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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-3970
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HARSCO CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 23-1483991
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
Camp Hill, Pennsylvania 17001-8888
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 717-763-7064
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Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange on which registered
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Common stock, par value $1.25 per share New York Stock Exchange and
Preferred stock purchase rights Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [_]
The aggregate market value of the Company's voting stock held by non-affiliates
of the Company as of June 30, 2003 was $1,467,128,400.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Classes Outstanding at February 29, 2004
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Common stock, par value $1.25 per share 40,948,830
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 2004 Proxy Statement are Incorporated by Reference in
Part III of this Report.
The Exhibit Index (Item No. 15) located on pages 77 to 84 incorporates several
documents by reference as indicated therein.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I
ITEM 1. BUSINESS
(a) Description of Business
Harsco Corporation ("the Company") is a diversified, multinational provider of
market-leading industrial services and engineered products. The Company's
operations fall into three reportable segments: Mill Services, Access Services
and Gas and Fluid Control, plus an "all other" category labeled Other
Infrastructure Products and Services. The Company has over 400 locations in 43
countries, including the United States.
The Company's executive offices are located at 350 Poplar Church Road, Camp
Hill, Pennsylvania 17011. The Company's main telephone number is (717) 763-7064.
The Company's Internet website address is www.harsco.com. Through this Internet
website (found in the "Investor Information" link) the Company makes available,
free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K and all amendments to those reports, as soon as
reasonably practicable after these reports are electronically filed with or
furnished to the Securities and Exchange Commission.
The Company's principal lines of business and related principal business drivers
are as follows:
Principal Lines of Business Principal Business Drivers
--------------------------- --------------------------
o Outsourced, on-site mill services o Steel mill production and capacity utilization
o Outsourcing of services by mills
------------------------------------------------------- -----------------------------------------------------------------------
o Scaffolding, forming, shoring and other o Non-residential construction
access-related services o Annual industrial and building maintenance cycles
------------------------------------------------------- -----------------------------------------------------------------------
o Gas control and containment products
- Cryogenic containers and industrial cylinders o General industrial production and industrial gas production
- Valves o Use of industrial, fuel and refrigerant gases
o Respiratory care
o Consumer barbeque grills
- Propane Tanks o Use of propane as a primary and/or backup fuel
- Filament-wound composite cylinders o Self-contained breathing apparatus (SCBA) market
o Natural gas vehicle (NGV) market
- Air-cooled heat exchangers o Natural gas drilling and transmission
------------------------------------------------------- -----------------------------------------------------------------------
o Railway track maintenance services and o Domestic and international railway track maintenance-of-way
equipment capital spending
o Outsourcing of track maintenance and new track
construction by railroads
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o Industrial grating products o Industrial production
o Non-residential construction
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o Industrial abrasives and roofing granules o Industrial and infrastructure surface preparation and
restoration
o Residential roof replacement
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o Powder processing equipment and heat o Pharmaceutical, food and chemical production
transfer products o Commercial and institutional heating requirements
------------------------------------------------------- -----------------------------------------------------------------------
-2-
The Company reports segment information using the "management approach" in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The management approach is based on the way management
organizes and reports the segments within the enterprise for making operating
decisions and assessing performance. The Company's reportable segments are
identified based upon differences in products, services and markets served. Due
to reorganization changes, the Company adopted a new segment reporting structure
for its operations as of December 31, 2002. The new segments are Mill Services,
Access Services, Gas and Fluid Control and an "all other" category labeled Other
Infrastructure Products and Services, as more fully described below. Historical
information has been reclassified for comparative purposes.
In 2003, 2002 and 2001, the United States contributed sales of $0.9 billion,
$0.9 billion and $1.0 billion, equal to 43%, 46% and 50% of total sales,
respectively. In 2003, 2002 and 2001 the United Kingdom contributed sales of
$0.5 billion, $0.4 billion and $0.4 billion, equal to 21%, 21% and 19% of total
sales, respectively. No single customer represented 10% or more of the Company's
sales during 2003, 2002 and 2001. There were no significant inter-segment sales.
