================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
_____________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 1-3970
_____________
HARSCO CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-1483991
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
350 Poplar Church Road, Camp Hill, Pennsylvania 17011
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number (717) 763-7064
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [_] NO [X]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2005
----- -------------------------------
Common stock, par value $1.25 per share 41,740,314
================================================================================
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2005 2004
===================================================================================================================================
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 472,183 $ 439,956 $ 1,440,543 $ 1,286,563
Product sales 225,286 177,332 593,134 504,575
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 697,469 617,288 2,033,677 1,791,138
- -----------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 350,169 325,453 1,069,975 956,839
Cost of products sold 182,477 145,292 482,633 410,772
Selling, general and administrative expenses 95,090 90,594 287,338 268,053
Research and development expenses 620 590 1,991 1,971
Other (income) expenses (502) 907 347 4,480
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 627,854 562,836 1,842,284 1,642,115
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 69,615 54,452 191,393 149,023
Equity in income (loss) of unconsolidated entities, net (29) 38 92 210
Interest income 879 454 2,024 1,655
Interest expense (9,921) (10,092) (30,783) (30,412)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND 60,544 44,852 162,726 120,476
MINORITY INTEREST
Income tax expense (18,624) (12,147) (51,380) (35,616)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 41,920 32,705 111,346 84,860
Minority interest in net income (1,898) (2,031) (6,458) (6,349)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 40,022 30,674 104,888 78,511
- -----------------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued business (111) (203) (452) (619)
Gain/(loss) on disposal of discontinued business 66 (36) 261 (124)
Income/(loss) related to discontinued defense business (6) 12,529 26 12,753
Income tax benefit (expense) 19 (4,411) 62 (4,298)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME/(LOSS) FROM DISCONTINUED OPERATIONS (32) 7,879 (103) 7,712
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 39,990 $ 38,553 $ 104,785 $ 86,223
===================================================================================================================================
Average shares of common stock outstanding 41,693 41,165 41,603 41,061
Basic earnings per common share:
Continuing operations $ 0.96 $ 0.75 $ 2.52 $ 1.91
Discontinued operations -- 0.19 -- 0.19
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ 0.96 $ 0.94 $ 2.52 $ 2.10
===================================================================================================================================
Diluted average shares of common stock outstanding 42,112 41,589 42,046 41,525
Diluted earnings per common share:
Continuing operations $ 0.95 $ 0.74 $ 2.49 $ 1.89
Discontinued operations -- 0.19 -- 0.19
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 0.95 $ 0.93 $ 2.49 $ 2.08
===================================================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.30 $ 0.275 $ 0.90 $ 0.825
===================================================================================================================================
See accompanying notes to consolidated financial statements
-2-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2005 2004 (A)
===================================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 113,231 $ 94,093
Accounts receivable, net 566,996 555,191
Inventories 246,622 217,026
Other current assets 62,405 58,614
Assets held-for-sale 36,316 932
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,025,570 925,856
- ---------------------------------------------------------------------------------------------------
Property, plant and equipment, net 949,732 932,298
Goodwill, net 401,964 433,125
Other assets 105,566 98,477
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,482,832 $ 2,389,756
===================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 7,148 $ 16,145
Current maturities of long-term debt 6,512 14,917
Accounts payable 204,876 220,322
Accrued compensation 60,848 63,776
Income taxes 47,550 40,227
Dividends payable 12,519 12,429
Insurance liabilities 57,266 23,470
Other current liabilities 198,905 187,111
Liabilities associated with assets held-for-sale 15,945 691
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 611,569 579,088
- ---------------------------------------------------------------------------------------------------
Long-term debt 597,718 594,747
Deferred income taxes 109,433 95,702
Insurance liabilities 56,889 53,960
Retirement plan liabilities 93,591 97,586
Other liabilities 52,787 54,483
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,521,987 1,475,566
- ---------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 85,256 84,889
Additional paid-in capital 152,340 139,532
Accumulated other comprehensive loss (160,094) (127,491)
Retained earnings 1,487,926 1,420,637
Treasury stock (603,261) (603,377)
Unearned stock-based compensation (1,322) --
- ---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 960,845 914,190
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,482,832 $ 2,389,756
===================================================================================================
(a) Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
-3-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
(IN THOUSANDS) 2005 2004 (A)
===================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 104,785 $ 86,223
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 145,307 133,448
Amortization 1,895 1,859
Equity in income of unconsolidated entities, net (92) (210)
Dividends or distributions from unconsolidated entities 60 544
Other, net 4,270 (5,823)
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (57,577) (67,015)
Inventories (43,060) (54,079)
Accounts payable 2,654 16,710
Accrued interest payable 18,385 17,752
Accrued compensation 484 7,849
Other assets and liabilities 55,468 28,567
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 232,579 165,825
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (209,247) (153,883)
Purchase of businesses, net of cash acquired (7,011) (5,165)
Proceeds from sales of assets 17,353 3,564
- ---------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (198,905) (155,484)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (937) 1,610
Current maturities and long-term debt:
Additions 147,482 152,829
Reductions (120,956) (121,409)
Cash dividends paid on common stock (37,407) (33,831)
Common stock issued-options 8,336 10,350
Other financing activities (3,532) (4,778)
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (7,014) 4,771
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (7,522) (1,863)
- ---------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 19,138 13,249
Cash and cash equivalents at beginning of period 94,093 80,210
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 113,231 $ 93,459
===================================================================================================
(a) Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
-4-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
(IN THOUSANDS) 2005 2004
===================================================================================================
Net income $ 39,990 $ 38,553
- ---------------------------------------------------------------------------------------------------
Other comprehensive income (loss):
Foreign currency translation adjustments 1,737 8,552
Net gains/(losses) on cash flow hedging instruments, net of
deferred income taxes of $7 and $(12) in 2005 and 2004,
respectively (14) 22
Pension liability adjustments, net of deferred income taxes of
($1,256) and ($214) in 2005 and 2004, respectively 2,962 537
Marketable securities, unrealized gain net of deferred income
taxes of less than $1 in both 2005 and 2004 -- 1
Reclassification adjustment for gain on cash flow hedging
instruments included in net income, net of deferred income
taxes of $1 and $0 in 2005 and 2004, respectively (1) --
- ---------------------------------------------------------------------------------------------------
Other comprehensive income 4,684 9,112
- ---------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 44,674 $ 47,665
===================================================================================================
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
(IN THOUSANDS) 2005 2004
===================================================================================================
Net income $ 104,785 $ 86,223
- ---------------------------------------------------------------------------------------------------
Other comprehensive income (loss):
Foreign currency translation adjustments (43,940) (3,205)
Net losses on cash flow hedging instruments, net of deferred
income taxes of $52 and $1 in 2005 and 2004, respectively (96) (3)
Pension liability adjustments, net of deferred income taxes of
($4,895) and $446 in 2005 and 2004, respectively 11,437 (1,030)
Marketable securities, unrealized gain net of deferred income
taxes of less than $1 in both 2005 and 2004 -- 1
Reclassification adjustment for (gain) loss on cash flow
hedging instruments included in net income, net of deferred
income taxes of $2 and ($56) in 2005 and 2004, respectively (4) 104
- ---------------------------------------------------------------------------------------------------
Other comprehensive loss (32,603) (4,133)
- ---------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 72,182 $ 82,090
===================================================================================================
See accompanying notes to consolidated financial statements.
-5-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
A. OPINION OF MANAGEMENT
Financial information furnished herein, which is unaudited, in the opinion of
management reflects all adjustments (all of which are of a normal recurring
nature) that are necessary to present a fair statement of the interim period.
This unaudited interim information should be read in conjunction with the
Company's annual Form 10-K filing for the year ended December 31, 2004.
B. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform with
current year classifications. These reclassifications relate principally to
components of the Condensed Consolidated Balance Sheets and the Condensed
Consolidated Statements of Cash Flows. As a result of these reclassifications,
certain 2004 amounts presented for comparative purposes will not individually
agree with previously filed Forms 10-K or 10-Q.
C. OPTIONS FOR COMMON STOCK
In prior years, when stock options were issued to employees, the Company used
the intrinsic value method to account for the options. No compensation expense
was recognized on the grant date, since at that date, the option price equaled
the market price of the underlying common stock. Effective in 2003, the Company
ceased granting stock options to employees. In 2004, the Management Development
and Compensation Committee of the Board of Directors approved the granting of
restricted stock units as the long-term equity component of officer
compensation. In the first quarter of 2005, the Company issued 32,700
performance-based restricted stock units, with a fair value of $50.41 per unit,
to certain officers. Restricted stock units are more fully described in Note 12,
"Stock-Based Compensation," to the Company's Form 10-K for the year ended
December 31, 2004.
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).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
(IN THOUSANDS, EXCEPT PER SHARE) 2005 2004 2005 2004
=====================================================================================================
Net income:
As reported $ 39,990 $ 38,553 $ 104,785 $ 86,223
Compensation expense (a) -- -- -- (96)
---------------------------------------------------------
Pro forma $ 39,990 $ 38,553 $ 104,785 $ 86,127
=========================================================
Basic earnings per share:
As reported $ 0.96 $ 0.94 $ 2.52 $ 2.10
Pro forma 0.96 0.94 2.52 2.10
Diluted earnings per share:
As reported 0.95 0.93 2.49 2.08
Pro forma 0.95 0.93 2.49 2.07
- -----------------------------------------------------------------------------------------------------
(a) Total stock-based employee compensation expense related to stock options
determined under fair value-based method for all awards, net of related tax
effects.
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
D. REVIEW OF OPERATIONS BY SEGMENT
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
--------------------------- ---------------------------
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
=====================================================================================================
Mill Services Segment $ 254,857 $ 23,095 $ 244,904 $ 24,958
Access Services Segment 195,353 20,867 176,338 13,446
Gas Technologies Segment 98,010 5,168 84,448 2,444
- -----------------------------------------------------------------------------------------------------
Segment Totals 548,220 49,130 505,690 40,848
Engineered Products & Services
("all other") Category 149,249 20,872 111,598 13,667
General Corporate -- (387) -- (63)
- -----------------------------------------------------------------------------------------------------
Consolidated Totals $ 697,469 $ 69,615 $ 617,288 $ 54,452
=====================================================================================================
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
--------------------------- ---------------------------
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
=====================================================================================================
Mill Services Segment $ 794,778 $ 83,500 $ 723,445 $ 75,056
Access Services Segment 585,527 51,486 517,273 31,168
Gas Technologies Segment 270,178 10,896 244,964 10,799
- -----------------------------------------------------------------------------------------------------
Segment Totals 1,650,483 145,882 1,485,682 117,023
Engineered Products & Services
("all other") Category 383,194 48,183 305,456 33,007
General Corporate -- (2,672) -- (1,007)
- -----------------------------------------------------------------------------------------------------
Consolidated Totals $ 2,033,677 $ 191,393 $ 1,791,138 $ 149,023
=====================================================================================================
-7-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME
BEFORE INCOME TAXES AND MINORITY INTEREST
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
(IN THOUSANDS) 2005 2004 2005 2004
=====================================================================================================
Segment Operating Income $ 49,130 $ 40,848 $ 145,882 $ 117,023
Engineered Products & Services
("all other") Category 20,872 13,667 48,183 33,007
General Corporate (387) (63) (2,672) (1,007)
- -----------------------------------------------------------------------------------------------------
Operating income from continuing operations 69,615 54,452 191,393 149,023
Equity in income (loss) of unconsolidated
entities, net (29) 38 92 210
Interest income 879 454 2,024 1,655
Interest expense (9,921) (10,092) (30,783) (30,412)
- -----------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interest $ 60,544 $ 44,852 $ 162,726 $ 120,476
=====================================================================================================
E. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable are net of an allowance for doubtful accounts of $17.4
million and $19.1 million at September 30, 2005 and December 31, 2004,
respectively. The decrease in the allowance for doubtful accounts is due to the
write-off of previously reserved accounts receivable and the effects of foreign
currency translation. The provision for doubtful accounts was $1.3 million and
$1.6 million for the three months ended September 30, 2005 and 2004,
respectively, and $4.4 million and $4.2 million for the nine months ended
September 30, 2005 and 2004, respectively.
INVENTORIES
---------------------------
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2005 2004
=======================================================================
Finished goods $ 63,121 $ 60,554
Work-in-process 55,606 37,882
Raw materials and purchased parts 96,216 91,965
Stores and supplies 31,679 26,625
- -----------------------------------------------------------------------
Total Inventories $ 246,622 $ 217,026
=======================================================================
Inventories increased $29.6 million from December 31, 2004 due to the following
factors:
o Increased work-in-process and raw materials inventories due primarily
to customer orders being manufactured at the railway track maintenance
services and equipment business, scheduled for delivery principally in
the fourth quarter of 2005.
o Increased finished goods for the Gas Technologies Segment to meet
expected demand in the fourth quarter of 2005.
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2005 2004
- -----------------------------------------------------------------------
Land and improvements $ 38,677 $ 39,838
Buildings and improvements 166,126 185,807
Machinery and equipment 2,049,056 2,027,765
Uncompleted construction 81,311 45,083
- -----------------------------------------------------------------------
Gross property, plant and equipment 2,335,170 2,298,493
Less accumulated depreciation (1,385,438) (1,366,195)
- -----------------------------------------------------------------------
Net property, plant and equipment $ 949,732 $ 932,298
=======================================================================
G. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in carrying amounts of goodwill for the
nine months ended September 30, 2005:
GOODWILL
----------------------------------------------------------------------------
ENGINEERED
PRODUCTS
MILL ACCESS GAS AND SERVICES
SERVICES SERVICES TECHNOLOGIES ("ALL OTHER") CONSOLIDATED
(IN THOUSANDS) SEGMENT SEGMENT SEGMENT CATEGORY TOTALS
=================================================================================================================================
Balance as of December 31, 2004, net
of accumulated amortization $ 220,493 $ 167,802 $ 36,693 $ 8,137 $ 433,125
Goodwill acquired during year 166 -- -- -- 166
Goodwill transferred to held-for-sale -- (5,309) -- -- (5,309)
Foreign currency translation (12,724) (13,185) -- -- (25,909)
Other -- (109) -- -- (109)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 2005,
NET OF ACCUMULATED AMORTIZATION $ 207,935 $ 149,199 $ 36,693 $ 8,137 $ 401,964
=================================================================================================================================
Goodwill is net of accumulated amortization of $103.8 million and $108.4 million
at September 30, 2005 and December 31, 2004, respectively.
