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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 June 30, 2007
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
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HARSCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1483991
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(State of incorporation) (I.R.S. Employer Identification No.)
350 Poplar Church Road, Camp Hill, Pennsylvania 17011
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(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [_] Non-accelerated filer [_]
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 July 31, 2007
----- ----------------------------
Common stock, par value $1.25 per share 84,181,622
================================================================================
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2007 2006 (A) 2007 2006 (A)
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 810,429 $ 636,393 $ 1,533,244 $ 1,209,024
Product sales 135,720 129,629 252,931 239,063
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
TOTAL REVENUES 946,149 766,022 1,786,175 1,448,087
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 585,677 457,133 1,124,215 879,957
Cost of products sold 97,580 95,066 184,659 174,601
Selling, general and administrative expenses 127,313 115,053 255,068 227,303
Research and development expenses 734 694 1,727 1,251
Other (income) expenses (1,003) 1,658 (1,916) 3,507
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 810,301 669,604 1,563,753 1,286,619
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
OPERATING INCOME FROM CONTINUING OPERATIONS 135,848 96,418 222,422 161,468
Equity in income of unconsolidated entities, net 285 102 413 163
Interest income 1,173 888 2,212 1,749
Interest expense (20,540) (14,618) (39,116) (28,709)
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST 116,766 82,790 185,931 134,671
Income tax expense (37,388) (27,542) (58,989) (44,527)
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 79,378 55,248 126,942 90,144
Minority interest in net income (2,335) (2,089) (4,459) (4,360)
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 77,043 53,159 122,483 85,784
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income from operations of discontinued business 8,959 969 14,378 3,286
Disposal costs of discontinued business (580) -- (2,878) --
Income tax expense (2,353) (254) (3,260) (944)
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
INCOME FROM DISCONTINUED OPERATIONS 6,026 715 8,240 2,342
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
NET INCOME $ 83,069 $ 53,873(b) $ 130,723 $ 88,126
================================================================= ============ ============ ============ ============
Average shares of common stock outstanding 84,145 83,922 84,097 83,784
Basic earnings per common share:
Continuing operations $ 0.92 $ 0.63 $ 1.46 $ 1.02
Discontinued operations 0.07 0.01 0.10 0.03
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE $ 0.99 $ 0.64 $ 1.55(b) $ 1.05
================================================================= ============ ============ ============ ============
Diluted average shares of common stock outstanding 84,702 84,444 84,641 84,338
Diluted earnings per common share:
Continuing operations $ 0.91 $ 0.63 $ 1.45 $ 1.02
Discontinued operations 0.07 0.01 0.10 0.03
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
DILUTED EARNINGS PER COMMON SHARE $ 0.98 $ 0.64 $ 1.54(b) $ 1.04(b)
================================================================= ============ ============ ============ ============
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.1775 $ 0.1625 $ 0.3550 $ 0.3250
================================================================= ============ ============ ============ ============
(a) Reclassified for comparative purposes.
(b) Does not total due to rounding.
See accompanying notes to unaudited condensed consolidated financial statements.
-2-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30 DECEMBER 31
(IN THOUSANDS) 2007 2006
- -------------------------------------------------------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,927 $ 101,260
Accounts receivable, net 812,557 753,168
Inventories 240,749 285,229
Other current assets 76,925 88,398
Assets held-for-sale 290,291 3,567
- -------------------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT ASSETS 1,516,449 1,231,622
- -------------------------------------------------------------------------------------- ------------ ------------
Property, plant and equipment, net 1,391,033 1,322,467
Goodwill, net 697,560 612,480
Intangible assets, net 190,102 88,164
Other assets 97,762 71,690
- -------------------------------------------------------------------------------------- ------------ ------------
TOTAL ASSETS $ 3,892,906 $ 3,326,423
====================================================================================== ============ ============
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 412,327 $ 185,074
Current maturities of long-term debt 3,797 13,130
Accounts payable 288,847 287,006
Accrued compensation 85,376 95,028
Income taxes payable 45,700 61,967
Dividends payable 16,084 15,983
Insurance liabilities 43,051 40,810
Other current liabilities 243,740 211,777
Liabilities associated with assets held-for-sale 57,618 --
- -------------------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT LIABILITIES 1,196,540 910,775
- -------------------------------------------------------------------------------------- ------------ ------------
Long-term debt 903,690 864,817
Deferred income taxes 153,725 103,592
Insurance liabilities 64,156 62,542
Retirement plan liabilities 176,356 189,457
Other liabilities 101,053 48,876
- -------------------------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES 2,595,520 2,180,059
- -------------------------------------------------------------------------------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 138,316 85,614
Additional paid-in capital 119,558 166,494
Accumulated other comprehensive loss (124,441) (169,334)
Retained earnings 1,767,122 1,666,761
Treasury stock (603,169) (603,171)
- -------------------------------------------------------------------------------------- ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,297,386 1,146,364
- -------------------------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,892,906 $ 3,326,423
====================================================================================== ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30
----------------------------
(IN THOUSANDS) 2007 2006
- -------------------------------------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 130,723 $ 88,126
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 132,787 119,388
Amortization 12,959 3,757
Equity in income of unconsolidated entities, net (414) (163)
Dividends or distributions from unconsolidated entities 176 --
Other, net (821) 5,722
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (93,118) (15,358)
Inventories (54,224) (13,950)
Accounts payable 11,215 (9,572)
Accrued interest payable 15,057 13,098
Accrued compensation (8,323) (7,296)
Other assets and liabilities 50,579 556
- -------------------------------------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 196,596 184,308
- -------------------------------------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (201,202) (166,807)
Net use of cash associated with the purchases of businesses (227,323) (935)
Proceeds from sale of assets 10,773 5,889
Other investing activities (1,845) 118
- -------------------------------------------------------------------------------------------- ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (419,597) (161,735)
- -------------------------------------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 220,926 (41,511)
Current maturities and long-term debt:
Additions 466,480 206,181
Reductions (446,171) (206,722)
Cash dividends paid on common stock (29,837) (27,204)
Common stock issued-options 3,899 10,614
Other financing activities (3,448) (3,469)
- -------------------------------------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 211,849 (62,111)
- -------------------------------------------------------------------------------------------- ------------ ------------
Effect of exchange rate changes on cash 5,819 6,879
- -------------------------------------------------------------------------------------------- ------------ ------------
Net decrease in cash and cash equivalents (5,333) (32,659)
Cash and cash equivalents at beginning of period 101,260 120,929
- -------------------------------------------------------------------------------------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 95,927 $ 88,270
============================================================================================ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED
JUNE 30
----------------------------
(IN THOUSANDS) 2007 2006
- ------------------------------------------------------------------------------------- ------------ ------------
Net income $ 83,069 $ 53,873
- ------------------------------------------------------------------------------------- ------------ ------------
Other comprehensive income (loss):
Foreign currency translation adjustments 28,129 30,531
Net gains (losses) on cash flow hedging instruments, net of deferred income
taxes of $5 and ($17) in 2007 and 2006, respectively (10) 31
Pension liability adjustments, net of deferred income taxes of $242 and $2,597
in 2007 and 2006, respectively (549) (6,292)
Marketable securities, unrealized gain, net of deferred income taxes of $1 and
$0 in 2007 and 2006, respectively (2) --
Reclassification adjustment for gain on cash flow hedging instruments
included in net income, net of deferred income taxes of $1 and $0 in 2007
and 2006,
respectively (1) --
- ------------------------------------------------------------------------------------- ------------ ------------
Other comprehensive income 27,567 24,270
- ------------------------------------------------------------------------------------- ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 110,636 $ 78,143
===================================================================================== ============ ============
SIX MONTHS ENDED
JUNE 30
----------------------------
(IN THOUSANDS) 2007 2006
- ------------------------------------------------------------------------------------- ------------ ------------
Net income $ 130,723 $ 88,126
- ------------------------------------------------------------------------------------- ------------ ------------
Other comprehensive income (loss):
Foreign currency translation adjustments 35,438 41,355
Net gains (losses) on cash flow hedging instruments, net of deferred income
taxes of $5 and ($11) in 2007 and 2006, respectively (10) 21
Pension liability adjustments, net of deferred income taxes of $(4,148) and
$3,265 in 2007 and 2006, respectively 9,474 (8,559)
Marketable securities, unrealized gain, net of deferred income taxes of $1 and
($1) in 2007 and 2006, respectively (2) 1
Reclassification adjustment for (gain) loss on cash flow hedging instruments
included in net income, net of deferred income taxes of $3 and ($1) in 2007
and 2006, respectively (6) 1
- ------------------------------------------------------------------------------------- ------------ ------------
Other comprehensive income 44,894 32,819
- ------------------------------------------------------------------------------------- ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 175,617 $ 120,945
===================================================================================== ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
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.
The year-end condensed balance sheet information contained in this Form 10-Q was
derived from 2006 audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America for a year-end report. The unaudited interim information
contained herein should also be read in conjunction with the Company's 2006 Form
10-K filing.
B. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform with
current year classifications. These reclassifications relate principally to the
Gas Technologies Segment that is currently classified as Discontinued Operations
in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144") as discussed in Note G, "Acquisitions and
Dispositions." Additionally, all historical share and per share data have been
restated to reflect the two-for-one stock split that was effective at the close
of business on March 26, 2007. As a result of these reclassifications, certain
2006 amounts presented for comparative purposes will not individually agree with
previously filed Forms 10-K or 10-Q.
C. REVIEW OF OPERATIONS BY SEGMENT
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2006
--------------------------- ---------------------------
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
------------------------------------------------------------ ------------ ------------ ------------ ------------
Access Services Segment $ 360,921 $ 49,305 $ 269,660 $ 36,652
Mill Services Segment 380,824 36,670 344,295 38,529
------------------------------------------------------------ ------------ ------------ ------------ ------------
Segment Totals 741,745 85,975 613,955 75,181
Minerals & Rail Technologies, Services and Products
("all other") Category (a) 204,404 50,539 152,067 22,001
General Corporate -- (666) -- (764)
------------------------------------------------------------ ------------ ------------ ------------ ------------
Consolidated Totals $ 946,149 $ 135,848 $ 766,022 $ 96,418
============================================================ ============ ============ ============ ============
(a) In March 2007, after the completion of the Excell Minerals acquisition,
the "all other" Category was renamed Minerals & Rail Technologies,
Services and Products, to reflect the Company's strengthening strategic
presence in the minerals technologies and railway services sectors.
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2006
--------------------------- ---------------------------
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
------------------------------------------------------------ ------------ ------------ ------------ ------------
Access Services Segment $ 677,130 $ 84,346 $ 495,454 $ 53,435
Mill Services Segment 741,594 68,978 670,530 72,109
------------------------------------------------------------ ------------ ------------ ------------ ------------
Segment Totals 1,418,724 153,324 1,165,984 125,544
Minerals & Rail Technologies, Services and Products
("all other") Category (a) 367,451 69,918 282,103 37,439
General Corporate -- (820) -- (1,515)
------------------------------------------------------------ ------------ ------------ ------------ ------------
Consolidated Totals $ 1,786,175 $ 222,422 $ 1,448,087 $ 161,468
============================================================ ============ ============ ============ ============
(a) In March 2007, after the completion of the Excell Minerals acquisition,
the "all other" Category was renamed Minerals & Rail Technologies,
Services and Products, to reflect the Company's strengthening strategic
presence in the minerals technologies and railway services sectors.
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME FROM
CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
(IN THOUSANDS) 2007 2006 2007 2006
------------------------------------------------------------ ------------ ------------ ------------ ------------
Segment Operating Income $ 85,975 $ 75,181 $ 153,324 $ 125,544
Minerals & Rail Technologies, Services and Products
("all other") Category 50,539 22,001 69,918 37,439
General Corporate (666) (764) (820) (1,515)
------------------------------------------------------------ ------------ ------------ ------------ ------------
Operating income from continuing operations 135,848 96,418 222,422 161,468
Equity in income of unconsolidated entities, net 285 102 413 163
Interest income 1,173 888 2,212 1,749
Interest expense (20,540) (14,618) (39,116) (28,709)
------------------------------------------------------------ ------------ ------------ ------------ ------------
Income from continuing operations before income taxes and
minority interest $ 116,766 $ 82,790 $ 185,931 $ 134,671
============================================================ ============ ============ ============ ============
D. ACCOUNTS RECEIVABLE AND INVENTORIES
At June 30, 2007 and December 31, 2006, accounts receivable of $812.6 million
and $753.2 million, respectively, were net of an allowance for doubtful accounts
of $27.4 million and $25.4 million, respectively. Gross accounts receivable
included trade accounts receivable of $801.2 million and $737.1 million at June
30, 2007 and December 31, 2006, respectively. Other receivables included
insurance claim receivables of $18.3 million and $18.9 million at June 30, 2007
and December 31, 2006, respectively. The provision for doubtful accounts was
$1.9 million and $2.1 million for the three months ended June 30, 2007 and 2006,
respectively. For six months ended June 30, 2007 and 2006, the provision for
doubtful accounts was $4.7 million and $4.4 million, respectively.
-7-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Inventories consist of the following:
INVENTORIES
---------------------------
JUNE 30 DECEMBER 31
(IN THOUSANDS) 2007 2006
------------------------------------------ ------------ ------------
Finished goods $ 113,225 $ 117,072
Work-in-process 16,209 31,489
Raw materials and purchased parts 66,282 96,750
Stores and supplies 45,033 39,918
------------------------------------------ ------------ ------------
Total Inventories $ 240,749 $ 285,229
========================================== ============ ============
Inventories decreased $44.5 million from December 31, 2006 due to the following
factors:
o Decreased finished goods, work-in-process and raw materials inventories due
to the reclassification of the Gas Technologies Segment to Discontinued
Operations in the first quarter of 2007. All related assets and liabilities
are classified as held-for-sale.
