================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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
--------------------
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
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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 April 30, 2007
--------------------------------------------------------------------------------
Common stock, par value $1.25 per share 84,155,128
================================================================================
-1-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2007 2006(A)
------------------------------------------------------------------------------------------------------------------------
REVENUES FROM CONTINUING OPERATIONS:
Service revenues $ 722,815 $ 572,631
Product revenues 117,211 109,434
------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 840,026 682,065
========================================================================================================================
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 538,538 422,824
Cost of products sold 87,079 79,534
Selling, general and administrative expenses 127,754 112,251
Research and development expenses 993 557
Other (income) expenses (912) 1,849
------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 753,452 617,015
========================================================================================================================
OPERATING INCOME FROM CONTINUING OPERATIONS 86,574 65,050
Equity in income of unconsolidated entities, net 128 61
Interest income 1,039 861
Interest expense (18,575) (14,090)
------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 69,166 51,882
Income tax expense (21,602) (16,986)
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INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 47,564 34,896
Minority interest in net income (2,124) (2,271)
------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 45,440 32,625
------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Income from operations of discontinued business 5,418 2,317
Disposal costs of discontinued business (2,297) --
Income tax expense (908) (690)
------------------------------------------------------------------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS 2,213 1,627
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NET INCOME $ 47,653 $ 34,252
========================================================================================================================
Average shares of common stock outstanding 84,048 83,645
Basic earnings per common share:
Continuing operations $ 0.54 $ 0.39
Discontinued operations 0.03 0.02
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BASIC EARNINGS PER COMMON SHARE $ 0.57 $ 0.41
========================================================================================================================
Diluted average shares of common stock outstanding 84,578 84,230
Diluted earnings per common share:
Continuing operations $ 0.54 $ 0.39
Discontinued operations 0.03 0.02
========================================================================================================================
DILUTED EARNINGS PER COMMON SHARE $ 0.56(B) $ 0.41
========================================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.1775 $ 0.1625
========================================================================================================================
(a) Reclassified for comparative purposes. See Note B, "Reclassifications," for
additional information on these changes.
(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)
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2007 2006
------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 102,031 $ 101,260
Accounts receivable, net 757,549 753,168
Inventories 219,627 285,229
Other current assets 74,581 88,398
Assets held-for-sale 280,600 3,567
------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,434,388 1,231,622
========================================================================================================================
Property, plant and equipment, net 1,320,983 1,322,467
Goodwill, net 692,149 612,480
Intangible assets, net 183,493 88,164
Other assets 92,319 71,690
------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,723,332 $ 3,326,423
========================================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 435,382 $ 185,074
Current maturities of long-term debt 11,282 13,130
Accounts payable 260,312 287,006
Accrued compensation 70,654 95,028
Income taxes payable 36,437 61,967
Dividends payable 16,009 15,983
Insurance liabilities 42,270 40,810
Other current liabilities 224,414 211,777
Liabilities associated with assets held-for-sale 57,532 --
------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,154,292 910,775
========================================================================================================================
Long-term debt 882,046 864,817
Deferred income taxes 147,295 103,592
Insurance liabilities 64,602 62,542
Retirement plan liabilities 181,190 189,457
Other liabilities 96,421 48,876
------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,525,846 2,180,059
========================================================================================================================
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 138,161 85,614
Additional paid-in capital 115,507 166,494
Accumulated other comprehensive loss (152,006) (169,334)
Retained earnings 1,698,995 1,666,761
Treasury stock (603,171) (603,171)
------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,197,486 1,146,364
========================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,723,332 $ 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)
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 2007 2006
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47,653 $ 34,252
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 65,008 58,415
Amortization 5,270 1,836
Equity in income of unconsolidated entities, net (128) (61)
Other, net (760) 2,336
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (43,486) 27,464
Inventories (30,070) (27,611)
Accounts payable (13,942) (10,250)
Accrued interest payable 5,621 4,710
Accrued compensation (22,848) (14,543)
Other assets and liabilities 29,369 (6,708)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 41,687 69,840
========================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (83,363) (66,940)
Net source (use) of cash associated with the purchases of businesses (212,337) 2,264
Proceeds from sale of assets 4,513 1,324
Other investing activities (392) --
------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (291,579) (63,352)
========================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 248,887 10,352
Current maturities and long-term debt:
Additions 294,788 59,841
Reductions (278,527) (92,484)
Cash dividends paid on common stock (14,916) (13,580)
Common stock issued-options 541 6,345
Other financing activities (1,550) (2,266)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 249,223 (31,792)
========================================================================================================================
Effect of exchange rate changes on cash 1,440 3,227
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Net increase (decrease) in cash and cash equivalents 771 (22,077)
Cash and cash equivalents at beginning of period 101,260 120,929
========================================================================================================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 102,031 $ 98,852
========================================================================================================================
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
MARCH 31
(IN THOUSANDS) 2007 2006
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Net income $ 47,653 $ 34,252
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Other comprehensive income (loss):
Foreign currency translation adjustments 7,309 10,825
Net losses on cash flow hedging instruments, net of deferred income taxes of
$0 and $5 in 2007 and 2006, respectively -- (10)
Pension liability adjustments, net of deferred income taxes of $(4,390) and
$668 in 2007 and 2006, respectively 10,023 (2,267)
Marketable securities, unrealized gain, net of deferred income taxes of $0
and $1 in 2007 and 2006, respectively -- 1
Reclassification adjustment for (gain) loss on cash flow hedging instruments
included in net income, net of deferred income taxes of $2 and $(1) in
2007 and 2006, respectively (5) 1
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Other comprehensive income 17,327 8,550
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TOTAL COMPREHENSIVE INCOME $ 64,980 $ 42,802
========================================================================================================================
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
MARCH 31, 2007 MARCH 31, 2006
OPERATING INCOME OPERATING INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
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Access Services Segment $ 316,209 $ 35,041 $ 225,794 $ 16,783
Mill Services Segment 360,771 32,308 326,235 33,580
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Segment Totals 676,980 67,349 552,029 50,363
Minerals & Rail Technologies, Services and Products
("all other") Category (a) 163,046 19,379 130,036 15,438
General Corporate -- (154) -- (751)
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Consolidated Totals $ 840,026 $ 86,574 $ 682,065 $ 65,050
==============================================================================================================================
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME FROM
CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 2007 2006
------------------------------------------------------------------------------------------------------------------------------
Segment Operating Income $ 67,349 $ 50,363
Minerals & Rail Technologies, Services and Products
("all other") Category (a) 19,379 15,438
General Corporate (154) (751)
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Operating income from continuing operations 86,574 65,050
Equity in income of unconsolidated entities, net 128 61
Interest income 1,039 861
Interest expense (18,575) (14,090)
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Income from continuing operations before income taxes and minority interest $ 69,166 $ 51,882
==============================================================================================================================
(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.
D. ACCOUNTS RECEIVABLE AND INVENTORIES
At March 31, 2007 and December 31, 2006, accounts receivable of $757.5 million
and $753.2 million, respectively, were net of an allowance for doubtful accounts
of $26.9 million and $25.4 million, respectively. Gross accounts receivable
included trade accounts receivable of $746.6 million and $737.1 million at March
31, 2007 and December 31, 2006, respectively. Other receivables included
insurance claim receivables of $18.4 million and $18.9 million at March 31, 2007
and December 31, 2006, respectively. The provision for doubtful accounts was
$2.7 million and $2.3 million for the three months ended March 31, 2007 and
2006, respectively.
