of accounting for stock options under the fair value method in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data.” The weighted-average assumptions used and the estimated fair value are as follows:
|
| 2002 | | 2001 | | 2000 | |
|---|
| | Expected term | | | | 5 year | s | | 4 year | s | | 4 year | s | | Expected stock volatility | | | | 35.2 | % | | 36.6 | % | | 30.5 | % | | Risk-free interest rate | | | | 4.24 | % | | 4.96 | % | | 6.44 | % | | Dividend | | | $ | 1.00 | | $ | .96 | | $ | .94 | | | Rate of dividend increase | | | | 3.25 | % | | 5 | % | | 5 | % | | Fair value | | | $ | 9.48 | | $ | 6.83 | | $ | 7.13 | |
|
The Company has granted stock options to officers, certain key employees and directors for the purchase of its common stock under two shareholder-approved plans. The 1995 Executive Incentive Compensation Plan authorizes the issuance of up to 4,000,000 shares of the Company’s common stock for use in paying incentive compensation awards in the form of stock options. The 1995 Non-Employee Directors’ Stock Plan authorizes the issuance of up to 300,000 shares of the Company’s common stock for stock option awards. Options are granted at fair market value at date of grant and become exercisable commencing two years later for options issued under the 1995 Executive Incentive Compensation Plan and one year later for options issued under the 1995 Non-Employee Directors’ Stock Plan. All options granted before 2002 were granted with a one year vesting period. The options expire ten years from the date of grant. Upon shareholder approval of these two plans in 1995, the Company terminated the use of the 1986 Stock Option Plan for granting of stock option awards. At December 31, 2002, there were 1,215,121 and 176,000 shares available for granting stock options under the 1995 Executive Incentive Compensation Plan and the 1995 Non-Employee Directors’ Stock Plan, respectively.
Changes during 2002, 2001 and 2000 in options outstanding were:
| continuing operations $ 2.12 $ 2.17 $ 1.86
===================================================================================================
| Shares | | Weighted Average | |
|---|
| Under Option | | Exercise Price | |
|---|
| | Outstanding, January 1, 2000 | | | | 1,336,604 | | $ | 28.97 | | | Granted | | | | 539,247 | (a) | | 28.18 | | | Exercised | | | | (88,107 | ) | | 22.11 | | | Terminated and expired | | | | (105,052 | ) | | 33.01 | |
| | Outstanding, December 31, 2000 | | | | 1,682,692 | | | 29.18 | | | Granted | | | | 726,240 | | | 25.69 | | | Exercised | | | | (187,693 | ) | | 25.00 | | | Terminated and expired | | | | (85,424 | ) | | 30.28 | |
| | Outstanding, December 31, 2001 | | | | 2,135,815 | | | 28.31 | | | Granted | | | | 614,237 | | | 32.93 | | | Exercised | | | | (552,101 | ) | | 25.38 | | | Terminated and expired | | | | (74,838 | ) | | 33.09 | |
| | Outstanding, December 31, 2002 | | | | 2,123,113 | | $ | 30.30 | |
|
Options to purchase 32,000 shares, 1,369,954 shares and 416,856 shares were
outstanding at December 31, 2003, 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share because the effect was
antidilutive.
12. STOCK-BASED COMPENSATION
The fair value of stock options granted during 2003, 2002 and 2001 is estimated
on the date of grant using the binomial option pricing model. The Company
discloses the pro forma effect of accounting for stock options under the fair
value method in Note 1, "Summary of Significant Accounting Policies." The
weighted-average assumptions used and the estimated fair value are as follows:
2003 2002 2001
- ------------------------------------------------------------------------------
Expected term 7.5 YEARS 5 years 4 years
Expected stock volatility 32.7% 35.2% 36.6%
Risk-free interest rate 3.46% 4.24% 4.96%
Dividend $ 1.05 $ 1.00 $ .96
Rate of dividend increase 4.63% 3.25% 5%
Fair value $ 9.70 $ 9.48 $ 6.83
- ------------------------------------------------------------------------------
The Company has granted stock options to officers, certain key employees and
directors for the purchase of its common stock under two shareholder-approved
plans. The 1995 Executive Incentive Compensation Plan authorizes the issuance of
up to 4,000,000 shares of the Company's common stock for use in paying incentive
compensation awards in the form of stock options. The 1995 Non-Employee
Directors' Stock Plan authorizes the issuance of up to 300,000 shares of the
Company's common stock for stock option awards.
Options are granted at fair market value on the date of grant. Options issued
under the 1995 Executive Incentive Compensation Plan vest and become exercisable
commencing two years following the date of grant. All options granted before
2002 under the 1995 Executive Incentive Compensation Plan vested and became
exercisable one year following the date of grant. Options issued under the 1995
Non-Employee Directors' Stock Plan become exercisable commencing one year
following the date of grant but vest immediately. The options under both Plans
-63-
expire ten years from the date of grant. Upon shareholder approval of these two
plans in 1995, the Company terminated the use of the 1986 Stock Option Plan for
granting of stock option awards. At December 31, 2003, there were 1,308,831 and
160,000 shares available for granting stock options under the 1995 Executive
Incentive Compensation Plan and the 1995 Non-Employee Directors' Stock Plan,
respectively.
No stock options were granted to employees in 2003 and none will be granted in
2004. The Management Development and Compensation Committee of the Board of
Directors is currently reviewing the long-term equity component of management
compensation, and is considering performance-based restricted stock or
restricted stock units as a replacement for stock options.
Changes during 2003, 2002 and 2001 in options outstanding were:
SHARES WEIGHTED AVERAGE
UNDER OPTION EXERCISE PRICE
- -------------------------------------------------------------------------------
Outstanding, January 1, 2001 1,682,692 29.18
Granted 726,240 25.69
Exercised (187,693) 25.00
Terminated and expired (85,424) 30.28
- -------------------------------------------------------------------------------
Outstanding, December 31, 2001 2,135,815 28.31
Granted 614,237 32.93
Exercised (552,101) 25.38
Terminated and expired (74,838) 33.09
- -------------------------------------------------------------------------------
Outstanding, December 31, 2002 2,123,113 30.30
Granted 16,000 (a) 33.92
Exercised (325,480) 27.15
Terminated and expired (118,553) 33.76
- -------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 2003 1,695,080 (b) $30.72
===============================================================================
(a) During 2003, options were only granted to non-employee directors.
(b) Included in options outstanding at December 31, 2003 were 16,052 options
granted to SGB key employees as part of the Company's acquisition of SGB in
2000. These options are not a part of the 1995 Executive Compensation Plan,
or the 1995 Non-Employee Directors' Stock Plan.
Options to purchase 1,187,938 shares, 1,536,411 shares and 1,429,087 shares were
exercisable at December 31, 2003, 2002 and 2001, respectively. The following
table summarizes information concerning outstanding and exercisable options at
December 31, 2003.
(a) | | Included in the 2000 grant are 61,097 options granted to SGB key employees as part of the Company’s acquisition of SGB. These options are not a part of the 1995 Executive Incentive Compensation Plan, or the 1995 Non-Employee Directors’ Stock Plan.
|
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISABLE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------------------------------------------------------------------------------
$21.00 - $27.52 518,744 6.2 $25.74 505,584 $25.74
27.93 - 32.65 802,426 7.0 31.21 330,804 29.20
32.81 - 46.16 373,910 4.1 36.56 351,550 36.69
- -------------------------------------------------------------------------------------------------
1,695,080 1,187,938
=================================================================================================
55
Options to purchase 1,536,411 shares, 1,429,087 shares and 1,162,947 shares were exercisable at December 31, 2002, 2001 and 2000, respectively. The following table summarizes information concerning outstanding and exercisable options at December 31, 2002.
|
| Options Outstanding | | Options Exercisable | |
|---|
|
| |
| |
|---|
| Range of | | | Remaining | | Weighted | | | Weighted | |
|---|
| Exercisable | | Number | | Contractual Life | | Average | | Number | | Average | |
|---|
| Prices | | Outstanding | | In Years | | Exercise Price | | Exercisable | | Exercise Price | |
|---|
| | $18.43 - $ 27.52 | | | | 739,159 | | | 7.2 | | $ | 25.64 | | | 725,999 | | $ | 25.63 | | | 27.93 - 32.65 | | | | 941,558 | | | 7.9 | | | 31.14 | | | 392,776 | | | 29.07 | | | 32.81 - 46.16 | | | | 442,396 | | | 4.8 | | | 36.31 | | | 417,636 | | | 36.11 | |
| | | | | | 2,123,113 | | | | | | | | | 1,536,411 | | | | |
|
During 2002, the Company did not have any non-cash transactions related to stock option exercises.
During both 2001 and 2000, the Company had non-cash transactions related to stock option exercises of $0.1 million whereby old shares were exchanged for new shares.
13. Financial Instruments
Off-Balance Sheet Risk
As collateral for the Company’s performance and to insurers, the Company is contingently liable under standby letters of credit and bonds in the amount of $193.7 million and $181.3 million at December 31, 2002 and 2001, respectively. These standby letters of credit and bonds are generally in force for up to three years. Certain issues have expiration dates beyond three years or no scheduled expiration date. The Company pays fees to various banks and insurance companies that range from 0.17 to 1.9 percent per annum of their face value. If the Company were required to obtain replacement standby letters of credit and bonds as of December 31, 2002 for those currently outstanding, it is the Company’s opinion that the replacement costs would not vary significantly from the present fee structure.
The Company generally has currency exposures in 43 countries. The Company’s primary foreign currency exposures during 2002 were in the United Kingdom, European Economic and Monetary Union countries, Brazil and South Africa.
Off-Balance Sheet Risk – Third Party Guarantees
The Company guarantees the debt of certain third parties in its international operations. These guarantees are provided to enable the third parties to obtain financing of their operations. In return for these guarantees, other management services and the use of one of the Company’s trade names, the Company receives fifty percent of the profits from these operations. These guarantees are renewed on an annual basis and the Company would only be required to perform under the guarantee if the third parties default on their debt. The maximum potential amount of future payments (undiscounted) related to these guarantees was $2.9 million and $3.0 million at December 31, 2002 and 2001, respectively. There is no recognition of this potential future payment in the accompanying financial statements as the Company believes the potential for making these payments is remote. In accordance with FIN 45, the Company will recognize a liability for the fair value of these guarantees when they renew during 2003.
Off-Balance Sheet Risk – Unconditional Purchase Commitments
The Company entered into an unconditional purchase commitment during 2001 for scaffolding equipment that can be used by the Company for either rental or sale. This commitment is not recorded on the Company’s Balance Sheet. The Company purchased $15.4 million and $14.1 million of equipment under this commitment during 2002 and 2001, respectively. The future obligations (undiscounted) of the Company under this commitment are as follows:
|
| (In thousands) | |
|---|
| | 2003 | | | $ | 10,732 | | | 2004 | | | | 7,512 | | | 2005 | | | | 2,146 | |
Derivative Instruments and Hedging Activities
The Company has several hedges of net investment recorded in accordance with SFAS 133. The Company recorded a debit of $12.1 million and $1.1 million during 2002 and 2001, respectively, in the foreign currency translation adjustments line of other comprehensive income (expense) related to hedges of net investments.
56
At December 31, 2002 and 2001, the Company had $2.9 million and $1.8 million contracted amounts, respectively, 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 mature within six months and are with major financial institutions. The Company may be exposed to credit loss in the event of non-performance by the other parties to the contracts. The Company evaluates the credit worthiness of the counterparties’ financial condition and does not expect default by the counterparties. 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.
Subsequent to December 31, 2002, the Company entered into a 25 million British pound sterling ($40 million) forward contract to hedge a net liability exposure in the U.K. This forward contract will mature in April 2003, at which point the Company’s exposure will be reassessed and a new contract will be executed to the extent necessary.