This was partially offset by:
o Increased finished goods and raw materials inventories in the Minerals &
Rail Technologies, Services and Products Category due to the Excell
Minerals acquisition, higher material costs and increased inventories to
meet expected customer demand.
o Increased finished goods in the Access Services Segment in order to meet
expected customer demand.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 30 DECEMBER 31
(IN THOUSANDS) 2007 2006
------------------------------------------ ------------ ------------
Land and improvements $ 45,859 $ 41,255
Buildings and improvements 166,649 192,575
Machinery and equipment 2,773,141 2,699,131
Uncompleted construction 69,118 52,640
------------------------------------------ ------------ ------------
Gross property, plant and equipment 3,054,767 2,985,601
Less accumulated depreciation (1,663,734) (1,663,134)
------------------------------------------ ------------ ------------
Net property, plant and equipment $ 1,391,033 $ 1,322,467
========================================== ============ ============
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
F. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in carrying amounts of goodwill by
segment for the six months ended June 30, 2007:
GOODWILL BY SEGMENT
- --------------------------------------------------------------------------------------------------------------------------------
MINERALS & RAIL
TECHNOLOGIES,
SERVICES AND
ACCESS MILL PRODUCTS GAS
SERVICES SERVICES ("ALL OTHER") TECHNOLOGIES CONSOLIDATED
(IN THOUSANDS) SEGMENT SEGMENT CATEGORY SEGMENT TOTALS
- --------------------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance as of December 31, 2006, net of
accumulated amortization $ 241,937 $ 325,492 $ 8,137 $ 36,914 $ 612,480
Goodwill acquired during the year -- 4,595 107,480 -- 112,075
Changes to Goodwill (a) (386) -- -- -- (386)
Foreign currency translation 4,736 4,156 1,413 6 10,311
Goodwill transferred to assets held-for-sale -- -- -- (36,920) (36,920)
- --------------------------------------------------- ------------ ------------ ------------ ------------ ------------
BALANCE AS OF JUNE 30, 2007,
NET OF ACCUMULATED AMORTIZATION $ 246,287 $ 334,243 $ 117,030 $ -- $ 697,560
=================================================== ============ ============ ============ ============ ============
(a) Relate principally to opening balance sheet adjustments.
Goodwill is net of accumulated amortization of $101.5 million and $109.3 million
at June 30, 2007 and December 31, 2006, respectively. The reduction in
accumulated amortization from December 31, 2006 is due to the transfer of the
Gas Technologies Segment's balance to assets held-for-sale.
The following table reflects intangible assets by major category:
INTANGIBLE ASSETS
- -------------------------------------------------------------------------------------------
JUNE 30, 2007 DECEMBER 31, 2006
--------------------------- ---------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ------------------------------- ------------ ------------ ------------ ------------
Customer Relationships $ 148,682 $ 15,348 $ 87,426 $ 7,084
Non-compete agreements 3,347 2,815 5,648 4,708
Patents 6,760 4,083 4,700 3,940
Other (a) 62,344 7,680 9,800 3,678
- ------------------------------- ------------ ------------ ------------ ------------
Total $ 221,133 $ 29,926 $ 107,574 $ 19,410
=============================== ============ ============ ============ ============
(a) Principally technical know-how and contractual revenue.
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Intangible assets are included in the Intangible Assets, Net and Other Current
Assets line items in the Condensed Consolidated Balance Sheets.
During the first six months of 2007, the Company acquired the following
intangible assets (by major class) which are subject to amortization. These
intangible assets relate principally to the Excell Minerals and the Performix
Technologies Ltd. acquisitions more fully discussed in Note G, "Acquisitions and
Dispositions."
ACQUIRED INTANGIBLE ASSETS
- -----------------------------------------------------------------------------
(IN THOUSANDS) GROSS CARRYING RESIDUAL WEIGHTED-AVERAGE
AMOUNT VALUE AMORTIZATION PERIOD
- -----------------------------------------------------------------------------
Customer relationships $ 60,240 None 5 years
Patents 2,010 None 10 years
Other (a) 50,390 None 9 years
------------
Total $ 112,640
============
(a) Principally technical know-how and contractual revenue.
There were no research and development assets acquired and written off in the
first six months of 2007 or 2006.
Amortization expense for intangible assets was $7.3 million and $12.3 million
for the second quarter and first six months of 2007, respectively. This compares
with $1.7 million and $3.3 million for the second quarter and first six months
of 2006, respectively. The following table shows the estimated amortization
expense for the next five fiscal years based on current intangible assets:
(IN THOUSANDS) 2007 2008 2009 2010 2011
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
Estimated amortization expense (a) $ 25,800 $ 25,500 $ 24,400 $ 24,100 $ 22,900
(a) These estimated amortization expense amounts do not reflect the potential
effect of future foreign currency exchange rate fluctuations.
G. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
In April 2007, the Company acquired Performix Technologies, Ltd. ("Performix"),
an Ohio-based company that is one of the United States' leading producers of
specialty additives used by steelmakers in the ladle refining of molten steel.
Performix operates from two plants in the U.S. and serves most of the major
steelmakers in the upper Midwest and Canada. Performix recorded 2006 sales of
approximately $29 million and employs approximately 60 people. Performix has
been included in the Mill Services Segment.
In February 2007, the Company acquired Excell Materials, Inc. ("Excell"), a
Pittsburgh-based multinational company, for approximately $210 million, which
included the assumption of debt but excluded direct acquisition costs. Excell
specializes in the reclamation and recycling of high-value content from
principally steelmaking slag. Excell is also involved in the development of
mineral-based products for commercial applications. Excell recorded 2006 sales
in excess of $100 million and maintains operations at nine locations in the
United States, Canada, Brazil, South Africa and Germany. Goodwill recognized in
this transaction (based on foreign exchange rates at the transaction date) was
$107.5 million, none of which is expected to be deductible for U.S. income tax
purposes. Because this acquisition occurred in the first quarter of 2007, the
purchase price allocation and goodwill balance have not been finalized as of
June 30, 2007. Excell has been included in the Minerals & Rail Technologies,
Services and Products ("all other") Category and has been renamed Excell
Minerals to emphasize its long-term growth strategy.
In November 2006, the Company acquired the Santiago, Chile-based company
Moldajes y Andamios TH S.A. ("MyATH"), a supplier of rental formwork,
scaffolding and related services to the construction, infrastructure and
building maintenance sectors. MyATH employs approximately 100 people and its
annual revenues are approximately $8 million. MyATH has been included in the
Hunnebeck Division of the Access Services Segment.
-10-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
In November 2006, the Company acquired the conveyor services and trading arm of
Technic Gum, a Belgium-based provider of conveyor belt maintenance services for
the steel and cement-producing industries. Technic Gum Services recorded
revenues of approximately $8 million in 2005 and employs approximately 50
people. Technic Gum Services has been included in the Mill Services Segment.
In July 2006, the Company acquired the assets of U.K.-based Cape PLC's Cleton
industrial maintenance services ("Cleton") subsidiaries in the Netherlands,
Belgium and Germany for (euro)8 million (approximately $10 million). Cleton
posted 2005 revenues in excess of $50 million and employs close to 400 people.
Cleton specializes in providing scaffolding and related insulation services for
the maintenance of large-scale industrial plants, and serves some of the largest
oil refinery, petrochemical and process plant sites in the Benelux countries.
Cleton has been included in the SGB Division of the Access Services Segment.
DISPOSITIONS - ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Consistent with the Company's strategic focus to grow and allocate financial
resources to its industrial services businesses, in January 2007, the Company's
Board of Directors approved the divestiture of its Gas Technologies Segment,
which consists of manufacturing businesses. This Segment recorded revenues and
operating income of $397.7 million and $14.2 million, respectively, for 2006.
The Company expects the divestiture to occur in the second half of 2007. Results
of operations of the Segment have been included in Discontinued Operations of
the income statement effective with the first quarter 2007 report. The Segment's
assets and liabilities are classified as held-for-sale in the June 30, 2007
balance sheet.
The major classes of assets and liabilities "held-for-sale" included in the
Consolidated Balance Sheets are as follows:
JUNE 30 (a) DECEMBER 31
(IN THOUSANDS) 2007 2006
- --------------------------------------------- ------------ ------------
ASSETS
Accounts receivable, net $ 66,940 $ --
Inventories 108,341 --
Other current assets 2,690 --
Property, plant and equipment, net 71,162 3,567
Goodwill, net 36,920 --
Other assets 4,238 --
- --------------------------------------------- ------------ ------------
TOTAL ASSETS "HELD-FOR-SALE" $ 290,291 $ 3,567
============================================= ============ ============
LIABILITIES
Current maturities of long-term debt $ 1,626 $ --
Accounts payable 30,874 --
Accrued compensation 4,960 --
Income taxes payable 799 --
Other current liabilities 15,108 --
Long-term debt 1,826 --
Retirement plan liabilities 2,073 --
Other liabilities 352 --
- --------------------------------------------- ------------ ------------
TOTAL LIABILITIES ASSOCIATED
WITH ASSETS "HELD-FOR-SALE" $ 57,618 $ --
============================================= ============ ============
(a) June 30, 2007 amounts are predominantly assets and liabilities associated
with the Gas Technologies Segment.
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Subsequent to the reclassification of the Gas Technologies Segment's results to
Discontinued Operations, the Company's results from continuing operations for
2006 are as follows:
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2006 2006 2006 2006
- ----------------------------------------------------- ------------ ------------ ------------ ------------
Revenues from continuing operations $ 682.1 $ 766.0 $ 773.3 $ 804.2
Income from continuing operations 32.6 53.2 54.2 46.4
Diluted Earnings per share from continuing operations 0.39 0.63 0.64 0.55
H. INCOME TAXES
The Company adopted the provisions of FASB Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" ("FIN 48"), effective January 1, 2007. As a result of the
adoption, the Company recognized a cumulative effect reduction to the January 1,
2007 retained earnings balance of $0.5 million. As of the adoption date, the
Company had gross tax-affected unrecognized income tax benefits of $46.0
million, of which $17.8 million, if recognized, would affect the Company's
effective income tax rate. Of this amount, $0.8 million was classified as
current and $45.2 million was classified as non-current on the Company's balance
sheet. While the Company believes it has adequately provided for all tax
positions, amounts asserted by taxing authorities could be different than the
accrued position.
The Company recognizes accrued interest and penalty expense related to
unrecognized income tax benefits within its global operations in income tax
expense. In conjunction with the adoption of FIN 48, the total amount of accrued
interest and penalties resulting from such unrecognized tax benefits was $4.4
million.
The Company files its income tax returns as prescribed by the tax laws of the
jurisdictions in which it operates. With few exceptions, the Company is no
longer subject to U.S. and foreign examinations by tax authorities for years
through 1999.
During the first quarter of 2007, the U.S. Internal Revenue Service commenced
its audit of the Company's U.S. income tax returns for 2004 and 2005. The
Company anticipates that this audit will be completed by early 2008.
The Company is involved in a royalty dispute with the Canada Revenue Agency
("CRA"). The Company has initiated settlement discussions with the CRA and they
are progressing. It is reasonably possible that these settlement discussions
will lead to a resolution of this matter by December 31, 2007 and that the
resolution will be favorable to the Company resulting in a significant decrease
to the unrecognized tax benefit. It is still too premature to discuss the
details of any potential settlement including the quantification of any
settlement amounts. This matter is more fully discussed in Note I, "Commitments
and Contingencies," to the Consolidated Financial Statements.
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 June 30, 2007 and December 31, 2006 include
accruals of $4.2 million and $3.8 million, respectively, for environmental
matters. The amounts charged against pre-tax income related to environmental
matters totaled $1.3 million and $0.5 million for the first six months of 2007
and 2006, respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Company does not expect that any sum it may have to pay in connection with
environmental matters in excess of the amounts recorded or disclosed above would
have a material adverse effect on its financial position, results of operations
or cash flows.
ROYALTY EXPENSE DISPUTE
The Company is involved in a royalty expense dispute with the 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 June 30, 2007, the maximum assessment from the CRA for the period
1994-1998 is approximately $11.7 million, including tax and interest. The
Company has initiated settlement discussions with the CRA and they are
progressing. It is reasonably possible that these settlement discussions will
lead to a resolution of this matter by December 31, 2007 and that the resolution
will be favorable to the Company resulting in a significant decrease to the
unrecognized tax benefit. It is still too premature to discuss the details of
any potential settlement including the quantification of any settlement amounts.
The Ontario Ministry of Finance ("Ontario") is also proposing to disallow these
same royalty expense deductions for the period 1994-1998. As of June 30, 2007,
the maximum assessment from Ontario is approximately $3.6 million, including tax
and interest. The Company has filed an administrative appeal of this assessment
and will vigorously contest these disallowances. We anticipate that Ontario will
approach the settlement and resolution of this matter in a manner consistent
with the results obtained in the CRA dispute.
The Company believes that any amount of potential liability regarding this
matter has been fully reserved as of June 30, 2007 and, therefore will not have
a material adverse impact on the Company's future results of operations or
financial condition. In accordance with Canadian tax law, the Company made a
payment to the CRA in the fourth quarter of 2005 of $5.0 million. Additionally,
the Company made a payment to the Ontario Ministry of Finance in the first
quarter of 2006 for the entire disputed amount. These payments were made for tax
compliance purposes and to reduce potential interest expense on the disputed
amount. These payments in no way reflect the Company's acknowledgement as to the
validity of the assessed amounts.