Inventories consist of the following:
INVENTORIES
----------------------------
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2007 2006
----------------------------------------------------------------------
Finished goods $ 101,558 $ 117,072
Work-in-process 12,429 31,489
Raw materials and purchased parts 63,397 96,750
Stores and supplies 42,243 39,918
----------------------------------------------------------------------
Total Inventories $ 219,627 $ 285,229
======================================================================
Inventories decreased $65.6 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 as of March 31, 2007. All related assets and liabilities have
been reclassified to held-for-sale as of March 31, 2007.
-7-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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:
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2007 2006
--------------------------------------------------------------------------
Land and improvements $ 43,569 $ 41,255
Buildings and improvements 156,969 192,575
Machinery and equipment 2,634,385 2,699,131
Uncompleted construction 65,436 52,640
--------------------------------------------------------------------------
Gross property, plant and equipment 2,900,359 2,985,601
Less accumulated depreciation (1,579,376) (1,663,134)
--------------------------------------------------------------------------
Net property, plant and equipment $ 1,320,983 $ 1,322,467
==========================================================================
F. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in carrying amounts of goodwill by
segment for the three months ended March 31, 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 quarter -- -- 112,793 -- 112,793
Changes to Goodwill (a) 1,884 -- -- -- 1,884
Foreign currency translation 1,116 626 164 3 1,909
Goodwill transferred to assets held-for-sale -- -- -- (36,917) (36,917)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2007, NET OF ACCUMULATED AMORTIZATION $244,937 $326,118 $121,094 $ -- $ 692,149
====================================================================================================================================
(a) Relate principally to opening balance sheet adjustments.
Goodwill is net of accumulated amortization of $100.8 million and $109.3 million
at March 31, 2007 and December 31, 2006, respectively.
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The following table reflects intangible assets by major category:
INTANGIBLE ASSETS
---------------------------------------------------------------------------------------------
MARCH 31, 2007 DECEMBER 31, 2006
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------------------------------------------------------------------------------------
Customer Relationships $ 142,265 $ 10,407 $ 87,426 $ 7,084
Non-compete agreements 3,338 2,750 5,648 4,708
Patents 4,711 3,972 4,700 3,940
Other 56,601 4,855 9,800 3,678
---------------------------------------------------------------------------------------------
Total $ 206,915 $ 21,984 $ 107,574 $ 19,410
=============================================================================================
Intangible assets are included in the Intangible Assets, Net and Other Current
Assets line items in the Consolidated Balance Sheets.
During the first three 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 acquisition more
fully discussed in Note G, "Acquisitions and Dispositions."
ACQUIRED INTANGIBLE ASSETS
--------------------------------------------------------------------------------
GROSS CARRYING RESIDUAL WEIGHTED-AVERAGE
(IN THOUSANDS) AMOUNT VALUE AMORTIZATION PERIOD
--------------------------------------------------------------------------------
Customer relationships $ 56,740 None 5 years
Other (a) 46,760 None 9 years
------------
Total $ 103,500
============
(a) Principally technical know-how and contractual revenue
There were no research and development assets acquired and written off in the
first three months of 2007 or 2006.
Amortization expense for intangible assets was $5.0 million and $1.6 million for
the three months ended March 31, 2007 and 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) $24,500 $24,000 $22,900 $22,500 $21,300
(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 will be
included in the Mill Services Segment.
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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
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, and South Africa. Goodwill recognized in this transaction (based
on foreign exchange rates at the transaction date) was $113 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 March 31, 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.
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 Holland, 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 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 this first quarter 2007 report. The
Segment's assets and liabilities have been classified as held-for-sale in the
March 31, 2007 balance sheet.
-10-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The major classes of assets and liabilities "held-for-sale" included in the
Consolidated Balance Sheets are as follows:
MARCH 31(A) DECEMBER 31
(IN THOUSANDS) 2007 2006
--------------------------------------------------------------------------------
ASSETS
Accounts receivable, net $ 63,172 $ --
Inventories 101,489 --
Other current assets 4,829 --
Property, plant and equipment, net 69,529 3,567
Goodwill, net 36,917 --
Other assets 4,664 --
--------------------------------------------------------------------------------
TOTAL ASSETS "HELD-FOR-SALE" $ 280,600 $ 3,567
================================================================================
LIABILITIES
Current maturities of long-term debt $ 1,755 $ --
Accounts payable 31,685 --
Accrued compensation 3,693 --
Income taxes payable 524 --
Other current liabilities 15,404 --
Long-term debt 2,034 --
Retirement plan liabilities 2,073 --
Other liabilities 364 --
--------------------------------------------------------------------------------
TOTAL LIABILITIES ASSOCIATED WITH ASSETS
"HELD-FOR-SALE" $ 57,532 $ --
================================================================================
(a) March 31, 2007 amounts are predominantly assets and liabilities associated
with the Gas Technologies Segment.
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
Income tax expense from continuing operations increased $4.6 million or 27% for
the first quarter of 2007 compared with the first quarter of 2006. This was
primarily due to increased earnings from continuing operations, partially offset
by a decrease in the effective income tax rate from continuing operations (31.2%
for the first quarter of 2007 compared with 32.7% for the first quarter of
2006). The decrease in the effective income tax rate for the first quarter of
2007 was primarily due to the recognition of previously unrecognized tax
benefits in certain foreign jurisdictions.
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 2007 beginning retained
earnings of $0.5 million. As of the adoption date, the Company had gross
tax-affected unrecognized income tax benefits of approximately $46.0 million, of
which $17.8 million, if recognized, would affect the Company's effective income
tax rate. Of this $46.0 million, $0.8 million
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
is classified as current and $45.2 million is classified as non-current on the
Company's balance sheet as of March 31, 2007. While the Company believes it has
adequately provided for all tax positions, amounts asserted by taxing
authorities could be greater than the accrued position.
The Company recognizes accrued interest and penalties 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"), which is more fully discussed in Note I, "Commitments and
Contingencies," to the Consolidated Financial Statements. This matter is
currently in administrative appeals with CRA, and it is reasonably possible that
within the next twelve months the Company and the CRA will resolve the matter.
At this point in the appeals process, an estimate of a change, if any, to the
unrecognized tax benefit amount cannot be made.
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 March 31, 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 $0.6 million and $0.2 million for the first three 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 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 March 31, 2007, the maximum assessment from the CRA for the
period 1994-1998 is approximately $10.6 million, including tax and interest. The
Ontario Ministry of Finance ("Ontario") is also proposing to disallow these same
deductions for the period 1994-1998. As of March 31, 2007, the maximum
assessment from Ontario is approximately $3.3 million, including tax and
interest. The Company has filed administrative appeals and will vigorously
contest these disallowances.
The Company currently anticipates that, ultimately, it may have a liability for
some portion of the assessment in this royalty expense dispute. However, the
Company intends to utilize competent authority proceedings in the U.S. to
recover a portion of any required tax payment amount. The Company believes that
any amount not recovered through these proceedings has been fully reserved as of
March 31, 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.