(b) Financial Information about Industry Segments
Financial information concerning industry segments is included in Note 14,
Information by Segment and Geographic Area, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
(c) Narrative Description of Business
(1) A narrative description of the businesses by reportable segment is as
follows:
MILL SERVICES SEGMENT - 39% OF CONSOLIDATED SALES FOR 2003
The Mill Services Segment, which consists of the MultiServ Division, is
the Company's largest operating segment in terms of revenues and operating
income. MultiServ is the world's largest provider of outsourced, on-site
mill services to the global steel and metals industries. MultiServ
provides its services on a long-term contract basis, supporting each stage
of the metal-making process from initial raw material handling to
post-production by-product processing and on-site recycling. Working
exclusively as a specialized, high-value-added services provider,
MultiServ does not trade steel or scrap, or take ownership of its
customers' raw materials or finished products. Similar services are
provided to the producers of non-ferrous metals, such as aluminum, copper
and nickel. The Company's multi-year Mill Services contracts had estimated
future revenues of $3.4 billion at December 31, 2003, which provides the
Company with a substantial base of long-term revenues. Approximately 60%
of these revenues are expected to be recognized by December 31, 2006. The
remaining revenues are expected to be recognized principally between
January 1, 2007 and December 31, 2012.
MultiServ's geographic reach to approximately 160 locations in over 30
countries, and its increasing range of services, enhance the Company's
financial and operating balance. Approximately 32%, 19%, 17% and 11% of
this Segment's revenues are generated in Continental Europe, the United
Kingdom, the United States and Latin America, respectively.
For 2003, 2002 and 2001, the Mill Services Segment's percentage of
consolidated sales was 39%, 35% and 33%, respectively.
ACCESS SERVICES SEGMENT - 29% OF CONSOLIDATED SALES FOR 2003
The Access Services Segment includes the Company's SGB Group and Patent
Construction Systems Divisions. The Company's Access Services Segment
leads the access industry as the world's most complete provider of
scaffolding, shoring, forming and other access solutions. Major products
and services include the rental and sale of scaffolding, powered access
equipment, shoring and concrete forming products. The Company also
provides access design engineering services, on-site installation and
dismantling services, and a variety of other access equipment services.
These businesses serve principally the non-residential construction and
industrial plant maintenance markets.
The Company's access services are provided from over 20 countries of
operation. Approximately 47%, 25% and 23% of this Segment's revenues are
generated in the United Kingdom, the United States and Continental Europe,
respectively.
-3-
For 2003, 2002 and 2001, the Access Services Segment's percentage of
consolidated sales was 29%, 30% and 29%, respectively.
GAS AND FLUID CONTROL SEGMENT - 16% OF CONSOLIDATED SALES FOR 2003
The Gas and Fluid Control Segment includes the Company's Gas and Fluid
Control Group. The Segment's manufacturing and service facilities in the
United States, Europe, Australia, Malaysia and China comprise an
integrated manufacturing network for gas containment and control products.
This global operating presence and product breadth provide economies of
scale and multiple code production capability, enabling the Gas and Fluid
Control Group to serve as a single source to the world's leading
industrial gas producers and distributors, as well as regional and local
customers. Approximately 91% of this Segment's revenues are generated in
the United States.
The Company's gas containment products include cryogenic gas storage
tanks; high pressure and acetylene cylinders; propane tanks; and composite
vessels for industrial and commercial gases, natural gas vehicle (NGV)
products and other products. The Company's gas control products include
valves and regulators serving a variety of markets, including the
industrial gas, commercial refrigeration, life support and outdoor
recreation industries. The segment also provides custom-designed and
manufactured air-cooled heat exchangers for the natural gas industry.
For 2003, 2002 and 2001, the Gas and Fluid Control Segment's percentage of
consolidated sales was 16%, 18% and 20%, respectively.
OTHER INFRASTRUCTURE PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - 16% OF
CONSOLIDATED SALES FOR 2003
The Other Infrastructure Products and Services ("all other") Category
includes the Harsco Track Technologies, Reed Minerals, IKG Industries and
Patterson-Kelley Divisions. Approximately 90% of this category's revenues
are generated in the United States.