The following tables summarize by major currency the contractual amounts of the Company’s forward exchange contracts in U.S. dollars as of December 31, 2002 and 2001. 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.
|
| | (In thousands) | As of December 31, 2002 | |
|---|
| | | U.S. Dollar | | | Recognized | |
|---|
| Type | | Equivalent | | Maturity | | Gain (Loss) | |
|---|
| | Forward exchange contracts: | | | | | | | | | | | | | | | | British pounds | | | Buy | | | $ | 1,770 | | Various in 2003 | | | $ | (53 | ) | | Euros | | | Buy | | | | 220 | | January 7, 2003 | | | | 15 | | | South African rand | | | Sell | | | | 927 | | Various in 2003 | | | | (73 | ) | | Euros | | | Sell | | | | 2 | | January 7, 2003 | | | | — | |
| | | | | | | | $ | 2,919 | | | | | $ | (111 | ) |
|
At December 31, 2002, the Company held forward exchange contracts in British pounds, euros and South African rand which were used to offset certain future payments between the Company and its various subsidiaries or vendors. The Company did not elect to treat these contracts as hedges under SFAS 133 and so mark to market gains and losses were recognized in income. The Company did not have any material cash flow or fair value hedge transactions to be accounted for under SFAS 133 as of December 31, 2002.
|
| | (In thousands) | As of December 31, 2001 | |
|---|
| | | U.S. Dollar | | | Recognized | |
|---|
| Type | | Equivalent | | Maturity | | Gain (Loss) | |
|---|
| | Forward exchange contracts: | | | | | | | | | | | | | | | | British pounds | | | Buy | | | $ | 1,720 | | Various in 2002 | | | $ | 13 | | | British pounds | | | Sell | | | $ | 130 | | January 10, 2002 | | | $ | (5 | ) |
| | | | | | | | $ | 1,850 | | | | | $ | 8 | |
|
At December 31, 2001, the Company held forward exchange contracts in British pounds, which were used to offset certain future payments between the Company and its various subsidiaries. The Company did not elect to treat these contracts as hedges under SFAS 133 and so mark to market gains and losses were recognized in income.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments and accounts receivable. The Company places its cash and cash equivalents with high quality financial institutions and, by policy, limits the amount of credit exposure to any one institution. Concentrations of credit risk with respect to accounts receivable are limited due to the Company’s large number of customers and their dispersion across different industries and geographies. The Company generally does not require collateral or other security to support customer receivables.
57
Fair Value of Financial Instruments
The major methods and assumptions used in estimating the fair values of financial instruments are:
|
| Cash and cash equivalents
The carrying amount approximates fair value due to the relatively short period to maturity of these instruments. |
| Long-term debt
The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. |
| Foreign currency exchange contracts
The fair value of foreign currency exchange contracts are estimated by obtaining quotes from brokers. |
During 2003 and 2002, the Company did not have any non-cash transactions related
to stock option exercises.
During 2001, the Company had non-cash transactions related to stock option
exercises of $0.1 million whereby old shares were exchanged for new shares.
-64-
13. FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
As collateral for the Company's performance and to insurers, the Company is
contingently liable under standby letters of credit and bonds in the amount of
$216.3 million and $193.7 million at December 31, 2003 and 2002, respectively.
These standby letters of credit and bonds are generally in force for up to three
years. Certain issues have expiration dates beyond three years or no scheduled
expiration date. The Company pays fees to various banks and insurance companies
that range from 0.08 to 0.75 percent per annum of their face value. If the
Company were required to obtain replacement standby letters of credit and bonds
as of December 31, 2003 for those currently outstanding, it is the Company's
opinion that the replacement costs would not vary significantly from the present
fee structure.
The Company has currency exposures in over 40 countries. The Company's primary
foreign currency exposures during 2003 were in the United Kingdom, European
Economic and Monetary Union countries, South Africa and Australia.
OFF-BALANCE SHEET RISK - THIRD PARTY GUARANTEES
In connection with the licensing of one of the Company's trade names and
providing certain management services (the furnishing of selected employees),
the Company guarantees the debt of certain third parties related to its
international operations. These guarantees are provided to enable the third
parties to obtain financing of their operations. The Company receives fees from
these operations, which are included as Services sales in the Company's
Consolidated Statements of Income. The revenue the Company recorded from these
entities was $1.5 million, $1.9 million and $2.0 million for the twelve months
ended December 31, 2003, 2002 and 2001, respectively. The guarantees are renewed
on an annual basis and the Company would only be required to perform under the
guarantee if the third parties default on their debt. The maximum potential
amount of future payments (undiscounted) related to these guarantees was $2.9
million at December 31, 2003 and 2002. There is no recognition of this potential
future payment in the accompanying financial statements as the Company believes
the potential for making these payments is remote. These guarantees were renewed
in June 2003, September 2003 and November 2003; accordingly, liabilities for the
fair value of the guarantee instruments were recognized in accordance with FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45)
which the Company adopted January 1, 2003. These liabilities are included in
Other current liabilities on the Consolidated Balance Sheet. The recognition of
these liabilities did not have a material impact on the Company's financial
condition or results of operations for the twelve months ended December 31,
2003.
In the normal course of business, the Company provides legal indemnifications
related primarily to the performance of its products and services and patent and
trademark infringement of its goods and services sold. These indemnifications
generally relate to the performance (regarding function, not price) of the
respective goods or services and therefore no liability is recognized related to
the fair value of such guarantees.
OFF-BALANCE SHEET RISK - UNCONDITIONAL PURCHASE COMMITMENTS
The Company entered into an unconditional purchase commitment during 2001 for
scaffolding equipment that can be used by the Company for either rental or sale.
This commitment is not recorded on the Company's Balance Sheets. The Company
purchased $15.1 million and $15.4 million of equipment under this commitment
during 2003 and 2002, respectively. The future obligations (undiscounted) of the
Company under this commitment are as follows:
(IN THOUSANDS)
------------------------------------
2004 $ 8,335
2005 2,381
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has several hedges of net investment recorded in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). The Company recorded a debit of $17.1 million and $12.1 million
during 2003 and 2002, respectively, in the foreign currency translation
adjustments line of other comprehensive income (expense) related to hedges of
net investments.
At December 31, 2003 and 2002, the Company had $78.4 million and $2.9 million
contracted amounts, respectively, 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 mature within six months and are with major financial institutions.
The Company may be exposed to credit loss in the event of non-performance by the
other parties to the contracts. The Company evaluates the credit worthiness of
the counterparties' financial condition and does not expect default by the
counterparties. 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.
-65-
The following tables summarize by major currency the contractual amounts of the
Company's forward exchange contracts in U.S. dollars as of December 31, 2003 and
2002. 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.
FORWARD EXCHANGE CONTRACTS
- --------------------------------------------------------------------------------
(IN THOUSANDS) AS OF DECEMBER 31, 2003
- --------------------------------------------------------------------------------
U.S. DOLLAR RECOGNIZED
TYPE EQUIVALENT MATURITY GAIN (LOSS)
- --------------------------------------------------------------------------------
Forward exchange contracts:
Euros Sell $ 44,186 Various in 2004 $ (270)
Euros Buy 27,008 Various in 2004 227
Pounds Buy 6,139 Various in 2004 119
Pounds Sell 1,082 Various in 2004 (48)
- --------------------------------------------------------------------------------
$ 78,415 $ 28
================================================================================
At December 31, 2003, the Company held forward exchange contracts in British
pounds and euros which were used to offset certain future payments between the
Company and its various subsidiaries or vendors. These contracts all mature by
February 2004. The Company had outstanding forward contracts designated as SFAS
133 cash flow hedges in the amount of $1.6 million at December 31, 2003. These
forward contracts had a net unrealized loss of $47 thousand that was included in
Other comprehensive income (expense) net of deferred taxes at December 31, 2003.
The Company did not elect to treat the remaining contracts as hedges under SFAS
133 and so mark-to-market gains and losses were recognized in net income.
FORWARD EXCHANGE CONTRACTS
- --------------------------------------------------------------------------------
(IN THOUSANDS) AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
U.S. DOLLAR RECOGNIZED
TYPE EQUIVALENT MATURITY GAIN (LOSS)
- --------------------------------------------------------------------------------
Forward exchange contracts:
British pounds Buy $ 1,770 Various in 2003 $ (53)
Euros Buy 220 January 7, 2003 15
South African rand Sell 927 Various in 2003 (73)
Euros Sell 2 January 7, 2003 --
- --------------------------------------------------------------------------------
$ 2,919 $ (111)
================================================================================
At December 31, 2002, the Company held forward exchange contracts in British
pounds, euros and South African rands which were used to offset certain future
payments between the Company and its various subsidiaries or vendors. The
Company did not elect to treat these contracts as hedges under SFAS 133 and so
mark-to-market gains and losses were recognized in net income. The Company did
not have any material cash flow or fair value hedge transactions to be accounted
for under SFAS 133 as of December 31, 2002.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents, investments
and accounts receivable. The Company places its cash and cash equivalents with
high quality financial institutions and, by policy, limits the amount of credit
exposure to any one institution. Concentrations of credit risk with respect to
accounts receivable are generally limited due to the Company's large number of
customers and their dispersion across different industries and geographies.
However, the Company's Mill Services Segment has several large customers
throughout the world with significant accounts receivable balances. If a
receivable from one or more of those customers became uncollectible, it could
have a material effect on the Company's results of operations. The Company
generally does not require collateral or other security to support customer
receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The major methods and assumptions used in estimating the fair values of
financial instruments are:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the relatively short
period to maturity of these instruments.
-66-
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
The fair value of foreign currency forward exchange contracts is estimated
by obtaining quotes from brokers.
The carrying amounts and estimated fair values of the Company’sCompany's financial
instruments as of December 31, 20022003 and 20012002 are as follows: | (In thousands) | 2002 | | 2001 (a) | |
|---|
| | Carrying | | Fair | | Carrying | | Fair | |
|---|
| Amount | | Value | | Amount | | Value | |
|---|
| | Cash and cash equivalents | | | $ | 70,132 | | $ | 70,132 | | $ | 67,407 | | $ | 67,407 | | | Long-term debt including current maturities | | | | 617,308 | | | 653,144 | | | 732,555 | | | 738,158 | | | Foreign currency exchange contracts | | | | 2,919 | | | 2,808 | | | 1,850 | | | 1,858 | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
14. Information by Segment
(IN THOUSANDS) 2003 2002
- -----------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
Cash and Geographic Area
The Company reports information about its operating segments using the “management approach” in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This approach is based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. The Company’s reportable segments are identified based upon differences in products, services and markets served.
Due to reorganization changes, the Company has adopted a new segment reporting structure for its operations as of December 31, 2002. Prior year information has been restated to reflect those changes. The Company’s business units are aggregated into three reportable segments and an “all other” category labeled Other Infrastructure Products and Services. These segments and the type of products and services offered include the following:
Mill Services
This segment provides mill services, principally for the global steel industry. Mill services include slag processing, marketing and disposal; metal reclamation; slab management systems; materials handling and scrap management programs; in-plant transportation; and a variety of other services. Similar services are provided to non-ferrous metallurgical industries, such as aluminum, nickel and copper.
Access Services
Major products and services include the rental and sales of scaffolding, powered access equipment, shoring and concrete forming products as well as erection and dismantling services and a variety of other access equipment services.
Products and services are provided to the oil, chemical and petrochemical industries; commercial and industrial construction firms; public utilities; industrial plants; and infrastructure repair and maintenance markets.