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 on-going. The initial clean-up and salvage efforts are
completed, although work on environmental remediation is on-going. Estimated
environmental remediation expenses have been recognized as of March 31, 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 March 31,
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.
As of March 31, 2007, there are 26,496 pending asbestos personal injury claims
filed against the Company. Of these cases, 26,109 were pending in the New York
Supreme Court (a trial court) for New York County in New York State. The other
claims, totaling 387, are filed in various counties in a number of state courts,
and in certain Federal District Courts (including New York), and those
complaints generally assert lesser amounts of damages than the New York State
court cases or do not state any amount claimed.
As of March 31, 2007, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in 17,008 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 March 31, 2007, the Company has been
listed as a defendant in 189 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.
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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.
J. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED
MARCH 31
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2007 2006
--------------------------------------------------------------------------------------------------
Income from continuing operations $ 45,440 $ 32,625
==================================================================================================
Average shares of common stock outstanding used to compute basic
earnings per common share 84,048 83,645
Dilutive effect of stock-based compensation 530 585
--------------------------------------------------------------------------------------------------
Shares used to compute dilutive effect of stock-based compensation 84,578 84,230
==================================================================================================
Basic earnings per common share from continuing operations $ 0.54 $ 0.39
==================================================================================================
Diluted earnings per common share from continuing operations $ 0.54 $ 0.39
==================================================================================================
All outstanding stock options and restricted stock units were included in the
computation of diluted earnings per share at March 31, 2007 and 2006.
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
K. EMPLOYEE BENEFIT PLANS
THREE MONTHS ENDED
MARCH 31
-----------------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U.S. PLANS INTERNATIONAL PLANS
--------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 743 $ 921 $ 2,079 $ 2,145
Interest cost 3,865 3,730 12,144 10,263
Expected return on plan assets (5,494) (4,986) (14,923) (12,318)
Recognized prior service costs 212 186 230 295
Recognized losses 383 737 3,764 3,066
Amortization of transition liability (asset) -- (90) 7 9
Curtailment/settlement loss (gain) 1,547 -- -- (12)
--------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 1,256 $ 498 $ 3,301 $ 3,448
========================================================================================================
Defined benefit pension expense in the first quarter of 2007 was $0.6 million
higher than the comparable 2006 period. The increase relates primarily to
increased interest cost and a one time curtailment loss in the U.S. in the Gas
Technologies Segment, which has been reclassified in Discontinued Operations
effective in the first quarter of 2007. These increases were partially offset by
decreased expense due to a higher expected return on plan assets as a result of
a higher plan asset base resulting from cash contributions and significant
returns on plan assets in 2006.
In the quarter ended March 31, 2007, the Company contributed $0.6 million and
$5.7 million for the U.S. and international defined benefit pension plans,
respectively. The Company currently anticipates contributing an additional $1.8
million and $17.5 million for the U.S. and international plans, respectively,
during the remainder of 2007.
In the quarter ended March 31, 2007, the Company's contributions to
multi-employer pension plans were $4.2 million and for defined contribution
plans, payments were $6.2 million.
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) MARCH 31
----------------------------------------------------------------------------
(IN THOUSANDS) 2007 2006
----------------------------------------------------------------------------
Service cost $ 1 $ 1
Interest cost 45 47
Recognized prior service costs 1 1
Recognized gains (32) (10)
----------------------------------------------------------------------------
Postretirement benefits expense $ 15 $ 39
============================================================================
In the quarter ended March 31, 2007, the Company contributed $75 thousand to the
postretirement plans and anticipates contributing approximately $229 thousand
during the remainder of 2007.
L. NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments, an Amendment
--------------------------------------------------------------------------------
of FASB Statements No. 133 and 140" ("SFAS 155")
------------------------------------------------
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
155, which amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." SFAS 155 addresses
several issues relating to the accounting for financial instruments, including
permitting fair value measurement for any hybrid financial instrument that
contains an embedded derivative, and eliminating the prohibition on a qualifying
special-purpose entity from holding certain derivative instruments. SFAS 155
also provides clarification that concentrations of credit risk in the form of
subordination are not embedded derivatives. SFAS 155 is effective for all
financial instruments issued or acquired after the fiscal year that begins after
September 15, 2006 (January 1, 2007 for the Company), with early adoption
permitted. The Company implemented SFAS 155 effective January 1, 2007, and it
did not have a material impact on the Company's financial position, results of
operations or cash flows.
-15-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SFAS No. 156, "Accounting for Servicing of Financial Assets, an Amendment of
----------------------------------------------------------------------------
FASB Statement 140" ("SFAS 156")
--------------------------------
In March 2006, the FASB issued SFAS 156, which amends SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS 156 requires, in certain specified situations, an entity to
recognize a servicing asset or servicing liability when it undertakes an
obligation to service a financial asset by entering into a servicing contract.
SFAS 156 also requires all separately recognized servicing assets and servicing
liabilities to be initially recognized at fair value, if practical, and allows
entities to choose either the amortization method or the fair value measurement
method for subsequent measurement. SFAS 156 is effective for all servicing
transactions occurring on or after the beginning of the first fiscal year that
begins after September 15, 2006 (January 1, 2007 for the Company), with early
adoption permitted. The Company implemented SFAS 156 effective January 1, 2007,
and it did not have a material impact on the Company's financial position,
results of operations or cash flows.
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.
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. 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 March 31, 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 March 31, 2007, outstanding commodity swap agreements had a notional value
of $30.5 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 March 31, 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
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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
the 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 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 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 taxes and import tariffs; (5) market and competitive
changes, including pricing pressures, market demand and acceptance for new
products, services and technologies; (6) unforeseen business disruptions in one
or more of the many countries in which the Company operates due to political
instability, civil disobedience, armed hostilities or other calamities; and (7)
other risk factors listed from time to time in the Company's SEC reports. 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 first quarter 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 first quarter results were
led by the Access Services Segment, which achieved record levels for revenues,
operating income and operating margins.
Additionally, 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 in the first quarter, the
Company acquired Excell Minerals, which specializes in the reclamation and
recycling of high-value content from steelmaking slag, and is involved in the
development of minerals-based products for commercial applications.
Additionally, 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 the effective date.
The Company's first quarter 2007 revenues from continuing operations were a
record $840.0 million. This is an increase of $158.0 million or 23% over the
first quarter of 2006. Income from continuing operations was a record $45.4
million compared with $32.6 million in 2006, an increase of 39%. Diluted
earnings per share from continuing operations were a record $0.54, a 39%
increase over 2006.
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The first quarter of 2007 results benefited from increased performance in the
Access Services Segment and the February 1, 2007 acquisition of Excell Minerals.
The increased performance in the Access Services Segment was due to continued
strength in the Company's worldwide non-residential and commercial construction
and industrial maintenance markets, and positive returns from the Company's
increased investment in highly engineered formwork rental systems. Excell
Minerals' operating results during the quarter were accretive to the Company's
earnings.
Overall global markets remain strong and provide the Company numerous 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 from Excell Minerals, and the industrial grating products
and air-cooled heat exchangers businesses. In addition, the Company expects
improvement during the remainder of 2007 from the Mill Services Segment as
production levels normalize in the U.S., new contracts are signed and work
started, and unplanned mill maintenance outages diminish.