Harsco Track Technologies is a global provider of equipment and services
to maintain, repair and construct railway track. The Company's railway
track maintenance services provide high technology comprehensive track
maintenance and new track construction support to railroad customers
worldwide. The railway track maintenance equipment product class includes
specialized track maintenance equipment used by private and
government-owned railroads and urban transit systems worldwide.
Reed Minerals' roofing granules and industrial abrasives are produced from
utility coal slag at a number of locations throughout the United States.
The Company's Black Beauty(R) abrasives are used for industrial surface
preparation, such as rust removal and cleaning of bridges, ship hulls and
various structures. Roofing granules are sold to residential roofing
shingle manufacturers, primarily for the replacement market. This Division
is the United States' largest manufacturer of slag abrasives and third
largest manufacturer of residential roofing granules.
IKG Industries manufactures a varied line of industrial grating products
at several plants in North America. These products include a full range of
riveted, pressure-locked and welded grating in steel, aluminum and
fiberglass, which are used mainly in industrial flooring, safety and
security applications in the power, paper, chemical, refining and
processing industries.
Patterson-Kelley is a leading manufacturer of powder processing equipment
such as blenders, dryers and mixers for the chemical, pharmaceutical and
food processing industries and heat transfer products such as water
heaters and boilers for commercial and institutional applications.
For 2003, 2002 and 2001, the Other Infrastructure Products and Services
("all other") Category's percentage of consolidated sales was 16%, 17% and
18%, respectively.
(1)(i) The products and services of the Company include a number of
product groups. These product groups are more fully discussed in
Note 14, Information by Segment and Geographic Area, to the
Consolidated Financial Statements under Part II, Item 8,
"Financial Statements and Supplementary Data." The product
groups that contributed 10% or more as a percentage of
consolidated sales in any of the last three fiscal years are set
forth in the following table:
-4-
PERCENTAGE OF CONSOLIDATED SALES
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PRODUCT GROUP 2003 2002 2001
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Mill Services 39% 35% 33%
Access Services 29% 30% 29%
Industrial Gas Products 14% 16% 16%
================================ ========== ========== ==========
(1)(ii) New products and services are added from time to time; however,
in 2003 none required the investment of a material amount of the
Company's assets.
(1)(iii) The manufacturing requirements of the Company's operations are
such that no unusual sources of supply for raw materials are
required. The raw materials used by the Company include
principally steel and, to a lesser extent, aluminum which are
usually readily available. Currently, due to strong worldwide
demand for steel, its general availability has decreased. The
Company believes that this is a short-term situation. However,
if this situation continues long-term, it could have a material
impact on the Company's financial position, results of
operations and cash flows. Additionally, the Company uses coal
slag for its roofing granule and abrasives manufacturing.
Although this raw material has limited availability, the Company
has an adequate supply for the foreseeable future.
(1)(iv) While the Company has a number of trademarks, patents and patent
applications, it does not consider that any material part of its
business is dependent upon them.
(1)(v) The Company furnishes products and materials and certain
industrial services within the Access Services and Gas and Fluid
Control Segments and the Other Infrastructure Products and
Services ("all other") Category that are seasonal in nature. As
a result, the Company's sales and net income for the first
quarter ending March 31 are normally lower than the second,
third and fourth quarters.
(1)(vi) The practices of the Company relating to working capital are
similar to those practices of other industrial service providers
or manufacturers servicing both domestic and international
industrial services and commercial markets. These practices
include the following:
o Standard accounts receivable payment terms of 30 days to 60
days, with progress payments required for certain
long-lead-time or large orders.
o Standard accounts payable payment terms of 30 days to 75
days.
o Inventories are maintained in sufficient quantities to meet
forecasted demand. Due to the time required to manufacture
certain railway maintenance equipment to customer
specifications, inventory levels of this business tend to
increase during the production phase and then decline when
the equipment is sold.