Intangible assets, which are included principally in Other assets on the
Condensed Consolidated Balance Sheets, totaled $10.7 million, net of accumulated
amortization of $11.2 million at September 30, 2005 and $10.9 million, net of
accumulated amortization of $10.5 million at December 31, 2004. The following
chart reflects these intangible assets by major category.
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
INTANGIBLE ASSETS
---------------------------------------------------------
SEPTEMBER 30, 2005 DECEMBER 31, 2004
--------------------------- ---------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
===========================================================================================
Customer Relationships $ 9,126 $ 962 $ 7,662 $ 609
Non-compete agreements 5,038 4,308 4,898 4,032
Patents 3,871 3,572 4,416 3,757
Other 3,880 2,406 4,411 2,087
- -------------------------------------------------------------------------------------------
Total $ 21,915 $ 11,248 $ 21,387 $ 10,485
===========================================================================================
The increase in intangible assets during 2005 is due in part to the Evulca
acquisition discussed in Note H, "Acquisitions and Dispositions." As part of
this transaction, the Company acquired the following intangible assets (by major
class) which are subject to amortization:
ACQUIRED INTANGIBLE ASSETS
- ------------------------------------------------------------------------------
WEIGHTED-AVERAGE
GROSS CARRYING RESIDUAL AMORTIZATION
(IN THOUSANDS) AMOUNT VALUE PERIOD
==============================================================================
Customer relationships $ 3,565 None 8 years
Non-compete agreements 149 None 10 years
------------
Total $ 3,714
============
The above acquisitions were partially offset by the sale of certain intangible
assets principally in the Mill Services Segment.
There were no research and development assets acquired and written off in the
first nine months of 2005 or 2004.
Amortization expense for intangible assets was $1.4 million and $1.3 million for
the nine months ended September 30, 2005 and 2004, respectively. The following
chart shows the estimated amortization expense for the next five fiscal years
based on the current intangible asset carrying amounts.
(IN THOUSANDS) 2005 2006 2007 2008 2009
- --------------------------------------------------------------------------------
Estimated Amortization Expense $ 2,000 $ 1,800 $ 1,500 $ 1,200 $ 900
H. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
In September 2005, the Company executed an agreement with Sun HB Holdings, LLC
whereby the Company will acquire the German-based Hunnebeck Group GmbH
(Hunnebeck) for (euro)140 million (approximately $170 million) subject to
certain adjustments related to specific balance sheet amounts at closing. The
Company will not purchase cash or assume debt. Hunnebeck is a provider of highly
engineered formwork and scaffolding equipment with more than 60 branches and
depots in 12 countries and export sales worldwide. Hunnebeck's annual revenues
of approximately (euro)143 million (approximately $174 million) include
approximately 73 percent from Western Europe, including Germany, France, Italy
and Scandinavia, with the remainder generated from export sales and emerging
markets in Eastern Europe and the Middle East. Completion of the acquisition is
subject to the receipt of the necessary regulatory approvals and customary
closing conditions. It is expected to close during the fourth quarter of 2005.
In May 2005, the Company's Mill Services Segment acquired Evulca SAS, a
France-based company with more than 30 years experience providing conveyor belt
management and maintenance services to the steel industry and other industrial
-10-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
clients. The privately-held company recorded 2004 sales in excess of $5 million.
The pro forma impact of the above acquisition was not material.
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.
During the third quarter of 2005, certain assets and liabilities related to the
Company's Youngman light access manufacturing plant in the U.K. (a component of
the Access Services Segment) were classified as "held-for-sale" in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets." At September 30, 2005, these assets and liabilities had a net book
value of $34.5 million and $15.9 million, respectively. The Youngman unit was
sold in October 2005. Additionally, certain long-lived assets of the Gas
Technologies Segment were classified as "held-for-sale" during the second
quarter of 2005, and have been reported on the Consolidated Balance Sheet as
"held-for-sale" at September 30, 2005. These assets had a net book value of $1.0
million at September 30, 2005.
The major classes of assets and liabilities "held-for-sale" included in the
Consolidated Balance Sheets are as follows:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2005 2004
===============================================================================
ASSETS
Cash and cash equivalents $ 3 $ --
Accounts receivable, net 16,033 15
Inventories 9,408 133
Other current assets 183 23
Property, plant and equipment, net 5,380 761
Goodwill 5,309 --
- -------------------------------------------------------------------------------
TOTAL ASSETS "HELD-FOR-SALE" $ 36,316 $ 932
===============================================================================
LIABILITIES
Accounts payable $ 9,940 $ 24
Accrued compensation 690 --
Other current liabilities 5,315 542
Other liabilities -- 125
- -------------------------------------------------------------------------------
TOTAL LIABILITIES ASSOCIATED WITH ASSETS
"HELD-FOR-SALE" $ 15,945 $ 691
===============================================================================
I. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its financial
exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheets at September 30, 2005 and December 31, 2004 include
accruals of $2.5 million and $2.7 million, respectively, for environmental
matters. The amounts charged against pre-tax income related to environmental
matters totaled $0.8 million and $1.4 million for the first nine months of 2005
and 2004, respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs 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
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
recorded or disclosed above would have a material adverse effect on its
financial position, results of operations or cash flows.
ROYALTY EXPENSE DISPUTE
The Company is involved in a royalty expense dispute with Canada Revenue Agency
(CRA). The CRA is proposing to disallow certain royalty expense deductions
claimed by the Company's Canadian subsidiary on its 1994-1998 tax returns. As of
September 30, 2005, the maximum assessment from the CRA for the period 1994-1998
is approximately $10.0 million including tax and interest. The Company has filed
an administrative appeal and will vigorously contest the disallowance.
The Company currently anticipates that, ultimately, it may have liability for
some portion of the assessment in this royalty expense dispute. However, the
Company intends to utilize competent authority proceedings in the U.S. to
recover a portion of any required tax payment amount. The Company believes that
any amount not recovered through these proceedings has been fully reserved as of
September 30, 2005, and therefore will not have a material adverse effect on the
Company's future results of operations or financial condition. In accordance
with Canadian tax law, the Company intends to make a payment to the CRA during
the fourth quarter of 2005 of approximately $5.0 million, or one-half of the
disputed amount. Payment of that amount will only be made for tax compliance
purposes and to reduce potential interest expense on the disputed amount. The
payment in no way reflects the Company's acknowledgement as to the validity of
the assessed amounts.
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 three settlements for nominal amounts paid by the Company's
insurance carrier. The Company's insurance carrier has also 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 September 30, 2005, there are 31,393 pending asbestos personal injury
claims filed against the Company. Of these cases, 26,293 were pending in the New
York Supreme Court for New York County in New York State and 4,772 of the cases
were pending in state courts of various counties in Mississippi. The other
claims, totaling approximately 328, are filed in various counties in a number of
state courts, and in certain Federal District Courts, and those complaints
assert lesser amounts of damages than the New York cases or do not state any
amount claimed.
As of September 30, 2005, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in all cases that have proceeded to trial. To
date, the Company has been dismissed from 11,808 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
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 the New
York Supreme Court for New York County and in Mississippi state courts after
2002. On December 19, 2002, the New York Supreme Court responsible for managing
all asbestos cases pending within New York County 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. The Order has been challenged by
plaintiffs. Under the Order, the Court is reviewing cases for docketing based on
their date of filing, with the older pending cases reviewed first. Cases
designated as Active are then assigned to a "FIFO" trial group, which groups are
scheduled for trial in the designated months of either February or August. For
cases in which there has been a recent death or a diagnosis of cancer, the Court
reviews such cases on an expedited basis and, if medically supported, such cases
are transferred to an "In Extremis" trial group, which groups are scheduled for
trial in the designated months of either May or November. As of September 30,
2005, the Company was listed as a defendant in approximately 258 pending cases
in the New York Supreme Court for New York County that have been designated as
Active or "In Extremis" and assigned to trial groups. To date, the Company has
been dismissed as a defendant prior to trial in all New York cases that have
proceeded to trial. The number of these dismissals is currently approximately
1,496.
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.
During the third quarter of 2005, the Company continued to obtain case
dismissals in Mississippi. These dismissals were in the wake of the Mississippi
Supreme Court's decision in the Mangialardi case (in which the court held that
consolidation of personal injury claims is impermissible and which restricted
out of state residents from bringing asbestos suits in Mississippi). Based on
these dismissals, the total number of pending Mississippi cases as of September
30, 2005 is now 4,772. Significantly, however, 2,877 of those cases were filed
in, or removed to, the Mississippi federal district court, which is in the
process of transferring them to the federal Multidistrict Asbestos Docket in
Philadelphia (the "MDL"). In accordance with an order of the MDL court entered
several years ago, the transferred cases are deemed "administratively
dismissed," subject to being reinstated only when each individual plaintiff can
demonstrate both a present physical injury and that asbestos exposure resulted
from the products or activities of identifiable defendants. These
"administratively dismissed" cases are not included in the dismissal numbers
noted in the above paragraphs.
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.
Insurance liabilities are recorded in accordance with SFAS 5, "Accounting for
Contingencies." Insurance reserves have been estimated based primarily upon
actuarial calculations and reflect the undiscounted estimated liabilities for
ultimate losses including claims incurred but not reported. Inherent in these
estimates are assumptions which are based on the Company's history of claims and
losses, a detailed analysis of existing claims with respect to potential value,
and current legal and legislative trends. If actual claims differ from those
projected by management, changes (either increases or decreases) to insurance
reserves may be required and would be recorded through income in the period the
change was determined. When a recognized liability is covered by third-party
insurance, the Company records an insurance claim receivable to reflect the
covered liability.
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
J. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 40,022 $ 30,674 $ 104,888 $ 78,511
=============================================================================================================================
Average shares of common stock outstanding used to compute
basic earnings per common share 41,693 41,165 41,603 41,061
Dilutive effect of stock-based compensation 419 424 443 464
- -----------------------------------------------------------------------------------------------------------------------------
Shares used to compute dilutive effect of stock-based
compensation 42,112 41,589 42,046 41,525
=============================================================================================================================
Basic earnings per common share from continuing operations $ 0.96 $ 0.75 $ 2.52 $ 1.91
=============================================================================================================================
Diluted earnings per common share from continuing
operations $ 0.95 $ 0.74 $ 2.49 $ 1.89
=============================================================================================================================
All outstanding stock options and restricted stock units were included in the
computation of diluted earnings per share at September 30, 2005. Options to
purchase 8,000 shares were not included in the computation of diluted earnings
per share at September 30, 2004 because the effect was antidilutive.
K. EMPLOYEE BENEFIT PLANS
THREE MONTHS ENDED
SEPTEMBER 30
------------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U. S. PLANS INTERNATIONAL PLANS
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
Service cost $ 845 $ 652 $ 1,757 $ 2,113
Interest cost 3,479 3,398 9,679 9,083
Expected return on plan assets (4,778) (4,490) (10,674) (9,649)
Recognized prior service costs 192 188 302 301
Recognized losses 904 746 3,006 3,312
Amortization of transition (asset) (364) (366) 11 (135)
Settlement loss -- -- 10 --
- -------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 278 $ 128 $ 4,091 $ 5,025
=======================================================================================================
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U. S. PLANS INTERNATIONAL PLANS
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
Service cost $ 2,535 $ 1,957 $ 5,322 $ 6,938
Interest cost 10,436 10,194 29,933 27,984
Expected return on plan assets (14,334) (13,470) (33,041) (29,459)
Recognized prior service costs 576 565 937 918
Recognized losses 2,713 2,237 9,364 9,966
Amortization of transition liability (asset) (1,092) (1,099) 14 (410)
Settlement loss -- -- 37 --
- -------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 834 $ 384 $ 12,566 $ 15,937
=======================================================================================================
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Defined benefit pension expense in the third quarter and nine months of 2005
decreased $0.8 million and $2.9 million, respectively, from the comparable 2004
periods. This decrease relates primarily to a decline in the Company's SGB
Group's U.K. pension expense as a result of plan changes implemented effective
January 1, 2004. The decline in 2005 defined benefit pension expense was offset
by increased defined contribution and multi-employer plans' pension expense.
Contributions to defined benefit pension plans are as follows:
DEFINED BENEFIT PENSION PLAN CONTRIBUTIONS
- ----------------------------------------------------------------------------
(IN MILLIONS) U. S. PLANS INTERNATIONAL PLANS
- ----------------------------------------------------------------------------
First quarter 2005 $ 0.2 $ 14.9(a)
Second quarter 2005 0.2 4.9
Third quarter 2005 4.1(b) 4.4
- ----------------------------------------------------------------------------
Nine months 2005 4.5 24.2
Projected October - December 2005 3.9(c) 4.9
- ----------------------------------------------------------------------------
Total projected for the year 2005 $ 8.4 $ 29.1
============================================================================
(a) Includes a $9.4 million voluntary contribution to the Company's SGB
Group's U.K. pension plan.
(b) Includes a $3.8 million voluntary contribution to the Company's U.S.
pension plans.