During the first quarter of 2007, the Company had net cash provided by operating
activities of $41.7 million, a 40% decrease from the record $69.8 million
achieved in the first quarter of 2006, primarily due to increases in working
capital to meet near-term demand and timing differences in cash receipts.
However, 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.
SEGMENT OVERVIEW
The Access Services Segment's revenues in the first quarter of 2007 were $316.2
million compared with $225.8 million in the first quarter of 2006, a 40%
increase. Operating income increased by 109% to $35.0 million, from $16.8
million in the first quarter of 2006. Operating margins for the Segment improved
by 370 basis points to 11.1% from 7.4% in the first quarter of 2006. The record
performance in the quarter was due principally to continued strength in the
Company's worldwide non-residential and commercial construction and industrial
maintenance markets, particularly in Europe and North America. Also benefiting
this Segment's results was a gain of $1.6 million from an asset sale. This
Segment accounted for 38% of the Company's revenues and 40% of the operating
income for the first quarter of 2007.
Revenues for the first quarter of 2007 for the Mill Services Segment were $360.8
million compared with $326.2 million in the first quarter of 2006, an 11%
increase. Operating income decreased by 4% to $32.3 million, from $33.6 million
in the first quarter of 2006, and operating margins decreased by 130 basis
points to 9.0% from 10.3%. Performance was negatively impacted by higher
operating and maintenance costs, unplanned maintenance outages at a number of
mill sites, the timing of new contract signings and start-ups, and lower steel
production in certain regions, particularly North America. Operating income was
also negatively impacted by a $1.0 million provision associated with the
termination of a mill services contract. This Segment accounted for 43% of the
Company's revenues and 37% of the operating income for the first quarter of
2007.
The Minerals & Rail Technologies, Services and Products ("All Other") Category's
revenues in the first quarter of 2007 were $163.0 million compared with $130.0
million in the first quarter of 2006, a 25% increase. Operating income increased
by 26% to $19.4 million, from $15.4 million in the first quarter of 2006. The
February 1, 2007 acquisition of Excell Minerals, which was accretive to
earnings, contributed to this Category's improved performance in the quarter.
Four of the other five businesses contributed higher revenues, and three of the
five businesses contributed higher operating income in the first quarter of 2007
compared with the first quarter of 2006. Operating margins were 11.9% for the
first quarter of 2007, the same as the first quarter of 2006. This Category
accounted for 19% of the Company's revenues and 23% of the operating income for
the first quarter of 2007.
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 commercial construction and industrial maintenance 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 commercial construction
spending and industrial maintenance 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 businesses; and
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
business optimization opportunities through consolidated procurement, logistics
and continuous process improvement initiatives. Further global expansion and
market share gains are also expected from this Segment.
The outlook for the Mill Services Segment for the remainder of the year remains
positive. Liquid steel production in the U.S. has recently begun to improve over
last year and global steel production, even excluding China, is expected to
exceed that of 2006. In addition, bidding activity on new contract opportunities
remains strong and signings should gain momentum as the year progresses. The
Company is actively engaged in process improvement initiatives designed to
improve operating results. 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. Excell Minerals is expected to be accretive
to earnings in the remaining quarters of 2007, as full integration into the
Company occurs. The Category's remaining units continue to have an overall
positive outlook, particularly industrial grating products as well as the
air-cooled heat exchangers business, which continues to benefit from strong
market demand for its gas compression equipment. The railway track maintenance
services and equipment business has been experiencing substantial international
quoting activity that is expected to result in longer-term sales, income and
margin growth.
The stable or improved market conditions for most of the Company's services and
products and the significant investments made recently for acquisitions (such as
the Excell Minerals acquisition for approximately $210 million in February 2007)
and growth-related capital expenditures provide the base for achieving the
Company's stated objective of growth in diluted earnings per share from
continuing operations and net cash provided by operating activities for the full
year 2007. The record performance for revenue and operating income achieved in
the first three months of 2007 provides a solid foundation towards achieving the
full-year objectives.
--------------------------------------------------------------------------------
REVENUES BY REGION
--------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
MARCH 31 2006 TO 2007
--------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2007 2006 VOLUME CURRENCY TOTAL
--------------------------------------------------------------------------------
Europe $ 443.5 $ 342.8 18.7% 10.7% 29.4%
North America 276.8 233.6 18.6 (0.1) 18.5
Latin America 45.6 40.2 12.7 0.7 13.4
Middle East and Africa 41.4 40.9 6.5 (5.1) 1.4
Asia/Pacific 32.7 24.6 25.0 7.8 32.8
--------------------------------------------------------------------------------
Total $ 840.0 $ 682.1 17.8% 5.4% 23.2
================================================================================
2007 HIGHLIGHTS
The following significant items affected the Company overall during the first
quarter of 2007 in comparison with the first quarter of 2006:
Company Wide:
-------------
o Continued strong worldwide economic activity, as well as the accretive
earnings performance of the Excell Minerals acquisition, benefited the
Company in the first quarter of 2007. This included increased access
equipment services, sales and rentals, especially in North America and
Europe, and increased demand for air-cooled heat exchangers.
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. In the first quarter of
2007, industrial services businesses accounted for a record 86% of total
revenues from continuing operations.
o During the first quarter of 2007, international sales and operating income
were 69% and 75%, respectively, of total sales and operating income. This
compares with the first quarter of 2006 levels of 68% of sales and 78% of
operating income.
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ACCESS SERVICES SEGMENT:
------------------------
THREE MONTHS
ENDED MARCH 31
--------------------------------------------------------------------------------
(IN MILLIONS) 2007 2006
--------------------------------------------------------------------------------
Revenues $ 316.2 $ 225.8
Operating income 35.0 16.8
Operating margin percent 11.1% 7.4%
================================================================================
THREE MONTHS
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED MARCH 31
--------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------
Revenues - 2006 $ 225.8
Net increased volume and new business 53.5
Acquisitions 20.6
Impact of foreign currency translation 16.3
--------------------------------------------------------------------------------
Revenues - 2007 $ 316.2
================================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o In the first quarter of 2007, the international access services business,
and Eastern Europe in particular, continued to improve due to increased
non-residential and commercial construction spending in the Company's major
markets. The Company has benefited from its recent rental equipment capital
investments made in these markets. Equipment rentals, particularly in the
construction sector, provide the highest margins in this Segment.
o The North American non-residential construction and industrial maintenance
markets remained buoyant in the first quarter of 2007. This had a positive
effect on volume which caused overall margins and operating income in North
America to improve.
o The MyATH (Chile) and Cleton acquisitions were accretive to earnings in the
first quarter of 2007.
o Operating income and margins were positively affected in the first quarter
of 2007 due to a $1.6 million gain on an asset sale.
o Foreign currency translation in the first quarter of 2007 increased
operating income for this Segment by $0.8 million, compared with the first
quarter of 2006.