Gas and Fluid Control
Major products and services are gas containment cylinders and tankscash equivalents $ 80,210 $ 80,210 $ 70,132 $ 70,132
Long-term debt including natural gas vehicle (NGV) fuel tanks; cryogenic equipment; valves, regulators and gauges, for scuba and life support equipment; and air-cooled heat exchangers.
58
Major customers include various industrial markets; petrochemical sectors; natural gas and process industries; propane, compressed gas, life support, scuba and refrigerant gas industries; gas equipment companies; welding distributors; medical laboratories; beverage carbonation users; and the animal husbandry industry.
Other Infrastructure Products and Services
Major products and services include granules for asphalt roofing shingles and slag abrasives for industrial surface preparation derived from coal slag; railway track maintenance equipment and services; industrial grating; and process equipment, including industrial blenders, dryers, mixers, water heaters and boilers.
Major customers include asphalt roofing manufacturers; private and government-owned railroads worldwide; urban mass transit operators; and industrial plants. Other customers include the chemical, food processing and pharmaceutical industries; and the institutional building and retrofit markets.
Other Information
The measurement basis of segment profit or loss is operating income. Sales of the Company in the United States and the United Kingdom exceed 10% of consolidated sales with 46% and 21%, respectively, in 2002; 50% and 19%, respectively, in 2001; and 56% and 15%, respectively, in 2000. No single customer represented 10% or more of the Company’s sales during 2002, 2001, or 2000. There are no significant inter-segment sales.
Corporate assets include principally cash, investments, prepaid pension costs and United States deferred taxes. Assets in the United Kingdom represent 30% of totalcurrent maturities 598,677 633,190 617,308 653,144
Foreign currency forward exchange contracts 28 28 2,919 2,808
- -----------------------------------------------------------------------------------------------------------
|
14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA
The Company reports information about its operating segments using the
"management approach" in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). This approach is
based on the way management organizes and reports the segments within the
enterprise for making operating decisions and assessing performance. The
Company's reportable segments are identified based upon differences in products,
services and markets served.
Due to reorganization changes, the Company adopted a new segment reporting
structure for its operations as of December 31, 2002. Information for 2001 has
been reclassified to reflect those changes. The Company's Divisions are
aggregated into three reportable segments and an "all other" category labeled
Other Infrastructure Products and Services. These segments and the types of
products and services offered include the following:
MILL SERVICES SEGMENT
This segment provides mill services, principally for the global steel industry.
Mill services include slag processing, marketing and disposal; metal
reclamation; slab management systems; materials handling; scrap management
programs; in-plant transportation; and a variety of other services. Similar
services are provided to non-ferrous metallurgical industries, such as aluminum,
nickel and copper.
ACCESS SERVICES SEGMENT
Major products and services include the rental and sales of scaffolding, powered
access equipment, shoring and concrete forming products as well as erection and
dismantling services and a variety of other access equipment services.
Products and services are provided to the oil, chemical and petrochemical
industries; commercial and industrial construction firms; public utilities;
industrial plants; and infrastructure repair and maintenance markets.
GAS AND FLUID CONTROL SEGMENT
Major products and services are gas containment cylinders and tanks; cryogenic
equipment; valves, regulators and gauges, for scuba and life support equipment;
and air-cooled heat exchangers.
Major customers include various industrial markets; petrochemical sectors;
natural gas and process industries; propane, compressed gas, life support, scuba
and refrigerant gas industries; gas equipment companies; automotive industry;
welding distributors; medical laboratories; beverage carbonation users; and the
animal husbandry industry.
OTHER INFRASTRUCTURE PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY
Major products and services include granules for asphalt roofing shingles and
slag abrasives for industrial surface preparation derived from coal slag;
railway track maintenance equipment and services; industrial grating; and
process equipment, including industrial blenders, dryers, mixers, water heaters
and boilers.
Major customers include asphalt roofing manufacturers; private and
government-owned railroads worldwide; urban mass transit operators; and
industrial plants. Other customers include the chemical, food processing and
pharmaceutical industries; and the institutional building and retrofit markets.
-67-
OTHER INFORMATION
The measurement basis of segment profit or loss is operating income. Sales of
the Company in the United States and the United Kingdom exceeded 10% of
consolidated sales with 43% and 21%, respectively, in 2003; 46% and 21%,
respectively, in 2002; and 50% and 19%, respectively, in 2001. No single
customer represented 10% or more of the Company's sales during 2003, 2002 or
2001. There are no significant inter-segment sales.
Corporate assets include principally cash, prepaid pension costs and United
States deferred taxes. Assets in the United Kingdom represent 25% of total
assets excluding corporate assets as of December 31, 2003 and 2002, and are
disclosed separately in the geographic area information.
SEGMENT INFORMATION
TWELVE MONTHS ENDED
--------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002 and 28% of total segment assets as of DecemberDECEMBER 31, 2001 and are disclosed separately in the geographic area information.(a)
OPERATING OPERATING OPERATING
(IN MILLIONS) SALES (b) INCOME (c) SALES (b) INCOME (c) SALES (b) INCOME (c)
------------------------------------------------------------------------------------------------------------------------
Mill Services Segment Information (a)
| Twelve Months Ended | |
|---|
|
| |
|---|
| December 31, 2002 | | December 31, 2001 (b) | | December 31, 2000 (b) | |
|---|
| | Operating | | | Operating | | | Operating | |
|---|
| (In millions) | Sales (c) | | Income (d) | | Sales (c) | | Income (d) | | Sales (c) | | Income (d) | |
|---|
|
| |
| |
| |
|---|
| Mill Services | | | $ | 696.8 | | $ | 73.5 | | $ | 664.7 | | $ | 57.5 | | $ | 694.8 | | $ | 81.3 | | | Access Services | | | | 587.9 | | | 41.7 | | | 583.4 | | | 59.1 | | | 382.3 | | | 43.1 | | | Gas and Fluid Control | | | | 350.6 | | | 23.0 | | | 400.1 | | | 24.3 | | | 437.6 | | | 38.8 | | | Other Infrastructure Products and | | | | Services | | | | 341.4 | | | 37.6 | | | 377.0 | | | 23.1 | | | 390.0 | | | 28.9 | | | General Corporate | | | | — | | | 0.2 | | | — | | | 3.7 | | | — | | | (1.3 | ) | |
| |
| |
| |
|---|
| Consolidated Totals | | | $ | 1,976.7 | | $ | 176.0 | | $ | 2,025.2 | | $ | 167.7 | | $ | 1,904.7 | | $ | 190.8 | | |
| |
| |
| |
|---|
(a) | | Segment information for prior periods has been reclassified to conform with the current presentation.
|
(b) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment Disposal of Long-Lived Assets,” 2001 and 2000 information has been reclassified for comparative purposes.
|
(c) | | Sales from continuing operations to unaffiliated customers.
|
(d) | | Operating income (loss) from continuing operations.
|
59
Reconciliation of Segment Operating Income to Consolidated Income
Before Income Taxes and Minority Interest
|
| Twelve Months Ended | |
|---|
|
| |
|---|
| December 31 | | December 31 | | December 31 | |
|---|
| (In millions) | 2002 | | 2001 (a) | | 2000 (a) | |
|---|
| | Operating income from continuing operations | | | $ | 176.0 | | $ | 167.7 | | $ | 190.8 | | | Equity in income (loss) of affiliates, net | | | | 0.3 | | | (1.8 | ) | | (2.0 | ) | | Interest Income | | | | 3.7 | | | 5.6 | | | 6.0 | | | Interest Expense | | | | (43.3 | ) | | (53.2 | ) | | (50.1 | ) |
| | Income from continuing operations before income taxes and | | | $ | 136.7 | | $ | 118.3 | | $ | 144.7 | | | minority interest | | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 and 2000 information has been reclassified for comparative purposes.
|
Segment Information (a)
| | | | Depreciation and | | | | |
|---|
| Assets (b) | | Amortization (c) | | Capital Expenditures (d) | |
|---|
|
| |
| |
| |
|---|
| (In millions) | 2002 | | 2001 | | 2000 | | 2002 | | 2001 | | 2000 | | 2002 | | 2001 | | 2000 | |
|---|
|
| |
| |
| |
|---|
| Mill Services | | | $ | 766.8 | | $ | 806.6 | | $ | 844.3 | | $ | 86.2 | | $ | 93.7 | | $ | 92.8 | | $ | 62.5 | | $ | 77.5 | | $ | 112.3 | | | Access Services | | | | 685.4 | | | 646.5 | | | 677.1 | | | 37.4 | | | 41.6 | | | 23.7 | | | 34.3 | | | 47.6 | | | 43.0 | | | Gas and Fluid Control | | | | 248.1 | | | 292.5 | | | 306.8 | | | 15.0 | | | 19.6 | | | 19.6 | | | 8.7 | | | 13.6 | | | 9.2 | | | Other Infrastructure | | | | Products and Services | | | | 216.5 | | | 260.0 | | | 291.4 | | | 15.8 | | | 20.3 | | | 19.2 | | | 8.4 | | | 17.1 | | | 15.2 | | |
| |
| |
| |
|---|
| Subtotal | | | | 1,916.8 | | | 2,005.6 | | | 2,119.6 | | | 154.4 | | | 175.2 | | | 155.3 | | | 113.9 | | | 155.8 | | | 179.7 | | | Corporate | | | | 82.5 | | | 85.2 | | | 61.3 | | | 1.3 | | | 1.3 | | | 3.8 | | | 0.4 | | | 0.3 | | | 0.3 | | |
| |
| |
| |
|---|
| Total | | | $ | 1,999.3 | | $ | 2,090.8 | | $ | 2,180.9 | | $ | 155.7 | | $ | 176.5 | | $ | 159.1 | | $ | 114.3 | | $ | 156.1 | | $ | 180.0 | | |
| |
| |
| |
|---|
(a) | | Segment information for prior periods has been reclassified to conform with the current presentation.
|
(b) | | Assets from discontinued operations of $1.3 million, $22.5 million and $26.8 million in 2002, 2001 and 2000, respectively, are included in the Gas and Fluid Control Segment.
|
(c) | | Depreciation and amortization from discontinued operations of $0.5 million, $1.8 million and $2.0 million in 2002, 2001 and 2000, respectively, are included in the Gas and Fluid Control Segment.
|
(d) | | Capital Expenditures from discontinued operations of $0.6 million, $2.3 million and $1.2 million in 2002, 2001 and 2000, respectively, are included in the Gas and Fluid Control Segment.
|
60
Information by Geographic Area (a)
|
| Geographic Area | Sales to Unaffiliated Customers | | Segment Assets | |
|---|
| |
| |
| |
|---|
| (In millions) | 2002 | | 2001 (b) | | 2000 (b) | | 2002 | | 2001 | | 2000 | |
|---|
| |
|
|
| |
|---|
| United States | | | $ | 903.2 | | $ | 1,007.2 | | $ | 1,058.7 | | $ | 692.1 | | $ | 745.4 | | $ | 810.6 | | | United Kingdom | | | | 405.7 | | | 389.8 | | | 287.0 | | | 579.9 | | | 565.3 | | | 558.6 | | | All Other | | | | 667.8 | | | 628.2 | | | 559.0 | | | 644.8 | | | 694.9 | | | 750.4 | | |
| |
| |
| |
| |
| |
| | | Segment Totals | | | $ | 1,976.7 | | $ | 2,025.2 | | $ | 1,904.7 | | $ | 1,916.8 | | $ | 2,005.6 | | $ | 2,119.6 | | |
| |
| |
| |
| |
| |
| |
(a) | | Revenues are attributed to individual countries based on the location of the facility generating the revenue.
|
(b) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 and 2000 information has been reclassified for comparative purposes.
|
15. Other (Income) and Expenses
In the years 2002, 2001 and 2000, the Company recorded pre-tax Other (income) and expenses from continuing operations of $3.5 million, $22.8 million and $2.0 million, respectively:
|
| Other (Income) and Expenses | |
|---|
|
| |
|---|
| (In thousands) | 2002 | | 2001 (a) | | 2000 (a) | |
|---|
| | Net gains | | | $ | (7,091 | ) | $ | (6,880 | ) | $ | (3,312 | ) | | Impaired asset write-downs | | | | 204 | | | 15,181 | | | 1,876 | | | Employee termination benefit costs | | | | 7,140 | | | 10,135 | | | 3,501 | | | Costs to exit activities | | | | 1,934 | | | 2,584 | | | 593 | | | Other expense (income) | | | | 1,286 | | | 1,766 | | | (661 | ) |
| | Total | | | $ | 3,473 | | $ | 22,786 | | $ | 1,997 | |
|
(a) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
Net Gains
Net gains are recorded from the sales of redundant properties (primarily land, buildings and related equipment) and non-core assets. In 2002, this included $2.2 million in the$ 827.5 $ 85.9 $ 696.8 $ 73.5 $ 664.7 $ 57.5
Access Services Segment as well as $1.9 million for assets of a product line in Other Infrastructure Products and Services. A $2.7 million net gain was also realized from the sale of an equity investment which was part of the Mill Services Segment.