(c) Includes a $3.7 million voluntary contribution to the Company's U.S.
pension plans.
Contributions to multiemployer pension plans during the third quarter and nine
months ended September 30, 2005 were $2.3 million and $9.4 million,
respectively.
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) SEPTEMBER 30
- ----------------------------------------------------------------------------
(IN THOUSANDS) 2005 2004
- ----------------------------------------------------------------------------
Service cost $ 1 $ 3
Interest cost 48 72
Recognized prior service costs 1 8
Recognized (gains)/losses (9) 8
- ----------------------------------------------------------------------------
Postretirement benefits expense $ 41 $ 91
============================================================================
NINE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) SEPTEMBER 30
- ----------------------------------------------------------------------------
(IN THOUSANDS) 2005 2004
- ----------------------------------------------------------------------------
Service cost $ 5 $ 9
Interest cost 151 270
Recognized prior service costs 7 24
Recognized (gains)/losses (27) 30
Curtailment gains (318) (2,238)
- ----------------------------------------------------------------------------
Postretirement benefits income $ (182) $(1,905)
============================================================================
The curtailment gains of $0.3 million and $2.2 million for the nine months ended
September 30, 2005 and 2004, respectively, were due principally to the
termination of certain postretirement health care plans.
In the quarter ended September 30, 2005, the Company contributed $78 thousand to
the postretirement plans. For the nine months ended September 30, 2005, the
Company contributed $213 thousand to the postretirement plans and anticipates
contributing approximately $100 thousand during the remainder of 2005.
-15-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
L. INCOME TAXES
The effective income tax rate relating to continuing operations was 30.8% and
31.6% in the third quarter and first nine months of 2005, respectively. This
compares with 27.1% and 29.6% in the third quarter and first nine months of
2004, respectively. These increases in the effective income tax rate in 2005
were primarily the result of the expiration of three tax holidays, including
Europe, Asia and the Middle East.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the "Act") into law. The Act creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85
percent dividends-received deduction for certain dividends from controlled
foreign corporations. The deduction is subject to a number of limitations and
complexities, and during the past six months, the Company has been analyzing the
previous guidance provided by the U.S. Department of the Treasury and the
potential effect of applying the repatriation provision to un-remitted foreign
earnings held by its various Controlled Foreign Corporations. The Company
expects to finalize its evaluation in the fourth quarter of 2005, and it expects
to receive a one-time tax benefit from the Act. The amount of income to be
repatriated, and the expected tax benefit have not yet been determined.
M. NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R)
- --------------------------------------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123R which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). SFAS 123R requires the cost of employee
services received in exchange for an award of equity instruments to be based
upon the grant-date fair value of the award (with limited exceptions).
Additionally, this cost is to be recognized as expense over the period during
which an employee is required to provide services in exchange for the award
(usually the vesting period). SFAS 123R eliminates APB 25's intrinsic value
method which the Company has historically used to account for stock option
grants.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 107 (SAB 107) which summarizes the views of the SEC
staff regarding the interaction between SFAS 123R and certain SEC rules and
regulations. SAB 107 provides guidance on several topics including: valuation
methods, the classification of compensation expense, capitalization of
compensation cost related to share-based payment arrangements, the accounting
for income tax effects of share-based payment arrangements, and disclosures in
Management's Discussion and Analysis subsequent to adoption of SFAS 123R.
In April 2005, the SEC issued FR-74, "Amendment to Rule 4-01(a) of Regulation
S-X Regarding the Compliance Date for Statement of Financial Accounting
Standards No. 123 (Revised 2004), SHARE-BASED PAYMENT" (FR-74). FR-74 allows
companies to implement SFAS 123R at the beginning of their next fiscal year
(January 1, 2006 for the Company), instead of the next reporting period that
begins after June 15, 2005. FR-74 does not change the accounting required by
SFAS 123R; it only changes the required implementation date of the standard.
The Company has not yet determined the full impact of implementing SFAS 123R,
but it is not expected to have a material impact on the Company's financial
position, results of operations or cash flows since the Company ceased granting
stock options in 2003. The Company plans to implement SFAS 123R as of January 1,
2006.
SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4"
- ----------------------------------------------------------------------
(SFAS 151)
- ----------
In November 2004, the FASB issued SFAS 151, which amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" (ARB 43). SFAS 151 clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage) should be expensed rather than capitalized as
inventory. Additionally, SFAS 151 requires that allocation of fixed production
overheads to inventory costs be based upon the normal capacity of the production
facility. The provisions of SFAS 151 are applicable to inventory costs incurred
during fiscal years beginning after June 15, 2005 (as of January 1, 2006 for the
Company) with earlier application permitted. The Company has not yet determined
the full impact of SFAS 151; however, it is not expected to materially impact
the Company's financial position, results of operations or cash flows. The
Company plans to implement SFAS 151 effective January 1, 2006.
SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB
- -----------------------------------------------------------------------------
Opinion No. 20 and FASB Statement No. 3" (SFAS 154)
- ---------------------------------------------------
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
In May 2005, the FASB issued SFAS 154 which replaces APB Opinion No. 20,
"Accounting Changes" (APB 20) and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements" (SFAS 3). SFAS 154 changes the requirements for
the accounting and reporting of a change in accounting principle or correction
of an error. It establishes, unless impracticable, retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect the adoption of SFAS 154 to have a material impact
on the Company's financial position, results of operations or cash flows. The
Company plans to implement SFAS 154 effective January 1, 2006.
FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement
- ------------------------------------------------------------------------
Obligations, an interpretation of FASB Statement No. 143" (FIN 47).
- -------------------------------------------------------------------
In March 2005, the FASB issued FIN 47 which clarifies that the term "conditional
asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143), refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of settlement.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. The fair value of a liability for the conditional
asset retirement obligation should be recognized when incurred--generally upon
acquisition, construction, or development and/or through the normal operation of
the asset. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. FIN 47 also clarifies when
an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005 (December 31, 2005 for the
Company). The Company has not yet determined the full impact of implementing FIN
47, but it is not expected to have a material impact on the Company's financial
position, results of operations or cash flows. The Company plans to implement
FIN 47 by December 31, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion should be read in conjunction with the accompanying
unaudited financial statements as well as the Company's annual Form 10-K for the
year ended December 31, 2004 which included additional information about the
Company's critical accounting policies, contractual obligations, practices and
the transactions that support the financial results.
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,
those discussed in Part I, Item 3, "Quantitative and Qualitative Disclosures
About Market Risk," of this Form 10-Q. The Company cautions that these factors
may not be exhaustive and that many of these factors are beyond the Company's
ability to control or predict. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The Company undertakes no
duty to update forward-looking statements.
EXECUTIVE OVERVIEW
The Company's third quarter 2005 revenues were a record $697.5 million. This was
an increase of $80.2 million or 13% over the third quarter of 2004. Income from
continuing operations was a record $40.0 million compared with $30.7 million in
the third quarter of 2004, an increase of 30%. Diluted earnings per share from
continuing operations were a record $0.95 compared with $0.74 for the third
quarter of 2004, a 28% increase.
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Revenues for the first nine months of 2005 were a record $2.0 billion. This is
an increase of $242.5 million or 14% over the first nine months of 2004. Income
from continuing operations was a record $104.9 million compared with $78.5
million in the first nine months of 2004, an increase of 34%. Diluted earnings
per share from continuing operations were a record $2.49 compared with $1.89 for
the first nine months of 2004, a 32% increase.
The third quarter and first nine months of 2005 results were led by strong
performances from the Access Services Segment and all businesses in the
Engineered Products and Services ("all other") Category. The Mill Services
Segment had improved revenues in both the third quarter and first nine months of
2005. For the first nine months of 2005, the Mill Services Segment had improved
operating income compared with 2004 despite a decline during the third quarter
of 2005 due to increased energy costs and reduced volume at certain customer
sites. The Gas Technologies Segment had improved revenues and operating income
for both the third quarter and first nine months of 2005.
During the first nine months of 2005, the Company had record net cash provided
by operating activities of $232.6 million compared with $165.8 million in the
first nine months of 2004. Since the fourth quarter has historically been the
Company's highest for cash flows, Management is confident that the stated 2005
strategic objective of generating a record $320 million in cash from operations
will be achieved. The Company's cash flows are further discussed in the
Liquidity and Capital Resources section.
The record revenue, operating income from continuing operations and diluted
earnings per share from continuing operations for both the third quarter and
first nine months of 2005 demonstrates the balance and geographic diversity of
the Company's operations. The Company's Access Services Segment and Engineered
Products and Services ("all other") Category delivered improved results and more
than offset the third quarter operating income decline in the Mill Services
Segment. This operating balance and geographic diversity provides a hedge
against normal changes in economic and industrial cycles.
SEGMENT OVERVIEW
Revenues for the third quarter of 2005 for the Mill Services Segment were $254.9
million compared with $244.9 million in the third quarter of 2004, a 4%
increase. Operating income decreased by 7% to $23.1 million, from $25.0 million
in the third quarter of 2004. Operating margins for this Segment decreased by
110 basis points to 9.1% from 10.2% in the third quarter last year due to higher
energy costs, production cutbacks by certain global steel mill customers, and
higher severance costs. In comparison with the first nine months of 2004, this
Segment achieved period-over-period revenue growth of $71.3 million or 10%, and
accounted for 39% of the Company's revenues and 44% of the operating income for
the first nine months of 2005. Despite the decline in third quarter results,
operating margins for the first nine months of 2005 still increased by 10 basis
points to 10.5% from 10.4% for the first nine months of 2004 due principally to
new contracts.
The Access Services Segment's revenues in the third quarter of 2005 were $195.4
million compared with $176.3 million in the third quarter of 2004, an 11%
increase. Operating income increased by 55% to $20.9 million, from $13.4 million
in the third quarter of 2004. Operating margins for the Segment improved by 310
basis points to 10.7% from 7.6% in the third quarter of last year due to
increased rental equipment utilization; better market conditions; improved
pricing, particularly in the United States; and a $1.6 million pre-tax gain from
the disposal of assets related to the closing of a branch location. In
comparison with the first nine months of 2004, this Segment achieved
period-over-period revenue growth of $68.3 million or 13%, and accounted for 29%
of the Company's revenues and 27% of the operating income for the first nine
months of 2005. Improved performance was achieved by both the international and
domestic Access Services operations.
The Gas Technologies Segment's revenues in the third quarter of 2005 were $98.0
million compared with $84.4 million in the third quarter of 2004, a 16%
increase. Operating income increased by 111% to $5.2 million, from $2.4 million
in the third quarter of 2004. The increased revenues in the third quarter of
2005 were led by the propane tank and cryogenics equipment and businesses;
however all businesses showed some improvement from the third quarter of 2004.
As expected, operating income and margins were positively affected in the
quarter by $4.0 million in lower commodity costs, particularly steel, compared
with the third quarter of 2004. In comparison with the first nine months of
2004, this Segment achieved period-over-period revenue growth of $25.2 million
or 10%, and accounted for 13% of the Company's revenues and 6% of the operating
income for the first nine months of 2005.
Four of the five businesses in the Engineered Products and Services ("all
other") Category contributed higher revenues, operating income and operating
margins in the third quarter of 2005 compared with the third quarter of 2004.
The performance included record results from the railway track maintenance
services and equipment business, which continued to see strong sales and
contracting services activity; the air-cooled heat exchangers business, where
improved
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
market conditions have resulted in increased volumes and backlogs; and the
boiler and process equipment business, where positive market acceptance of a new
product and a better sales mix contributed to improved performance.
Additionally, all five of the businesses contributed higher revenues and
operating income in the first nine months of 2005 compared with the
corresponding 2004 period.
The positive effect of foreign currency translation increased third quarter 2005
consolidated revenues by $4.9 million and pre-tax income by $1.2 million when
compared with the third quarter of 2004. For the first nine months of 2005, the
positive effect of foreign currency translation increased consolidated revenues
by $34.6 million and pre-tax income by $3.7 million when compared with the first
nine months of 2004.
OUTLOOK OVERVIEW
The Company's operations span several industries and products as more fully
discussed in Part I, Item 1, "Business," of the Company's Form 10-K for the year
ended December 31, 2004. On a macro basis, the Company is affected by worldwide
steel mill production and capacity utilization; non-residential construction and
industrial maintenance activities; industrial production volume; and the general
business trend towards the outsourcing of services. The overall outlook for the
remainder of 2005 continues to be positive for these business drivers, although
worldwide steel mill production (excluding China) in the fourth quarter of 2005
is expected to approximate the fourth quarter of 2004. Also, the Company is
currently experiencing increased energy costs that may have a negative effect on
operating margins, to the extent these costs cannot be passed to customers.
Both domestic and international Access Services activity remains strong.
Additionally, the Company's pending acquisition of Hunnebeck will expand the
Company' geographic reach and diversification. Hunnebeck is Europe's
third-largest provider of highly engineered construction formwork and
scaffolding access equipment services with more than 60 branches and depots in
12 countries. The acquisition is expected to be completed in the fourth quarter
of 2005, subject to regulatory approvals.
During the fourth quarter of 2004, the Company's railway track maintenance
services and equipment business delivered a record number of units, principally
to international customers in China, resulting in record revenues for the
business. During 2005, this business' shipments have been more evenly
distributed throughout the year. Therefore, on a comparative basis, results for
the fourth quarter of 2005 for this business are expected to be lower than the
record levels attained in the fourth quarter of 2004.
Company Management believes that the Company's record third quarter and first
nine months of 2005 revenues (nine months increased 14% from 2004) and earnings
per share (nine months increased 32% from 2004); the stable or improved market
conditions for most of the Company's services and products; and the significant
investments made in growth-related capital expenditures provide a solid base for
achieving the Company's stated objective of double-digit growth in diluted
earnings per share from continuing operations in 2005.