DERAILMENT
One of the Company's production rail grinders derailed near Baxter, California
on November 9, 2006, resulting in two crew member fatalities and the near total
loss of the rail grinder. Government and private investigations into the cause
of the derailment are ongoing. The initial clean-up and salvage efforts are
completed, although work on environmental remediation is ongoing. Estimated
environmental remediation expenses have been recognized in the financial
statements as of June 30, 2007. All remaining Company rail grinders have been
inspected by the Federal Railroad Administration ("FRA") and each grinder is
fully operational. The Company has also conducted its own inspections to ensure
that its grinders are safe and in compliance with contractual commitments. The
Company believes that the insurance proceeds from the loss of the rail grinder
will offset the majority of incurred expenses and contingent liabilities, which
have been recognized as of June 30, 2007. Therefore, the Company does not
believe that the derailment will have a material adverse effect on its financial
position, results of operations or cash flows.
OTHER
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos over the past several decades. In their suits, the plaintiffs
have named as defendants, among others, many manufacturers, distributors and
installers of numerous types of equipment or products that allegedly contained
asbestos.
The Company believes that the claims against it are without merit. The Company
has never been a producer, manufacturer or processor of asbestos fibers. Any
component within a Company product which may have contained asbestos would have
been purchased from a supplier. Based on scientific and medical evidence, the
Company believes that any asbestos exposure arising from normal use of any
Company product never presented any harmful levels of airborne asbestos
exposure, and moreover, the type of asbestos contained in any component that was
used in those products was protectively encapsulated in other materials and is
not associated with the types of injuries alleged in the pending suits. Finally,
in most of the depositions taken of plaintiffs to date in the litigation against
the Company, plaintiffs have failed to specifically identify any Company
products as the source of their asbestos exposure.
The majority of the asbestos complaints pending against the Company have been
filed in New York. Almost all of the New York complaints contain a standard
claim for damages of $20 million or $25 million against the approximately 90
defendants, regardless of the individual plaintiff's alleged medical condition,
and without specifically identifying any Company product as the source of
plaintiff's asbestos exposure.
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
As of June 30, 2007, there are 26,362 pending asbestos personal injury claims
filed against the Company. Of these cases, 25,897 were pending in the New York
Supreme Court (a trial court) for New York County in New York State. The other
claims, totaling 465, are filed in various counties in a number of state courts,
and in certain Federal District Courts (including New York), and those
complaints generally assert lesser amounts of damages than the New York State
court cases or do not state any amount claimed.
As of June 30, 2007, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in 17,304 cases.
In view of the persistence of asbestos litigation nationwide, which has not yet
been sufficiently addressed either politically or legally, the Company expects
to continue to receive additional claims. However, there have been developments
during the past several years, both by certain state legislatures and by certain
state courts, which could favorably affect the Company's ability to defend these
asbestos claims in those jurisdictions. These developments include procedural
changes, docketing changes, proof of damage requirements and other changes that
require plaintiffs to follow specific procedures in bringing their claims and to
show proof of damages before they can proceed with their claim. An example is
the action taken by the New York Supreme Court, which is responsible for
managing all asbestos cases pending within New York County in the State of New
York. This Court issued an order in December 2002 that created a Deferred or
Inactive Docket for all pending and future asbestos claims filed by plaintiffs
who cannot demonstrate that they have a malignant condition or discernable
physical impairment, and an Active or In Extremis Docket for plaintiffs who are
able to show such medical condition. As a result of this order, the majority of
the asbestos cases filed against the Company in New York County have been moved
to the Inactive Docket until such time as the plaintiff can show that they have
incurred a physical impairment. As of June 30, 2007, the Company has been listed
as a defendant in 298 Active or In Extremis asbestos cases in New York County.
The Court's Order has been challenged by plaintiffs.
The Company's insurance carrier has paid all legal and settlement costs and
expenses relating to the asbestos litigation 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.
The Company intends to continue its practice of vigorously defending these cases
as they are listed for trial. It is not possible to predict the ultimate outcome
of asbestos-related lawsuits, claims and proceedings due to the unpredictable
nature of personal injury litigation. Despite this uncertainty, and although
results of operations and cash flows for a given period could be adversely
affected by asbestos-related lawsuits, claims and proceedings, management
believes that the ultimate outcome of these cases will not have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
The Company is subject to various other claims and legal proceedings covering a
wide range of matters that arose in the ordinary course of business. In the
opinion of management, all such matters are adequately covered by insurance or
by accruals, and if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
Insurance liabilities are recorded in accordance with SFAS 5, "Accounting for
Contingencies." Insurance reserves have been estimated based primarily upon
actuarial calculations and reflect the undiscounted estimated liabilities for
ultimate losses including claims incurred but not reported. Inherent in these
estimates are assumptions which are based on the Company's history of claims and
losses, a detailed analysis of existing claims with respect to potential value,
and current legal and legislative trends. If actual claims differ from those
projected by management, changes (either increases or decreases) to insurance
reserves may be required and would be recorded through income in the period the
change was determined. When a recognized liability is covered by third-party
insurance, the Company records an insurance claim receivable to reflect the
covered liability. See Note 1, "Summary of Significant Accounting Policies," of
the Company's Form 10-K for the year ended December 31, 2006 for additional
information on Accrued Insurance and Loss Reserves.
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
J. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2007 2006 2007 2006
----------------------------------------------------------- ------------ ------------ ------------ ------------
Income from continuing operations $ 77,043 $ 53,159 $ 122,483 $ 85,784
=========================================================== ============ ============ ============ ============
Average shares of common stock outstanding used to
compute basic earnings per common share 84,145 83,922 84,097 83,784
Dilutive effect of stock-based compensation 557 522 544 554
----------------------------------------------------------- ------------ ------------ ------------ ------------
Shares used to compute dilutive effect of stock-based
compensation 84,702 84,444 84,641 84,338
=========================================================== ============ ============ ============ ============
Basic earnings per common share from continuing operations $ 0.92 $ 0.63 $ 1.46 $ 1.02
=========================================================== ============ ============ ============ ============
Diluted earnings per common share from continuing
operations $ 0.91 $ 0.63 $ 1.45 $ 1.02
=========================================================== ============ ============ ============ ============
All outstanding stock options and restricted stock units were included in the
computation of diluted earnings per share at June 30, 2007 and 2006.
K. EMPLOYEE BENEFIT PLANS
THREE MONTHS ENDED JUNE 30
------------------------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U.S. PLANS INTERNATIONAL PLANS
---------------------------------------------------- ---------------------------- ----------------------------
(IN THOUSANDS) 2007 2006 2007 2006
---------------------------------------------------- ------------ ------------ ------------ ------------
Service cost $ 783 $ 922 $ 2,105 $ 2,248
Interest cost 3,868 3,730 12,414 10,755
Expected return on plan assets (5,641) (4,985) (15,183) (12,909)
Recognized prior service costs 212 185 229 308
Recognized losses 315 737 3,834 3,218
Amortization of transition liability (asset) -- (91) 7 9
Curtailment/settlement loss 544 78 -- 248
---------------------------------------------------- ------------ ------------ ------------ ------------
Defined benefit pension expense $ 81 $ 576 $ 3,406 $ 3,877
==================================================== ============ ============ ============ ============
SIX MONTHS ENDED JUNE 30
------------------------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U.S. PLANS INTERNATIONAL PLANS
---------------------------------------------------- ---------------------------- ----------------------------
(IN THOUSANDS) 2007 2006 2007 2006
---------------------------------------------------- ------------ ------------ ------------ ------------
Service cost $ 1,526 $ 1,843 $ 4,191 $ 4,393
Interest cost 7,733 7,460 24,563 21,018
Expected return on plan assets (11,135) (9,971) (30,106) (25,227)
Recognized prior service costs 424 371 460 603
Recognized losses 698 1,474 7,598 6,284
Amortization of transition liability (asset) -- (181) 13 18
Curtailment/settlement loss 2,091 78 -- 236
---------------------------------------------------- ------------ ------------ ------------ ------------
Defined benefit pension expense $ 1,337 $ 1,074 $ 6,719 $ 7,325
==================================================== ============ ============ ============ ============
Defined benefit pension expense in the second quarter and six months ended June
30, 2007 was $1.0 million and $0.3 million, respectively, lower than the
comparable 2006 periods. The decreases relate primarily to higher plan asset
bases
-15-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
in 2007 resulting from cash contributions and significant returns on plan
assets in 2006. The decreases were partially offset by curtailment losses in the
U.S. in the Gas Technologies Segment in the first quarter of 2007 as a result of
the decision to sell the business, and in the railway track maintenance services
and equipment business in the second quarter of 2007.
Defined benefit pension expense in the second quarter and six months ended June
30, 2007 includes $0.3 million and $2.2 million, respectively, for the Gas
Technologies Segment which has been reclassified to Discontinued Operations. Of
the $2.2 million in expense for the six months ended June 30, 2007, $1.5 million
relates to the one-time curtailment loss in the first quarter of 2007. Defined
benefit expense in the second quarter and six months ended June 30, 2006
includes $0.5 million and $0.9 million, respectively, for the Gas Technologies
Segment.
In the quarter ended June 30, 2007, the Company contributed $0.3 million and
$6.3 million to the U.S. and international defined benefit pension plans,
respectively. In the six months ended June 30, 2007, the Company contributed
$0.9 million and $12.0 million to the U.S. and international defined benefit
pension plans, respectively. The Company currently anticipates contributing an
additional $1.5 million and $11.2 million for the U.S. and international plans,
respectively, during the remainder of 2007.
Contributions to multiemployer pension plans during the second quarter and six
months ended June 30, 2007 were $7.5 million and $11.7 million, respectively.
Contributions for defined contribution plans during the second quarter and six
months ended June 30, 2007 were $3.7 million and $9.3 million, respectively.
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) JUNE 30
---------------------------------------------------- ----------------------------
(IN THOUSANDS) 2007 2006
---------------------------------------------------- ------------ ------------
Service cost $ 1 $ 2
Interest cost 45 46
Recognized prior service costs 1 --
Recognized gains (32) (9)
---------------------------------------------------- ------------ ------------
Postretirement benefits expense $ 15 $ 39
==================================================== ============ ============
SIX MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) JUNE 30
---------------------------------------------------- ----------------------------
(IN THOUSANDS) 2007 2006
---------------------------------------------------- ------------ ------------
Service cost $ 2 $ 3
Interest cost 90 93
Recognized prior service costs 1 1
Recognized gains (63) (19)
---------------------------------------------------- ------------ ------------
Postretirement benefits expense $ 30 $ 78
==================================================== ============ ============
In the quarter ended June 30, 2007, the Company contributed $63 thousand to the
postretirement plans. For the six months ended June 30, 2007, the Company
contributed $139 thousand to the postretirement plans and anticipates
contributing approximately $166 thousand during the remainder of 2007.
L. NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
FASB Interpretation ("FIN") 48, "Accounting for Uncertainty in Income Taxes-an
- ------------------------------------------------------------------------------
interpretation of FASB Statement No. 109" ("FIN 48")
- ----------------------------------------------------
In July 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements in
accordance with SFAS No. 109, "Accounting for Income Taxes." It prescribes a
recognition threshold and measurement attribute for financial statement
recognition and disclosure of tax positions taken or expected to be taken on a
tax return. The provisions of FIN 48 are required to be applied to all tax
positions upon initial adoption with any cumulative effect adjustment to be
recognized as an adjustment to retained earnings. FIN 48 is effective for fiscal
periods beginning after December 15, 2006 (January 1, 2007 for the Company). The
Company implemented FIN 48 effective January 1, 2007 and recognized a cumulative
effect reduction to 2007 beginning retained earnings of $0.5 million.
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SFAS No. 157, "Fair Value Measurements" ("SFAS 157")
- ----------------------------------------------------
In September 2006, the FASB issued SFAS 157 to provide a single definition of
fair value, establish a framework for measuring fair value in U.S. generally
accepted accounting principles ("GAAP"), and expand the disclosure requirements
regarding fair value measurements. SFAS 157 is applicable in the application of
other accounting pronouncements that require or permit fair value measurements,
but does not require new fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 (January 1, 2008 for the
Company), with limited retrospective application required. The Company is
currently evaluating the requirements of SFAS 157 and has not yet determined the
impact on the consolidated financial statements.
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
- -----------------------------------------------------------------------
Liabilities" ("SFAS 159")
- -------------------------
In February 2007, the FASB issued SFAS 159, which permits all entities to choose
to measure eligible items at fair value at specified election dates. Unrealized
gains and losses on items for which the fair value option has been elected will
be reported in earnings at each subsequent reporting date. The fair value option
may be applied financial instrument by financial instrument (with limited
exceptions), is generally irrevocable, and must be applied to the entire
financial instrument. SFAS 159 is effective for fiscal years that begin after
November 15, 2007 (January 1, 2008 for the Company). The Company is currently
evaluating the requirements of SFAS 159, and has not yet determined the impact
on the consolidated financial statements.
M. DERIVATIVE INSTRUMENTS
The Company may periodically use derivative instruments to hedge cash flows
associated with selling price exposure to certain commodities, as well as cash
flows related to foreign currency fluctuations. The Company's commodity
derivative activities are subject to the management, direction and control of
the Company's Risk Management Committee ("the Committee"). The Committee
approves the use of all commodity derivative instruments. During the first
quarter of 2007, the Company executed fixed-price swap agreements to hedge cash
flows associated with the selling price exposure to certain commodities. The
unsecured contracts outstanding at June 30, 2007 mature monthly through November
2007 and are with major financial institutions. The Company may be exposed to
credit loss in the event of non-performance by the other parties to the
contracts. The Company evaluates the credit worthiness of the counterparties and
does not expect default by them. Company policy prohibits the use of derivatives
for speculative purposes.