MILL SERVICES SEGMENT:
----------------------
THREE MONTHS
ENDED MARCH 31
--------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2007 2006
--------------------------------------------------------------------------------
Revenues $ 360.8 $ 326.2
Operating income 32.3 33.6
Operating margin percent 9.0% 10.3%
================================================================================
THREE MONTHS
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED MARCH 31
--------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------
Revenues - 2006 $ 326.2
Increased volume and new business 13.6
Acquisitions 1.8
Impact of foreign currency translation 19.2
--------------------------------------------------------------------------------
Revenues - 2007 $ 360.8
================================================================================
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o Despite overall increased volume, operating income for the first quarter 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 In the first quarter of 2007, this Segment's operating income was adversely
impacted by a $1.0 million provision associated with the termination of a
contract. This was partially offset by higher gains on the disposal of
assets.
o Foreign currency translation in the first quarter of 2007 increased
operating income for this Segment by $1.6 million, compared with the first
quarter of 2006.
MINERALS & RAIL TECHNOLOGIES, SERVICES AND PRODUCTS ("ALL OTHER") CATEGORY:
---------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
-----------------------------------------------------------------------
(IN MILLIONS) 2007 2006
-----------------------------------------------------------------------
Revenues $ 163.0 $ 130.0
Operating income 19.4 15.4
Operating margin percent 11.9% 11.9%
=======================================================================
MINERALS & RAIL TECHNOLOGIES, SERVICES AND PRODUCTS ("ALL OTHER") CATEGORY - THREE MONTHS
SIGNIFICANT IMPACTS ON REVENUES ENDED MARCH 31
--------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------
Revenues - 2006 $ 130.0
Acquisitions 21.6
Industrial grating products 4.9
Air-cooled heat exchangers 4.8
Railway track maintenance services and equipment 3.4
Boiler and process equipment 0.4
Roofing granules and abrasives (3.1)
Impact of foreign currency translation 1.1
Other (0.1)
--------------------------------------------------------------------------------------------
Revenues - 2007 $ 163.0
============================================================================================
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 first quarter.
o Operating income of the air-cooled heat exchangers business continued to
benefit from increased volume resulting from a strong natural gas market.
o The railway track maintenance services and equipment business delivered
increased income in the first quarter of 2007 compared with 2006, due to
increased contract services volume and reduced operating expenses,
partially offset by lower repair parts volume and an unfavorable rail
equipment sales mix.
o Operating income for the boiler and process equipment business was slightly
lower in the first quarter of 2007 compared with 2006, due to decreased
process equipment sales resulting from the timing of shipments and
increased commodity costs.
o Lower volume and higher operating expenses resulted in slightly lower
operating income for the roofing granules and abrasives business in the
first quarter of 2007 compared with 2006.
o The impact of foreign currency translation in the first quarter of 2007 did
not have a material impact on operating income for this Category when
compared with the first quarter of 2006.
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 focus on expanding the industrial services
businesses, with a particular emphasis on growing the Access Services
Segment, the Mill Services Segment, 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 services and
equipment will be pursued globally.
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 be very selective in
its investments, choosing projects with the highest Economic Value Added
("EVA(R)") potential.
o A greater 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 Controllable cost reductions and continuous process improvement initiatives
across the Company are targeted to further enhance margins for most
businesses. These initiatives include improved supply-chain and logistics
management; additional outsourcing in the manufacturing businesses; and an
added emphasis on corporate-wide procurement initiatives. The Company will
use its increased size and leverage due to recent acquisitions to reduce
vendor costs and focus on additional opportunities for cost reductions via
procurement in low-cost countries such as China and India.
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 assets 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 any 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 as a result of
translation adjustments during the first quarter 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 approximate or be slightly higher
than the 2006 level. Defined benefit pension expense increased $0.6 million
in the first quarter of 2007 compared to the first quarter of 2006 due
principally to a one-time curtailment loss related to the Gas Technologies
Segment. Defined benefit pension expense is expected to decline for the
full year 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 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.
-22-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
On a comparative basis, total pension expense during the first quarter of
2007 was $2.9 million higher than the first quarter of 2006, due
principally to the one-time curtailment loss related to the Gas
Technologies Segment, as well as increased defined contribution and
multi-employer pension expense resulting from increased volume in the
Access Services and Mill Services Segments.
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 March 31, 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. The Company also
plans to pay down debt to the extent possible.
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
commercial 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 steel industry has been
adjusting production levels to bring inventories in-line with current
demand. Based on current market conditions and industry reports, the
Company expects global steel production to remain stable or increase
slightly in 2007, which would generally have a favorable effect on this
Segment's revenues.
o Further consolidation in the global steel industry is probable. 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 up 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 continues to place significant emphasis on improving operating
margins of this Segment. Margin improvements are most likely to be achieved
through internal business optimization efforts such as global procurement
initiatives; process improvement programs; maintenance best practices
programs; and reorganization actions.
Minerals & Rail Technologies, Services and Products ("all other") Category:
---------------------------------------------------------------------------
o Worldwide demand for specialty steel, and other high-value metals,
continues to be strong and provides opportunities for Excell Minerals to
expand its value-added services of extracting high-value metallic content
from slag and responsibly handling and recycling residual materials.
However, market pricing volatility for some of these materials could affect
the operating results for this business, both 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. In addition, increased volume of higher-margin contract services
and manufacturing process improvements and efficiencies 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.
Gas Technologies Segment:
-------------------------
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.