- -------------------------------------------------------------------------------------------
REVENUES BY REGION
- -------------------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
SEPTEMBER 30 2004 TO 2005
(DOLLARS IN MILLIONS) 2005 2004 VOLUME CURRENCY TOTAL
- -------------------------------------------------------------------------------------------
U.S. $ 298.6 $ 252.7 18.2% 0.0% 18.2%
Europe 274.9 252.3 10.0 (1.0) 9.0
Latin America 37.5 32.2 2.2 14.3 16.5
Asia-Pacific 34.1 31.1 5.3 4.3 9.6
Middle East 24.2 19.1 25.2 1.5 26.7
Other 28.2 29.9 (9.5) 3.8 (5.7)
- -------------------------------------------------------------------------------------------
Total $ 697.5 $ 617.3 12.2% 0.8% 13.0%
===========================================================================================
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------------------
REVENUES BY REGION
- -------------------------------------------------------------------------------------------
TOTAL REVENUES
NINE MONTHS ENDED PERCENTAGE GROWTH FROM
SEPTEMBER 30 2004 TO 2005
(DOLLARS IN MILLIONS) 2005 2004 VOLUME CURRENCY TOTAL
- -------------------------------------------------------------------------------------------
U.S. $ 828.4 $ 737.7 12.3% 0.0% 12.3%
Europe 831.5 741.0 10.1 2.1 12.2
Latin America 111.0 88.0 15.1 11.0 26.1
Asia-Pacific 102.0 87.5 12.5 4.1 16.6
Middle East 70.5 51.6 35.1 1.5 36.6
Other 90.3 85.3 0.1 5.8 5.9
- -------------------------------------------------------------------------------------------
Total $2,033.7 $1,791.1 11.6% 1.9% 13.5%
===========================================================================================
2005 HIGHLIGHTS
The following significant items affected the Company overall during the third
quarter and first nine months of 2005 in comparison with the third quarter and
first nine months of 2004, respectively:
Company Wide:
- -------------
o Strong worldwide economic activity benefited the Company's Mill Services
Segment for the first nine months (particularly the first and second
quarters) and also benefited a number of the Company's other products and
services. This included increased international demand for railway track
maintenance services and equipment; access equipment sales and rentals
especially in the U.S., Middle East and Europe; cryogenics equipment;
industrial cylinders; industrial grating products; roofing granules and
abrasives; and air-cooled heat exchangers.
o The effective income tax rate relating to continuing operations increased
from 27.1% and 29.6% in the third quarter and first nine months of 2004,
respectively, to 30.8% and 31.6% in the third quarter and first nine months
of 2005, respectively. This resulted in approximately $2.2 million and $3.2
million in higher income tax expense for the third quarter and first nine
months of 2005, respectively. This is more fully discussed under Part I,
Item 1, Footnote L, labeled "Income Taxes."
MILL SERVICES SEGMENT:
- ----------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ----------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2005 2004 2005 2004
- ----------------------------------------------------------------------------
Revenues $ 254.9 $ 244.9 $ 794.8 $ 723.4
Operating income 23.1 25.0 83.5 75.1
Operating margin percent 9.1% 10.2% 10.5% 10.4%
============================================================================
THREE MONTHS NINE MONTHS
MILL SERVICES SEGMENT - SIGNIFICANT ENDED ENDED
IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
- ----------------------------------------------------------------------------
(IN MILLIONS)
- ----------------------------------------------------------------------------
Revenues - 2004 $ 244.9 $ 723.4
Increased volume and new business 2.6 42.4
Benefit of positive foreign currency translation 5.6 25.8
Acquisitions - (principally Evulca SAS in France) 1.6 2.4
Other 0.2 0.8
- ----------------------------------------------------------------------------
Revenues - 2005 $ 254.9 $ 794.8
============================================================================
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE SAME 2004 PERIODS:
o In the third quarter of 2005, operating income decreased by $1.9 million,
and operating margins decreased 110 basis points to 9.1%, as a result of
higher energy costs, production cutbacks by global steel mill customers,
and higher severance costs. However, operating income for the first nine
months of 2005 increased by $8.4 million as a result of increased pricing
for certain contracts and new business, particularly in Europe and Brazil,
partially offset by increased operating costs (as noted below) and reduced
volume in South Africa and in North America during the second and third
quarters of 2005.
o Compared with the third quarter and first nine months of 2004, the
Segment's operating income in the third quarter and first nine months of
2005 was negatively impacted by increased fuel and energy-related costs of
approximately $3 million and $11 million, respectively.
o The benefit of positive foreign currency translation in the third quarter
and first nine months of 2005 resulted in increased operating income of
$0.9 million and $2.7 million, respectively, compared with the
corresponding 2004 periods.
o The Segment's operating income for the first nine months of 2005 was
positively affected by $2.1 million in pre-tax income due to a net gain on
the disposal of assets related to exiting an underperforming contract,
partially offset by reorganization costs. This compares with $1.3 million
in pre-tax expense in the first nine months of 2004.
o Selling, general and administrative costs increased $1.2 million and $6.1
million for the third quarter and first nine months of 2005, respectively
(including approximately $0.4 million and $1.7 million related to foreign
currency translation in the third quarter and first nine months of 2005,
respectively). These increases related primarily to increased compensation
costs.
ACCESS SERVICES SEGMENT:
- ------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ------------------------------------------------------------------------------------------
(IN MILLIONS) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------
Revenues $ 195.4 $ 176.3 $ 585.5 $ 517.3
Operating income 20.9 13.4 51.5 31.2
Operating margin percent 10.7% 7.6% 8.8% 6.0%
==========================================================================================
THREE MONTHS NINE MONTHS
ACCESS SERVICES SEGMENT - SIGNIFICANT ENDED ENDED
IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------
Revenues - 2004 $ 176.3 $ 517.3
Net increased volume, mainly in the Middle East and U.S. 20.1 56.8
Effect of (negative)/positive foreign currency translation (1.0) 7.5
Acquisitions (principally SGB Raffia in Australia) -- 3.5
Other -- 0.4
- ------------------------------------------------------------------------------------------
Revenues - 2005 $ 195.4 $ 585.5
==========================================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE SAME 2004 PERIODS:
o In the third quarter and first nine months of 2005, the Segment's operating
income and operating margins were positively affected by the performance of
the concrete forming rental business, particularly in the Middle East and
the U.K. (first six months only), as well as increased equipment rentals,
product sales and erection and dismantling services revenue in North
America.
o Lower pension expense in the third quarter and first nine months of 2005
increased operating income by approximately $0.9 million and $3.1 million,
respectively, when compared with the respective 2004 periods.
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o During the third quarter and first nine months of 2005, the international
Access Services business continued to grow outside the U.K., principally in
the Middle East, due to certain on-going large projects. During the first
nine months of 2005, the international operations outside of the U.K. had
approximately $201 million in revenues and $28 million in operating income.
This compares with $154 million in revenues and $20 million in operating
income for the first nine months of 2004.
o In the first nine months of 2005, there was a continued strengthening in
the U.S. non-residential construction markets that started in the latter
half of 2004. During the third quarter of 2005, the value of equipment on
customer job sites reached an all-time high. This had a positive effect on
volume (particularly erection and dismantling services revenue and
equipment rental) which caused overall margins in the U.S. to improve.
Equipment rentals, particularly in the construction sector, provide the
highest margins for this Segment.
o Foreign currency translation in the third quarter and first nine months of
2005 resulted in increased operating income of $0.2 million and $1.1
million, respectively, compared with the corresponding 2004 periods.
o On a comparative basis, operating income in the first nine months of 2005
was positively affected by a $1.6 million pre-tax gain from the disposal of
assets related to the closing of a branch location. This was mostly offset
by the impact of $1.3 million in pre-tax income from the termination of a
post-retirement benefit during the first nine months of 2004 that was not
repeated in 2005.
GAS TECHNOLOGIES SEGMENT:
- -------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------
Revenues $ 98.0 $ 84.4 $ 270.2 $ 245.0
Operating income 5.2 2.4 10.9 10.8
Operating margin percent 5.3% 2.9% 4.0% 4.4%
===================================================================================================
THREE MONTHS NINE MONTHS
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT ENDED ENDED
IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------
Revenues - 2004 $ 84.4 $ 245.0
Increased demand for cryogenics equipment and industrial cylinders 3.9 21.2
Increased demand for composite-wrapped cylinders and certain valves 3.8 6.0
Benefit of positive foreign currency translation 0.1 0.5
Increased/(decreased) sales of propane tanks (due to customers
accelerating purchases in 2004 to avoid price increases) 5.8 (2.3)
Other -- (0.2)
- ---------------------------------------------------------------------------------------------------
Revenues - 2005 $ 98.0 $ 270.2
===================================================================================================
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE SAME 2004 PERIODS:
o Operating income increased in the third quarter and first nine months of
2005 compared with the same periods of 2004, due mainly to decreased
commodity costs, particularly steel.
o As expected, the propane business had increased revenues and operating
income in the third quarter although both revenue and operating income
decreased in the first nine months of 2005 when compared with the same 2004
periods. As indicated last year, there was increased demand for propane
tanks in the first nine months of 2004 driven by customers accelerating
purchases in anticipation of future price increases due to higher steel
prices.
o Increased costs and product mix in the valves business negatively impacted
operating income in the first nine months of 2005 compared with the same
period of 2004. A strategic action plan is being implemented to improve the
results of the valves business. This plan is further discussed in the
Outlook, Trends and Strategies section.
-22-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o The international businesses, in both Asia and Europe, contributed
significantly to the increased performance of the cryogenics business
during the first nine months of 2005 compared with the first nine months of
2004.
o Higher operating income for industrial cylinders was due to increased
demand and selling price increases.
o Foreign currency translation in the first nine months of 2005 did not have
a material impact on operating income for this Segment compared with the
first nine months of 2004.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY:
- --------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------
Revenues $ 149.2 $ 111.6 $ 383.2 $ 305.5
Operating income 20.9 13.7 48.2 33.0
Operating margin percent 14.0% 12.2% 12.6% 10.8%
============================================================================================================
ENGINEERED PRODUCTS & SERVICES ("ALL OTHER") CATEGORY - THREE MONTHS NINE MONTHS
SIGNIFICANT IMPACTS ON REVENUES ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 111.6 $ 305.5
Railway track maintenance services and equipment 24.7 41.6
Air-cooled heat exchangers 9.7 24.4
Industrial grating products 1.5 7.8
Boiler and process equipment 1.7 2.8
Benefit of positive foreign currency translation 0.2 0.8
Roofing granules and abrasives (0.3) 0.2
Rounding 0.1 0.1
- ------------------------------------------------------------------------------------------------------------
Revenues - 2005 $ 149.2 $ 383.2
============================================================================================================
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - SIGNIFICANT IMPACTS ON
OPERATING INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED
WITH THE SAME 2004 PERIODS:
o Higher operating income in the first nine months of 2005 (including a
record third quarter) for the railway track maintenance services and
equipment business was due principally to increased rail equipment sales
(principally to international customers), international contract services
and repair parts sales in the U.S. This was partially offset by increased
engineering and selling, general and administrative expenses.
o Operating income for the air-cooled heat exchangers business improved in
the third quarter and first nine months of 2005 due to increased volume
resulting from an improved natural gas market.
o Increased third quarter and first nine months of 2005 operating income for
the industrial grating products business was due principally to higher
selling prices and an improved product mix.
o The boiler and process equipment business delivered improved third quarter
and first nine months 2005 results due to improved pricing and improved
revenues from the new-generation Mach boilers.
o Strong demand for roofing granules and abrasives again resulted in
sustained levels of profitable results for that business in the first nine
months of 2005, consistent with prior periods. This is despite difficulty
throughout the third quarter of 2005 in obtaining rail cars to deliver its
products, and to a lesser extent higher energy costs.
o Foreign currency translation in the first nine months of 2005 did not have
a material impact on operating income for this Segment compared with the
first nine months of 2004.
-23-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
OUTLOOK, TRENDS AND STRATEGIES
Looking to the remainder of 2005 and beyond, the following significant items,
trends and strategies are expected to affect the Company:
Company Wide:
- -------------
o The Company will continue its focus on expanding the higher-margin
industrial services businesses, with a particular emphasis on growing the
Mill Services Segment, Access Services Segment and railway services through
the provision of additional services to existing customers, new contracts
in both mature and emerging markets and strategic acquisitions such as the
previously announced Hunnebeck Access Services acquisition.
o The continued growth of the Chinese steel industry could impact the Company
in several ways. Increased steel mill production in China may provide
additional service opportunities for the Mill Services Segment. However,
increased Chinese steel exports could result in lower steel production in
other parts of the world affecting the Company's customer base.