(1)(vii) The Company as a whole is not dependent upon any one customer
for 10% or more of its revenues. However, the Mill Services
Segment is dependent largely on the global steel industry and
has two European-based customers that each provided in excess of
10% of this segment's revenues for the years 2001 to 2003 under
multiple long-term contracts at several mill sites. The loss of
any one of the contracts would not have a material adverse
effect upon the Company's financial position or cash flows;
however, it could have a material effect on quarterly or annual
results of operations. Additionally, the Other Infrastructure
Products and Services ("all other") Category has one U.S.-based
customer that provided in excess of 10% of this Category's
revenue. The loss of this customer would not have a material
adverse effect upon the Company's financial position or cash
flows; however, it could have a material effect on quarterly or
annual results of operations.
(1)(viii) Backlog of orders was $186.2 million and $157.8 million as of
December 31, 2003 and 2002, respectively. It is expected that
approximately 27% of the total backlog at December 31, 2003 will
not be filled during 2004. There is no significant seasonal
aspect to the Company's backlog. Backlog for scaffolding,
shoring and forming services and for roofing granules and slag
abrasives is not included in the total backlog because it is
generally not quantifiable, due to the nature of the products
and services provided. Contracts for the Mill Services Segment
are also excluded from the total backlog. These contracts have
estimated future revenues of $3.4 billion at December 31, 2003.
(1)(ix) At December 31, 2003, the Company had no material contracts that
were subject to renegotiation of profits or termination at the
election of the U.S. Government.
-5-
(1)(x) The Company encounters active competition in all of its
activities from both larger and smaller companies who produce
the same or similar products or services, or who produce
different products appropriate for the same uses.
(1)(xi) The expense for product development activities was $3.3 million,
$2.8 million and $4.0 million in 2003, 2002 and 2001,
respectively.
(1)(xii) The Company has become subject, as have others, to stringent air
and water quality control legislation. In general, the Company
has not experienced substantial difficulty complying with these
environmental regulations in the past, and does not anticipate
making any material capital expenditures for environmental
control facilities. While the Company expects that environmental
regulations may expand, and that its expenditures for air and
water quality control will continue, it cannot predict the
effect on its business of such expanded regulations. For
additional information regarding environmental matters see Note
10, Commitments and Contingencies, to the Consolidated Financial
Statements included in Part II, Item 8, "Financial Statements
and Supplementary Data."
(1)(xiii) As of December 31, 2003, the Company had approximately 17,500
employees.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations is included in
Note 14, Information by Segment and Geographic Area, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data." Export sales totaled $108.5 million, $76.6 million and
$84.3 million in 2003, 2002 and 2001, respectively.
ITEM 2. PROPERTIES
Information as to the principal plants owned and operated by the Company is
summarized in the following table:
LOCATION PRINCIPAL PRODUCTS
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Access Services Segment
-----------------------
Marion, Ohio Access Equipment Maintenance
Dosthill, United Kingdom Access Equipment Maintenance
Gas and Fluid Control Segment
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Catoosa, Oklahoma Heat Exchangers
Lockport, New York Valves
Niagara Falls, New York Valves
Washington, Pennsylvania Valves
Bloomfield, Iowa Propane Tanks
Fremont, Ohio Propane Tanks
Jesup, Georgia Propane Tanks
West Jordan, Utah Propane Tanks
Harrisburg, Pennsylvania High Pressure Cylinders
Huntsville, Alabama High Pressure Cylinders
Beijing, China Cryogenic Storage Vessels
Jesup, Georgia Cryogenic Storage Vessels
Kosice, Slovakia Cryogenic Storage Vessels
Shah Alam, Malaysia Cryogenic Storage Vessels
Theodore, Alabama Cryogenic Storage Vessels
Other Infrastructure Products and Services
------------------------------------------
("all other") Category
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Drakesboro, Kentucky Roofing Granules/Abrasives
Gary, Indiana Roofing Granules/Abrasives
Moundsville, West Virginia Roofing Granules/Abrasives
-6-
LOCATION PRINCIPAL PRODUCTS
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Brendale, Australia Railroad Equipment
Fairmont, Minnesota Railroad Equipment
Ludington, Michigan Railroad Equipment
West Columbia, South Carolina Railroad Equipment
Channelview, Texas Grating
Leeds, Alabama Grating
Nashville, Tennessee Grating
Queretaro, Mexico Grating
East Stroudsburg, Pennsylvania Process Equipment
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The Company also operates the following plants which are leased:
LOCATION PRINCIPAL PRODUCTS
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Access Services Segment
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Maldon, United Kingdom Aluminum Access Products
DeLimiet, Netherlands Access Equipment Maintenance
Gas and Fluid Control Segment
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Cleveland, Ohio Brass Castings
Catoosa, Oklahoma Heat Exchangers
Sapulpa, Oklahoma Heat Exchangers
Pomona, California Composite Cylinders
Other Infrastructure Products and Services
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("all other") Category
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Eastwood, United Kingdom Railroad Equipment
Marlboro, New Jersey Grating
Tulsa, Oklahoma Grating
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The Company operates from a number of other plants, branches, warehouses and
offices in addition to the above. The Company has approximately 160 locations
related to mill services in over 30 countries; however since these facilities
are on the property of the steel mill being serviced they are not listed. The
Company considers all of its properties at which operations are currently
performed to be in satisfactory condition and suitable for operations.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is included in Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II, Item 8,
"Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
covered by this report.