-23-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AND PERCENTAGES) 2007 2006
--------------------------------------------------------------------------------------------
Revenues from continuing operations $ 840.0 $ 682.1
Cost of services and products sold 625.6 502.4
Selling, general and administrative expenses 127.8 112.3
Other (income) expenses (0.9) 1.8
Operating income from continuing operations 86.6 65.1
Interest expense 18.6 14.1
Income tax expense from continuing operations 21.6 17.0
Income from continuing operations 45.4 32.6
Income from discontinued operations 2.2 1.6
Net income 47.7 34.3
Diluted earnings per common share from continuing operations 0.54 0.39
Diluted earnings per common share 0.56 0.41
Effective income tax rate for continuing operations 31.2% 32.7%
Consolidated effective income tax rate 31.1% 32.6%
--------------------------------------------------------------------------------------------
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
Revenues for the first quarter of 2007 increased $158.0 million or 23% from the
first quarter of 2006. The increase was attributable to the following
significant items:
CHANGES IN REVENUES - 2007 VS. 2006 FIRST QUARTER
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------------
Net increased revenues (excluding acquisitions) in the Access Services Segment $ 53.5
due principally to the continued strength of both the North American and
international businesses (particularly in Europe)
Effect of business acquisitions in the Access Services Segment ($20.6 million), 44.0
the Mill Services Segment ($1.8 million), and the Minerals & Rail
Technologies, Services and Products ("all other") Category ($21.6 million)
Effect of foreign currency translation 36.6
Net increased volume, new contracts and sales price changes in the Mill 13.6
Services Segment (excluding acquisitions)
Increased revenues in the industrial grating products business due to continued 4.9
strong demand
Increased revenues of the air-cooled heat exchangers business due to a 4.8
continued strong natural gas market
Increased revenues in the railway track maintenance services and equipment 2.9
business due to increased contract services and rail equipment sales,
partially offset by decreased repair parts sales
Other (minor changes across the various units not already mentioned) (2.3)
--------------------------------------------------------------------------------------------------------------
Total Change in Revenues - 2007 vs. 2006 $ 158.0
==============================================================================================================
-24-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
COST OF SERVICES AND PRODUCTS SOLD
Cost of services and products sold for the first quarter of 2007 increased
$123.3 million, or 25%, from the first quarter of 2006, a higher rate than the
23% increase in revenues. This increase was attributable to the following
significant items:
CHANGES IN COST OF SERVICES AND PRODUCTS SOLD - 2007 VS. 2006 FIRST QUARTER
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------------
Increased costs due to increased revenues (exclusive of the effect of foreign $ 49.6
currency translation and business acquisitions and including the impact of
increased commodity costs included in selling prices)
Effect of business acquisitions 35.8
Effect of foreign currency translation 27.5
Other (due to increased commodity costs not recovered through selling prices 10.4
and increased equipment maintenance costs, partially offset by process
improvements and volume-related efficiencies)
--------------------------------------------------------------------------------------------------------------
Total Change in Cost of Services and Products Sold - 2007 vs. 2006 $ 123.3
==============================================================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses for the first quarter of
2007 increased $15.5 million or 14% from the first quarter of 2006, a lower rate
than the 23% increase in revenues. The increase in SG&A expense was attributable
to the following significant items with the principal driver being the continued
expansion of the business:
CHANGES IN SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES - 2007 VS. 2006 FIRST QUARTER
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation $ 5.4
Increased compensation expense due to salary increases, increased headcount 4.6
and employee incentive plan costs due to improved performance, as well as
higher commissions due to increased volume
Effect of business acquisitions 3.7
Other 1.8
--------------------------------------------------------------------------------------------------------------
Total Change in Selling, General and Administrative
Expenses - 2007 vs. 2006 $ 15.5
==============================================================================================================
OTHER (INCOME) EXPENSES
This income statement classification includes impaired asset write-downs,
employee termination benefit costs and costs to exit activities, offset by net
gains on the disposal of non-core assets. Net Other income was $0.9 million in
the first quarter of 2007, compared with expense of $1.8 million in the
comparable 2006 period. This variance was attributable to the following
significant items:
CHANGES IN OTHER (INCOME) EXPENSES - 2007 VS. 2006 FIRST QUARTER
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------------
Increase in net gains on the disposal of non-core assets $ (1.5)
Decrease in other exit costs due principally to a loss on a sublease in the first
quarter of 2006 (0.9)
Decrease in employee termination benefit costs (0.3)
--------------------------------------------------------------------------------------------------------------
Total Change in Other Expenses - 2007 vs. 2006 $ (2.7)
==============================================================================================================
INTEREST EXPENSE
Interest expense for the first quarter of 2007 increased $4.5 million or 32%
from the first quarter of 2006. This increase was principally due to increased
borrowings to finance business acquisitions and higher interest rates on
variable-rate borrowings. Additionally, there was approximately $0.8 million of
increased interest expense due to the effect of foreign currency translation.
-25-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
Income tax expense from continuing operations increased $4.6 million or 27% for
the first quarter of 2007 compared with the first quarter of 2006. This was
primarily due to increased earnings from continuing operations, partially offset
by a decrease in the effective income tax rate from continuing operations (31.2%
for the first quarter of 2007 compared with 32.7% for the first quarter of
2006). The decrease in the effective income tax rate for the first quarter of
2007 was primarily due to the recognition of previously unrecognized tax
benefits in certain foreign jurisdictions.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased $12.8 million or 39% in the first
quarter of 2007 compared with the first quarter of 2006. This increase 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 $0.6 million or 36% in the first
quarter of 2007 compared with the first quarter of 2006. This was primarily due
to increased income from the operations of the Gas Technologies Segment of $3.1
million, partially offset by $2.3 million of transaction costs related to the
anticipated sale of this Segment.
NET INCOME AND EARNINGS PER SHARE
Net income of $47.7 million and diluted earnings per share of $0.56 in the first
quarter of 2007 exceeded the first quarter of 2006 by $13.4 million or 39% and
$0.15 or 37%, 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 quarter of 2007, the Company generated $41.7 million in
operating cash, 40.3% lower than the $69.8 million in the first quarter of 2006.
The main reasons for the decline are working capital build-up in the Gas
Technologies Segment to meet near-term demand and timing differences in cash
receipts. More specifically, a build up of inventory in the Gas Technologies
Segment resulted in approximately $15 million lower cash from operations during
the first quarter of 2007 when compared with the first quarter of 2006. Although
the Gas Technologies Segment is classified as held-for-sale on the balance sheet
the Segment's cash flows are still included in their respective categories in
the Consolidated Statements of Cash Flows. Additionally, the railway track
maintenance services and equipment business had approximately $13 million lower
cash from operations during the first quarter of 2007 when compared with the
first quarter of 2006 due to a $20 million dollar cash receipt from China in the
first quarter of 2006 that was not repeated in the first quarter of 2007.
Despite the first quarter decrease in operating cash, the Company expects to
achieve record cash from operations for the full year 2007, exceeding 2006's
$409 million.
In the first quarter of 2007, the Company invested $83.4 million in capital
expenditures (over 45% of which were for revenue-growth projects); paid $14.9
million in stockholder dividends; and invested $212.3 million in business
acquisitions. The Company also generated $4.5 million of cash from the sale of
non-core assets during the first quarter of 2007.
The Company's net cash borrowings increased $265.1 million in the first quarter
of 2007 due primarily to business acquisitions. Balance sheet debt, which is
affected by foreign currency translation and the reclassification of debt
related to the Gas Technologies Segment to held-for-sale, increased $265.7
million from December 31, 2006. The debt to total capital ratio increased from
48.1% to 52.6% as a result of increased borrowings.
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
business, 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 forsees continuing its long and consistent
history of paying dividends to stockholders and paying down debt.
The Company also intends to focus 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.
-26-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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.
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 continues 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 will 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, upon the adoption of FIN 48, the Company had a current obligation of $0.8
million. An additional $45.2 million is classified as a long-term liability. See
Note H, "Income Taxes," for additional information on FIN 48.
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 March 31, 2007.
SUMMARY OF CREDIT FACILITIES AND
COMMERCIAL PAPER PROGRAMS AS OF MARCH 31, 2007
--------------------------------------------------------------------------------
FACILITY OUTSTANDING AVAILABLE
(IN MILLIONS) LIMIT BALANCE CREDIT
--------------------------------------------------------------------------------
U.S. commercial paper program $ 550.0 $ 518.8 $ 31.2
Euro commercial paper program 266.7 201.3 65.4
Revolving credit facility (a) 450.0 -- 450.0
Supplemental credit facility (a) 250.0 -- 250.0
Bilateral credit facility (b) 50.0 -- 50.0
--------------------------------------------------------------------------------
TOTALS AT MARCH 31, 2007 $1,566.7 $ 720.1 $ 846.6(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 $750 million.
On April 16, 2007, the Company entered into credit agreements with the Royal
Bank of Scotland Finance (Ireland) and the Royal Bank of Scotland plc for
borrowings of up to $125 million and $75 million, respectively. Each credit
agreement terminates no later than December 31, 2007. In conjunction with
entering into these new facilities, the Company amended its policy to limit
aggregate commercial paper and credit facility borrowings at any one time from
the maximum of $750 million noted above to a maximum of $825 million. These
credit agreements provide the Company with additional financial flexibility to
pursue its growth strategies.