Additionally, although certain commodity costs (e.g., steel) have
stabilized in the first nine months of 2005, continued increased Chinese
economic activity may result in increased commodity costs in the future,
which may adversely affect the Company's manufacturing businesses. The
potential impact of these risks are currently unknown.
o Fuel and energy costs have increased approximately $13 million for the
first nine months of 2005 compared with the same period of 2004. Should
these costs continue to rise, the Company's operating costs would further
increase and profitability would decline to the extent that such costs
cannot be passed to customers.
o Foreign currency translation has had a favorable effect on the Company's
sales and income during the first nine months of 2005. This is due to the
average foreign exchange rate for the euro and the British pound sterling
being 3% and 1% higher, respectively, during the first nine months of 2005
when compared with the first nine months of 2004. In comparison with
December 31, 2004, the euro and British pound sterling have weakened 13%
and 9%, respectively, in relation to the U.S. dollar. Should the U.S.
dollar continue to strengthen, particularly in relationship to the euro or
British pound sterling, the impact on the Company would generally be
negative in terms of reduced sales and income.
o The Company will continue to focus on improving Economic Value Added
(EVA(R)). 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 defined benefit pension expense
is included for EVA purposes). Therefore, value is created when a project
or initiative produces a return above the cost of capital.
o A record $320 million in net cash provided by operating activities has been
targeted for 2005 and will likely be achieved. This is supported by record
net cash provided by operating activities of $232.6 million in the first
nine months of 2005 combined with fourth quarter cash flows that are
traditionally the Company's strongest quarter of the year (see chart in
Part I, Item 3. "Quantitative and Qualitative Disclosures About Market
Risk."
o Controllable cost reductions and continuous process improvement initiatives
across the Company should further enhance margins for most businesses. This
includes improved supply chain management and additional outsourcing in the
manufacturing businesses.
o Total pension expense (defined benefit, defined contribution and
multi-employer) for 2005 is expected to approximate 2004. Global defined
benefit pension plan expense for 2006 is expected to approximate 2005. In
the U.K., pension expense is expected to decline in 2006 due to the
significant level (approximately $20 million in the past 12 months) of
voluntary cash contributions to the defined benefit pension plan. This will
be partially offset by increased expense due to the effects of changes in
actuarial assumptions in the global pension plans required by SFAS No. 87,
"Employers' Accounting for Pensions." Domestically, the twenty-year
amortization of the transition asset (from the initial implementation of
SFAS No. 87 in 1986) will cease during 2006. This is projected to increase
pension expense approximately $1.3 million when compared with 2005. The
full impact of these anticipated changes will not be known until the latter
half of the fourth quarter of 2005. For additional information on the
Company's defined benefit pension plans see Part I, Item 1, Footnote K
labeled "Employee Benefit Plans" and Part I, Item 3, "Quantitative and
Qualitative Disclosures About Market Risk."
o Changes in worldwide interest rates should not significantly affect the
Company's overall interest expense. Approximately 84% of the Company's
current borrowings are at fixed interest rates, principally in British
pounds sterling or U.S. dollars. Additionally, most of the Company's
borrowings are long-term in nature and do not mature until 2010 or later.
Should the Company require significant additional borrowings to finance
growth-related acquisitions, they would be at the prevailing market
interest rates which may be higher than the Company is currently paying
under its commercial paper programs.
o On October 22, 2004, the President signed the American Jobs Creation Act of
2004 (the "Act") into law. The Act creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an
85 percent dividends-received deduction for certain dividends from
controlled foreign corporations. The deduction is
-24-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
subject to a number of limitations and complexities, and during the past
six months, the Company has been analyzing the previous guidance provided
by the U.S. Department of the Treasury and the potential effect of applying
the repatriation provision to un-remitted foreign earnings held by its
various Controlled Foreign Corporations. The Company expects to finalize
its evaluation in the fourth quarter of 2005, and it expects to receive a
one-time tax benefit from the Act. The amount of income to be repatriated,
and the expected tax benefit have not yet been determined.
o In the fourth quarter of 2005, the effective income tax rate for continuing
operations is expected to be 33.4%, before the effect of any discrete
items. This compares with an effective tax rate of 26.4% in the fourth
quarter of 2004. However, as indicated in the prior paragraph, a one-time
tax benefit from the American Jobs Creation Act of 2004 is expected in the
fourth quarter of 2005. Overall, net of the one-time benefit, the effective
income tax rate is expected to be higher in the fourth quarter of 2005
compared with 2004.
Mill Services Segment:
- ----------------------
o According to the International Iron and Steel Institute (IISI), global
steel production (excluding China) for the first nine months of 2005 was
slightly below the first nine months of 2004. To maintain pricing levels, a
more disciplined steel industry has been adjusting production levels to
bring inventories in-line with current demand. Based on these demand
changes, during the fourth quarter of 2005, the Company expects global
steel production to approximate the production of the fourth quarter of
2004.
o The Mill Services Segment's fourth quarter 2005 results are expected to
approximate the fourth quarter of 2004. This is principally a result of
production volume decreases in certain counties (i.e., the U.S., South
Africa, Spain, etc.) and higher energy costs, mostly offset by the benefit
of new contracts. A gradual increase in volume is expected to occur as the
fourth quarter progresses and should continue into 2006.
o The effect of foreign currency translation for the remainder of 2005 is
unknown.
o The increased energy-related costs this Segment experienced during the
first nine months of 2005 are expected to persist through the rest of the
year and into 2006. However, given the volatility of such costs, the effect
cannot be quantified.
o A merger during April 2005 of two of the Company's larger customers has
created the world's largest steel company. The risk remains that certain
Mill Services customers may be acquired or consolidate in the future, which
could have an adverse impact on the Company's income and cash flows.
Conversely, such consolidation may provide additional service opportunities
for the Company.
Access Services Segment:
- ------------------------
o Both the international and domestic Access Services businesses are expected
to show continued improvement during 2005 and into 2006.
o Nonresidential construction activity at the Company's international
operations, particularly in the Middle East, remains strong. However,
looking towards 2006, certain large projects in the Middle East are
expected to be completed. This potential decrease is expected to be offset
by increased activity in other markets.
o U.S. non-residential construction activity continued to improve in the
first nine months of 2005 and the overall market outlook remains positive.
Various industry sources are currently forecasting significant growth for
U.S. non-residential construction during 2005 which should continue into
2006.
o The domestic Access Services business is expected to benefit from increased
non-residential construction activity as a result of recent hurricanes;
however, the projected benefit cannot be quantified at this time.
o The effect of foreign currency translation for the remainder of 2005 is
unknown.
Gas Technologies Segment:
- -------------------------
o Although cost inflation for steel and certain commodities started to
moderate in the second and third quarters of 2005, worldwide supply and
demand for steel and the availability of carbon fiber used to manufacture
filament-wound composite cylinders could have adverse effects on future raw
material costs and this Segment's ability to obtain the necessary raw
materials. Nonetheless, this Segment is expected to benefit from overall
lower commodity costs during the fourth quarter of 2005 in comparison with
the fourth quarter of 2004.
o Weak market conditions and increased costs have impacted the valves
business during the first nine months of 2005. A comprehensive strategic
plan has been developed and is currently being executed to mitigate these
conditions. They include the following: a new senior management team;
development and marketing of new products; focus on an expanded
international customer base; consolidating certain manufacturing process;
process improvements within the manufacturing operations including
outsourcing; and optimization of the organizational structure of the
business. If the conditions encountered during 2004 and the first nine
months of 2005 persist, despite execution of the strategic action plan, the
valuation of this business could be negatively impacted.
-25-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o Despite a decline in the first nine months of 2005, the propane business is
expected to perform well for 2005 as a whole, as it returns to its more
normal business cycle.
Engineered Products and Services ("all other") Category:
- --------------------------------------------------------
o International demand for the railway track maintenance services and
equipment business' products and services has been strong and is expected
to remain so. However, on a comparative basis, results for the fourth
quarter of 2005 are expected to be lower than the record levels attained by
this business in the fourth quarter of 2004.
o Process improvements, new technologies and improved manufacturing
efficiencies are expected to assist in continuing to improve margins of the
railway track maintenance services and equipment business on a long-term
basis.
o The industrial grating business is expected to sustain its continued levels
of increased profitability for 2005. Additionally, this business is
expected to benefit from increased non-residential construction activity as
a result of recent hurricanes; however, the projected benefit cannot be
quantified at this time.
o Although cost inflation for steel and certain commodities has started to
moderate in 2005, worldwide supply and demand for steel could have an
adverse effect on raw material costs and the ability to obtain the
necessary raw materials for most businesses in this Category.
o Consistent, sustained profitable results are expected from the roofing
granules and abrasives business, although increased energy costs could
impact margins.
o Due to an improving natural gas market, demand for air-cooled heat
exchangers is expected to remain strong for the balance of the 2005 and
stable into 2006.
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
(DOLLARS ARE IN MILLIONS, EXCEPT ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
PER SHARE AND PERCENTAGES) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------
Revenues from continuing operations $ 697.5 $ 617.3 $ 2,033.7 $ 1,791.1
Cost of services and products sold 532.6 470.7 1,552.6 1,367.6
Selling, general and administrative expenses 95.1 90.6 287.3 268.1
Other (income) expenses (0.5) 0.9 0.3 4.5
Operating income from continuing operations 69.6 54.5 191.4 149.0
Interest expense 9.9 10.1 30.8 30.4
Income tax expense from continuing operations 18.6 12.1 51.4 35.6
Income from continuing operations 40.0 30.7 104.9 78.5
Income/(loss) from discontinued operations -- 7.9 (0.1) 7.7
Net income 40.0 38.6 104.8 86.2
Diluted earnings per common share 0.95 0.93 2.49 2.08
Consolidated effective income tax rate 30.8% 29.0% 31.6% 30.1%
- ----------------------------------------------------------------------------------------------------------
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
Revenues for the third quarter of 2005 increased $80.2 million or 13% from the
third quarter of 2004, to a record level. Revenues for the first nine months of
2005 increased $242.5 million or 14% from the first nine months of 2004, to a
record level for the first nine months of a year. These increases were
attributable to the following significant items:
-26-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CHANGES IN REVENUES - 2005 VS. 2004 THIRD QUARTER NINE MONTHS
- ------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
Net increased revenues in the Access Services Segment due principally to the strength $ 20.1 $ 57.2
of the international business, particularly in the Middle East and
Europe, and improving markets in North America.
Net increased volume, new contracts and sales price changes in the Mill Services 2.8 43.2
Segment.
Net increased revenues in the railway track maintenance services and equipment 24.7 41.6
business due principally to increased rail equipment sales (primarily to
international customers), contract services and repair part sales.
Effect of positive foreign currency translation. 4.9 34.6
Net increased revenues in the Gas Technologies Segment due principally to improved 13.5 24.7
market conditions for industrial cylinders, cryogenics equipment and
composite-wrapped cylinders. For the third quarter of 2005, propane
tank sales increased due to lower than normal seasonal demand in the
third quarter of 2004. However, for the first nine months of 2005,
propane tank sales decreased in comparison with the first nine months
of 2004. This was due to customers accelerating purchases in 2004 to
avoid anticipated price increases due to commodity cost inflation.
Increased revenues of the air-cooled heat exchangers business due to improving natural 9.7 24.4
gas markets.
Increased revenues of the industrial grating products business due principally to 1.5 7.8
strong demand resulting in increased volume and increased prices.
Net effect of business acquisitions in the Mill Services Segment $1.6 million/$2.4 1.6 5.9
million (quarter and nine months) and the Access Services Segment $3.5 million
(nine months only).
Other (minor changes across the various units not already mentioned). 1.4 3.1
- ------------------------------------------------------------------------------------------------------------------------------
Total Change in Revenues - 2005 vs. 2004 $ 80.2 $ 242.5
==============================================================================================================================
COST OF SERVICES AND PRODUCTS SOLD
Cost of services and products sold for the third quarter of 2005 increased $61.9
million, or 13%, from the third quarter of 2004, in line with the 13% increase
in revenues. Cost of services and products sold for the first nine months of
2005 increased $185.0 million, or 14%, from the first nine months of 2004, in
line with the 14% increase in revenues. These increases were attributable to the
following significant items:
CHANGES IN COST OF SERVICES AND PRODUCTS SOLD - 2005 VS. 2004 THIRD QUARTER NINE MONTHS
- ------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
Increased costs due to increased revenues (exclusive of the effect of foreign currency $ 55.5 $ 153.7
translation and business acquisitions) including the effect of increased
commodity costs and energy-related cost increases in excess of approximately $4
million and $12 million for the third quarter and first nine months,
respectively.
Effect of foreign currency translation. 4.3 27.1
Effect of business acquisitions in the Mill Services (third quarter and nine months) 1.1 4.8
and Access Services Segments (nine months only).
Other (due to product mix and minor changes across the various units not already 1.0 (0.6)
mentioned).
- ------------------------------------------------------------------------------------------------------------------------------
Total Change in Cost of Services and Products Sold - 2005 vs. 2004 $ 61.9 $ 185.0
==============================================================================================================================
-27-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third quarter of
2005 increased $4.5 million or 5% from the third quarter of 2004, a lower rate
than the 13% increase in revenues. SG&A expenses for the first nine months of
2005 increased $19.3 million or 7% from the first nine months of 2004, a lower
rate than the 14% increase in revenues. These lower relative percentage
increases in SG&A expenses as compared with revenues were due to stringent cost
controls, process improvements and reorganization actions. Additionally, a
significant portion of the general and administrative costs are relatively fixed
and would not normally change in direct proportion to increases or decreases in
revenues. The absolute dollar increase in SG&A expenses were attributable to the
following significant items:
CHANGES IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - 2005 VS. 2004 THIRD QUARTER NINE MONTHS
- ------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
Increased compensation expense due to salary increases, increased headcount, increased $ 1.9 $ 4.8
payroll taxes and employee incentive plan increases due to improved performance,
partially offset by decreased defined benefit pension expense.
Effect of foreign currency translation. 0.1 3.9
Increased commissions expense. 1.7 2.9
Increased costs on a comparative basis due to income generated by the termination of -- 2.1
postretirement benefit plans in 2004 that were not repeated in 2005.