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF REGISTRANT (PURSUANT TO INSTRUCTION 3
TO ITEM 401(B) OF REGULATION S-K)
Set forth below, as of March 11, 2004, are the executive officers (this excludes
one corporate officer who is not deemed an "executive officer" within the
meaning of applicable Securities and Exchange Commission regulations) of the
Company and certain information with respect to each of them. The executive
officers were elected to their respective offices on April 29, 2003, or at
various times during the year as noted. All terms expire on April 27, 2004.
There are no family relationships between any of the executive officers.
-7-
NAME AGE PRINCIPAL OCCUPATION OR EMPLOYMENT
- ---- --- ----------------------------------
EXECUTIVE OFFICERS:
D. C. Hathaway 59 Chairman, President and Chief Executive Officer of
the Corporation since July 31, 2000. Chairman and
Chief Executive Officer from January 1, 1998 to
July 31, 2000. Served as Chairman, President and
Chief Executive Officer from April 1, 1994 to
December 31, 1997 and President and Chief Executive
Officer from January 1, 1994 to April 1, 1994.
Director since 1991. From 1991 to 1993, served as
President and Chief Operating Officer. From 1986 to
1991 served as Senior Vice President-Operations of
the Corporation. Served as Group Vice President
from 1984 to 1986 and as President of the Dartmouth
Division of the Corporation from 1979 until 1984.
G. D. H. Butler 57 Senior Vice President - Operations of the
Corporation effective September 26, 2000 and
Director since January 2002. Concurrently serves as
President of the MultiServ and SGB Divisions. From
September 2000 through December 2003, he was
President of the Heckett MultiServ International
and SGB Divisions. Was President of the Heckett
MultiServ-East Division from July 1, 1994, to
September 26, 2000. Served as Managing Director -
Eastern Region of the Heckett MultiServ Division
from January 1, 1994 to June 30, 1994. Served in
various officer positions within MultiServ
International, N. V. prior to 1994 and prior to
Harsco's acquisition of that corporation in August
1993.
S. D. Fazzolari 51 Senior Vice President, Chief Financial Officer and
Treasurer of the Corporation effective August 24,
1999 and Director since January 2002. Served as
Senior Vice President and Chief Financial Officer
from January 1998 to August 1999. Served as Vice
President and Controller from January 1994 to
December 1997 and as Controller from January 1993
to January 1994. Previously served as Director of
Auditing from 1985 to 1993 and served in various
auditing positions from 1980 to 1985.
R. W. Kaplan 52 Vice President of the Corporation effective January
1, 2004. Concurrently serves as President of the
Harsco Gas & Fluid Control Group. Served as Senior
Vice President - Operations of the Corporation from
July 1, 1998 to December 31, 2003. Prior to that,
he was President of the Taylor-Wharton Gas
Equipment Division from February 1, 1994 to
November 16, 1999. Served as Vice President and
Treasurer of the Corporation from January 1992 to
February 1994. Served as Treasurer of the
Corporation from May 1991 to December 1992.