As of June 30, 2007, outstanding commodity swap agreements had a notional value
of $20.3 million. Based on the requirements of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), these contracts did
not qualify as cash flow hedges as of June 30, 2007. As such, they were
marked-to-market with the resulting changes in fair value recorded in cost of
sales. Although earnings volatility may occur between fiscal quarters if the
derivatives do not qualify as cash flow hedges under SFAS 133, the economic
substance of the derivatives provides more predictable cash flows by reducing
the Company's exposure to the commodity price fluctuations.
See Note 13, "Financial Instruments," of the Company's Form 10-K for the year
ended December 31, 2006 for additional information on derivative instruments and
hedging activities.
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, 2006, which included additional information about the
Company's critical accounting policies, contractual obligations, practices and
transactions that support the financial results, and provided a more
comprehensive summary of the Company's outlook, trends and strategies for 2007
and beyond.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
statements, expectations and assumptions expressed or implied herein.
Forward-looking statements contained herein could include statements about our
management confidence and strategies for performance; expectations for new and
existing products, technologies, and opportunities; and expectations regarding
growth, sales, cash flows, earnings and Economic Value Added (EVA(R)). These
statements can be identified by the use of such terms as "may," "could,"
"expect," "anticipate," "intend," "believe," or other comparable terms.
Factors which could cause results to differ include, but are not limited to: (1)
changes in the worldwide business environment in which the Company operates,
including general economic conditions; (2) changes in currency exchange rates,
certain commodity prices and costs, interest rates and capital costs; (3)
changes in the performance of stock and bond markets that could affect, among
other things, the valuation of the assets in the Company's pension plans and the
accounting for pension assets, liabilities and expenses; (4) changes in
governmental laws and regulations, including environmental, taxes and import
tariff standards; (5) market and competitive changes, including pricing
pressures, market demand and acceptance for new products, services and
technologies; (6) unforeseen business disruptions in one or more of the many
countries in which the Company operates due to political instability, civil
disobedience, armed hostilities or other calamities; (7) the seasonal nature of
our business; (8) the successful integration of the Company's strategic
acquisitions; and (9) other risk factors listed from time to time in the
Company's SEC reports. A further discussion of these, along with other potential
factors, can be found in Part II, Item 1A, "Risk Factors," 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 record performance in the second quarter and first six months of
2007 reflected the continued execution of the Company's strategy of growth
through increased international diversity and a focused, industrial
services-based portfolio, augmented by selective strategic acquisitions. The
second quarter results were led by the Minerals & Rail Technologies, Services
and Products ("all other") Category and the Access Services Segment.
The Company's second quarter 2007 revenues from continuing operations were a
record $946.1 million. This is an increase of $180.1 million or 24% over the
second quarter of 2006. Income from continuing operations was a record $77.0
million compared with $53.2 million in 2006, an increase of 45%. Diluted
earnings per share from continuing operations were a record $0.91, a 44%
increase over 2006.
Revenues for the first six months of 2007 were a record $1.8 billion. This is an
increase of $338.1 million or 23% over the first six months of 2006. Income from
continuing operations was a record $122.5 million, compared with $85.8 million
in the first six months of 2006, a 43% increase. Diluted earnings per share from
continuing operations were a record $1.45, a 42% increase from the first six
months of 2006.
Both the second quarter and first six months of 2007 results benefited from
improved performance in the Access Services Segment and the February 1, 2007
acquisition of Excell Minerals. The improved performance in the Access Services
Segment was due to continued strength in the Company's worldwide non-residential
and infrastructure construction and industrial services markets, and positive
returns from the Company's increased investment in highly engineered formwork
rental systems. Excell Minerals had a significant contribution to earnings in
the second quarter due to strong customer demand and favorable pricing resulting
from positive market conditions.
Overall global markets remain strong and the Company has a number of expansion
opportunities to pursue its prudent acquisition strategy of seeking further
accretive bolt-on acquisitions, as well as organic investments in its industrial
services platforms. The Company also expects continued strength in its
operations for the remainder of 2007, particularly from the Access Services
Segment, as well as certain businesses in the Minerals & Rail Technologies,
Services and Products ("all other") Category. In addition, the Company expects
gradual year-over-year improvement during the remainder of 2007 from the Mill
Services Segment as global steel production levels normalize offsetting expected
production decreases in North America, and new contracts are signed and work
begins.
During the second quarter of 2007, the Company had record net cash provided by
operating activities of $154.9 million, a 35% increase from the $114.5 million
achieved in the second quarter of 2006. For the first six months of 2007, the
Company had net cash provided by operating activities of $196.6 million,
compared with $184.3 million for the first six months of 2006, a 7% increase.
The Company expects to achieve record cash from operations for the full year
2007, exceeding 2006's record of $409 million. The Company's cash flows are
further discussed in the Liquidity and Capital Resources section.
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
During the first half of 2007, the Company's value-based management system
continued to deliver results by creating increased economic value. Significant
improvement in Economic Value Added ("EVA(R)") was achieved in the first half of
2007 and the Company's return on invested capital improved 180 basis points from
the comparable 2006 period. The Company's value-based management system is more
fully described in the 2006 Annual Report.
During the first quarter of 2007, the Company's Board of Directors approved the
divestiture of the Gas Technologies manufacturing business, which is expected to
occur in the second half of 2007. Also, effective in the first quarter of 2007,
there was a two-for-one stock split for which one additional share of common
stock was issued to stockholders as of March 26, 2007.
SEGMENT OVERVIEW
The Access Services Segment's revenues in the second quarter of 2007 were $360.9
million compared with $269.7 million in the second quarter of 2006, a 34%
increase. Operating income increased by 35% to $49.3 million, from $36.7 million
in the second quarter of 2006. Operating margins for the Segment improved by 10
basis points to 13.7% from 13.6% in the second quarter of 2006. In comparison
with the first six months of 2006, this Segment achieved period-over-period
revenue growth of $181.7 million or 37%, and operating income growth of $30.9
million or 58%. Operating margins for the first six months of 2007 improved by
170 basis points to 12.5% from 10.8% for the first six months of 2006. The
record performance in revenues, operating income and operating margins for the
second quarter and first six months of 2007 was due principally to continued
strength in the Company's worldwide non-residential and infrastructure
construction and industrial services markets, particularly in Europe and North
America. This Segment accounted for 38% and 38% of the Company's revenues and
36% and 38% of the operating income for the second quarter and first six months
of 2007, respectively.
Revenues for the second quarter of 2007 for the Mill Services Segment were
$380.8 million compared with $344.3 million in the second quarter of 2006, an
11% increase. Operating income decreased by 5% to $36.7 million, from $38.5
million in the second quarter of 2006, and operating margins decreased by 160
basis points to 9.6% from 11.2%. In comparison with the first six months of
2006, this Segment's revenue increased by 11% to $741.6 million. Operating
income in the first six months of 2007 decreased by 4% to $69.0 million from
$72.1 million in the first six months of 2006, and operating margins decreased
150 basis points to 9.3% from 10.8%. Performance was negatively impacted by
higher operating and maintenance costs, lower steel production in certain
regions, particularly North America, and unplanned maintenance outages at a
number of mill sites. This Segment accounted for 40% and 41% of the Company's
revenues and 27% and 31% of the operating income for the second quarter and
first six months of 2007, respectively.
The Minerals & Rail Technologies, Services and Products ("all other") Category's
revenues in the second quarter of 2007 were $204.4 million compared with $152.1
million in the second quarter of 2006, a 34% increase. Operating income
increased by 130% to $50.5 million, from $22.0 million in the second quarter of
2006. For the second quarter of 2007, operating margins increased 1,020 basis
points to 24.7% from 14.5% in the second quarter of 2006. For the first six
months of 2007, operating margins increased 570 basis points to 19.0% from 13.3%
in the first six months of 2006. The February 1, 2007 acquisition of Excell
Minerals, which performed well due to strong customer demand and favorable
pricing resulting from strong market conditions, contributed to this Category's
improved performance in the second quarter and first six months of 2007. Three
of the other five businesses contributed higher revenues, and four of the five
businesses contributed higher operating income in the second quarter and first
six months of 2007 compared with the second quarter and first six months of
2006. Additionally, this Category benefited from a $3.2 million pre-tax gain on
the sale of an asset in the second quarter of 2007. This Category accounted for
22% and 21% of the Company's revenues and 37% and 31% of the operating income
for the second quarter and first six months of 2007, respectively.
In comparison to the second quarter of 2006, the impact of foreign currency
translation for the Company increased second quarter 2007 sales and pre-tax
income by $35.2 million and $4.1 million respectively. For the first six months
of 2007, the impact of foreign currency translation increased sales by $71.7
million and pre-tax income by $6.0 million compared with the same period in
2006.
OUTLOOK OVERVIEW
The Company's operations span several industries and products as discussed in
Part I, Item 1, "Business," of the Company's Form 10-K for the year ended
December 31, 2006. On a macro basis, the Company is affected by non-residential
and infrastructure construction and industrial maintenance and capital
improvement activities; worldwide steel mill production and capacity
utilization; industrial production volume; and the general business trend
towards the outsourcing of services. The overall outlook for 2007 continues to
be positive for these business drivers.
Both international and domestic Access Services activity remains strong.
Operating performance in 2007 for this Segment has benefited, and is expected to
continue to benefit, from increased non-residential and infrastructure
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
construction spending and industrial services activity in the Company's major
markets; selective strategic investments or acquisitions in new markets and
expansion of current product lines; further market penetration from new
products; product cross-selling opportunities among the markets served by the
three Access Services divisions; and enterprise business optimization
opportunities including new technology applications, consolidated procurement,
logistics and continuous process improvement initiatives. Further global
expansion and market share gains are also expected from this Segment.
Overall, the outlook for the Mill Services Segment for the remainder of the year
remains positive. To maintain pricing levels, a more disciplined and
consolidated steel industry has been adjusting production levels to bring
inventories in-line with current demand. On an overall basis, the Company
expects global steel production to increase modestly in 2007, which would
generally have a favorable effect on this Segment's revenues. In addition, new
contract signings and start-ups are expected to have a positive impact on
results in the second half of 2007. The Company continues to engage in
enterprise business optimization initiatives designed to improve operating
results and margins. However, the Company may experience higher operating costs,
such as maintenance and energy that could have a negative impact on operating
margins, to the extent these costs cannot be passed to customers.
The outlook for the Minerals & Rail Technologies, Services and Products ("all
other") Category remains positive. Second half performance is again expected to
continue to be led by Excell Minerals and the railway track maintenance services
and equipment business. Excell Minerals is expected to continue to be accretive
to earnings in the second half of 2007, as full integration into the Company
occurs. While Excell Minerals is not expected to operate at the full capacity
levels that it did in the second quarter, and metal prices are not expected to
remain at the high levels seen in that quarter, the business is expected to be a
positive contributor to third quarter and second half 2007 growth for this
Category. Likewise, the railway track maintenance services and equipment
business should continue to see improved year-over-year operating performance in
2007's remaining quarters, as well as longer term. New contract bidding activity
for the business remains high (including the signing of a significant order from
China in the second quarter of 2007), which also adds confidence to the
longer-term outlook. The remaining businesses within this group are also
expected to continue to operate at their current high levels of operating
effectiveness.
The stable or improved market conditions for most of the Company's services and
products and the significant investments made recently for acquisitions and
growth-related capital expenditures provide the base for achieving the Company's
stated 2007 growth objectives in diluted earnings per share from continuing
operations and net cash provided by operating activities. The record performance
for revenue and operating income achieved in the first six months of 2007
provides a solid foundation towards achieving the full-year objectives.
- --------------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
JUNE 30 2006 TO 2007
- ------------------------------- --------------------------- ----------------------------------------------
(DOLLARS IN MILLIONS) 2007 2006 VOLUME CURRENCY TOTAL
- ------------------------------- ------------ ------------ ------------ ------------ ------------
Europe $ 474.3 $ 392.7 13.4% 7.4% 20.8%
North America 338.6 266.7 26.8 0.2 27.0
Latin America 52.3 41.3 18.7 7.8 26.5
Middle East and Africa 51.2 38.6 34.7 (2.2) 32.5
Asia/Pacific 29.7 26.7 (0.4) 11.7 11.3
- ------------------------------- ------------ ------------ ------------ ------------ ------------
Total $ 946.1 $ 766.0 18.9% 4.6% 23.5%
=============================== ============ ============ ============ ============ ============
- --------------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES
SIX MONTHS ENDED PERCENTAGE GROWTH FROM
JUNE 30 2006 TO 2007
- ------------------------------- --------------------------- ----------------------------------------------
(DOLLARS IN MILLIONS) 2007 2006 VOLUME CURRENCY TOTAL
- ------------------------------- ------------ ------------ ------------ ------------ ------------
Europe $ 917.8 $ 735.6 15.8% 9.0% 24.8%
North America 615.6 500.2 23.1 0.0 23.1
Latin America 97.8 81.5 15.7 4.3 20.0
Middle East and Africa 92.6 79.5 20.2 (3.7) 16.5
Asia/Pacific 62.4 51.3 11.9 9.7 21.6
- ------------------------------- ------------ ------------ ------------ ------------ ------------
Total $ 1,786.2 $ 1,448.1 18.4% 4.9% 23.3%
=============================== ============ ============ ============ ============ ============
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
2007 HIGHLIGHTS
The following significant items affected the Company overall during the second
quarter and first six months of 2007, in comparison with the second quarter and
first six months of 2006:
COMPANY WIDE:
- -------------
o Continued strong worldwide economic activity, as well as the strong
earnings performance of the Excell Minerals acquisition, benefited the
Company in the second quarter and first six months of 2007. This included
increased access equipment services, especially in North America and
Europe; increased global demand for railway track maintenance services and
equipment; and increased demand for air-cooled heat exchangers and
industrial grating products.
o Consistent with its overall strategic focus on global industrial services
businesses, the Company announced in January 2007 its intention to divest
the Gas Technologies manufacturing business group.
o During the first six months of 2007, international sales and operating
income were 68% and 66%, respectively, of total sales and operating income.