In 2001, net gains on the sale of redundant properties were recorded at the Corporate Headquarters for $2.7 million, in the619.1 37.4 587.9 41.7 583.4 59.1
Gas and Fluid Control Segment for $1.9 million and in the335.1 17.0 350.6 23.0 400.1 24.3
------------------------------------------------------------------------------------------------------------------------
Segment Totals 1,781.7 140.3 1,635.3 138.2 1,648.2 140.9
Other Infrastructure Products and
Services ("all other") Category 336.8 34.0 341.4 37.6 377.0 23.1
General Corporate -- (0.4) -- 0.2 -- 3.7
------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $ 2,118.5 $ 173.9 $ 1,976.7 $ 176.0 $ 2,025.2 $ 167.7
========================================================================================================================
|
(a) Segment information for 2001 has been reclassified to conform with
the current presentation. Additionally, in order to comply with the
Financial Accounting Standards Board (FASB) Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
2001 information has been reclassified for comparative purposes.
(b) Sales from continuing operations to unaffiliated customers.
(c) Operating income (loss) from continuing operations.
-68-
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME
BEFORE INCOME TAXES AND MINORITY INTEREST
TWELVE MONTHS ENDED
-------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
(IN MILLIONS) 2003 2002 2001 (a)
------------------------------------------------------------------------------------------------------
Segment for $1.0 million. Also included inoperating income $ 140.3 $ 138.2 $ 140.9
Other Infrastructure Products and Services
was a $0.9 million("all other") Category 34.0 37.6 23.1
General Corporate Income (Expense) (0.4) 0.2 3.7
------------------------------------------------------------------------------------------------------
Operating income from continuing operations 173.9 176.0 167.7
Equity in income (loss) of affiliates, net gain related to the sale of non-core product lines.Net gains in 2000 were recorded in all four operating segments. Net gains on the sale of non-core product lines were recorded in the Gas and Fluid Control Segment for $1.5 million and the Mill Services Segment for $0.4 million. Gains on the sale of redundant properties were recorded in Other Infrastructure Products and Services for $0.7 million, the Mill Services Segment for $0.5 million and the Access Services Segment for $0.2 million.
Cash proceeds associated with these gains are included in Proceeds from the sale of assets in the investing activities section of the Consolidated Statement of Cash Flows.
Impaired Asset Write-downs
Impaired asset write-downs in 2001 include principally valuation reserves recorded for certain investments in property, plant and equipment. This includes a pre-tax write down of $9.8 million in Other Infrastructure Products and Services of which $8.0 million relates to an underperforming plant in the United States associated with the Company’s roofing granules business. The plant was sold in 2002. In addition, $4.8 million in the Mill Services Segment relates to fixed plant
61
and equipment associated with steel mill customers which filed for reorganization proceedings under local laws in principally the United States and Asia. Also, during 2001, $0.6 million of impaired asset write-downs were recorded by the Gas and Fluid Control Segment.
Impairment losses were measured as the amount by which the carrying amount of assets exceeded their estimated fair value. Fair value was estimated based upon the expected future realizable cash flows including anticipated selling prices.
Non-cash impaired asset write-downs are included in Other (income) and expenses in the Consolidated Statement of Cash Flows as adjustments to reconcile net income to net cash provided by operating activities.
Employee Termination Benefit Costs
Employee termination benefit costs consist principally of severance arrangements to employees terminated as a result of management reorganization actions. Under these reorganization actions, the Company’s management has established and approved specific plans of termination. Details of the termination benefit plans have been communicated to the affected employees prior to recognition of related provisions.
During 2002, $7.1 million of expense related to employee termination benefits was incurred in the Mill Services and Access Services Segments and Other Infrastructure Products and Services, for $3.6 million, $1.7 million and $1.3 million, respectively. These terminations were principally in Europe and the United States.
During 2001, $10.1 million of expense related to employee termination benefits was incurred primarily in the Mill Services and Gas and Fluid Control Segments for $4.8 million and $3.6 million, respectively. These terminations were principally in Europe and the United States.
During 2000, $3.5 million of employee termination benefit costs were incurred, principally in the Mill Services Segment, primarily in Europe. Additionally, employee termination benefit costs were incurred in the United States in the Gas and Fluid Control Segment as well as at Corporate Headquarters.
The payments for employee termination benefit costs are reflected as uses of operating cash in the Consolidated Statement of Cash Flows.
Employee Termination Benefit Costs and Payments Associated with Continuing Operations
| (In millions) | Summary of Activity | |
|---|
| | Original reorganization action period | 2002 | | 2001 | | 2000 | |
|---|
| | Employee termination benefits expense | | | $ | 7.1 | | $ | 10.1 | | $ | 3.5 | |
| | Payments: (a) | | | | In 2000 | | | | — | | | — | | | (2.9 | ) | | In 2001 | | | | — | | | (6.1 | ) | | (0.9 | ) | | In 2002 | | | | (4.4 | ) | | (2.0 | ) | | — | |
| | Total payments | | | | (4.4 | ) | | (8.1 | ) | | (3.8 | ) | | | | Other | | | | — | | | 0.1 | | | 0.3 | |
| | Remaining payments as of December 31, 2002 | | | $ | 2.7 | (b) | $ | 2.1 | (c) | $ | — | |
|
(a) | | Payments are categorized according to the original reorganization action period to which they relate (2002, 2001 or 2000).
|
(b) | | Remaining payments are expected to be completed by December 2003.
|
(c) | | Remaining payments relate principally to a reorganization in Germany that commenced in December 2001. Final payments are expected to be completed by June 2003.
|
62
Employee Terminations – Number of Employees
|
| | Summary of Activity | |
|---|
| | Original reorganization action period | 2002 | | 2001 | | 2000 | |
|---|
| | Employees affected by new reorganization actions | | | $ | 668 | | $ | 799 | | $ | 201 | |
| | Employee terminations: | | | | In 2000 | | | | — | | | — | | | (197 | ) | | In 2001 | | | | — | | | (647 | ) | | (4 | ) | | In 2002 | | | | (563 | ) | | (93 | ) | | — | |
| | Total terminations | | | | (563 | ) | | (740 | ) | | (201 | ) | | | | Other | | | | — | | | — | | | — | |
| | Remaining terminations as of December 31, 2002 | | | | 105 | | | 59 | | | — | |
|
Costs to Exit Activities
Costs to exit activities consist of incremental direct costs of reorganization actions and lease run-out costs. Such costs are recorded when a specific exit plan is approved by management. Relocation expenses, such as employee moving costs, are classified as exit costs and are expensed as incurred. Other costs classified in this category are generally expensed as incurred.
During 2002, $1.9 million of exit costs were incurred. These were incurred principally in the Mill Services Segment.
During 2001, $2.6 million of exit costs were incurred. These were incurred principally in the Gas and Fluid Control and Mill Services Segments.
63
Two-Year Summary of Quarterly Results
(Unaudited)
|
| (In millions, except per share amounts) | 2002 | |
|---|
| |
| |
|---|
| Quarterly | First | | Second (a) | | Third | | Fourth | |
|---|
| | Sales | | | $ | 458.6 | | $ | 510.3 | | $ | 510.5 | | $ | 497.3 | | | Gross profit (b) | | | | 114.1 | | | 131.5 | | | 126.8 | | | 122.6 | | | Net income | | | | 14.2 | | | 26.2 | | | 25.7 | | | 24.1 | | | Diluted earnings per share | | | | .35 | | | .64 | | | .63 | | | .59 | |
| | | | (In millions, except per share amounts) | 2001 (c) | |
|---|
| |
| |
|---|
| Quarterly | First | | Second (a) | | Third | | Fourth | |
|---|
| Sales | | | $ | 505.0 | | $ | 510.1 | | $ | 510.3 | | $ | 499.7 | | | Gross profit (b) | | | | 119.9 | | | 131.8 | | | 127.9 | | | 129.1 | | | Net income | | | | 10.1 | | | 24.7 | | | 26.8 | | | 10.0 | | | Diluted earnings per share | | | | .25 | | | .62 | | | .67 | | | .25 | |
|
(a) | | Sales and Gross profit have been reclassified to include the results of IKG Industries that were originally classified as discontinued operations as of June 30, 2002. Due to management’s decision not to sell this business, it is no longer classified as discontinued operations.
|
(b) | | Gross profit is defined as Sales less costs and expenses associated directly with or allocated to products sold or services rendered.
|
(c) | | In order to comply with the Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 2001 information has been reclassified for comparative purposes.
|
Common Stock Price and Dividend Information
(Unaudited)
| Market Price Per Share | | Dividends Declared | |
|---|
| High | | Low | | Per Share | |
|---|
| | 2002 | | | | | | | | | | | | | First Quarter | | | $ | 39.76 | | $ | 32.00 | | $ | .25 | | | Second Quarter | | | | 44.48 | | | 34.32 | | | .25 | | | Third Quarter | | | | 38.39 | | | 25.75 | | | .25 | | | Fourth Quarter | | | | 32.28 | | | 24.20 | | | .2625 | | | | | 2001 | | | | | | | First Quarter | | | $ | 28.48 | | $ | 23.60 | | $ | .24 | | | Second Quarter | | | | 29.25 | | | 23.71 | | | .24 | | | Third Quarter | | | | 36.00 | | | 25.85 | | | .24 | | | Fourth Quarter | | | | 35.00 | | | 29.40 | | | .25 | |
|
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures
None.
64
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding executive officers required by this Item is set forth as a Supplementary Item at the end of Part I hereof (pursuant to Instruction 3 to Item 401(b) of Regulation S-K). Other information required by this Item is incorporated by reference to the sections entitled “Director Information” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the 2003 Proxy Statement.
Item 11. Executive Compensation
Information regarding compensation of executive officers and directors is incorporated by reference to the sections entitled “Board Compensation Committee Report on Executive Compensation,” “Executive Compensation and Other Information,” “Stock Options,” “Options Exercises and Holdings,” “Stock Performance Graph,” “Retirement Plans,” “Employment Agreements with Officers of the Company” and “Directors’ Compensation” of the 2003 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the sections entitled “Share Ownership of Certain Beneficial Owners” and “Share Ownership of Management” of the 2003 Proxy Statement.
Equity Compensation Plan Information
The Company maintains the 1995 Executive Incentive Compensation Plan and the 1995 Non-Employee Directors’ Stock Plan, which allow the Company to grant equity awards to eligible persons. Upon shareholder approval of these two plans in 1995, the Company terminated the use of the 1986 Stock Option Plan for granting stock option awards.