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.
-27-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at March 31, 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 August 2006, 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 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. Also in January 2007, Moody's reaffirmed
its ratings for the Company, and in February 2007 reaffirmed its short-term
rating. 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:
MARCH 31 DECEMBER 31 INCREASE
(DOLLARS ARE IN MILLIONS) 2007 2006 (DECREASE)
-------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 102.0 $ 101.2 $ 0.8
Accounts receivable, net 757.6 753.2 4.4
Inventories 219.6 285.2 (65.6)
Other current assets 74.6 88.4 (13.8)
Assets held-for-sale 280.6 3.6 277.0
-------------------------------------------------------------------------------------------------------------------
Total current assets 1,434.4 1,231.6 202.8
-------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Notes payable and current maturities 446.7 198.2 248.5
Accounts payable 260.3 287.0 (26.7)
Accrued compensation 70.7 95.0 (24.3)
Income taxes payable 36.4 62.0 (25.6)
Other current liabilities 282.7 268.6 14.1
Liabilities associated with assets held-for-sale 57.5 -- 57.5
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,154.3 910.8 243.5
-------------------------------------------------------------------------------------------------------------------
WORKING CAPITAL $ 280.1 $ 320.8 $ (40.7)
-------------------------------------------------------------------------------------------------------------------
CURRENT RATIO 1.2:1 1.4:1
===================================================================================================================
Working capital decreased approximately 13% in the first quarter of 2007 due
principally to the following factors:
o Notes payable and current maturities increased $248.5 million
primarily due to an increase in short-term debt resulting from the
Excell Minerals acquisition.
o Assets held-for-sale increased $277.0 million and liabilities
associated with assets held-for-sale increased $57.5 million due to
the reclassification of the Gas Technologies Segment to Discontinued
Operations in the first quarter of 2007. All related assets and
liabilities have been reclassified to held-for-sale as of March 31,
2007.
o Decreased finished goods, work-in-process and raw materials
inventories due to the reclassification of the Gas Technologies
Segment's inventories to assets held-for-sale in the first quarter of
2007.
o Accounts payable decreased $26.7 million primarily due to the
reclassification of the Gas Technologies Segment into liabilities
associated with assets held-for-sale, partially offset by the
acquisition of Excell Minerals.
-28-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o Accrued compensation decreased $24.3 million due principally to the
payments of incentive compensation earned during 2006.
o Income taxes payable decreased $25.6 million due principally to
reclassifications of certain amounts to noncurrent liabilities as a
result of implementing FIN 48.
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 March 31, 2007, the Company's continuing
operations had an order backlog of $266.9 million for its Minerals & Rail
Technologies, Services and Products businesses. This compares with $236.5
million at December 31, 2006 and $254.9 million at March 31, 2006. The increase
from December 31, 2006 is due principally to increased demand for certain
products within the railway track maintenance services and equipment business as
well as heat exchangers and industrial grating. The increase from March 31, 2006
is due principally to the demand for certain products within the heat exchangers
business. 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 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 the Company serves. Due to these factors,
the Company is confident in its future ability to generate positive cash flows
from operations.
CASH FLOW SUMMARY
The Company's cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
SUMMARIZED CASH FLOW INFORMATION
----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
(IN MILLIONS) 2007 2006
----------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 41.7 $ 69.8
Investing activities (291.6) (63.4)
Financing activities 249.2 (31.8)
Effect of exchange rate changes on cash 1.4 3.2
----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents $ 0.8(a) $ (22.1)(a)
====================================================================================================
(a) Does not total due to rounding
CASH FROM OPERATING ACTIVITIES - Net cash provided by operating activities in
the first quarter of 2007 was $41.7 million, a decrease of $28.2 million (40.3%)
from the first quarter of 2006. The decreased cash from operations was primarily
due to the net receivables increase results from the timing of collections
primarily in the railway track maintenance services and equipment business (due
to a $20 million cash collection in the first quarter of 2006 that was not
repeated in the first quarter of 2007) and, to a lesser extent, in the
international Access Services business as well as the Mill Services business.
Additionally, a decrease in cash from operating activities occurred in the Gas
Technologies Segment as discussed in the Overview section above.
CASH USED IN INVESTING ACTIVITIES - In the first quarter of 2007, cash
used in investing activities consisted of $212.3 million use of cash principally
related to the purchase of Excell Minerals in February 2007. Also, capital
investments for the first quarter of 2007 were $83.4 million. This was an
increase of $16.4 million (24.5%) over the first quarter of 2006. Over 45% of
the investments were for projects intended to grow future revenues. Investments
were made predominantly in the industrial services businesses, with 50% in the
Access Services Segment and 43.5% in the Mill Services Segment.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Throughout the remainder of 2007 and into 2008, the Company plans to continue to
invest in high-return projects and selective 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 March 31, 2007 and December 31, 2006.
MARCH 31 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2007 2006
-------------------------------------------------------------------------------------
Notes Payable and Current Maturities $ 446.7 $ 198.2
Long-term Debt 882.0 864.8
-------------------------------------------------------------------------------------
Total Debt 1,328.7 1,063.0
Total Equity 1,197.5 1,146.4
-------------------------------------------------------------------------------------
Total Capital $ 2,526.2 $ 2,209.4
Total Debt to Total Capital 52.6% 48.1%
=====================================================================================
The Company's debt as a percent of total capital as of March 31, 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
increased net income for the first quarter ended March 31, 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 March 31, 2007, the Company could
increase borrowings by approximately $467.5 million and still be within its debt
covenants. Alternatively, keeping all other factors constant, the Company's
equity could decrease by approximately $311.7 million and the Company would
still be within 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
of 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 quarter of 2007
results, meaningful improvement in EVA was achieved compared with the first
quarter of 2006.
The Company is committed to continue paying dividends to stockholders. The
Company has increased the dividend rate for thirteen consecutive years, and in
February 2007, the Company paid its 227th consecutive quarterly cash dividend.
In March 2007, the Company declared its 228th consecutive quarterly cash
dividend. The Company also plans to pay down debt. Additionally, the Company has
authorization to repurchase up to one 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.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 March 31, 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 first quarter of 2007.
-31-
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 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 and industrial production;
o The air-cooled heat exchangers business is affected by cyclical conditions
present in the natural gas industry. A high demand for natural gas is
currently creating increased demand for the Company's air-cooled heat
exchangers. However, a slowdown in natural gas production could adversely
affect this business; and
o The Company's Gas Technologies business may be adversely impacted by
reduced industrial production, and lower demand for industrial gases,
slowdowns in demand for medical cylinders, valves, 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
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.