This compares with the first six months of 2006 levels of 68% of sales and
75% of operating income. The Excell Minerals acquisition, based principally
in the U.S., and the performance of the U.S. Access Services business have
increased the percentage of domestic operating income in 2007.
ACCESS SERVICES SEGMENT:
- ------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- --------------------------------------------- ---------------------------- ----------------------------
(DOLLARS IN MILLIONS) 2007 2006 2007 2006
- --------------------------------------------- ------------ ------------ ------------ ------------
Revenues $ 360.9 $ 269.7 $ 677.1 $ 495.5
Operating income 49.3 36.7 84.3 53.4
Operating margin percent 13.7% 13.6% 12.5% 10.8%
============================================= ============ ============ ============ ============
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES
- ---------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- ---------------------------------------------------------------------------- ------------- -------------
(IN MILLIONS)
- ---------------------------------------------------------------------------- ------------- -------------
Revenues - 2006 $ 269.7 $ 495.5
Net increased volume and new business 53.9 107.3
Acquisitions 23.3 43.9
Impact of foreign currency translation 14.1 30.4
Other (0.1) --
- ---------------------------------------------------------------------------- ------------- -------------
Revenues - 2007 $ 360.9 $ 677.1
============================================================================ ============= =============
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o In the second quarter and first six months of 2007, the international
access services business, and Eastern Europe in particular, continued to
improve due to increased non-residential and infrastructure construction
spending. The Company has also benefited from its recent rental equipment
capital investments made in these markets. Equipment rentals, particularly
in the construction sector, are the highest margin revenue source in this
Segment.
o The North American non-residential construction and industrial services
markets continued strong in the second quarter and first six months of
2007. This had a positive effect on volume which caused overall margins and
operating income in North America to improve.
o The 2006 MyATH (Chile) and Cleton (Northern Europe) acquisitions were
accretive to earnings in the second quarter and first six months of 2007.
o The impact of foreign currency translation in the second quarter and first
six months of 2007 increased operating income for this Segment by $1.8
million and $2.7 million, respectively, compared with the second quarter
and first six months of 2006.
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
MILL SERVICES SEGMENT:
- ----------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- --------------------------------------------- ---------------------------- ----------------------------
(DOLLARS IN MILLIONS) 2007 2006 2007 2006
- --------------------------------------------- ------------ ------------ ------------ ------------
Revenues $ 380.8 $ 344.3 $ 741.6 $ 670.5
Operating income 36.7 38.5 69.0 72.1
Operating margin percent 9.6% 11.2% 9.3% 10.8%
============================================= ============ ============ ============ ============
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES
- -------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- ---------------------------------------------------------------------------- ------------- -------------
(IN MILLIONS)
- ---------------------------------------------------------------------------- ------------- -------------
Revenues - 2006 $ 344.3 $ 670.5
Impact of foreign currency translation 19.5 38.7
Increased volume and new business 8.0 21.6
Acquisitions 9.0 10.8
- ---------------------------------------------------------------------------- ------------- -------------
Revenues - 2007 $ 380.8 $ 741.6
============================================================================ ============= =============
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o Despite overall increased volume, operating income for the second quarter
and first six months of 2007 was negatively impacted by increased operating
and maintenance expenses, unplanned outages at a number of mills, and lower
steel production in certain regions, particularly in North America.
o Foreign currency translation in the second quarter and first six months of
2007 increased operating income for this Segment by $2.3 million and $4.0
million, respectively, compared with the second quarter and first six
months of 2006.
MINERALS & RAIL TECHNOLOGIES, SERVICES AND PRODUCTS ("ALL OTHER") CATEGORY:
- ---------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- --------------------------------------------- ---------------------------- ----------------------------
(DOLLARS IN MILLIONS) 2007 2006 2007 2006
- --------------------------------------------- ------------ ------------ ------------ ------------
Revenues $ 204.4 $ 152.1 $ 367.5 $ 282.1
Operating income 50.5 22.0 69.9 37.4
Operating margin percent 24.7% 14.5% 19.0% 13.3%
============================================= ============ ============ ============ ============
-22-
MINERALS & RAIL TECHNOLOGIES, SERVICES AND PRODUCTS ("ALL OTHER") CATEGORY -
- ----------------------------------------------------------------------------
SIGNIFICANT IMPACTS ON REVENUES
- -------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- ---------------------------------------------------------------------------- ------------ ------------
(IN MILLIONS)
- ---------------------------------------------------------------------------- ------------ ------------
Revenues - 2006 $ 152.1 $ 282.1
Acquisitions 40.0 61.6
Industrial grating products 6.9 11.9
Air-cooled heat exchangers 6.2 11.0
Railway track maintenance services and equipment (0.1) 2.9
Impact of foreign currency translation 1.6 2.6
Roofing granules and abrasives (2.4) (5.5)
Boiler and process equipment (0.7) (0.3)
Other 0.8 1.2
- ---------------------------------------------------------------------------- ------------ ------------
Revenues - 2007 $ 204.4 $ 367.5
============================================================================ ============ ============
MINERALS & RAIL TECHNOLOGIES, SERVICES AND PRODUCTS ("ALL OTHER") CATEGORY -
SIGNIFICANT IMPACTS ON OPERATING INCOME:
o The Excell Minerals acquisition was accretive to the Category's performance
in the second quarter and first six months of 2007. During the second
quarter of 2007, Excell Minerals had record volumes due to strong customer
demand for the division's high-value materials as well as favorable market
pricing. Additionally, during the entire quarter, Excell's major processing
locations operated at maximum capacity.
o This Category benefited from a $3.2 million pre-tax gain on the sale of an
asset in the second quarter of 2007.
o Operating income of the air-cooled heat exchangers business continued to
benefit from increased volume resulting from a strong natural gas market
during the second quarter and first six months of 2007.
o Increased second quarter and first six months 2007 operating income for the
industrial grating products business was due principally to strong demand,
partially offset by higher material costs.
o The railway track maintenance services and equipment business delivered
increased income in the second quarter and first six months of 2007
compared with the second quarter and first six months of 2006, due to
increased volume and reduced operating expenses for contract services,
partially offset by lower equipment sales volume.
o Despite lower volume for the roofing granules and abrasives business in the
second quarter and first six months of 2007, operating income increased due
to price increases necessitated by higher costs.
o Operating income for the boiler and process equipment business was slightly
lower in the second quarter and first six months of 2007 compared with the
comparable periods for 2006, due to decreased equipment sales and increased
commodity costs.
o Foreign currency translation in the second quarter and first six months of
2007 increased operating income for this Category by $0.5 million and $0.7
million, respectively, compared with the second quarter and first six
months of 2006.
OUTLOOK, TRENDS AND STRATEGIES
Looking to the remainder of 2007 and beyond, the following significant items,
trends and strategies are expected to affect the Company:
COMPANY WIDE:
- -------------
o The Company will continue its disciplined focus on expanding the industrial
services businesses, with a particular emphasis on growing the Access
Services and Mill Services Segments, especially in emerging economies, and
other specialized services. Growth is expected to be achieved through the
provision of additional services to existing customers, new contracts in
both developed and emerging markets, and strategic acquisitions, such as
the February 2007 acquisition of Excell Minerals. Additionally, new
higher-margin service and sales opportunities in railway track maintenance
services and equipment will be pursued globally.
-23-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o In January 2007, the Company announced its intention to divest the Gas
Technologies manufacturing business. This decision is consistent with the
Company's overall strategic focus on industrial services businesses. The
divestiture is expected to be completed in the second half of 2007.
o The Company will continue to invest in selective strategic acquisitions and
growth capital investments; however, management will continue to be very
selective in allocating capital, choosing projects with the highest
Economic Value Added ("EVA(R)") potential.
o A strong focus on corporate-wide expansion into emerging economies is
expected in the coming years. More specifically, within the next three to
five years, a focused strategy of the Company is to approximately double
its presence in the Latin American, Asia-Pacific, Middle East and Africa,
and Eastern European markets to approximately 30% of total revenues.
o The Company will continue to implement enterprise business optimization
initiatives across the Company to further enhance margins for most
businesses, especially the Mill Services Segment. These initiatives include
improved supply-chain and logistics management and added emphasis on global
procurement. The Company will continue to use its increased size and
leverage due to recent acquisitions to reduce procurement costs and focus
on additional opportunities for cost reductions via procurement in low-cost
countries.
o The Company expects strong cash flow from operating activities in 2007,
exceeding the record of $409 million achieved in 2006. This, combined with
the expected cash from the Gas Technologies Segment divestiture, as well as
other asset sales, will support both the Company's growth initiatives and
help reduce debt.
o The continued growth of the Chinese steel industry, as well as other Asian
emerging economies, could impact the Company in several ways. Increased
steel mill production in China, and in other Asian countries, may provide
additional service opportunities for the Mill Services Segment. However,
increased Asian steel exports could result in lower steel production in
other parts of the world, affecting the Company's customer base.
Additionally, continued increased Chinese economic activity may result in
increased commodity costs in the future, which may adversely affect the
Company's manufacturing businesses. The potential impact of these risks is
currently unknown.
o Volatility in energy and commodity costs (e.g., fuel, natural gas, steel,
etc.) and worldwide demand for these commodities could have an adverse
effect on the Company's operating costs and ability to obtain the necessary
raw materials. Cost increases could result in reduced operating income for
certain products, to the extent that such costs cannot be passed on to
customers. The effect of continued Middle East armed hostilities on the
cost of fuel and commodities is currently unknown, but it could have a
significant effect.
o The armed hostilities in the Middle East could also have a significant
effect on the Company's operations in the region. The potential impact of
this risk is currently unknown. This exposure is further discussed in Part
II, Item 1A, "Risk Factors."
o Foreign currency translation had an overall favorable effect on the
Company's sales, operating income and Stockholders' Equity during the first
half of 2007. If the U.S. dollar strengthens, particularly in relationship
to the euro or British pound sterling, the impact on the Company would
generally be negative in terms of reduced sales, income and Stockholders'
Equity.
o Total pension expense (defined benefit, defined contribution and
multi-employer) for 2007 is expected to be higher than the 2006 level due
to increased volume which affects defined contribution and multi-employer
pension expense. On a comparative basis, total pension expense in the first
half of 2007 was $4.9 million higher than the first half of 2006 due
principally to increased defined contribution and multi-employer pension
expense resulting from increased volume in the Access Services Segment and
$1.5 million as a result of a one-time curtailment loss in the first
quarter of 2007 related to the Gas Technologies Segment.
o Defined benefit pension expense decreased $0.3 million in the first half of
2007 compared to the first half of 2006 due primarily to higher plan asset
bases in 2007 resulting from cash contributions and significant returns on
plan assets in 2006. The decreases were partially offset by plan
curtailment losses in the U.S. in the Gas Technologies Segment and in the
railway track maintenance services and equipment business. Defined benefit
pension expense is expected to decline for the full year 2007 compared with
2006 due to the significant level of cash contributions, including
voluntary cash contributions to the defined benefit pension plans
(approximately $10.6 million during 2006 and $16.9 million during 2005,
mostly to the U.K. plan), which will have a positive effect on current and
future years' pension expense, as well as the higher-than-expected plan
asset returns in 2006. The Company's pension task force continues to
evaluate alternative strategies to further mitigate overall pension
expense, including the on-going evaluation of investment fund managers'
performance; the balancing of plan assets and liabilities; the risk
assessment of all multi-employer pension plans; the possible merger of
certain plans; the consideration of incremental cash contributions to
certain plans; and other changes that should mitigate future volatility and
expense.
o Changes in worldwide interest rates, particularly in the U.S. and Europe,
could have a significant effect on the Company's overall interest expense,
as approximately 58% of the Company's borrowings are at variable interest
rates as of June 30, 2007 (in comparison to approximately 48% at December
31, 2006). The Company manages the mix of fixed-rate and floating-rate debt
to preserve adequate funding flexibility, as well as control the effect of
interest-rate changes on consolidated interest expense.
-24-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ACCESS SERVICES SEGMENT:
- ------------------------
o Both the international and domestic Access Services businesses have
experienced buoyant markets that are expected to continue throughout 2007.
Specifically, international and North American non-residential and
infrastructure construction activity continues at historically high volume
levels. Additionally, recent product-line additions continue to benefit
growth in North America.
MILL SERVICES SEGMENT:
- ----------------------
o To maintain pricing levels, a more disciplined and consolidated steel
industry has been adjusting production levels to bring inventories in-line
with current demand. On an overall basis, the Company expects global steel
production to increase modestly in 2007, which would generally have a
favorable effect on this Segment's revenues.
o Further consolidation in the global steel industry is possible. Should
additional transactions occur involving some of the steel industry's larger
companies that are customers of the Company, it would result in an increase
in concentration of revenues and credit risk for the Company. If a large
customer were to experience financial difficulty, or file for bankruptcy
protection, it could adversely impact the Company's income, cash flows and
asset valuations. As part of its credit risk management practices, the
Company closely monitors the credit standing and accounts receivable
position of its customer base. Further consolidation may also increase
pricing pressure on the Company and the competitive risk of services
contracts which are due for renewal. Conversely, such consolidation may
provide additional service opportunities for the Company as the Company
believes it is well-positioned competitively.
o The Company will continue to place significant emphasis on improving
operating margins of this Segment. Margin improvements are most likely to
be achieved through internal enterprise business optimization efforts such
as global procurement initiatives; process improvement programs; technology
enhancements; maintenance best practices programs; and reorganization
actions.