The Company also assumed options under the SGB Group Plc Discretionary Share Option Plan 1997 (the “SGB Plan”) upon Harsco’s acquisition of SGB Group Plc (“SGB”) in 2000. At the time of the acquisition, various employees of the U.K.–based SGB held previously granted stock options under the SGB Plan. Harsco authorized the issuance of Harsco common stock to fulfill these SGB Plan stock options upon exercise from time to time. Harsco has not made any additional stock option grants under the SGB Plan since the acquisition and will not make any further grants in the future.
The following table gives information about equity awards under these plans as of December 31, 2002. All securities referred to are shares of Harsco common stock.
|
| (a) | | (b) | | (c) | |
|---|
| | | Number of securities | |
|---|
| | | remaining available for | |
|---|
| Number of securities to be | | Weighted-average exercise | | future issuance under | |
|---|
| issued upon exercise of | | price of outstanding | | equity compensation plans | |
|---|
| outstanding options, | | options, warrants and | | (excluding securities | |
|---|
| Plan category | warrants and rights | | rights | | reflected in column (a)) | |
|---|
| | Equity compensation plans | | | | 2,080,175 | | | $30.30 | | | 1,391,121 | | | approved by security | | | | holders (1) | | | | | | Equity compensation plans not | | | | approved by security | | | | holders | | | | 42,938(2) | | | $30.52(3) | | | — | |
| | Total | | | | 2,123,113 | | | $30.30 | | | 1,391,121 | |
|
(1) | | Plans include the 1986 Stock Option Plan as amended, the 1995 Executive Incentive Compensation Plan as amended and the 1995 Non-Employee Directors’ Stock Plan.
|
(2) | | Represents the shares of Harsco common stock issuable as replacement option shares in satisfaction of the exercise of stock options granted by SGB under the SGB Plan as described below. This plan is not a material equity compensation plan of the Company.
|
(3) | | These stock options denominate the exercise price in U.K. pounds sterling. The price shown is translated into U. S. dollars at an exchange rate of $1.6097 effective December 31, 2002.
|
65
Description of the Equity Compensation Plan Not Approved by Security Holders
The SGB Group Plc Discretionary Share Option Plan 1997
Upon the acquisition of SGB in June 2000, Harsco authorized the assumption of outstanding options granted under the SGB Plan and the issuance of options (“Harsco Replacement Options”) exercisable for shares of Harsco common stock in exchange for options granted by SGB pursuant to the SGB Plan and exercisable for shares of SGB common stock (“SGB Options”). On June 30, 2000, Harsco commenced an offer (“Option Exchange Offer”) to the holders of SGB Options for an equivalent Harsco Replacement Option. Upon completion of the Option Exchange Offer, each SGB Option exercisable for one SGB share was exchanged for a Harsco Replacement Option exercisable for a fraction, equal to 0.1362, of one share of Harsco common stock. The Company has authorized the issuance of Harsco common stock from treasury or from authorized but unissued shares as necessary to fulfill the terms of the Harsco Replacement Options. The maximum number of shares of Harsco common stock that were issuable upon exercise of the Harsco Replacement Options was 61,097. Only those SGB participants who accepted the Option Exchange Offer and received Harsco Replacement Options were eligible to continue participation in the SGB Plan. SGB Options were granted under the Plan on five different dates prior to the acquisition. The exercise prices of the Harsco Replacement Options vary depending on the original SGB Option date of grant and range from 1145.0 U.K. pence to 2092.0 U.K. pence. The options are exercisable during the period commencing on the third anniversary of the date the original SGB Options were granted and ending on the day before the tenth anniversary of the date the SGB Options were granted. If a participant ceases to be an Eligible Employee (as defined under the Plan), the participant’s Harsco Replacement Options will lapse, except in the event that the participant ceases to be an Eligible Employee due to death or injury, disability, redundancy or retirement.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is incorporated by reference to the section entitled “Employment Agreements with Officers of the Company” of the 2003 Proxy Statement.
Item 14. Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of December 31, 2002. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date of their evaluation.
66
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
|
(a) | | (1) | The Consolidated Financial Statements are listed in the index to Item 8, “Financial Statements and Supplementary Data,” on page 29.
|
(a) | | (2) | The following financial statement schedule should be read in conjunction with the Consolidated Financial Statements (see Item 8, “Financial Statements and Supplementary Data”):
|
| | | | Report of Independent Accountants on Financial
| | | | | | | | Statement Schedule
| | 68 | |
| | | | Schedule II - Valuation and Qualifying Accounts for
| | | | | | | | the years 2002, 2001 and 2000
| | 69 | |
| | | Schedules other than those listed above are omitted for the reason that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto.
|
| | | Condensed financial information of the registrant is omitted since there are no substantial amounts of “restricted net assets” applicable to the Company’s consolidated subsidiaries.
|
| | | Financial statements of 50% or less owned unconsolidated companies are not submitted inasmuch as (1) the registrant’s investment in and advances to such companies do not exceed 20% of the total consolidated assets, (2) the registrant’s proportionate share of the total assets of such companies does not exceed 20% of the total consolidated assets, and (3) the registrant’s equity in the income0.3 0.3 (1.8)
Interest Income 2.2 3.7 5.6
Interest Expense (40.5) (43.3) (53.2)
------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and minority interest $ 135.9 $ 136.7 $ 118.3
======================================================================================================
|
(a) In order to comply with the Financial Accounting Standards Board
(FASB) Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," 2001 information has been reclassified for
comparative purposes.
SEGMENT INFORMATION
DEPRECIATION AND
ASSETS (a) AMORTIZATION (b)
------------------------------------- -------------------------------------
(IN MILLIONS) 2003 2002 2001 (c) 2003 2002 2001 (c)
---------------------------------------------------------------------------------------------------------------------
Mill Services Segment $ 898.0 $ 766.8 $ 806.6 $ 96.9 $ 86.2 $ 93.7
Access Services Segment 696.2 685.4 646.5 41.7 37.4 41.6
Gas and Fluid Control Segment 251.8 248.1 292.5 14.1 15.0 19.6
---------------------------------------------------------------------------------------------------------------------
Segment Totals 1,846.0 1,700.3 1,745.6 152.7 138.6 154.9
Other Infrastructure Products and
Services ("all other") Category 203.4 216.5 260.0 14.8 15.8 20.3
Corporate 88.6 82.5 85.2 1.4 1.3 1.3
---------------------------------------------------------------------------------------------------------------------
Total $ 2,138.0 $ 1,999.3 $ 2,090.8 $ 168.9 $ 155.7 $ 176.5
=====================================================================================================================
(a) Assets from discontinued operations of $1.0 million, $1.3 million and
$22.5 million in 2003, 2002 and 2001, respectively, are included in
the Gas and Fluid Control Segment.
(b) Depreciation and amortization from discontinued operations of $0.5
million and $1.8 million in 2002 and 2001, respectively, are included
in the Gas and Fluid Control Segment.
(c) Segment information for 2001 has been reclassified to conform with
the current presentation.
-69-
CAPITAL EXPENDITURES (a)
---------------------------------------------------------------------------------------
(IN MILLIONS) 2003 2002 2001 (b)
---------------------------------------------------------------------------------------
Mill Services Segment $ 88.1 $ 62.5 $ 77.5
Access Services Segment 41.2 34.3 47.6
Gas and Fluid Control Segment 8.0 8.7 13.6
---------------------------------------------------------------------------------------
Segment Totals 137.3 105.5 138.7
Other Infrastructure Products and
Services ("all other") Category 6.1 8.4 17.1
Corporate 0.4 0.4 0.3
---------------------------------------------------------------------------------------
Total $ 143.8 $ 114.3 $ 156.1
=======================================================================================
(a) Capital Expenditures from discontinued operations of $0.6 million and
$2.3 million in 2002 and 2001, respectively, are included in the Gas
and Fluid Control Segment.
(b) Segment information for 2001 has been reclassified to conform with
the current presentation.
INFORMATION BY GEOGRAPHIC AREA (a)
GEOGRAPHIC AREA SALES TO UNAFFILIATED CUSTOMERS ASSETS
------------------------------------ -----------------------------------
(IN MILLIONS) 2003 2002 2001 (b) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
United States $ 902.4 $ 903.2 $1,007.2 $ 650.0 $ 648.4 $ 745.4
United Kingdom 453.4 405.7 389.8 506.6 477.7 565.3
All Other 762.7 667.8 628.2 892.8 790.7 694.9
- ---------------------------------------------------------------------------------------------------------------------------
Totals excluding Corporate $2,118.5 $1,976.7 $2,025.2 $2,049.4 $1,916.8 $2,005.6
===========================================================================================================================
(a) Revenues are attributed to individual countries based on the location of
the facility generating the revenue.
(b) In order to comply with the Financial Accounting Standards Board (FASB)
Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," 2001 information has been reclassified for
comparative purposes.
INFORMATION ABOUT PRODUCTS AND SERVICES
----------------------------------
PRODUCT GROUP SALES TO UNAFFILIATED CUSTOMERS
----------------------------------
(IN MILLIONS) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Mill services $ 827.5 $ 696.8 $ 664.7
Access services 619.1 587.9 583.4
Industrial gas products 293.9 307.8 326.7
Railway track maintenance services and equipment 173.1 157.2 167.2
Industrial abrasives and roofing granules 68.9 68.7 66.9
Industrial grating products 66.2 86.0 107.1
Heat exchangers 41.2 42.8 73.4
Powder processing equipment and heat transfer products 28.6 28.5 30.0
Medical waste disposal (divested in 2002) -- 1.0 5.8
- -------------------------------------------------------------------------------------------------------
Consolidated Sales $2,118.5 $1,976.7 $2,025.2
=======================================================================================================
-70-
15. OTHER (INCOME) AND EXPENSES
In the years 2003, 2002 and 2001, the Company recorded pre-tax Other (income)
and expenses from continuing operations of $7.0 million, $3.5 million and $22.8
million, respectively:
OTHER (INCOME) AND EXPENSES
------------------------------------
(IN THOUSANDS) 2003 2002 2001 (a)
-----------------------------------------------------------------------------------
Net gains $ (3,543) $ (7,091) $ (6,880)
Impaired asset write-downs 168 204 15,181
Employee termination benefit costs 6,064 7,140 10,135
Costs to exit activities 2,725 1,934 2,584
Other expense 1,541 1,286 1,766
-----------------------------------------------------------------------------------
Total $ 6,955 $ 3,473 $ 22,786
===================================================================================
(a) As permitted by the Financial Accounting Standards Board (FASB)
Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," 2001 information has been reclassified for
comparative purposes.
NET GAINS
Net gains are recorded from the sales of redundant properties (primarily land,
buildings and related equipment) and non-core assets. In 2003, this included
$2.5 million in the Access Services Segment and $0.7 million in the Mill
Services Segment.
In 2002, net gains included $2.2 million in the Access Services Segment as well
as $1.9 million for assets of a product line in the Other Infrastructure
Products and Services ("all other") Category. A $2.7 million net gain was also
realized from the sale of an equity investment which was part of the Mill
Services Segment.
In 2001, net gains on the sale of redundant properties were recorded at the
Corporate Headquarters for $2.7 million, in the Gas and Fluid Control Segment
for $1.9 million and in the Other Infrastructure Products and Services ("all
other") Category for $1.0 million. Also included in the Other Infrastructure
Products and Services ("all other") Category was a $0.9 million net gain related
to the sale of non-core product lines.
Cash proceeds associated with these gains are included in Proceeds from the sale
of assets in the investing activities section of the Consolidated Statements of
Cash Flows.