Effect of business acquisitions - principally SGB Raffia in Australia. 0.1 1.4
Increased travel expenses. 0.2 1.2
Other (including increased energy-related costs). 0.5 3.0
- ------------------------------------------------------------------------------------------------------------------------------
Total Change in Selling, General and Administrative
Expenses - 2005 vs. 2004 $ 4.5 $ 19.3
==============================================================================================================================
OTHER (INCOME) 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 the first nine months of 2005,
the Company continued its strategy to streamline operations. This strategy
included the sale of certain assets related to exiting an underperforming Mill
Services contract; the sale of certain assets in the Access Services Segment;
and, where appropriate, headcount reductions in both administrative and
operating positions. These actions resulted in net Other (income)/expense of
$(0.5) million and $0.3 million in the third quarter and first nine months of
2005, respectively, compared with net Other expense of $0.9 million and $4.5
million in the comparable 2004 periods. These changes were attributable to the
following significant items:
CHANGES IN OTHER (INCOME) EXPENSES - 2005 VS. 2004 THIRD QUARTER NINE MONTHS
- ------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in gains on disposals of assets. $ (2.0) $ (5.9)
Increase in employee termination benefit costs. 0.5 1.5
Increase in other expenses due principally to costs associated with reorganization 0.1 0.3
initiatives.
- ------------------------------------------------------------------------------------------------------------------------------
Total Change in Other (Income) Expenses - 2005 vs. 2004 $ (1.4) $ (4.1)
==============================================================================================================================
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
The increase in income tax expense from continuing operations for the third
quarter and first nine months of 2005 of $6.5 million or 53% and $15.8 million
or 44%, respectively, was primarily due to increased earnings from continuing
operations for the reasons mentioned above. There was also an increase in the
effective income tax rate relating to continuing operations from 27.1% and 29.6%
in the third quarter and first nine months of 2004, respectively, to 30.8% and
31.6% in the third quarter and first nine months of 2005, respectively. The
increase in the effective income tax rate in 2005 was primarily the result of
the expiration of three tax holidays in Europe, Asia and the Middle East.
-28-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
INCOME FROM CONTINUING OPERATION
Income from continuing operations was a record $40.0 million and a record $104.9
million in the third quarter and first nine months of 2005, respectively. These
were increases of 30% and 34% from the respective 2004 periods. These records
resulted from improved third quarter performance from principally the Access
Services Segment, the railway track maintenance services and equipment business,
the Gas Technologies Segment, air-cooled heat exchangers and industrial grating
products. On a year-to-year basis, improved performance resulted primarily from
the Access Services Segment, the railway track maintenance services and
equipment business, the Mill Services Segment, air-cooled heat exchangers and
industrial grating products. Increased gains on the disposal of assets also
affected results, as more fully described in the sections above. These
improvements were partially offset by an increased effective income tax rate in
both the third quarter and first nine months of 2005.
INCOME/(LOSS) FROM DISCONTINUED OPERATIONS
The decrease in income from discontinued operations in both the third quarter
and first nine months of 2005 related to the recording of $12.5 million pre-tax
of the $12.6 million pre-tax settlement with the U.S. Government regarding the
long-standing Federal Excise Tax (FET) dispute during the third quarter of 2004.
The Company received payment of the settlement during the fourth quarter of
2004. For additional information on the FET settlement, see Note 10,
"Commitments and Contingencies," to the Company's Form 10-K for the year ended
December 31, 2004.
NET INCOME AND EARNINGS PER SHARE
Net income of $40.0 million and diluted earnings per share of $0.95 in the third
quarter of 2005 exceeded the third quarter of 2004 by $1.4 million and $0.02,
respectively. Net income of $104.8 million and diluted earnings per share of
$2.49 in the first nine months of 2005 exceeded the first nine months of 2004 by
$18.6 million and $0.41, respectively. These increases resulted from strong
demand for most of the Company's services and products resulting in increased
revenues, as well as from stringent cost controls and process improvements that
contained selling, general and administrative expenses growth to a level below
revenue growth, partially offset by an increased effective income tax rate. This
was partially offset by decreased income from discontinued operations in 2005
for the reasons mentioned in the previous paragraph.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Building on 2004's record cash provided by operations of $270.5 million, the
Company continued that momentum by achieving a record $232.6 million in
operating cash in the first nine months of 2005, 40% higher than the first nine
months of 2004. That significant source of cash in 2005 has enabled the Company
to invest $209.2 million in capital expenditures (over one-half of which were
for revenue-growth projects) and $7.0 million in strategic acquisitions, in
addition to paying $37.4 million in stockholder dividends. The Company also
received $17.4 million in cash from asset sales in the first nine months of
2005. The sale of the Youngman access equipment manufacturing plant in October
2005 will put the total cash from asset sales well above the Company's $20
million goal.
Since the fourth quarter has historically been the Company's highest for cash
flows, Management is confident that the stated 2005 strategic objective of
generating a record $320 million in net cash provided by operating activities
will be achieved. The Company's strategy is to redeploy excess or discretionary
cash in new long-term, high renewal-rate services contracts for the Mill
Services business and for growth in the Access Services and railway track
maintenance services businesses. The Company will also pursue sensible bolt-on
acquisitions, such as the recently announced Hunnebeck Access Services
acquisition, to further enhance its industrial services growth, expand its
geographic footprint and increase Economic Value Added (EVA(R)). Upon completion
of the pending Hunnebeck acquisition, the 2005 targeted investment of $140
million of discretionary cash flow for internal growth opportunities and
acquisitions will be substantially exceeded. The Company also plans to continue
its long and consistent history of paying dividends to stockholders.
The Company's net cash borrowings increased $25.6 million in the first nine
months of 2005 due to record capital investments of $209.2 million. As of
September 30, 2005, the Company had only approximately $87 million of debt that
can be paid prior to maturity. The balance of the debt, principally the
Company's (pound)200 million notes and its $150 million notes, cannot be paid
until maturity in 2010 and 2013, respectively. With the pending Hunnebeck
acquisition, the Company's overall debt is expected to increase in the near-term
with a goal of reducing this debt during 2006, to the extent possible. The
Hunnebeck acquisition is expected to be financed by issuing commercial paper in
the U.S. and Europe. This will increase variable debt from its current 16% of
total debt to approximately 34% of total debt.
-29-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
COMMERCIAL COMMITMENTS
As of September 30, 2005, there was a decrease in the standby letters of credit
and performance bonds of approximately $96.9 million from the total $218.3
million outstanding at December 31, 2004. This decrease was due principally to
the release in January 2005 of an $80 million surety bond and a $9 million
standby letter of credit, both related to the Company's settled Federal Excise
Tax (FET) dispute, as previously reported in the Annual Report on Form 10-K for
2004.
SOURCES AND USES OF CASH
The Company's principal sources of liquidity are cash from operations and
short-term borrowings under its various credit agreements, augmented
periodically by cash proceeds from asset sales. The primary drivers of the
Company's cash flow from operations are the Company's sales and income,
particularly in the services businesses. The Company's long-term Mill Services
contracts provide predictable cash flows for several years into the future. (See
"Certainty of Cash Flows" section for additional information on estimated future
revenues of Mill Services contracts and order backlogs for the Company's
manufacturing businesses and railway track maintenance services business).
Additionally, returns on capital investments made in prior years, for which no
cash is currently required, are a significant source of operating cash.
Depreciation related to these investments is a non-cash charge. The Company also
continues to maintain working capital at a manageable level based upon the
requirements and seasonality of the business.
Major uses of operating cash flows and borrowed funds include payroll costs and
related benefits; pension funding payments; raw material purchases for the
manufacturing businesses; income tax payments; interest payments; insurance
premiums and payments of self-insured casualty losses; and machinery, equipment,
automobile and facility rental payments. Other primary uses of cash include
capital investments, principally in the industrial services businesses; debt
payments; and dividend payments. Cash will also be used for acquisitions as the
appropriate opportunities arise.
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 September 30, 2005.
SUMMARY OF CREDIT FACILITIES AND
COMMERCIAL PAPER PROGRAMS AS OF SEPTEMBER 30, 2005
- --------------------------------------------------------------------------------------------------
(IN MILLIONS) FACILITY OUTSTANDING AVAILABLE
LIMIT BALANCE CREDIT
- --------------------------------------------------------------------------------------------------
U.S. commercial paper program $ 350.0 $ 56.6 $ 293.4
Euro commercial paper program 120.5 16.8 103.7
Revolving credit facility (a) 350.0 -- 350.0
Bilateral credit facility (b) 25.0 -- 25.0
- --------------------------------------------------------------------------------------------------
TOTALS AT SEPTEMBER 30, 2005 $ 845.5 $ 73.4 $ 772.1(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. This will increase to $500
million upon the expected execution of increased credit facilities and
commercial paper programs in the fourth quarter of 2005, as indicated
below.
In order to provide increased financial flexibility for potential growth-related
investments and for general corporate requirements, the Company plans to
increase its credit facilities and commercial paper programs during the fourth
quarter of 2005 as follows:
-30-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SUMMARY OF PROJECTED CHANGES TO CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS
- --------------------------------------------------------------------------------------------------
(IN MILLIONS) PROJECTED
SEPTEMBER 30, 2005 DECEMBER 31, 2005
FACILITY LIMIT FACILITY LIMIT(d) CHANGE
- --------------------------------------------------------------------------------------------------
U.S. commercial paper program $ 350.0 $ 450.0 $ 100.0
Euro commercial paper program (a) 120.5 241.0 120.5
Revolving credit facility (b) 350.0 450.0 100.0
Bilateral credit facility (c) 25.0 50.0 25.0
- --------------------------------------------------------------------------------------------------
Totals $ 845.5 $ 1,191.0 $ 345.5
==================================================================================================
(a) 100 million euros being expanded to 200 million euros
(b) U.S.-based program
(c) International-based program
(d) The projected increases are contingent upon the execution of the necessary
agreements and receipt of regulatory approvals.
For more information on the Company's credit facilities, see Note 6, "Debt and
Credit Agreements," to the Company's Form 10-K for the year ended December 31,
2004.
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at September 30, 2005:
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- F2 Stable
- ----------------------------------------------------------------------------
The Company's euro-based commercial paper program has not been rated since the
euro market does not require it. In July 2005, Fitch reaffirmed its A- and F2
ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. S&P and Moody's reaffirmed their ratings
for the Company in September 2005 and September 2004, respectively. 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.
-31-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
WORKING CAPITAL POSITION - Changes in the Company's working capital are
reflected in the following table:
(DOLLARS ARE IN MILLIONS) SEPTEMBER 30 DECEMBER 31 INCREASE
2005 2004 (DECREASE)
- --------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 113.3 $ 94.1 $ 19.2
Accounts receivable, net 567.0 555.2 11.8
Inventories 246.6 217.0 29.6
Other current assets 62.4 58.6 3.8
Assets held-for-sale 36.3 1.0 35.3
- --------------------------------------------------------------------------------------------------
Total current assets 1,025.6 925.9 99.7
- --------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Notes payable and current maturities 13.7 31.1 (17.4)
Accounts payable 204.9 220.3 (15.4)
Accrued compensation 60.8 63.8 (3.0)
Income taxes 47.6 40.2 7.4
Other current liabilities 268.7 223.0 45.7
Liabilities associated with assets held-for-sale 15.9 0.7 15.2
- --------------------------------------------------------------------------------------------------
Total current liabilities 611.6 579.1 32.5
- --------------------------------------------------------------------------------------------------
WORKING CAPITAL $ 414.0 $ 346.8 $ 67.2
- --------------------------------------------------------------------------------------------------
CURRENT RATIO 1.7:1 1.6:1
==================================================================================================
Working capital increased approximately 19% in the first nine months of 2005 due
principally to the following factors:
o Assets held-for-sale and their associated liabilities increased as of
September 30 due to the pending sale of the Youngman U.K. Access
Services manufacturing plant. This transaction closed in October 2005.
o Inventories increased $29.6 million from December 31, 2004 due to the
following factors:
- Increased work-in-process and raw materials inventories due
primarily to customer orders being manufactured at the railway
track maintenance services and equipment business, scheduled for
delivery principally in the fourth quarter of 2005.
- Increased finished goods for the Gas Technologies Segment to meet
expected demand in the fourth quarter of 2005.
o Cash increased by $19.2 million due to increased cash from operations
in certain subsidiaries. A portion of this cash will be repatriated in
the fourth quarter under the American Jobs Creation Act. See Part I,
Item 1, Footnote L, labeled "Income Taxes" for further discussion.
o Short-term borrowings and current maturities decreased due to reduced
international short-term borrowings.
o Other current liabilities increased principally due to increases in
accrued insurance liabilities (primarily related to claims covered by
third-party insurance) and accrued interest on the 200 million British
pound sterling notes (since interest is paid annually in October). The
increase in accrued insurance liabilities was offset by an increase in
accounts receivable related to the corresponding insurance recovery.
CERTAINTY OF CASH FLOWS - The certainty of the Company's future cash flows
is underpinned by the long-term nature of the Company's Mill Services contracts.
At December 31, 2004, the Company's Mill Services contracts had estimated future
revenues of $3.7 billion. In addition, as of September 30, 2005, the Company had
an order backlog of $323.4 million for its manufacturing businesses and railway
track maintenance services. This compares with $243.0 million at December 31,
2004 and $299.6 million at September 30, 2004. The increase from December 31,
2004 is due principally to new railway track maintenance services contracts and
new orders for heat exchangers in the Engineered Products and
-32-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Services ("all other") Category. The railway track maintenance services and
equipment business backlog includes a significant portion that is long-term,
which will not be realized until 2006 and later due to the long lead times
necessary to build certain equipment, and the long-term nature of certain
service contracts. Backlog for scaffolding, shoring and forming services and for
roofing granules and slag abrasives is not included in the total backlog because
it is generally not quantifiable, due to the nature of the products and services
provided.