MINERALS & RAIL TECHNOLOGIES, SERVICES AND PRODUCTS ("ALL OTHER") CATEGORY:
- ---------------------------------------------------------------------------
o The Company will focus on expanding globally Excell Minerals' value-added
services of extracting high-value metallic content from slag and
responsibly handling and recycling residual materials.
o Market pricing volatility for some of the high-value materials involved in
Excell Minerals services could affect the operating results for this
business either favorably or unfavorably.
o International demand for the railway track maintenance services and
equipment business's products and services is expected to be strong in the
long term. A large equipment order recently signed with China is an example
of the underlying strength of the international markets. Due to long-lead
times, this order is expected to generate revenues beginning in 2008 and
beyond. In addition, increased volume of higher-margin contract services
and enterprise business optimization initiatives are expected to improve
margins on a long-term basis.
o Worldwide supply and demand for steel could have an adverse impact on raw
material costs and the ability to obtain the necessary raw materials for
several businesses in this Category. The Company has implemented certain
strategies and plans to help ensure continued product supply to our
customers and mitigate the potentially negative impact that rising steel
prices could have on operating income.
o The abrasives business and, to a lesser extent, roofing granules are
expected to continue to perform well long-term, although operating margins
could be impacted by volatile energy prices that affect both production and
transportation costs. This business has pursued the use of more
energy-efficient equipment to help mitigate future energy-related
increases.
o Due to a strong natural gas market and additional North American
opportunities, demand for air-cooled heat exchangers is expected to remain
strong for 2007.
-25-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------------------- -----------------------------
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AND PERCENTAGES) 2007 2006 2007 2006
- --------------------------------------------------------------- ------------ ------------ ------------ ------------
Revenues from continuing operations $ 946.1 $ 766.0 $ 1,786.2 $ 1,448.1
Cost of services and products sold 683.3 552.2 1,308.9 1,054.6
Selling, general and administrative expenses 127.3 115.1 255.1 227.3
Other (income) expenses (1.0) 1.7 (1.9) 3.5
Operating income from continuing operations 135.8 96.4 222.4 161.5
Interest expense 20.5 14.6 39.1 28.7
Income tax expense from continuing operations 37.4 27.5 59.0 44.5
Income from continuing operations 77.0 53.2 122.5 85.8
Income from discontinued operations 6.0 0.7 8.2 2.3
Net income 83.1 53.9 130.7 88.1
Diluted earnings per common share from continuing operations 0.91 0.63 1.45 1.02
Diluted earnings per common share 0.98 0.64 1.54 1.04
Effective income tax rate for continuing operations 32.0% 33.3% 31.7% 33.1%
Consolidated effective income tax rate 31.8% 33.2% 31.5% 33.0%
- --------------------------------------------------------------- ------------ ------------ ------------ ------------
-26-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
Revenues for the second quarter of 2007 increased $180.1 million or 24% from the
second quarter of 2006. Revenues for the first six months of 2007 increased
$338.1 million or 23% from the first six months of 2006. These increases were
attributable to the following significant items:
SECOND SIX
CHANGES IN REVENUES - 2007 VS. 2006 QUARTER MONTHS
- ------------------------------------------------------------------------------------------- ------------ ------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------- ------------ ------------
Effect of business acquisitions in the Minerals & Rail Technologies, Services and $ 72.3 $ 116.3
Products ("all other") Category ($40.0 million and $61.6 million, for the second
quarter and six months, respectively), the Access Services Segment ($23.3 million
and $43.9 million, for the second quarter and six months, respectively) and the Mill
Services Segment ($9.0 million and $10.8 million, for the second quarter and six
months, respectively)
Net increased revenues (excluding acquisitions) in the Access Services Segment due 53.9 107.3
principally to the continued strength of both the North American and international
businesses (particularly in Europe)
Effect of foreign currency translation 35.2 71.7
Net increased volume, new contracts and sales price changes in the Mill Services Segment 8.0 21.6
(excluding acquisitions)
Increased revenues in the industrial grating products business due to continued strong 6.9 11.9
demand
Increased revenues of the air-cooled heat exchangers business due to a continued strong 6.2 11.0
natural gas market
Increased revenues in the railway track maintenance services and equipment business due -- 2.9
to increased contract services and repair parts sales, partially offset by decreased
rail equipment sales
Decreased revenues in the railway track maintenance services and equipment business due (0.1) --
to decreased rail equipment sales, mostly offset by increased contract services and
repair parts sales
Other (minor changes across the various units not already mentioned) (2.3) (4.6)
- ------------------------------------------------------------------------------------------- ------------ ------------
Total Change in Revenues - 2007 vs. 2006 $ 180.1 $ 338.1
=========================================================================================== ============ ============
COST OF SERVICES AND PRODUCTS SOLD
Cost of services and products sold for the second quarter of 2007 increased
$131.1 million, or 24%, from the second quarter of 2006, consistent with the 24%
increase in revenues. Cost of services and products sold for the first six
months of 2007 increased $254.3 million, or 24%, from the first six months of
2006, slightly higher than the 23% increase in revenues. These increases were
attributable to the following significant items:
SECOND SIX
CHANGES IN COST OF SERVICES AND PRODUCTS SOLD - 2007 VS. 2006 QUARTER MONTHS
- ------------------------------------------------------------------------------------------- ------------ ------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------- ------------ ------------
Increased costs due to increased revenues (exclusive of the effect of foreign currency $ 44.3 $ 93.8
translation and business acquisitions and including the impact of increased costs
included in selling prices)
Effect of business acquisitions 43.1 78.9
Effect of foreign currency translation 26.6 54.0
Other (product/service mix and increased equipment maintenance costs, partially offset by 17.1 27.6
enterprise business optimization initiatives and volume-related efficiencies)
- ------------------------------------------------------------------------------------------- ------------ ------------
Total Change in Cost of Services and Products Sold - 2007 vs. 2006 $ 131.1 $ 254.3
=========================================================================================== ============ ============
-27-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses for the second quarter of
2007 increased $12.3 million or 11% from the second quarter of 2006, a lower
rate than the 24% increase in revenues. SG&A expenses for the first six months
of 2007 increased $27.8 million or 12% from the first six months of 2006, a
lower rate than the 23% increase in revenues. The increases in SG&A expenses
were attributable to the following significant items with the principal driver
being the continued expansion of the business:
SECOND SIX
CHANGES IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - 2007 VS. 2006 QUARTER MONTHS
- ------------------------------------------------------------------------------------------- ------------ ------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------- ------------ ------------
Effect of business acquisitions $ 6.4 $ 10.1
Effect of foreign currency translation 4.3 9.6
Increased compensation expense due to salary increases, increased headcount
and employee incentive plan costs due to improved performance, as well
as higher commissions due to increased volume 3.0 7.6
Other (1.4) 0.5
- ------------------------------------------------------------------------------------------- ------------ ------------
Total Change in Selling, General and Administrative
Expenses - 2007 vs. 2006 $ 12.3 $ 27.8
=========================================================================================== ============ ============
OTHER (INCOME) EXPENSES
This income statement classification includes impaired asset write-downs
associated with exit activities, employee termination benefit costs and other
costs to exit activities, offset by net gains on the disposal of non-core
assets. Net Other income was $1.0 million in the second quarter of 2007,
compared with expense of $1.7 million in the comparable 2006 period. Net Other
income was $1.9 million in the first six months of 2007, compared with expense
of $3.5 million in the first six months of 2006. These variances were
attributable to the following significant items:
SECOND SIX
CHANGES IN OTHER (INCOME) EXPENSES - 2007 VS. 2006 QUARTER MONTHS
- ------------------------------------------------------------------------------------------- ------------ ------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------- ------------ ------------
Increase in net gains on the disposal of non-core assets $ (1.6) $ (3.1)
Decrease in other exit costs due principally to a loss on a sublease in the first quarter
of 2006 and certain contract termination costs in the second quarter of 2006 (0.7) (1.6)
Decrease in employee termination benefit costs (0.7) (1.0)
Increase in asset impairment costs 0.3 0.3
- ------------------------------------------------------------------------------------------- ------------ ------------
Total Change in Other (Income) Expenses - 2007 vs. 2006 $ (2.7) $ (5.4)
=========================================================================================== ============ ============
INTEREST EXPENSE
Interest expense for the second quarter of 2007 increased $5.9 million or 41%
from the second quarter of 2006. For the first six months of 2007, interest
expense increased $10.4 million or 36% from the first six months of 2006. These
increases were principally due to increased borrowings to finance business
acquisitions and higher interest rates on variable-rate borrowings.
Additionally, there was approximately $0.6 million and $1.4 million of increased
interest expense due to the effect of foreign currency translation in the second
quarter and first six months of 2007, respectively.
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
The increase from comparable 2006 periods in income tax expense from continuing
operations for the second quarter and first six months of 2007 of $9.8 million
or 36% and $14.5 million or 32%, respectively, was primarily due to increased
earnings from continuing operations, partially offset by a decrease in the
effective income tax rate from continuing operations. The effective income tax
rates of 32.0% and 31.7% for the second quarter and first six months of 2007,
respectively, compared with 33.3% and 33.1% for the second quarter and first six
months of 2006, respectively. The decrease in the effective income tax rate for
the second quarter and first six months of 2007 was primarily due to
book-to-tax-return adjustments in certain foreign jurisdictions, settlement of
audits in certain state jurisdictions and the recognition of previously
unrecognized tax benefits in certain foreign jurisdictions. Book-to-tax-return
adjustments represent changes to prior estimates upon the filing of tax returns.
-28-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased $23.9 million or 45% in the second
quarter of 2007 compared with the second quarter of 2006. Income from continuing
operations increased $36.7 million or 43% in the first six months of 2007
compared with the first six months of 2006. These increases resulted from strong
demand for most of the Company's services and products and the net effect of
business acquisitions and divestitures.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations increased $5.3 million or 743% in the second
quarter of 2007 compared with the second quarter of 2006. Income from
discontinued operations increased $5.9 million or 252% in the first six months
of 2007 compared with the first six months of 2006. This was primarily due to
increased income from the operations of the Gas Technologies Segment ($7.7
million and $10.8 million in the second quarter and first six months of 2007,
respectively), partially offset by transaction costs related to the anticipated
sale of this Segment ($0.6 million and $2.9 million in the second quarter and
first six months of 2007, respectively).
NET INCOME AND EARNINGS PER SHARE
Net income of $83.1 million and diluted earnings per share of $0.98 in the
second quarter of 2007 exceeded the second quarter of 2006 by $29.2 million and
$0.34, respectively. Net income of $130.7 million and diluted earnings per share
of $1.54 in the first six months of 2007 exceeded the first six months of 2006
by $42.6 million and $0.50, respectively. These increases are primarily due to
increased income from continuing operations for the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
During the first six months of 2007, the Company generated $196.6 million in
operating cash, 6.7% higher than the $184.3 million in the first six months of
2006. This significant source of cash in the first six months of 2007, combined
with cash on-hand, enabled the Company to invest $201.2 million in capital
expenditures (almost 50% of which were for revenue growth projects), in addition
to paying $29.8 million in stockholder dividends.
During the first half of 2007, the Company's value-based management system
continued to deliver results by creating increased economic value. Significant
improvement in Economic Value Added ("EVA(R)") was achieved in the first half of
2007 and the Company's return on invested capital improved 180 basis points from
the comparable 2006 period. The Company's value-based management system is more
fully described in the 2006 Annual Report.
The Company's net cash borrowings increased $241.2 million in the first six
months of 2007, but decreased $23.9 million in the second quarter of 2007. The
increase for the first six months of 2007 is primarily due to business
acquisitions, principally the first quarter Excell Minerals acquisition. Balance
sheet debt, which is affected by foreign currency translation, increased $256.8
million from December 31, 2006. In the second quarter of 2007, the debt to total
capital ratio decreased from 52.6% at March 31, 2007 to 50.4% at June 30, 2007
due principally to a $99.9 million increase in Stockholders' Equity. Debt to
total capital was 48.1% at December 31, 2006.
The Company's strategy remains to redeploy discretionary cash for growth and
international diversification in the Access Services Segment; in long-term,
high-return and high-renewal-rate services contracts for the Mill Services
Segment, principally in emerging economies; for growth and international
diversification in the Minerals & Rail Technologies, Services and Products ("all
other") Category; and for selective bolt-on acquisitions in the industrial
services businesses. The Company also foresees continuing its long and
consistent history of paying dividends to stockholders and paying down debt.
The Company is also focused on improved working capital management.
Specifically, accounts receivable in the Access Services and Mill Services
Segments and inventory levels in the manufacturing businesses will continue to
be scrutinized and challenged to improve the Company's use of funds.
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 sale of the Gas Technologies
Segment, currently held-for-sale, is expected to provide a significant source of
cash in the second half of 2007.
-29-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 and equipment business). Cash returns on capital
investments made in prior years, for which no cash is currently required, are a
significant source of operating cash. Depreciation expense related to these
investments is a non-cash charge. The Company also strives to maintain working
capital at a manageable level based upon the requirements and seasonality of the
businesses.
Major uses of operating cash flows and borrowed funds include payroll costs and
related benefits; pension funding payments; inventory purchases; raw material
purchases for the manufacturing businesses; income tax payments; debt principal
and interest payments; insurance premiums and payments of self-insured casualty
losses; and machinery, equipment, automobile and facility rental payments. Other
primary uses of cash include capital investments, principally in the industrial
services businesses; and dividend payments. Cash may also be used for selective
bolt-on acquisitions as the appropriate opportunities arise.