IMPAIRED ASSET WRITE-DOWNS
Impaired asset write-downs in 2001 included principally valuation reserves
recorded for certain investments in property, plant and equipment. This included
a pre-tax write down of $9.8 million in the Other Infrastructure Products and
Services ("all other") Category of which $8.0 million related to an
underperforming plant in the United States associated with the Company's roofing
granules business. The plant was sold in 2002. In addition, $4.8 million was
recorded in the Mill Services Segment related to fixed plant and equipment
associated with steel mill customers which filed for reorganization proceedings
under local laws in principally the United States and Asia. Also, during 2001,
$0.6 million of impaired asset write-downs were recorded by the Gas and Fluid
Control Segment.
Impairment losses were measured as the amount by which the carrying amount of
assets exceeded their estimated fair value. Fair value was estimated based upon
the expected future realizable cash flows including anticipated selling prices.
Non-cash impaired asset write-downs are included in Other (income) and expenses
in the Consolidated Statements of Cash Flows as adjustments to reconcile net
income to net cash provided by operating activities.
EMPLOYEE TERMINATION BENEFIT COSTS
The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," (SFAS 146) on January 1, 2003. This standard addresses
involuntary termination costs associated with one-time benefit arrangements
provided as part of an exit or disposal activity. These costs and the related
liabilities are recognized by the Company when a formal plan for reorganization
is approved at the appropriate level of management and communicated to the
affected employees. Additionally, costs associated with on-going benefit
arrangements, or in certain countries where statutory requirements dictate a
minimum required benefit, are recognized when they are probable and estimable,
in accordance with existing guidance in SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," (SFAS 112).
-71-
The total amount of employee termination benefit costs incurred for the years
2003, 2002 and 2001 was as follows. None of the actions are expected to incur
any additional costs.
----------------------------------------------------------------------------------------------------------
EMPLOYEE TERMINATION BENEFIT COSTS
----------------------------------
(IN THOUSANDS) 2003 2002 2001
----------------------------------------------------------------------------------------------------------
Mill Services Segment $ 3,101 $ 3,591 $ 4,813
Access Services Segment 1,778 1,722 26
Gas and Fluid Control Segment 252 375 3,577
Other Infrastructure Products and Services
("all other") Category 671 1,347 1,624
Corporate 262 105 95
----------------------------------------------------------------------------------------------------------
Total $ 6,064 $ 7,140 $ 10,135
==========================================================================================================
The terminations for the years 2001 to 2003 occurred principally in Europe and
the United States.
The following table summarizes employee termination benefit costs and payments
(associated with continuing operations) related to reorganization actions
initiated prior to January 1, 2004:
ORIGINAL REORGANIZATION ACTION PERIOD
(IN THOUSANDS) 2003 2002 2001
=====================================================================================================
Employee termination benefits expense $ 6,064 $ 7,140 $ 10,135
-----------------------------------------------------------------------------------------------------
Payments:
In 2001 -- -- (6,142)
In 2002 -- (4,438) (1,997)
In 2003 (3,838) (2,627) (2,215)
-----------------------------------------------------------------------------------------------------
Total payments: (3,838) (7,065) (10,354)
Other (principally foreign currency translation): 58 42 254
-----------------------------------------------------------------------------------------------------
Remaining payments as of such companies doesDecember 31, 2003 $ 2,284 $ 117 $ 35
=====================================================================================================
The payments for employee termination benefit costs are reflected as uses of
operating cash in the Consolidated Statements of Cash Flows.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
Costs associated with exit or disposal activities are recognized in accordance
with SFAS 146 and are included as a component of Other expenses in the Company's
Consolidated Statements of Income. SFAS 146 addresses involuntary termination
costs (as discussed above) and other costs associated with exit or disposal
activities (exit costs). Costs to terminate a contract that is not a capital
lease are recognized when an entity terminates the contract or when an entity
ceases using the right conveyed by the contract. This includes the costs to
terminate the contract before the end of its term or the costs that will
continue to be incurred under the contract for its remaining term without
economic benefit to the entity (lease run-out costs). Other costs associated
with an exit or disposal activity (e.g., costs to consolidate or close
facilities and relocate employees) are recognized and measured at their fair
value in the period in which the liability is incurred. In 2003, $2.7 million of
exit costs were incurred. These were principally lease run-out and termination
costs and relocation costs for mainly the Mill Services and Access Services
Segments.
-72-
TWO-YEAR SUMMARY OF QUARTERLY RESULTS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2003
--------------------------------------------
QUARTERLY FIRST SECOND THIRD FOURTH
------------------------------------------------------------------------------------------------
Sales $ 487.9 $ 536.4 $ 530.2 $ 564.0
Gross profit (a) 112.2 132.6 130.2 139.1
Net income 12.5 25.6 28.5 25.6
Basic earnings per share .31 .63 .70 .63
Diluted earnings per share .31 .63 .69 .62
================================================================================================
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2002
--------------------------------------------
QUARTERLY FIRST SECOND(b) THIRD FOURTH
------------------------------------------------------------------------------------------------
Sales $ 458.6 $ 510.3 $ 510.5 $ 497.3
Gross profit (a) 114.1 131.5 126.8 122.6
Net income 14.2 26.2 25.7 24.1
Basic earnings per share .35 .65 .63 .59
Diluted earnings per share .35 .64 .63 .59
================================================================================================
(a) Gross profit is defined as Sales less costs and expenses associated
directly with or allocated to products sold or services rendered.
(b) Sales and Gross profit have been reclassified to include the results
of IKG Industries that were originally classified as discontinued
operations as of June 30, 2002. Due to management's decision not to
sell this business, it is no longer classified as discontinued
operations.
COMMON STOCK PRICE AND DIVIDEND INFORMATION
(UNAUDITED)
MARKET PRICE PER SHARE
---------------------- DIVIDENDS DECLARED
HIGH LOW PER SHARE
--------------------------------------------------------------------------------------
2003
First Quarter $ 32.60 $ 27.50 $ .2625
Second Quarter 36.88 30.30 .2625
Third Quarter 39.49 35.14 .2625
Fourth Quarter 44.39 37.06 .2750
2002
First Quarter $ 39.76 $ 32.00 $ .25
Second Quarter 44.48 34.32 .25
Third Quarter 38.39 25.75 .25
Fourth Quarter 32.28 24.20 .2625
======================================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
-73-
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures as of December 31, 2003. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date of their evaluation.
-74-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers required by this Item is set forth as a
Supplementary Item at the end of Part I hereof (pursuant to Instruction 3 to
Item 401(b) of Regulation S-K). Other information required by this Item is
incorporated by reference to the sections entitled "Director Information" and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the 2004 Proxy
Statement.
In 2003, the Company updated its Code of Ethics for the Chief Executive Officer
and Senior Financial Officers (the "Code"). A copy of the Code may be found on
the Internet at the Company's website, www.harsco.com. The Company intends to
disclose on our website any amendments to the Code or any waiver from a
provision of the Code.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers and directors is
incorporated by reference to the sections entitled "Board Compensation Committee
Report on Executive Compensation"; "Executive Compensation and Other
Information"; "Stock Options"; "Options Exercises and Holdings"; "Stock
Performance Graph"; "Retirement Plans"; "Employment Agreements with Officers of
the Company"; and "Directors' Compensation" of the 2004 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the sections entitled "Share
Ownership of Certain Beneficial Owners" and "Share Ownership of Management" of
the 2004 Proxy Statement.
EQUITY COMPENSATION PLAN INFORMATION
The Company maintains the 1995 Executive Incentive Compensation Plan and the
1995 Non-Employee Directors' Stock Plan, which allow the Company to grant equity
awards to eligible persons. Upon shareholder approval of these two plans in
1995, the Company terminated the use of the 1986 Stock Option Plan for granting
stock option awards.
The Company also assumed options under the SGB Group Plc Discretionary Share
Option Plan 1997 (the "SGB Plan") upon Harsco's acquisition of SGB Group Plc
("SGB") in 2000. At the time of the acquisition, various employees of the
U.K.-based SGB held previously granted stock options under the SGB Plan. Harsco
authorized the issuance of Harsco common stock to fulfill these SGB Plan stock
options upon exercise from time to time. Harsco has not made any additional
stock option grants under the SGB Plan since the acquisition and will not make
any further grants in the future.
-75-
The following table gives information about equity awards under these plans as
of December 31, 2003. All securities referred to are shares of Harsco common
stock.
---------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column(a))
---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders (1) 1,679,028 $30.74 1,468,831
Equity compensation plans
not exceed 20% of the total consolidated income from continuing operations before income taxes.approved by
security holders 16,052(2) $28.01(3) --
---------------------------------------------------------------------------------------------------------------------
Total 1,695,080 $30.72 1,468,831
=====================================================================================================================
67
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Harsco Corporation:
Our audits of the consolidated financial statements referred to in our report dated January 30, 2003 appearing on page
(1) Plans include the 1986 Stock Option Plan, as amended, the 1995
Executive Incentive Compensation Plan, as amended, and the 1995
Non-Employee Directors' Stock Plan.
(2) Represents the shares of Harsco common stock issuable as replacement
option shares in satisfaction of the exercise of stock options granted
by SGB under the SGB Plan as described below. This plan is not a
material equity compensation plan of the Company.
(3) These stock options denominate the exercise price in U.K. pounds
sterling. The price shown is translated into U. S. dollars at an
exchange rate of $1.7859 effective December 31, 2003.
Description of the Equity Compensation Plan Not Approved by Security Holders
- ----------------------------------------------------------------------------
The SGB Group Plc Discretionary Share Option Plan 1997
Upon the acquisition of SGB in June 2000, Harsco authorized the assumption of
outstanding options granted under the SGB Plan and the issuance of options
("Harsco Replacement Options") exercisable for shares of Harsco common stock in
exchange for options granted by SGB pursuant to the SGB Plan and exercisable for
shares of SGB common stock ("SGB Options"). On June 30, 2000, Harsco commenced
an offer ("Option Exchange Offer") to the holders of SGB Options for an
equivalent Harsco Replacement Option. Upon completion of the Option Exchange
Offer, each SGB Option exercisable for one SGB share was exchanged for a Harsco
Replacement Option exercisable for a fraction, equal to 0.1362, of one share of
Harsco common stock. The Company has authorized the issuance of Harsco common
stock from treasury or from authorized but unissued shares as necessary to
fulfill the terms of the Harsco Replacement Options. The maximum number of
shares of Harsco common stock that were issuable upon exercise of the Harsco
Replacement Options was 61,097. Only those SGB participants who accepted the
Option Exchange Offer and received Harsco Replacement Options were eligible to
continue participation in the SGB Plan. SGB Options were granted under the Plan
on five different dates prior to the acquisition. The exercise prices of the
Harsco Replacement Options vary depending on the original SGB Option date of
grant and range from 1145.0 U.K. pence to 2092.0 U.K. pence. The options are
exercisable during the period commencing on the third anniversary of the date
the original SGB Options were granted and ending on the day before the tenth
anniversary of the date the SGB Options were granted. If a participant ceases to
be an Eligible Employee (as defined under the Plan), the participant's Harsco
Replacement Options will lapse, except in the event that the participant ceases
to be an Eligible Employee due to death or injury, disability, redundancy or
retirement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference to the section entitled "Employment Agreements with
Officers of the Company" of the 2004 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accounting fees and services is incorporated by
reference to the section entitled "Fees Billed by the Accountants for Audit and
Non-Audit Services" of the 2004 Proxy Statement.
-76-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The Consolidated Financial Statements are listed in the
index to Item 8, "Financial Statements and Supplementary
Data," on page 34.