The types of products and services that the Company provides are not subject to
rapid technological change. This 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 Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
SUMMARIZED CASH FLOW INFORMATION
- -----------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30
(IN MILLIONS) 2005 2004
- -----------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 232.6 $ 165.8
Investing activities (198.9) (155.5)
Financing activities (7.0) 4.8
Effect of exchange rate changes on cash (7.5) (1.9)
- -----------------------------------------------------------------------------
Net change in cash and cash equivalents $ 19.1(a) $ 13.2
=============================================================================
(a) does not total due to rounding
CASH FROM OPERATING ACTIVITIES - Net cash provided by operating activities in
the first nine months of 2005 was a record $232.6 million, an increase of $66.8
million from the first nine months of 2004. The increased cash from operations
was a result of the following factors:
o Increased net income in the first nine months of 2005 compared with
the first nine months of 2004.
o Net receivables increased as of September 30, 2005 compared with
December 31, 2004. This was due to the timing of receipts on
third-party insurance claims partially offset by the timing of cash
collections at the railway track maintenance services and equipment
business, Mill Services business, and the international Access
Services business. The increased receivables due to the third-party
insurance claims were directly offset by an increase in insurance
liabilities.
o Net cash payments for inventories of $43 million were made through
September 30, 2005, less than in the comparable period of 2004. This
build-up was to meet scheduled shipments at the railway track
maintenance services and equipment business and for anticipated
shipments by the Gas Technologies Segment.
o A change in other assets and liabilities was due principally to the
increase in insurance liabilities partially offset by a discretionary
payment made to the U.K. pension plan in the first quarter of 2005.
The increased insurance liabilities were directly offset by increased
third-party insurance claim receivables.
CASH USED IN INVESTING ACTIVITIES - Capital investments of $209.2 million
for the first nine months of 2005 were a record for the first nine months of a
year. This was an increase of $55.4 million over the first nine months of 2004.
Overall, in the first nine months of 2005, over 50% of the investments were for
projects intended to grow future revenues. Investments were made predominantly
in the industrial services businesses with 55% in the Mill Services Segment and
31% in the Access Services Segment. Throughout the remainder of 2005, the
Company plans to continue to invest in high-return projects and bolt-on
acquisitions, principally in the industrial services businesses.
-33-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions at September 30, 2005 and December 31,
2004.
SEPTEMBER 30 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2005 2004
- -------------------------------------------------------------------------------
Notes Payable and Current Maturities $ 13.7 $ 31.1
Long-term Debt 597.7 594.7
- -------------------------------------------------------------------------------
Total Debt 611.4 625.8
Total Equity 960.8 914.2
- -------------------------------------------------------------------------------
Total Capital $ 1,572.2 $ 1,540.0
Total Debt to Total Capital 38.9% 40.6%
===============================================================================
The Company's debt as a percent of total capital as of September 30, 2005
decreased slightly from December 31, 2004. Total equity increased due to $104.8
million of net income in the first nine months of 2005 and increases in
additional paid-in capital from stock option exercises partially offset by
foreign currency translation adjustments and cash dividends to stockholders.
DEBT COVENANTS
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Based on balances at September 30, 2005, the Company could
increase borrowings by approximately $829.9 million and still be within its debt
covenants. Alternatively, keeping all other factors constant, the Company's
equity could decrease by approximately $485.8 million and the Company would
still be within its covenants. The Company expects to be compliant with these
debt covenants one year from now.
CASH AND VALUE-BASED MANAGEMENT
The Company plans to continue with its strategy of selective investing for
strategic purposes for the foreseeable future. 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 defined benefit pension expense
is included for EVA purposes). Therefore, value is created when a project or
initiative produces a return above the cost of capital. In the first nine months
of 2005, eight of the Company's nine divisions improved their EVA from the
comparable 2004 period.
The Company is committed to continue paying dividends to stockholders. The
Company has increased the dividend rate for eleven consecutive years, and in
August 2005, the Company paid its 221st consecutive quarterly cash dividend. In
September 2005, the Company declared its 222nd consecutive quarterly cash
dividend. Additionally, the Company has authorization to repurchase up to one
million of its shares through January 31, 2006.
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 and acquisitions, reducing debt to the extent possible and paying cash
dividends as a means to enhance stockholder value.
NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
Information on new financial accounting standards issued is included in Note M,
"New Financial Accounting Standards Issued," in Part I, Item 1, Financial
Statements.
ITEM 3. 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 defined
benefit pension plans, and global economic and political conditions.
-34-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY IMPACT THE
COMPANY'S BUSINESSES.
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, 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 railway track maintenance business may be adversely impacted by
developments in the railroad industry that lead to lower capital spending
or reduced maintenance spending;
o The industrial abrasives and roofing granules business may be adversely
impacted by reduced home resales or economic conditions that slow the rate
of residential roof replacement, or by slowdowns in the industrial and
infrastructure refurbishment industries;
o The industrial grating business may be adversely impacted by slowdowns in
non-residential construction and industrial production;
o The Air-X-Changers business is affected by cyclical conditions present in
the natural gas industry. A high demand for natural gas is currently
creating increased demand for the Company's air-cooled heat exchangers.
However, a slowdown in natural gas production could adversely affect the
Air-X-Changers business, and
o The Company's Gas Technologies business may be adversely impacted by
reduced industrial production, and lower demand for industrial gases,
slowdowns in demand for medical cylinders, valves and consumer barbecue
grills, or lower demand for natural gas vehicles.
THE COMPANY'S DEFINED BENEFIT PENSION EXPENSE IS DIRECTLY AFFECTED BY THE
EQUITY AND BOND MARKETS AND A DOWNWARD TREND IN THOSE MARKETS COULD
ADVERSELY IMPACT THE COMPANY'S FUTURE EARNINGS. AN UPWARD TREND IN THE
EQUITY AND BOND MARKETS COULD POSITIVELY AFFECT THE COMPANY'S FUTURE
EARNINGS.
In addition to the economic issues that directly affect the Company's
businesses, changes in the performance of equity and bond markets, particularly
in the United Kingdom and the United States, impact actuarial assumptions used
in 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 negatively impacted the Company's
pension expense and the accounting for pension assets and liabilities. This
resulted in an increase in pre-tax defined benefit pension expense from
continuing operations of approximately $20.8 million for calendar year 2002
compared with 2001 and $17.7 million for calendar year 2003 compared with 2002.
The upturn in certain financial markets during 2003 and certain plan design
changes (discussed below) contributed to a decrease in pre-tax defined benefit
pension expense from continuing operations of approximately $5.4 million for
2004 compared with 2003. Additionally, pre-tax defined benefit pension expense
for 2005 is expected to be approximately $5 million less than 2004. This
estimate excludes the impact of any potential curtailments and will be mostly
offset by increased defined contribution and multi-employer plans' pension
expense. An upward trend in capital markets would likely result in a decrease in
future unfunded obligations and pension expense. This could also result in an
increase to Stockholders' Equity and a decrease in the Company's statutory
funding requirements. If the financial markets deteriorate, it would most likely
have a negative impact on the Company's pension expense and the accounting for
pension assets and liabilities. This could result in a decrease to Stockholders'
Equity and an increase in the Company's statutory funding requirements.
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. Using the expense calculated for
calendar year 2005 and holding all other assumptions constant, a one-half
percent increase or decrease in the discount rate and the expected long-term
rate of return on plan assets would increase or decrease annual 2005 pre-tax
defined benefit pension expense as follows:
-35-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
APPROXIMATE CHANGES IN PRE-TAX DEFINED BENEFIT
----------------------------------------------
PENSION EXPENSE
---------------
U.S. PLANS U.K. PLAN
---------- ---------
Discount rate
-------------
One-half percent increase Decrease of $1.6 million Decrease of $5.8 million
One-half percent decrease Increase of $1.6 million Increase of $5.8 million
Expected long-term rate of return on plan assets
------------------------------------------------
One-half percent increase Decrease of $1.1 million Decrease of $2.8 million
One-half percent decrease Increase of $1.1 million Increase of $2.8 million
Although the above sensitivity analysis is based upon calculations for the 2005
defined benefit pension expense, it is expected that these changes would result
in a similar impact on 2006 defined benefit pension expense.
During 2006, the twenty-year amortization of the transition asset (from the
implementation of SFAS No. 87 in 1986) for the U.S. pension plans will cease.
Holding all other assumptions constant with 2005, this will result in
approximately $1 million in additional pension expense during 2006. Overall
global defined benefit pension expense for 2006 is expected to approximate 2005
expense based upon the expected actuarial assumptions to be used, plan asset
returns, as well as the significant voluntary contributions made by the Company
during 2005.
In response to the adverse market conditions, during 2002 and 2003 the Company
conducted a comprehensive global review of its pension plans in order to
formulate a plan to make its long-term pension costs more predictable and
affordable. The Company implemented design changes for most of these plans
during 2003. The principal change involved converting future pension benefits
for many of the Company's non-union employees in both the U.K. and U.S. from
defined benefit plans to defined contribution plans as of January 1, 2004. In
the long-term, this conversion is expected to make the Company's pension expense
more predictable and affordable and less sensitive to changes in the financial
markets.
THE COMPANY'S GLOBAL PRESENCE SUBJECTS IT TO A VARIETY OF RISKS ARISING
FROM DOING BUSINESS INTERNATIONALLY.
The Company operates in over 40 countries, including the United States. The
Company's global footprint exposes it to a variety of risks that may adversely
impact results of operations, cash flows or financial position. These include
the following:
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;
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 international 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;
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o laws in various international jurisdictions that limit the right and
ability of subsidiaries to pay dividends and remit earnings to
affiliated companies unless specified conditions are met; and,
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, cash flows 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 the first nine months of 2005, 2004 and 2003,
operations in these countries contributed approximately $23.8 million, $17.5
million and $12.0 million, respectively, to the Company's operating income.
Additionally, the Company has operations in and sales to countries that have
encountered outbreaks of communicable diseases (e.g., Acquired Immune Deficiency
Syndrome (AIDS) and others). Should such outbreaks worsen or spread to other
countries, the Company may be negatively impacted through reduced sales to and
within these countries and other countries impacted by such diseases.
EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY IMPACT THE COMPANY'S BUSINESS.
Fluctuations in foreign exchange rates between the U.S. dollar and the
approximately 35 other currencies in which the Company conducts business may
adversely impact the Company's operating income and income from continuing
operations in any given fiscal period. Approximately 59% of the Company's sales
and approximately 69% of the Company's operating income from continuing
operations for the nine months ended September 30, 2005 and 2004 were derived
from operations outside the United States. More specifically, during the nine
months ended September 30, 2005 and 2004, approximately 21% and 22%,
respectively, of the Company's revenues were derived from operations in the U.K.
Additionally, approximately 18% and 17% of the Company's revenues were derived
from operations with the euro as their functional currency during the nine
months ended September 30, 2005 and 2004, respectively. Given the structure of
the Company's revenues and expenses, an increase in the value of the U.S. dollar
relative to the foreign currencies in which the Company earns its revenues
generally has a negative impact on operating income, whereas a decrease in the
value of the U.S. dollar tends to have the opposite effect. The Company's
principal foreign currency exposures are to the British pound sterling and the
euro.
Compared with the corresponding period in 2004, the average values of major
currencies changed as follows in relation to the U.S. dollar during the first
nine months of 2005, impacting the Company's sales and income:
o British pound sterling Strengthened by 1%
o euro Strengthened by 3%
o South African rand Strengthened by 4%
o Brazilian real Strengthened by 17%
o Australian dollar Strengthened by 6%
Compared with exchange rates at December 31, 2004, the values of major
currencies changed as follows as of September 30, 2005:
o British pound sterling Weakened by 9%
o euro Weakened by 13%
o South African rand Weakened by 12%
o Brazilian real Strengthened by 17%
o Australian dollar Weakened by 3%
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 on the
Company, in the first nine months of 2005, revenues would have been
approximately 2% or $34.6 million less and operating income would have been
approximately 2% or $4.0 million less if the average exchange rates for the
first nine months of 2004 were utilized. In a similar comparison for the first
nine months of 2004, revenues would have decreased approximately 5% or $83.1
million while
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
operating income would have been approximately 4% or $5.8 million less if the
average exchange rates would have remained the same as the first nine months of
2003.
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 decreased net assets of
$44.0 million and $3.1 million, at September 30, 2005 and 2004, respectively,
when compared with December 31, 2004 and 2003, respectively.
The Company seeks to reduce exposures to foreign currency transaction
fluctuations through the use of forward exchange contracts. At September 30,
2005, the notional amount of these contracts was $89.5 million, and over 90% of
these contracts will mature in the fourth quarter of 2005. The Company does not
hold or issue financial instruments for trading purposes, and it is the
Company's policy to prohibit the use of derivatives for speculative purposes.
Although the Company engages in foreign currency forward exchange contracts and
other hedging strategies to mitigate foreign exchange risk, hedging strategies
may not be successful or may fail to offset the risk.
In addition, competitive conditions in the Company's manufacturing businesses
may limit the Company's ability to increase product prices in the face of
adverse currency movements. Sales of products manufactured in the United States
for the domestic and export markets may be affected by the value of the U.S.
dollar relative to other currencies. Any long-term strengthening of the U.S.
dollar could depress demand for these products reducing sales and may cause
translation gains or losses due to the revaluation of foreign
currency-denominated 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 increasing sales and may cause translation
gains or losses due to the revaluation of accounts payable, accounts receivable
and other asset and liability accounts.
NEGATIVE ECONOMIC CONDITIONS MAY ADVERSELY IMPACT THE ABILITY OF THE
COMPANY'S CUSTOMERS TO MEET THEIR OBLIGATIONS TO THE COMPANY ON A TIMELY
BASIS AND IMPACT THE VALUATION OF THE COMPANY'S ASSETS.