In addition to cash requirements previously disclosed in the Company's 2006
10-K, the Company has a current liability for uncertain tax benefits of $0.9
million. An additional $46.5 million is classified as a long-term liability for
uncertain tax benefits. See Note H, "Income Taxes," for additional information
on uncertain tax benefits.
RESOURCES AVAILABLE FOR CASH REQUIREMENTS - The Company has various credit
facilities and commercial paper programs available for use throughout the world.
The following table illustrates the amounts outstanding under credit facilities
and commercial paper programs and available credit at June 30, 2007.
SUMMARY OF CREDIT FACILITIES AND
COMMERCIAL PAPER PROGRAMS AS OF JUNE 30, 2007
- -----------------------------------------------------------------------------------------
FACILITY OUTSTANDING AVAILABLE
(IN MILLIONS) LIMIT BALANCE CREDIT
- -------------------------------------------- ------------ ------------ ------------
U.S. commercial paper program $ 550.0 $ 383.7 $ 166.3
Euro commercial paper program 268.8 208.9 59.9
Revolving credit facility (a) 450.0 -- 450.0
Supplemental credit facilities (a) 325.0 -- 325.0
Bilateral credit facility (b) 50.0 -- 50.0
- -------------------------------------------- ------------ ------------ ------------
TOTALS AT JUNE 30, 2007 $ 1,643.8 $ 592.6 $ 1,051.2 (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 $825 million.
During the second quarter of 2007, the Company entered into a short-term bank
loan with the Royal Bank of Scotland Finance (Ireland) for $125 million. The
proceeds from this loan were used to pay down borrowings under the U.S.
commercial paper program. This credit agreement terminates upon repayment, but
no later than December 31, 2007.
For more information on the Company's credit facilities and long-term notes, see
Note 6, "Debt and Credit Agreements," to the Company's Form 10-K for the year
ended December 31, 2006.
-30-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at June 30, 2007:
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 January 2007, Fitch reaffirmed its A- and F2
ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. In March 2007, S&P reaffirmed its A- and
A-2 ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. In May 2007, Moody's reaffirmed its A3 and
P-2 ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. A downgrade to the Company's credit
ratings would probably increase borrowing costs to the Company, while an
improvement in the Company's credit ratings would probably decrease borrowing
costs to the Company.
WORKING CAPITAL POSITION - Changes in the Company's working capital are
reflected in the following table:
JUNE 30 DECEMBER 31 INCREASE
(DOLLARS ARE IN MILLIONS) 2007 2006 (DECREASE)
- --------------------------------------------------------- ------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 95.9 $ 101.2 $ (5.3)
Accounts receivable, net 812.6 753.2 59.4
Inventories 240.7 285.2 (44.5)
Other current assets 76.9 88.4 (11.5)
Assets held-for-sale 290.3 3.6 286.7
- --------------------------------------------------------- ------------ ------------ ------------
Total current assets 1,516.4 1,231.6 284.8
- --------------------------------------------------------- ------------ ------------ ------------
CURRENT LIABILITIES
Notes payable and current maturities 416.1 198.2 217.9
Accounts payable 288.8 287.0 1.8
Accrued compensation 85.4 95.0 (9.6)
Income taxes payable 45.7 62.0 (16.3)
Other current liabilities 302.9 268.6 34.3
Liabilities associated with assets held-for-sale 57.6 -- 57.6
- --------------------------------------------------------- ------------ ------------ ------------
Total current liabilities 1,196.5 910.8 285.7
- --------------------------------------------------------- ------------ ------------ ------------
WORKING CAPITAL $ 319.9 $ 320.8 $ (0.9)
- --------------------------------------------------------- ------------ ------------ ------------
CURRENT RATIO 1.3:1 1.4:1
========================================================= ============ ============ ============
Working capital remained flat for the six months ending 2007 due principally to
the following factors:
o Notes payable and current maturities increased $217.9 million primarily due
to an increase in short-term debt resulting from the Excell Minerals
acquisition.
o Assets held-for-sale increased $286.7 million and liabilities associated
with assets held-for-sale increased $57.6 million due to the
reclassification of the Gas Technologies Segment to Discontinued Operations
in the first quarter of 2007. All related assets and liabilities are
classified as held-for-sale as of June 30, 2007.
o Accounts receivable increased $59.4 million due to higher sales and timing
of collections in the international Access Services business as well as the
Mill Services business. Additionally, accounts receivable increased due to
the acquisition of Excell Minerals. Partially offsetting these increases
was the reclassification of the Gas Technologies Segment to Discontinued
Operations in the first quarter of 2007.
-31-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o Inventories decreased $44.5 million due principally to the reclassification
of the Gas Technologies Segment to Discontinued Operations in the first
quarter of 2007. Partially offsetting this decrease was increased finished
goods and raw materials inventories in the Minerals & Rail Technologies,
Services and Products Category due to the Excell Minerals acquisition,
higher material costs and increased inventories to meet expected customer
demand. Also offsetting the decrease was increased finished goods in the
international Access Services business to support increased demand.
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, 2006, the Company's mill services contracts had estimated future
revenues of $4.4 billion. As of June 30, 2007, the Company's continuing
operations had an order backlog of $459.7 million for its Minerals & Rail
Technologies, Services and Products businesses. This compares with $236.5
million at December 31, 2006 and $241.3 million at June 30, 2006. The increase
from December 31, 2006 and June 30, 2006 is due principally to increased demand
for certain products within the railway track maintenance services and equipment
business, including a significant order from China received in the second
quarter of 2007, as well as increased demand for heat exchangers and industrial
grating. The railway track maintenance services and equipment business backlog
includes a significant portion that will not be realized until 2008 and later
due to the long leadtime necessary to build certain equipment, and the long-term
nature of certain service contracts. Order backlog for scaffolding, shoring and
forming services; for roofing granules and slag abrasives; and the reclamation
and recycling of high-value content from steelmaking slag is excluded from the
above amounts. These amounts are generally not relevant or quantifiable due to
the short order lead times for certain services, the nature and timing of the
products and services provided and equipment rentals with the ultimate length of
the rental period often unknown.
The types of products and services that the Company provides are not subject to
rapid technological change, which increases the stability of related cash flows.
Additionally, each of the Company's businesses is among the top three companies
(relative to sales) in the industries or markets the Company serves. Due to
these factors, the Company is confident in its future ability to generate
positive cash flows from operations.
CASH FLOW SUMMARY
The Company's cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
SUMMARIZED CASH FLOW INFORMATION
- ---------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30
-------------------------------
(IN MILLIONS) 2007 2006
- ----------------------------------------------------- ------------ ------------
Net cash provided by (used in):
Operating activities $ 196.6 $ 184.3
Investing activities (419.6) (161.7)
Financing activities 211.8 (62.1)
Effect of exchange rate changes on cash 5.8 6.9
- ----------------------------------------------------- ------------ ------------
Net change in cash and cash equivalents $ (5.3)(a) $ (32.7)(a)
===================================================== ============ ============
(a) Does not total due to rounding
CASH FROM OPERATING ACTIVITIES - Net cash provided by operating activities in
the first six months of 2007 was $196.6 million, an increase of $12.3 million
(6.7%) from the first six months of 2006. The increased cash from operations was
a result of the following factors:
o Higher net income in the first six months of 2007 compared with the first
six months of 2006.
o Increased source of cash due principally to the timing of cash
disbursements in the Mill Services Segment, international Access Services
business and, to a lesser extent, the railway track maintenance services
and equipment business. Partially offsetting these increases was a decrease
in the Gas Technologies Segment.
o Increase in accrued taxes due principally to the timing of estimated
payments.
-32-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o Increase in other assets and liabilities primarily due to the timing of
payments for insurance, settlement of an insurance liability in 2006 not
repeated in 2007 and advances on contracts at the railway track maintenance
services and equipment business.
o Partially offsetting the above cash sources was the timing of sales and
accounts receivable collections, primarily in the Mill Services business
and, to a lesser extent, in the railway track maintenance services and
equipment business (due to the $20 million cash collection of a large sale
in the first quarter of 2006 that was not repeated in the first quarter of
2007), as well as the international Access Services business.
o Also offsetting the above cash sources were increased inventory purchases
required to meet current demand principally in the Gas Technologies
Segment, the international Access Services business and, to a lesser
extent, the railway track maintenance services and equipment business.
CASH USED IN INVESTING ACTIVITIES - In the first six months of 2007, cash
used in investing activities consisted of a $227.3 million use of cash,
principally related to the purchase of Excell Minerals in February 2007. Also,
capital investments for the first six months of 2007 were $201.2 million. This
was an increase of $34.4 million (20.6%) over the first six months of 2006.
Almost 50% of the investments were for projects intended to grow future revenues
with the remainder of the expenditures made generally to maintain the business.
Investments were made predominantly in the industrial services businesses, with
55% in the Access Services Segment and 39% in the Mill Services Segment.
Throughout the remainder of 2007 and into 2008, the Company plans to continue to
invest in value creation projects including bolt-on acquisitions, principally in
the industrial services businesses.
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions at June 30, 2007 and December 31, 2006.
JUNE 30 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2007 2006
- ---------------------------------------------- ------------ ------------
Notes Payable and Current Maturities $ 416.1 $ 198.2
Long-term Debt 903.7 864.8
- ---------------------------------------------- ------------ ------------
Total Debt 1,319.8 1,063.0
Total Equity 1,297.4 1,146.4
- ---------------------------------------------- ------------ ------------
Total Capital $ 2,617.2 $ 2,209.4
Total Debt to Total Capital 50.4% 48.1%
============================================== ============ ============
The Company's debt as a percent of total capital as of June 30, 2007 increased
from December 31, 2006. Overall debt increased due to the Excell Minerals
acquisition, and to a lesser extent, to foreign currency translation resulting
from the weakening of the U.S. dollar in comparison with the euro and the
British pound sterling. Additionally, total equity increased due principally to
the net income generated during the first six months of 2007.
DEBT COVENANTS
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Based on balances at June 30, 2007, the Company could
increase borrowings by approximately $624.6 million and still be within its debt
covenants. Alternatively, keeping all other factors constant, the Company's
equity could decrease by approximately $418.4 million and the Company would
still be in compliance with its covenants. The Company's 7.25% British pound
sterling-denominated notes due October 27, 2010 also include a covenant that
permits the note holders to redeem their notes, at par, in the event of a change
in control of the Company. The Company expects to remain 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 pension expense is included for
EVA purposes). Therefore, value is created when a project or initiative produces
a return above the cost of capital. Consistent with the first six months of 2007
results, meaningful improvement in EVA was achieved compared with the first six
months of 2006.
-33-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The Company is committed to continue paying dividends to stockholders. The
Company has increased the dividend rate for thirteen consecutive years, and in
May 2007, the Company paid its 228th consecutive quarterly cash dividend. In
June 2007, the Company declared its 229th consecutive quarterly cash dividend.
The Company also plans to use discretionary cash flows to pay down debt.
Additionally, the Company has authorization to repurchase up to two million of
its shares through January 31, 2008.
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 selective
high-return projects and acquisitions, to reduce debt, and pay cash dividends as
a means to enhance stockholder value.
NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
Information on new financial accounting standards issued is included in Note L,
"New Financial Accounting Standards Issued," in Part I, Item 1, Financial
Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -----------------------------------------------------------------------
See Part II, Item 1A, "Risk Factors," for quantitative and qualitative
disclosures about market risk.
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 June 30, 2007. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective. There have been no
significant changes in internal controls over financial reporting that could
materially affect, or are likely to materially affect, internal control over
financial reporting during the second quarter of 2007.
-34-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------------------------------
Information on legal proceedings is included under Part I, Item 1, Note I
labeled "Commitments and Contingencies."
ITEM 1A. RISK FACTORS
- -------------------------
MARKET RISK.
In the normal course of business, the Company is routinely subjected to a
variety of risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY IMPACT THE
COMPANY'S BUSINESSES.
The Company's businesses are subject to general economic slowdowns and cyclical
conditions in the industries served. In particular,
o The Company's Access Services business may be adversely impacted by
slowdowns in non-residential or infrastructure construction and annual
industrial and building maintenance cycles;
o The Company's Mill Services business may be adversely impacted 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 railway track maintenance services and equipment 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, infrastructure build and industrial
production;
o The air-cooled heat exchangers business is affected by cyclical conditions
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 this
business;
o The Excell Minerals business may be adversely impacted by the selling price
of materials which are market-based and varies based upon the current fair
value of its components. Therefore, the revenue amounts recorded from the
sale of such recycled materials vary based upon the fair value of the
commodity components being sold; and
o The Company's Gas Technologies business, now classified in Discontinued
Operations, may be adversely impacted by reduced industrial production, and
lower demand for industrial gases, slowdowns in demand for medical
cylinders, valves, 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. 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
-35-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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.
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. This
conversion is expected to make the Company's pension expense more predictable
and affordable and less sensitive to changes in the financial markets.
In addition to the Company's defined benefit pension plans, the Company also
participates in numerous multi-employer pension plans throughout the world.
Within the U.S., the Pension Protection Act of 2006 (the "Act") may require
additional funding for multiemployer plans that could cause the Company to be
subject to higher cash contributions in the future. The effect, if any, of the
Act is not determinable until further guidance becomes available. The Company
continues to assess any full and partial withdrawal liability implications
associated with these plans.
The Company's pension committee continues to evaluate alternative strategies to
further reduce overall pension expense including the on-going evaluation of
investment fund managers' performance; the balancing of plan assets and
liabilities; the risk assessment of all multi-employer pension plans; the
possible merger of certain plans; the consideration of incremental cash
contributions to certain plans; and other changes that are likely to reduce
future pension expense volatility and minimize risk.