-32-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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 ("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 assumptions and due to changes in returns on plan assets
resulting from financial market conditions. Using the expense calculated for
calendar year 2007 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 46 countries, including the United States. The Company's
global footprint exposes it to a variety of risks that may adversely impact
results of operations, cash flows or financial position. These include the
following:
o periodic economic downturns in the countries in which the Company
does business;
o fluctuations in currency exchange rates;
o customs matters and changes in trade policy or tariff regulations;
o imposition of or increases in currency exchange controls and hard
currency shortages;
-33-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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 quarter of 2007, 2006
and 2005, these countries contributed approximately $9.3 million, $9.5 million
and $7.4 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. Approximately 69% and 68% of the
Company's sales and approximately 75% and 78% of the Company's operating income
from continuing operations for the first quarter ended March 31, 2007 and 2006,
respectively, were derived from operations outside the United States. More
specifically, during the first quarter ended March 31, 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 23% of the Company's revenues from continuing operations
were derived from operations with the euro as their functional currency during
the three months ended March 31, 2007 and March 31, 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.
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 first
quarter of 2007, impacting the Company's sales and income:
THREE MONTHS ENDED
FOREIGN CURRENCY MARCH 31
-----------------------------------------------------------
British pound sterling Strengthened by 11%
Euro Strengthened by 9%
South African rand Weakened by 18%
Brazilian real Strengthened by 4%
Australian dollar Strengthened by 7%
-34-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Compared with exchange rates at December 31, 2006, the values of major
currencies changed as follows as of March 31, 2007:
o British pound sterling Strengthened by less than 1%
o Euro Strengthened by 1%
o South African rand Weakened by 4%
o Brazilian real Strengthened by 5%
o Australian dollar Strengthened by 2%
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 quarter of 2007, revenues would have
been approximately 4% or $36.6 million lower, while operating income would have
been approximately 3% or $2.6 million lower if the average exchange rates for
the first quarter of 2006 were utilized. A similar comparison for the first
quarter of 2006 would have decreased revenues approximately 2% or $16.3 million
while operating income would have been approximately 0.4% or $0.3 million less
if the average exchange rates would have remained the same as the first quarter
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 March 31, 2007,
the notional amount of these contracts was $157.1 million, and over 97% will
mature in the second 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
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 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.
-35-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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 commercial 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 continuous process
improvement and cost reduction 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.
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. However, 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.
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 quarter of 2007 and 2006, energy-related costs have approximated 3.7% and
4.3% 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.
-36-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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. Beginning in 2004,
the price paid for steel and certain other commodities increased significantly
compared with prior years. Although these costs moderated in 2005, such costs
increased during 2006 and the first quarter of 2007 and the current outlook for
the second quarter of 2007 indicates that certain of the cost increases may
continue. If raw material costs associated with the Company's manufactured
products continue to 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
foreign laws, regulations and ordinances relating to the protection of health,
safety and the environment, including those governing discharges to air and
water, handling and disposal practices for solid and hazardous wastes, the
remediation of contaminated sites and the maintenance of a safe work place.
These laws impose penalties, fines and other sanctions for non-compliance and
liability for response costs, property damages and personal injury resulting
from past and current spills, disposals or other releases of, or exposure to,
hazardous materials. The Company could incur substantial costs as a result of
non-compliance with or liability for remediation or other costs or damages under
these laws. The Company may be subject to more stringent environmental laws in
the future, and compliance with more stringent environmental requirements may
require the Company to make material expenditures or subject it to liabilities
that the Company currently does not anticipate.
The Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a "potentially responsible party" for certain waste disposal sites
under the federal "Superfund" law. At 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 March 31, 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 $0.6
million and $0.2 million for the first quarter ended March 31, 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 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
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
could, in turn, trigger an event of default under the
cross-default provisions of the Company's other outstanding indebtedness. At
March 31, 2007, the Company was in compliance with a debt to capital ratio of
52.6% and a net worth of $1.2 billion. The company had $396.3 million in
outstanding indebtedness containing these covenants at March 31, 2007.
HIGHER THAN EXPECTED CLAIMS UNDER INSURANCE POLICIES, 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
March 31, 2007 and December 31, 2006, the Company had recorded liabilities of
$106.9 million and $103.4 million, respectively, related to both asserted and
unasserted insurance claims. Included in the balances at March 31, 2007 and
December 31, 2006 were $18.4 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 may suffer.
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 -- 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
===========================================================================================
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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 -- 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 $ 41.7 $ 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 March 31, 2007 was $1.33 billion. Of this amount,
approximately 41.7% had fixed rates of interest and 58.3% had variable rates of
interest. The weighted average interest rate of total debt was approximately
5.7%. 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
----------------------------------------------------------------------
(c). Issuer Purchases of Equity Securities
TOTAL NUMBER MAXIMUM NUMBER OF
OF SHARES PURCHASED SHARES THAT MAY
AS PART OF YET BE PURCHASED
TOTAL NUMBER OF AVERAGE PRICE PUBLICLY ANNOUNCED UNDER THE
PERIOD SHARES PURCHASED PAID PER SHARE PLANS OR PROGRAMS PLANS OR PROGRAMS
------------------------------------------------------------------------------------------------------------------------
January 1, 2007 - January 31, 2007 -- -- -- 1,000,000
February 1, 2007 - February 28, 2007 -- -- -- 1,000,000
March 1, 2007 - March 31, 2007 -- -- -- 1,000,000
-------------------------------------------------------------------------------------------------
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 1,000,000 shares
of the Company's common stock and expires January 31, 2008.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
--------------------------------------------------------------
At the annual meeting of stockholders held on April 24, 2007 in Camp Hill,
Pennsylvania, the following proposals were voted upon by stockholders:
o Stockholders elected all eleven current members of the Board of
Directors to terms expiring in 2008 under the declassified Board
structure approved at the 2005 annual meeting.
-39-
HARSCO CORPORATION AND6 SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
The Board of Directors voting tabulation was as follows:
For Withheld
Name No. of Shares No. of Shares
---- ------------- -------------
G. D. H. Butler 34,628,928 3,518,572
K. G. Eddy 37,978,862 168,638
S. D. Fazzolari 33,369,816 4,777,684
D. C. Hathaway 34,697,815 3,449,685
J. J. Jasinowski 37,776,560 370,940
D. H. Pierce 37,794,731 352,769
C. F. Scanlan 37,953,923 193,577
J. I. Scheiner 35,028,053 3,119,447
A. J. Sordoni, III 33,559,934 4,587,566
J. P. Viviano 37,779,697 367,803
R. C. Wilburn 31,605,813 6,541,687
o Stockholders approved the appointment of PricewaterhouseCoopers LLP as
independent accountants to audit the financial statements of the
Company for the fiscal year ending December 31, 2007 by the following
vote:
For Against Abstentions
No. of Shares No. of Shares No. of Shares
------------- ------------- -------------
34,531,740 3,483,721 132,039
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 March 22, 2007, the Company's Board of Directors declared a quarterly cash
dividend of $0.1775 per share, on a post split basis, payable May 15, 2007, to
stockholders of record as of April 13, 2007.
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HARSCO CORPORATION AND6 SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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 1350, Exhibit
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32(b) Certification Pursuant to 18 U.S.C. Section 1350, Exhibit
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
-41-
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 May 8, 2007 /S/ Salvatore D. Fazzolari
------------------------------ ------------------------------------
Salvatore D. Fazzolari
President, Chief Financial
Officer and Treasurer
DATE May 8, 2007 /S/ Stephen J. Schnoor
------------------------------ ------------------------------------
Stephen J. Schnoor
Vice President and Controller
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