If a downturn in the economy occurs, it may adversely impact the ability of the
Company's customers to meet their obligations to the Company on a timely basis
and could result in bankruptcy filings by them. If customers are unable to meet
their obligations on a timely basis, it could adversely impact the realizability
of receivables, the valuation of inventories and the valuation of long-lived
assets across the Company's businesses, as well as negatively impact 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 recorded amounts, the Company will be required to record a
write-down in the period of determination, which will reduce net income for that
period. Additionally, the risk remains that certain Mill Services customers may
file for bankruptcy protection, be acquired or consolidate in the future, which
could have an adverse impact on the Company's income and cash flows. Conversely,
such consolidation may provide additional service opportunities for the Company.
A NEGATIVE OUTCOME ON PERSONAL INJURY CLAIMS AGAINST THE COMPANY MAY
ADVERSELY IMPACT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos. In their suits, the plaintiffs have named as defendants many
manufacturers, distributors and repairers of numerous types of equipment or
products that may 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 three settlements for nominal amounts paid by the Company's
insurance carrier. 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 I,
"Commitments and Contingencies," in Part 1, Item 1, Financial Statements.
THE COMPANY MAY LOSE CUSTOMERS OR BE REQUIRED TO REDUCE PRICES AS A RESULT
OF COMPETITION.
The industries in which the Company operates are highly competitive.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o The Company's Mill Services business is sustained mainly through contract
renewals. Historically, the Company's contract renewal rate has averaged
approximately 95%. If the Company is unable to renew its contracts at the
historical rates, revenue may decline.
o The Company's Access Services business rents and sells equipment and
provides erection and dismantling services to principally the
non-residential construction and industrial plant maintenance markets.
Contracts are awarded based upon the Company's engineering capabilities,
product availability, safety record, and the ability to competitively price
its rentals and services. Commencing in 2000, due to economic downturns in
their home markets, certain international competitors exported significant
quantities of rental equipment to the markets the Company serves,
particularly the U.S. This resulted in an oversupply of certain equipment
and a consequential reduction in product and rental pricing in the markets
receiving the excess equipment. If the Company is unable to consistently
provide high-quality products and services at competitive prices, it may
lose customers or operating margins may decline due to reduced selling
prices.
o The Company's manufacturing businesses compete with companies that
manufacture similar products both internationally and domestically. Certain
international competitors export their products into the United States and
sell them at lower prices due to lower labor costs and government subsidies
for exports. Such practices may limit the prices the Company can charge for
its products and services. Additionally, unfavorable foreign exchange rates
can adversely impact the Company's ability to match the prices charged by
international competitors. If the Company is unable to match the prices
charged by international competitors, it may lose customers.
The Company's strategy to overcome this competition includes 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, extreme weather conditions, and
other factors, may result in an increase in the volatility of energy costs, both
on a macro basis and for the Company specifically. In the first nine months of
2005 and 2004, energy costs have approximated 3.7% and 3.5% of the Company's
revenue, respectively. To the extent that such costs cannot be passed to
customers in the future, operating income and results of operations may be
adversely affected.
INCREASES OR DECREASES IN PURCHASE PRICES OR AVAILABILITY OF STEEL OR OTHER
MATERIALS AND COMMODITIES 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 and commodities. Beginning
in 2004, the price paid for steel and certain other commodities increased
significantly compared with prior years. If steel or other material costs
associated with the Company's manufactured products increase and the costs
cannot be passed on to the Company's customers, operating income would be
adversely affected. Additionally, decreased availability of steel or other
materials, such as carbon fiber used to manufacture filament-wound composite
cylinders, could affect the Company's ability to produce manufactured products
in a timely manner. If the Company cannot obtain the necessary raw materials for
its manufactured products, then revenues, operating income and cash flows will
be adversely affected.
THE COMPANY IS SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND THE SUCCESS OF
EXISTING OR FUTURE ENVIRONMENTAL CLAIMS AGAINST IT COULD ADVERSELY IMPACT
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
remediation of contaminated sites and the maintenance of a safe work place.
These laws impose penalties, fines and other sanctions for non-compliance and
liability for response costs, property damages and personal injury resulting
from past and current spills, disposals or other releases of, or exposure to,
hazardous materials. The Company could incur substantial costs as a result of
non-compliance with or liability for remediation or other costs or damages under
these laws. The Company may be subject to more stringent environmental laws in
the future, and compliance with more stringent environmental requirements may
require the Company to make material expenditures or subject it to liabilities
that the Company currently does not anticipate.
The Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a "potentially responsible party" for certain waste disposal sites
under the federal "Superfund" law. At certain sites, the Company is currently
conducting environmental remediation, and it is probable that the Company will
agree to make payments toward funding certain other remediation activities. It
also is possible that
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
some of these matters will be decided unfavorably to the Company and that other
sites requiring remediation will be identified. Each of these matters is subject
to various uncertainties and financial exposure is dependent upon such factors
as the continuing evolution of environmental laws and regulatory requirements,
the availability and application of technology, the allocation of cost among
potentially responsible parties, the years of remedial activity required and the
remediation methods selected. The Company has evaluated its potential liability
and the Consolidated Balance Sheets at September 30, 2005 and December 31, 2004
include an accrual of $2.5 million and $2.7 million, respectively, for
environmental matters. The amounts charged against pre-tax earnings related to
environmental matters totaled $0.8 million and $1.4 million for the nine months
ended September 30, 2005 and 2004, 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 a
covenant requiring a maximum debt to capital ratio of 60%. In addition, certain
notes payable agreements also contain a covenant requiring a minimum net worth
of $475 million. These covenants limit the amount of debt the Company may incur,
which could limit its ability to obtain additional financing or to pursue
business opportunities. In addition, the Company's ability to comply with these
ratios may be affected by events beyond its control. A breach of any of these
covenants or the inability to comply with the required financial ratios could
result in a default under these credit facilities. In the event of any default
under these credit facilities, the lenders under those facilities could elect to
declare all borrowings outstanding, together with accrued and unpaid interest
and other fees, to be due and payable, which would cause an event of default
under the notes. This could, in turn, trigger an event of default under the
cross-default provisions of the Company's other outstanding indebtedness. At
September 30, 2005, the Company was in compliance with these covenants with a
debt to capital ratio of 38.9% and a net worth of $960.8 million. The Company
had $355.8 million in outstanding indebtedness containing these covenants at
September 30, 2005.
HIGHER THAN EXPECTED INSURANCE CLAIMS, FOR WHICH THE COMPANY RETAINS A
PORTION OF THE RISK, COULD ADVERSELY IMPACT 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 September 30, 2005 and December 31,
2004, the Company had recorded liabilities of $114.2 million and $77.4 million,
respectively, related to both asserted and unasserted insurance claims. These
amounts also include losses for which a corresponding receivable from the
insurance companies has been recorded. If actual claims are higher than those
projected by management, an increase to the Company's insurance reserves may be
required and would be recorded as a charge to income in the period the need for
the change was determined. Conversely, if actual claims are lower than those
projected by management, a decrease to the Company's insurance reserves may be
required and would be recorded as a reduction to expense in the period the need
for the change was determined.
THE SEASONALITY OF THE COMPANY'S BUSINESS MAY CAUSE ITS QUARTERLY RESULTS
TO FLUCTUATE.
The Company has historically generated the majority of its cash flows in the
third and fourth quarters (periods ending September 30 and December 31). This is
a direct result of normally higher sales and income during the latter part 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 financial condition and results of operations
may suffer.
-40-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
HISTORICAL REVENUE PATTERNS
IN MILLIONS 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
First Quarter Ended March 31 $ 640.1 $ 556.3 $ 487.9 $ 458.6 $ 505.0
Second Quarter Ended June 30 696.1 617.6 536.4 510.3 510.1
Third Quarter Ended September 30 697.5 617.3 530.2 510.5 510.3
Fourth Quarter Ended December 31 -- 710.9 564.0 497.3 499.7
- ------------------------------------------------------------------------------------------------------------
Totals $ -- $2,502.1 $2,118.5 $1,976.7 $2,025.2(a)
============================================================================================================
(a) Does not total due to rounding.
HISTORICAL CASH PROVIDED BY OPERATIONS
IN MILLIONS 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
First Quarter Ended March 31 $ 48.1 $ 32.4 $ 31.2 $ 9.0 $ 2.6
Second Quarter Ended June 30 86.3 64.6 59.2 71.4 65.1
Third Quarter Ended September 30 98.1 68.9 64.1 83.3 66.1
Fourth Quarter Ended December 31 -- 104.6 108.4 90.1 106.9
- ------------------------------------------------------------------------------------------------------------
Totals $ -- $ 270.5 $ 262.8(a) $ 253.8 $ 240.6(a)
============================================================================================================
(a) Does not total due to rounding.
THE COMPANY'S CASH FLOWS AND EARNINGS ARE SUBJECT TO CHANGES IN INTEREST
RATES.
The Company's total debt as of September 30, 2005 was $611.4 million. Of this
amount, approximately 16% had variable rates of interest and 84% had fixed rates
of interest. The weighted average interest rate of total debt was approximately
6.2%. At current debt levels, a one-percentage increase/decrease in variable
interest rates would increase/decrease interest expense by approximately $1.0
million per year. Should the Company require significant additional borrowings
to finance growth-related acquisitions, they would be at the prevailing market
interest rates which may be higher than the Company is currently paying under
its commercial paper programs.
The future financial impact on the Company associated with the above risks
cannot be estimated.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures as of September 30, 2005. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective. There have been no
changes in internal control over financial reporting that could materially
affect, or are likely to materially affect, internal control over financial
reporting during the third quarter of 2005.
-41-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------------------------------
Information on legal proceedings is included under Part I, Item 1, Footnote I
labeled "Commitments and Contingencies."
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- ------------------------------------------------------------------------
(c). Purchases of equity securities by the issuer and affiliated purchasers.
TOTAL NUMBER OF MAXIMUM NUMBER OF
TOTAL SHARES PURCHASED AS SHARES THAT MAY
NUMBER OF AVERAGE PART OF PUBLICLY YET BE PURCHASED
SHARES PRICE PAID ANNOUNCED PLANS UNDER THE PLANS OR
PERIOD PURCHASED PER SHARE OR PROGRAMS PROGRAMS
- ---------------------------------------------------------------------------------------------------------------
January 1, 2005 - January 31, 2005 - - - 1,000,000
February 1, 2005 - February 28, 2005 - - - 1,000,000
March 1, 2005 - March 31, 2005 - - - 1,000,000
April 1, 2005 - April 30, 2005 - - - 1,000,000
May 1, 2005 - May 31, 2005 - - - 1,000,000
June 1, 2005 - June 30, 2005 - - - 1,000,000
July 1, 2005 - July 31, 2005 - - - 1,000,000
August 1, 2005 - August 31, 2005 133(a) $53.02 - 1,000,000
September 1, 2005 - September 30, 2005 - - - 1,000,000
- ---------------------------------------------------------------------------------------------
Total 133 $53.02 -
- ---------------------------------------------------------------------------------------------
(a) The 133 shares purchased were not part of the share repurchase program.
They were shares which a retired employee sold to the Company in order to
pay personal federal and state income taxes on shares issued to the
employee upon retirement.
The Company's share repurchase program was extended by the Board of Directors in
November 2004. This was announced to the public on November 16, 2004 as part of
a Company-issued press release. The program authorizes the repurchase of up to
1,000,000 shares of the Company's common stock and expires January 31, 2006.
ITEM 5. OTHER INFORMATION
- ------------------------------
DIVIDEND INFORMATION
- --------------------
On September 27, 2005, the Board of Directors declared a quarterly cash dividend
of $0.30 per share, payable November 15, 2005, to shareholders of record as of
October 14, 2005.
10b5-1 Plan
- -----------
The Chief Executive Officer (CEO) of the Company adopted in the Fourth Quarter
of 2004, a personal trading plan, as part of a long-term strategy for asset
diversification and liquidity, in accordance with the Securities and Exchange
Commission's Rule 10b5-1. Under the plan, the CEO will exercise, under
pre-arranged terms, up to 167,500 options in open market transactions. The
167,500 options represented approximately 38% of his total option holdings at
the time the trading plan was initiated. The trading plan will expire in
December 2005. As of November 3, 2005, 157,500 shares have been sold under the
trading plan.
Rule 10b5-1 allows officers and directors, at a time when they are not in
possession of material non-public information, to adopt written plans to sell
shares on a regular basis under pre-arranged terms, regardless of any subsequent
non-public information they may receive. Exercises of stock options by the CEO
pursuant to the terms of the plan are disclosed publicly through Form 144 and
Form 4 filings with the Securities and Exchange Commission.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
- ---------------------
Listing of Exhibits filed with Form 10-Q:
Exhibit
Number Data Required Location
------ ------------- --------
2 Share Purchase Agreement between Sun HB Exhibit
Holdings, LLC, Boca Raton, Florida, United
States of America and Harsco Corporation, Camp
Hill, Pennsylvania/United States of America
dated September 20, 2005 regarding the sale
and purchase of the issued share capital of
Hunnebeck Group GmbH, Ratingen, Germany
31(a) Certification Pursuant to Rule 13a-14(a) and Exhibit
15d-14(a) as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31(b) Certification Pursuant to Rule 13a-14(a) and Exhibit
15d-14(a) as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32(a) Certification Pursuant to 18 U.S.C. Section Exhibit
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32(b) Certification Pursuant to 18 U.S.C. Section Exhibit
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
-43-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARSCO CORPORATION
-------------------------------
(Registrant)
DATE November 3, 2005 /S/ Salvatore D. Fazzolari
---------------------------- ------------------------------------
Salvatore D. Fazzolari
Senior Vice President, Chief
Financial Officer and Treasurer
DATE November 3, 2005 /S/ Stephen J. Schnoor
---------------------------- ------------------------------------
Stephen J. Schnoor
Vice President and Controller
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