Changes in the related pension benefit costs may occur in the future due to
changes in the actuarial assumptions and due to changes in returns on plan
assets resulting from financial market conditions. Using the expense calculated
for calendar year 2007, and the asset and liability balances as of December 31,
2006, 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 pre-tax defined benefit pension expense
as follows:
APPROXIMATE CHANGES IN PRE-TAX DEFINED BENEFIT
----------------------------------------------
PENSION EXPENSE
---------------
U.S. PLANS U.K. PLAN
---------- ---------
Discount rate
- -------------
One-half percent increase Decrease of $0.7 million Decrease of $4.3 million
One-half percent decrease Increase of $2.0 million Increase of $4.1 million
Expected long-term rate of return on plan assets
- ------------------------------------------------
One-half percent increase Decrease of $1.3 million Decrease of $3.7 million
One-half percent decrease Increase of $1.3 million Increase of $3.7 million
Should circumstances change that affect these estimates, changes (either
increases or decreases) to the net pension obligations may be required and would
be recorded in accordance with the provisions of SFAS 87 and SFAS 158. See Note
8, "Employee Benefit Plans" included in the Company's 2006 Form 10-K for more
information on the impact of SFAS 158. Additionally, certain events could result
in the pension obligation changing at a time other than the annual measurement
date. This would occur when the benefit plan is amended or when plan
curtailments occur under the provisions of SFAS 88.
THE COMPANY'S GLOBAL PRESENCE SUBJECTS IT TO A VARIETY OF RISKS ARISING
FROM DOING BUSINESS INTERNATIONALLY.
The Company operates in over 45 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;
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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 in certain jurisdictions 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;
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 be negatively affected.
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, Iran, Israel, Lebanon and other countries with a
continued high risk of armed hostilities. During the first six months of 2007,
2006 and 2005, these countries contributed approximately $20.8 million, $17.9
million and $15.3 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), avian influenza and others). Should these outbreaks worsen or
spread to other countries, the Company may be negatively impacted through
reduced sales to and within those 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 40 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. For the six months ended June 30, 2007
and 2006, approximately 68% of the Company's sales from continuing operations
and approximately 66% and 75%, respectively, of the Company's operating income
from continuing operations were derived from operations outside the United
States. More specifically, during the six months ended June 30, 2007 and 2006,
approximately 21% and 23%, respectively, of the Company's revenues from
continuing operations were derived from operations in the U.K. Additionally,
approximately 26% and 24% of the Company's revenues from continuing operations
were derived from operations with the euro as their functional currency during
the six months ended June 30, 2007 and 2006, 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.
-37-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Compared with the corresponding period in 2006, the average values of major
currencies changed as follows in relation to the U.S. dollar during the six
months ended June 30, 2007, impacting the Company's sales and income:
SIX MONTHS ENDED
FOREIGN CURRENCY JUNE 30
- ------------------------------------------------------------
British pound sterling Strengthened by 9%
Euro Strengthened by 7%
South African rand Weakened by 12%
Brazilian real Strengthened by 7%
Australian dollar Strengthened by 8%
Compared with exchange rates at December 31, 2006, the values of major
currencies changed as follows as of June 30, 2007:
o British pound sterling Strengthened by 2%
o Euro Strengthened by 2%
o South African rand Weakened by 1%
o Brazilian real Strengthened by 10%
o Australian dollar Strengthened by 7%
The Company's foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies change
materially in relation to the U.S. dollar, the Company's financial position,
results of operations, or cash flows may be materially affected.
To illustrate the effect of foreign currency exchange rate changes in certain
key markets of the Company, in the first six months of 2007, revenues would have
been approximately 4% or $71.7 million lower, while operating income would have
been approximately 6% or $7.4 million lower if the average exchange rates for
the first six months of 2006 were utilized. A similar comparison for the first
six months of 2006 would have increased revenues approximately 1% or $12.2
million, while operating income would have decreased by less than 1% or $0.4
million if the average exchange rates would have remained the same as the first
six months of 2005. If the U.S. dollar weakens in relation to the euro and
British pound sterling, the Company would expect to see a positive impact on
future sales and income from continuing operations as a result of foreign
currency translation. Currency changes also result in assets and liabilities
denominated in local currencies being translated into U.S. dollars at different
amounts than at the prior period end.
The Company seeks to reduce exposures to foreign currency transaction
fluctuations through the use of forward exchange contracts. At June 30, 2007,
the notional amount of these contracts was $153.7 million, and over 94% will
mature in the third quarter of 2007. 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 and reduce sales and may cause
translation gains or losses due to the revaluation of accounts payable, accounts
receivable and other asset and liability accounts. Conversely, any long-term
weakening of the U.S. dollar could improve demand for these products and
increase sales and may cause translation gains 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 affect the
-38-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
forecasts used in performing the Company's goodwill impairment testing under
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). If management
determines that goodwill or other 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 contain asbestos. Most of these complaints contain a standard
claim for damages of $20 million or $25 million against the named defendants. 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 this litigation, 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.
o The Company's Access Services business rents and sells equipment and
provides erection and dismantling services to principally the
non-residential and infrastructure 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. 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 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 or renewals are at reduced prices, revenue may decline.
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 enterprise business
optimization programs, international customer focus and the diversification,
streamlining and consolidation of operations.
INCREASED CUSTOMER CONCENTRATION AND CREDIT RISK IN THE MILL SERVICES
SEGMENT MAY ADVERSELY AFFECT THE COMPANY'S FUTURE EARNINGS AND CASH FLOWS.
The Company's Mill Services Segment (and, to a lesser extent, the Minerals &
Rail Technologies, Services and Products ("all other") Category) has several
large customers throughout the world with significant accounts receivable
balances. In December 2005, the Company acquired the Northern Hemisphere steel
mill services operations of Brambles Industrial Services ("BISNH"), a unit of
the Sydney, Australia-based Brambles Industrials Limited. This acquisition has
increased the Company's corresponding concentration of credit risk to customers
in the steel industry. Additionally, further consolidation in the global steel
industry occurred in 2006 and additional consolidation is probable. Should
additional transactions occur involving some of the steel industry's larger
companies, which are customers of the Company, it would result in an increase in
concentration of credit risk for the Company. If a large customer were to
experience financial difficulty, or file for bankruptcy protection, it could
adversely impact the Company's income, cash flows and asset valuations. As part
of its credit risk management practices, the Company is developing strategies to
mitigate this increased concentration of credit risk. In the Access Services
Segment, concentrations of credit risk with respect to accounts receivable are
generally limited due to the Company's large number of customers and their
dispersion across different geographies.
-39-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
INCREASES IN ENERGY PRICES COULD INCREASE THE COMPANY'S OPERATING COSTS AND
REDUCE ITS PROFITABILITY.
Worldwide political and economic conditions, an imbalance in the supply and
demand for oil, extreme weather conditions, armed hostilities in oil-producing
regions, among 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 six months of 2007 and 2006, energy-related costs have approximated 3.5%
and 4.2% of the Company's revenue from continuing operations, 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 SELLING PRICES) OR
AVAILABILITY OF STEEL OR OTHER MATERIALS AND COMMODITIES MAY AFFECT THE
COMPANY'S PROFITABILITY.
The profitability of the Company's manufactured products is affected by changing
purchase prices of steel and other materials and commodities. If raw 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 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. Certain services performed by the Excell Minerals
Division result in the recovery, processing and sale of specialty steel and
other high-value metal by-products to its customers. The selling price of the
by-products material is market-based and varies based upon the current fair
value of its components. Therefore, the revenue amounts recorded from the sale
of such by-products material vary based upon the fair value of the commodity
components being sold. The Company has executed hedging instruments designed to
reduce the volatility of the revenue from the sale of the by-products material
at varying market prices. However, there can be no guarantee that such hedging
strategies will be fully effective in reducing the variability of revenues from
period to period.
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
international 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 several sites, the Company is currently
conducting environmental remediation, and it is probable that the Company will
agree to make payments toward funding certain other of these remediation
activities. It also is possible that some of these matters will be decided
unfavorably to the Company and that other sites requiring remediation will be
identified. Each of these matters is subject to various uncertainties and
financial exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Company has evaluated its potential liability and the Consolidated Balance
Sheets for June 30, 2007 and December 31, 2006 include an accrual of $4.2
million and $3.8 million for environmental matters, respectively. The amounts
charged against pre-tax earnings related to environmental matters totaled $1.3
million and $0.5 million for the six months ended June 30, 2007 and 2006,
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
-40-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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
June 30, 2007, the Company was in compliance with the covenants with a debt to
capital ratio of 50.4% and a net worth of $1.3 billion. The company had $402.3
million in outstanding indebtedness containing these covenants at June 30, 2007.
HIGHER THAN EXPECTED INSURANCE CLAIMS, UNDER WHICH THE COMPANY RETAINS A
PORTION OF RISK, COULD ADVERSELY IMPACT RESULTS OF OPERATIONS AND CASH
FLOWS.
The Company retains a significant portion of the risk for property, workers'
compensation, U.K. employers' liability, 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
June 30, 2007 and December 31, 2006, the Company had recorded liabilities of
$107.2 million and $103.4 million, respectively, related to both asserted and
unasserted insurance claims. Included in the balances at June 30, 2007 and
December 31, 2006 were $20.6 million and $18.9 million, respectively, of
recognized liabilities covered by insurance carriers. 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 second half of
the year, as the Company's business tends to follow seasonal patterns. If the
Company is unable to successfully manage the cash flow and other effects of
seasonality on the business, its results of operations and cash flows may be
adversely affected.
HISTORICAL REVENUE FROM CONTINUING OPERATIONS PATTERNS
(IN MILLIONS) 2007 2006 2005 2004
- --------------------------------- ------------ ------------ ------------ ------------
First Quarter Ended
March 31 $ 840.0 $ 682.1 $ 558.0 $ 478.7
Second Quarter Ended June 30 946.1 766.0 606.0 534.6
Third Quarter Ended September 30 -- 773.3 599.5 532.9
Fourth Quarter Ended December 31 -- 804.2 632.5 616.8
- --------------------------------- ------------ ------------ ------------ ------------
Totals $ -- $ 3,025.6 $ 2,396.0 $ 2,163.0
================================= ============ ============ ============ ============
-41-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
HISTORICAL CASH PROVIDED BY OPERATIONS
(IN MILLIONS) 2007 2006 2005 2004
- --------------------------------- ------------ ------------ ------------ ------------
First Quarter Ended
March 31 $ 41.7 $ 69.8 $ 48.1 $ 32.4
Second Quarter Ended June 30 154.9 114.5 86.3 64.6
Third Quarter Ended September 30 -- 94.6 98.1 68.9
Fourth Quarter Ended December 31 -- 130.3 82.7 104.6
- --------------------------------- ------------ ------------ ------------ ------------
Totals $ -- $ 409.2 $ 315.3(a) $ 270.5
================================= ============ ============ ============ ============
(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 June 30, 2007 was $1.32 billion. Of this amount,
approximately 41.9% had fixed rates of interest and 58.1% had variable rates of
interest. The weighted average interest rate of total debt was approximately
5.8%. At current debt levels, a one-percentage increase/decrease in variable
interest rates would increase/decrease interest expense by approximately $7.7
million per year.
The future financial impact on the Company associated with the above risks
cannot be estimated.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- ------------------------------------------------------------------------
(a). There were no unregistered sales of equity securities during the period
covered by the report.
(c). Issuer Purchases of Equity Securities
MAXIMUM
TOTAL NUMBER NUMBER
OF SHARES OF SHARES
PURCHASED THAT MAY
AS PART OF YET BE
TOTAL PUBLICLY PURCHASED
NUMBER AVERAGE ANNOUNCED UNDER THE
OF SHARES PRICE PAID PLANS OR PLANS OR
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS
- -------------------------------- --------- --------- --------- ---------
April 1, 2007 - April 30, 2007 -- -- -- 2,000,000
May 1, 2007 - May 31, 2007 -- -- -- 2,000,000
June 1, 2007 - June 30, 2007 -- -- -- 2,000,000
- -------------------------------- --------- --------- ---------
Total -- -- --
- -------------------------------- --------- --------- ---------
The Company's share repurchase program was extended by the Board of Directors in
November 2006. The program authorizes the repurchase of up to 2,000,000 shares
of the Company's common stock and expires January 31, 2008.
-42-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- ------------------------------
STOCK SPLIT
- -----------
On January 23, 2007, the Company's Board of Directors approved a two-for-one
stock split of the Company's Common Stock, par value $1.25 per share (the
"Common Stock"), to be effected in the form of a distribution of one additional
share of the Company's Common Stock for each share that is issued and
outstanding. The record date for the stock split was February 28, 2007 and the
payment date was March 26, 2007. All historical share and per share data has
been restated to reflect the two-for-one stock split.
DIVIDEND INFORMATION
- --------------------
On June 19, 2007, the Company's Board of Directors declared a quarterly cash
dividend of $0.1775 per share, on a post split basis, payable August 15, 2007,
to stockholders of record as of July 16, 2007.
ITEM 6. EXHIBITS
- ---------------------
Listing of Exhibits filed with Form 10-Q:
Exhibit
Number Data Required Location
- ------ ------------- --------
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 August 8, 2007 /S/ Salvatore D. Fazzolari
---------------------------- -------------------------------
Salvatore D. Fazzolari
President, Chief Financial
Officer and Treasurer
DATE August 8, 2007 /S/ Stephen J. Schnoor
---------------------------- -------------------------------
Stephen J. Schnoor
Vice President and Controller
-44-