(a) 2. The following financial statement schedule should be read
in conjunction with the Consolidated Financial Statements
(see Item 8, "Financial Statements and Supplementary
Data"):
Page
----
Report of Independent Auditors on Financial
Statement Schedule 78
Schedule II - Valuation and Qualifying
Accounts for the years 2003, 2002 and 2001 79
Schedules other than those listed above are omitted for
the reason that they are either not applicable or not
required or because the information required is contained
in the financial statements or notes thereto.
Condensed financial information of the registrant is
omitted since there are no substantial amounts of
"restricted net assets" applicable to the Company's
consolidated subsidiaries.
Financial statements of 50% or less owned unconsolidated
companies are not submitted inasmuch as (1) the
registrant's investment in and advances to such companies
do not exceed 20% of the total consolidated assets, (2)
the registrant's proportionate share of the total assets
of such companies does not exceed 20% of the total
consolidated assets, and (3) the registrant's equity in
the income from continuing operations before income taxes
of such companies does not exceed 20% of the total
consolidated income from continuing operations before
income taxes.
-77-
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
PRICEWATERHOUSECOOPERS [LOGO]
-----------------------------
To the Board of Directors of
Harsco Corporation:
Our audits of the consolidated financial statements referred to in
our report dated February 4, 2004 appearing in this Form 10-K also
included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
------------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 4, 2004
-78-
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
CONTINUING OPERATIONS
(DOLLARS IN THOUSANDS)
COLUMN C COLUMN D
-------- --------
COLUMN A COLUMN B Additions (Deductions) Additions COLUMN E
-------- -------- --------- --------------------------- --------
Due to
Balance at Charged to Currency
Beginning of Cost and Translation Balance at
Description Period Expenses Adjustments Other(a) End of Period
- ----------- ------ -------- ----------- -------- -------------
FOR THE YEAR 2003:
Deducted from Receivables:
Uncollectible accounts $ 36,483 $ 3,389 $ 1,609 $(16,869)(b) $ 24,612
======== ======== ======== ======== ========
Deducted from Inventories:
Inventory valuations $ 4,541 $ 2,775 $ 535 $ (1,901) $ 5,950
======== ======== ======== ======== ========
Other Reorganization and
Valuation Reserves $ 8,373 $ 7,409 $ 643 $ (9,733) $ 6,692
======== ======== ======== ======== ========
FOR THE YEAR 2002:
Deducted from Receivables:
Uncollectible accounts $ 32,495 $ 6,913 $ 1,655 $ (4,580) $ 36,483
======== ======== ======== ======== ========
Deducted from Inventories:
Inventory valuations $ 5,487 $ 2,514 $ 467 $ (3,927) $ 4,541
======== ======== ======== ======== ========
Other Reorganization and
Valuation Reserves $ 19,559 $ 7,709 $ 764 $(19,659)(c) $ 8,373
======== ======== ======== ======== ========
FOR THE YEAR 2001:
Deducted from Receivables:
Uncollectible accounts $ 25,873 $ 12,612 $ (495) $ (5,495) $ 32,495
======== ======== ======== ======== ========
Deducted from Inventories:
Inventory valuations $ 8,809 $ 2,916 $ (331) $ (5,907) $ 5,487
======== ======== ======== ======== ========
Other Reorganization and
Valuation Reserves $ 23,841 $ 9,135 $ (536) $(12,881) $ 19,559
======== ======== ======== ======== ========
(a) Includes principally the use of previously reserved balances.
(b) Includes $6,276 for the write-off of two accounts receivable in the Mill
Services Segment as well as the write-off of other accounts receivable for
all segments.
(c) Includes the use of previously reserved Bio-Oxidation balance of $10,377.
-79-
(a) 3. Listing of Exhibits Filed with Form 10-K
also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
January 30, 2003
68
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Continuing Operations
(Dollars in thousands)
|
| | COLUMN C | | COLUMN D | | |
|---|
| COLUMN A | | COLUMN B | | Additions | | (Deductions) Additions | | COLUMN E | |
|---|
| | | Due to | | | |
|---|
| Balance at | | Charged to | | Currency | | | |
|---|
| Beginning of | | Cost and | | Translation | | | Balance at | |
|---|
| Description | | Period | | Expenses | | Adjustments | | Other (a) | | End of Period |
|---|
| | | For the year 2002: | | | | | | | | | | | | | | | | | | | Deducted from Receivables: | | | | Uncollectible accounts | | | $ | 32,495 | | $ | 6,913 | | $ | 1,655 | | $ | (4,580 | ) | $ | 36,483 | | | Deducted from Inventories: | | | | Inventory valuations | | | $ | 5,487 | | $ | 2,514 | | $ | 467 | | $ | (3,927 | ) | $ | 4,541 | | | Other Reorganization and | | | | Valuation Reserves | | | $ | 19,559 | | $ | 7,709 | | $ | 764 | | $ | (19,659 | )(b) | $ | 8,373 | | | | | For the year 2001: | | | | Deducted from Receivables: | | | | Uncollectible accounts | | | $ | 25,873 | | $ | 12,612 | | $ | (495 | ) | $ | (5,495 | ) | $ | 32,495 | | | Deducted from Inventories: | | | | Inventory valuations | | | $ | 8,809 | | $ | 2,916 | | $ | (331 | ) | $ | (5,907 | ) | $ | 5,487 | | | Other Reorganization and | | | | Valuation Reserves | | | $ | 23,841 | | $ | 9,135 | | $ | (536 | ) | $ | (12,881 | ) | $ | 19,559 | | | | | For the year 2000: | | | | Deducted from Receivables: | | | | Uncollectible accounts | | | $ | 13,175 | | $ | 3,985 | | $ | (493 | ) | $ | 9,206 | | $ | 25,873 | | | Deducted from Inventories: | | | | Inventory valuations | | | $ | 10,359 | | $ | 2,217 | | $ | (284 | ) | $ | (3,483 | ) | $ | 8,809 | | | Other Reorganization and | | | | Valuation Reserves | | | $ | 16,883 | | $ | 1,987 | | $ | (666 | ) | $ | 5,637 | | $ | 23,841 | |
(a) | | Includes principally the use of previously reserved balances.
|
(b) | | Includes the use of previously reserved Bio-Oxidation balance of $10,377.
|
69
(a) 3. Listing of Exhibits Filed with Form
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN 10-K |
Exhibit | | |
|---|
Number | Data Required | Location in 10-K |
|---|
| |
- ------ ------------- ----------------
3(a) | | Articles of Incorporation as amended April 24, 1990 | | Exhibit volume, 1990 10-K | | | | 3(b) | | Certificate of Amendment of Articles of Incorporation filed June 3, 1997 | | Exhibit volume, 1999 10-K | | | | 3(c) | | Certificate of Designation filed September 25, 1997 | | Exhibit volume, 1997 10-K | | | | 3(d) | | By-laws as amended April 25, 1990 | | Exhibit volume, 1990 10-K | | | | 4(a) | | Harsco Corporation Rights Agreement dated as of September 28, 1997, with Chase Incorporated by reference to
Mellon Shareholder Services L.L.C. | | Incorporated by reference to Form 8-A, filed September
26, 1997 | | | | 4(b) | | Registration of Preferred Stock Purchase Rights | | Incorporated by reference to
Form 8-A dated October 2,
1987 | | | | 4(c) | | Current Report on dividend distribution of Preferred Stock Purchase Rights | | Incorporated by reference to
Form 8-K dated October 13,
1987 | | | 4(d) | | Debt Securities Registered under Rule 415 (6% Notes) | | Incorporated by reference to Form S-3, Registration No. 33-42389 dated August 23, 1991 | | | 4(e) | | 6% 1993 Notes due September 15, 2003 described in Prospectus Supplement dated September 8, 1993 to Form S-3 Registration under Rule 415 dated August 23, 1991 | | Incorporated by reference to the Prospectus Supplement dated September 8, 1993 to Form S-3, Registration No. 33-42389 dated August 23, 1991 | | | | 4(f) | | Debt and Equity Securities Registered | | Incorporated by reference to
Form S-3, Registration No.
33-56885 dated December
15, 1994, effective date
January 12, 1995 | | | | 4(g) | | Harsco Finance B. V.(pound)200 million, 7.25% Guaranteed Notes due 2010 | | Exhibit to 10-Q for the period
ended September 30, 2000 | | | | Material Contracts
4(h)(i) Indenture, dated as of May 1, 1985, by and between Harsco Corporation and The Exhibit to Form 8-K dated
Chase Manhattan Bank (National Association), as trustee (incorporated September 8, 2003
herein by reference to Exhibit 4(d) to the Registration Statement on Form
S-3, filed by Harsco Corporation on August 23, 1991 (Reg. No. 33-42389))
4(h)(ii) First Supplemental Indenture, dated as of April 12, 1995, by and among Harsco Exhibit to Form 8-K dated
Corporation, The Chase Manhattan Bank (National Association), as resigning September 8, 2003
trustee, and Chemical Bank, as successor trustee
4(h)(iii) Form of Second Supplemental Indenture, by and between Harsco Corporation and Exhibit to Form 8-K dated
JPMorgan Chase Bank, as Trustee September 8, 2003
4(h)(iv) Second Supplemental Indenture, dated as of September 12, 2003, by and between Exhibit to 10-Q for the period
Harsco Corporation and J.P. Morgan Chase Bank, as Trustee ended September 30, 2003
|
-80-
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN 10-K
- Credit and Underwriting Agreements | | | | | ------ ------------- ----------------
4(i)(i) Form of 5.125% Global Senior Note due September 15, 2013 Exhibit to Form 8-K dated
September 8, 2003
4(i)(ii) 5.125% 2003 Notes due September 15, 2013 described in Prospectus Supplement Incorporated by reference to
dated September 8, 2003 to Form S-3, Registration under Rule 415 dated the Prospectus Supplement
December 15, 1994 dated September 8, 2003 to
Form S-3 Registration No.
33-56885 dated December 15,
1994
MATERIAL CONTRACTS - CREDIT AND UNDERWRITING AGREEMENTS
10(a)(i) | | $50,000,000 $50,000,000 Facility agreement dated December 15, 2000 | | Exhibit volume, 2000 10-K | | | | 10(a)(ii) | | Agreement extending term of $50,000,000 Facility agreement dated December 15, 2000 | | Exhibit volume, 2001 10-K | | | |
15, 2000
10(a)(iii) | | Agreement amending term and amount of $50,000,000 Facility agreement dated December 15, 2000 | | Exhibit volume, 2002 10-K | | |
Exhibit | | |
|---|
Number | Data Required | Location in 10-K |
|---|
| 10(b) (i) | | $50,000,000 Facility agreement dated January 12, 2001 | | Exhibit volume,
December 15, 2000
10-K | | | 10(b) (ii) | | 10(a)(iv) Agreement extending term of $50,000,000 Facility agreement dated January 12, 2001 | | December Exhibit volume, 20012003 10-K | | | |
15, 2000
10(b) Commercial Paper Dealer Agreement dated September 24, 2003, between ING Belgium Exhibit volume, 2003 10-K
SA/NV and Harsco Finance B.V.
10(c) | | Commercial Paper Payment Agency Agreement Dated October 1, 2000, Between Salomon Exhibit volume, 2000 10-K
Smith Barney Inc. and Harsco Corporation | | Exhibit volume, 2000 10-K | | | 10(d) | | Commercial Paper Dealer Agreement Dated October 11, 1994, Between Lehman Brothers, Inc. and Harsco Corporation | | Exhibit volume, 1994 10-K | | | | 10(e) | | Issuing and Paying Agency Agreement, Dated October 12, 1994, Between Morgan Exhibit volume, 1994 10-K
Guaranty Trust Company of New York and Harsco Corporation | | Exhibit volume, 1994 10-K | | | 10(f) | | Commercial Paper
10(g) 364-Day Credit Agreement with Banque Bruxelles Lambert S.A./Bank Brussel Lambert N.V. dated September 25, 1996 | | Exhibit to 10-Q for the period
ended September 30, 1996 | | | 10(g) | | 364-Day Credit Agreement | | Exhibit to 10-Q for the period ended September 30, 2002 | | | | 2003
10(h) | | (i) Five Year Credit Agreement | | Exhibit to 10-Q for the period
ended September 30, 2000 | | | |
10(h)(ii) Amendment No. 1 dated as of September 27, 2002, to the Five-Year Credit Exhibit to 10-Q for the period
Agreement dated as of September 29, 2000 ended September 30, 2003
10(h)(iii) Amendment No. 2 dated as of August 15, 2003, to the Five Year Credit Agreement Exhibit to 10-Q for the period
dated as of September 29, 2000 ended September 30, 2003
|
-81-
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN 10-K
- ------ ------------- ----------------
10(i) | Commercial Paper Dealer Agreement dated June 7, 2001, between Citibank Exhibit to 10-Q for the period
International plc, National Westminster Bank plc, The Royal Bank of Scotland ended June 30, 2001
plc and Harsco Finance B.V. | | Exhibit to 10-Q for the period ended June 30, 2001 | | | 10(i) | | Commercial Paper Dealer Agreement dated June 7, 2001, between Citibank International plc, National Westminster Bank plc, The Royal Bank of Scotland plc and Harsco Finance B.V. | | Exhibit to 10-Q for the period ended June 30, 2001 | | | | 10(j) | | Commercial Paper Placement Agency Agreement dated November 6, 1998, between Chase Exhibit volume, 1998 10-K
Securities, Inc. and Harsco Corporation | | Exhibit volume, 1998 10-K | | | | 10(w) | | Commercial Paper Placement Agency Agreement dated April 12, 2002, between Credit Exhibit volume, 2002 10-K
Suisse First Boston Corp. and Harsco Corporation | | Exhibit volume, 2002 10-K | | | | Material Contracts
MATERIAL CONTRACTS - Management Contracts and Compensatory Plans | | | | | | MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10(k) | | Harsco Corporation Supplemental Retirement Benefit Plan as amended October 4, 2002 | | Exhibit volume, 2002 10-K | | |
Exhibit | | |
|---|
Number | Data Required | Location in 10-K |
|---|
| | 10(l) | | Trust Agreement between Harsco Corporation and Dauphin Deposit Bank and Trust Exhibit volume, 1987 10-K
Company dated July 1, 1987 relating to the Supplemental Retirement Benefit Plan | | Exhibit volume, 1987 10-K | | | | 10(m) | | Harsco Corporation Supplemental Executive Retirement Plan as amended | | Exhibit volume, 1991 10-K | | | | 10(n) | | Trust Agreement between Harsco Corporation and Dauphin Deposit Bank and Trust Exhibit volume, 1988 10-K
Company dated November 22, 1988 relating to the Supplemental Executive
Retirement Plan | | Exhibit volume, 1988 10-K | | | | 10(o)(i) | | 1995 Executive Incentive Compensation Plan | | Proxy Statement dated March
22, 1995 on Exhibit A pages
A-1 through A-12 | | | | 10(o)(ii) | | Amendment to 1995 Incentive Compensation Plan | | Proxy Statement dated March
23, 1998 on page 23 | | | | 10(o)(iii) | | Amendment to 1995 Incentive Compensation Plan | | Proxy Statement dated March
21, 2001 on page 26 | | | | 10(p) | | Authorization, Terms and Conditions of the Annual Incentive Awards, as amended Exhibit volume, 2001 10-K
and Restated November 15, 2001, under the 1995 Executive Incentive
Compensation Plan | | Exhibit volume, 2001 10-K | | | | 10(u) | | Harsco Corporation Deferred Compensation Plan for Non-Employee Directors, as Exhibit volume, 2002 10-K
amended and restated November 19, 2002 | | Exhibit volume, 2002 |
-82-
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN 10-K | | |
- ------ ------------- ----------------
10(v) | | Harsco Corporation 1995 Non-Employee Directors' Stock Plan | | Proxy Statement dated March
22, 1995 on Exhibit B pages
B-1 through B-6 | | | | Employment Agreements
10(x) Settlement and Consulting Agreement Exhibit to 10-Q for the period
ended March 31, 2003
EMPLOYMENT AGREEMENTS - | | | | | | 10(q) | | D. C. Hathaway | | Exhibit volume, 1989 10-K
Uniform agreement, the same
as shown for J. J. Burdge | | | | " | | G. D. H. Butler | | " " | | | " | | P. C. Coppock | | " " | | | " | | S. D. Fazzolari | | " " | | | | " | | R. W. Kaplan | | " " | | | | 10(r) | | Special Supplemental Retirement Benefit Agreement for D. C. Hathaway | | Exhibit Volume, 1988 10-K | | |
Exhibit | | |
|---|
Number | Data Required | Location in 10-K |
|---|
| | Director Indemnity Agreements
DIRECTOR INDEMNITY AGREEMENTS - | | | | | | 10(t) | | A. J. Sordoni, III | | Exhibit volume, 1989 10-K
Uniform agreement, same as
shown for J. J. Burdge | | | | " | | R. C. Wilburn | | " " | | | | " | | J. I. Scheiner | | " " | | | | " | | C. F. Scanlan | | " " | | | | " | | J. J. Jasinowski | | " " | | | | " | | J. P. Viviano | | " " | | | | " | | D. H. Pierce | | " " | | | " | | I. C. Strachan | | " " | | | | 12 | | Computation of Ratios of Earnings to Fixed Charges | | Exhibit volume, 20022003 10-K | | | | 21 | | Subsidiaries of the Registrant | | Exhibit volume, 20022003 10-K | | | | 23 | | Consent of Independent Accountants | | Exhibit volume, 2003 10-K
31(a) Certification Pursuant to Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant to Exhibit volume, 2003 10-K
Section 302 of the Sarbanes-Oxley Act of 2002
|
-83-
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN 10-K
- ------ ------------- ----------------
31(b) Certification Pursuant to Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant to Exhibit volume, 2003 10-K
Section 302 of the Sarbanes-Oxley Act of 2002
10-K | | 99(a) | | 32(a) Certification pursuantPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Exhibit volume, 2003 10-K
Section 906 of the Sarbanes-Oxley Act of 2002 | | Exhibit volume, 2002 10-K | | | 99(b) | |
32(b) Certification pursuantPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Exhibit volume, 2003 10-K
Section 906 of the Sarbanes-Oxley Act of 2002 | | Exhibit volume, 2002 10-K | |
Exhibits other than those listed above are omitted for the reason that they are
either not applicable or not material.
The foregoing Exhibits are available from the Secretary of the Company upon
receipt of a fee of $10 to cover the Company's reasonable cost of providing
copies of such Exhibits.
(b) Reports on Form 8-K
During the fourth quarter 2003 (and thereafter to the date hereof), the Company
furnished to the Commission the following reports on Form 8-K under Item 12:
(1) A Form 8-K dated October 23, 2003, furnishing a copy of the press release
announcing the Company's third quarter 2003 earnings;
(2) A Form 8-K dated January 29, 2004, furnishing a copy of the press release
announcing the Company's fourth quarter and full year of 2003 earnings.
-84-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date 3-11-04 By /S/ Salvatore D. Fazzolari
---------------------------- --------------------------------
Salvatore D. Fazzolari
Senior Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Exhibits other than those listed above are omitted for the reason that they are either not applicable or not material.
The foregoing Exhibits are available from the Secretary of the Company upon receipt of a fee of $10 to cover the Company’s reasonable cost of providing copies of such Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 2002.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
| | Date 3-20-03 | By /s/ SALVATORE
SIGNATURE CAPACITY DATE
/S/ Derek C. Hathaway Chairman, President and Chief 3-11-04
- ---------------------------------- Executive Officer -----------------
(Derek C. Hathaway)
/S/ Geoffrey D. FAZZOLARI |
| | |
| | H. Butler Senior Vice President - Operations 3-11-04
- ---------------------------------- and Director ------------------
(Geoffrey D. H. Butler)
/S/ Salvatore D. Fazzolari | | Senior Vice President, Chief Financial
Officer and Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | | | | | | Signature | | Capacity | | Date | | /s/ DEREK C. HATHAWAY
(Derek C. Hathaway) | | Chairman, President and Chief
Executive Officer | | 3-20-03 | | /s/ GEOFFREY D. H. BUTLER
(Geoffrey D. H. Butler) | | Senior Vice President — Operations
and Director | | 3-20-03 | | /s/ SALVATORE D. FAZZOLARI
(Salvatore D. Fazzolari) | | Senior Vice President, Chief
3-11-04
- ---------------------------------- Financial Officer, Treasurer and
------------------
(Salvatore D. Fazzolari) Director (Principal Financial Officer) | | 3-20-03 | | /s/ STEPHEN J. SCHNOOR
(
/S/ Stephen J. Schnoor) | | Schnoor Vice President and Controller
(Principal 3-11-04
- ---------------------------------- (Principal Accounting Officer) | | 3-20-03 | | | /s/ JERRY ------------------
(Stephen J. JASINOWSKI
(Schnoor)
/S/ Jerry J. Jasinowski Director 3-11-04
- ---------------------------------- ------------------
(Jerry J. Jasinowski) | | Director | | 3-20-03 | | | /s/ D. HOWARD PIERCE
(
/S/ D. Howard Pierce Director 3-11-04
- ---------------------------------- ------------------
(D. Howard Pierce) | | Director | | 3-20-03 | | | /s/ CAROLYN F. SCANLAN
(
/S/ Carolyn F. Scanlan Director 3-11-04
- ---------------------------------- ------------------
(Carolyn F. Scanlan) | | Director | | 3-20-03 | | | /s/ JAMES I. SCHEINER
(
/S/ James I. Scheiner Director 3-11-04
- ---------------------------------- ------------------
(James I. Scheiner) | | Director | | 3-20-03 | | /s/ ANDREW J. SORDONI III
(
/S/ Andrew J. Sordoni III Director 3-11-04
- ---------------------------------- ------------------
(Andrew J. Sordoni III) | | Director | | 3-20-03 | | | /s/ IAN C. STRACHAN
(Ian C. Strachan) | | Director | | 3-20-03 | | | /s/ JOSEPH P. VIVIANO
(
/S/ Joseph P. Viviano Director 3-11-04
- ---------------------------------- ------------------
(Joseph P. Viviano) | | Director | | 3-20-03 | | | /s/ DR. ROBERT C. WILBURN
(
/S/ Dr. Robert C. Wilburn) | | Wilburn Director | | 3-20-03 |
74
CERTIFICATIONS
I, Derek 3-11-04
- ---------------------------------- ------------------
(Dr. Robert C. Hathaway, certify that:
| Wilburn)
1. | | I have reviewed this annual report on Form 10-K of Harsco Corporation;
|
2. | | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|
3. | | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|
4. | | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
|
a) | | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
|
b) | | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
|
c) | | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
|
5. | | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
|
a) | | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
|
b) | | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
6. | | The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
/s/ Derek C. Hathaway
Derek C. Hathaway
Chief Executive Officer
March 20, 2003
75
CERTIFICATIONS
I, Salvatore D. Fazzolari, certify that:
|
1. | | I have reviewed this annual report on Form 10-K of Harsco Corporation;
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2. | | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
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3. | | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
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4. | | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
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a) | | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
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b) | | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
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c) | | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
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5. | | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
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a) | | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
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b) | | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
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6. | | The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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/s/ Salvatore D. Fazzolari
Salvatore D. Fazzolari
Chief Financial Officer
March 20, 2003
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