Previously served as Vice President and General
Manager of the Plant City Steel/Taylor-Wharton
Division from 1987 to 1991 and Vice President and
Controller of the Division from 1985 to 1987.
Previously served in various Corporate
treasury/financial positions since 1979.
M. E. Kimmel 44 General Counsel and Corporate Secretary effective
January 1, 2004. Served as Corporate Secretary and
Assistant General Counsel from May 1, 2003 to
December 31, 2003. Held various legal positions
within the Corporation since he joined the Company
in August, 2001. Prior to joining Harsco, he was
Vice President, Administration and General Counsel,
New World Pasta Company from January 1, 1999 to
July 2001. Before joining New World Pasta, Mr.
Kimmel spent approximately 12 years in various
legal positions with Hershey Foods Corporation.
S. J. Schnoor 50 Vice President and Controller of the Corporation
effective May 15, 1998. Served as Vice President
and Controller of the Patent Construction Systems
Division from February 1996 to May 1998 and as
Controller of the Patent Construction Systems
Division from January 1993 to February 1996.
Previously served in various auditing positions for
the Corporation from 1988 to 1993. Prior to joining
Harsco, he served in various auditing positions for
Coopers & Lybrand from September 1985 to April
1988.
-8-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Harsco common stock is listed on the New York and Pacific Stock Exchanges, and
also trades on the Boston and Philadelphia Exchanges under the symbol HSC. At
the end of 2003, there were 40,866,470 shares outstanding. In 2003, the stock
traded in a range of $27.50 to $44.39 and closed at $43.82 at year-end. At
December 31, 2003 there were approximately 17,000 shareholders. There are no
significant limitations on the payment of dividends included in the Company's
loan agreements. For additional information regarding Harsco common stock market
price and dividends declared, see Dividend Action under Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Common Stock Price and Dividend Information under Part II,
Item 8, "Financial Statements and Supplementary Data."
ITEM 6. SELECTED FINANCIAL DATA (A)
FIVE-YEAR STATISTICAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE INFORMATION) 2003 2002 2001 2000(b) 1999
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT INFORMATION
Revenues from continuing operations $ 2,118,516 $ 1,976,732 $ 2,025,163 $ 1,904,691 $ 1,649,092
Income from continuing operations 86,999 88,410 74,642 94,343 86,391
Income (loss) from discontinued operations 5,218 1,696 (2,917) 2,460 4,322
Net income 92,217 90,106 71,725 96,803 90,713
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AND CASH FLOW INFORMATION
Working capital $ 269,276 $ 228,552 $ 231,156 $ 181,489 $ 174,147
Total assets 2,138,035 1,999,297 2,090,766 2,180,948 1,659,823
Long-term debt 584,425 605,613 720,133 774,448 418,504
Total debt 613,531 639,670 762,115 837,473 455,343
Depreciation and amortization 168,935 155,661 176,531 159,099 135,853
Capital expenditures 143,824 114,340 156,073 180,048 175,248
Cash provided by operating activities 262,788 253,753 240,601 259,448 213,953
Cash used by investing activities (144,791) (53,929) (125,213) (459,052) (194,674)
Cash provided (used) by financing activities (125,501) (205,480) (99,190) 210,746 (8,928)
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS
Return on sales(c) 4.1% 4.5% 3.7% 5.0% 5.2%
Return on average equity(d) 12.2% 12.6% 11.1% 14.4% 13.3%
Current ratio 1.5:1 1.5:1 1.5:1 1.3:1 1.4:1
Total debt to total capital(e) 44.1% 49.8% 52.6% 55.4% 41.2%
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
Basic - Income from continuing operations $ 2.14 $ 2.19 $ 1.87 $ 2.36 $ 2.11
- Income (loss) from discontinued operations 0.13 .04 (.07) .06 .11
- Net income 2.27 2.23 1.80 2.42 2.22
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted - Income from continuing operations 2.12 2.17 1.86 2.36 2.11
- Income (loss) from discontinued operations 0.13 .04 (.07) .06 .10
- Net income 2.25 2.21 1.79 2.42 2.21
Book value 19.01 15.90 17.16 16.94 16.22
Cash dividends declared 1.0625 1.0125 .97 .945 .91
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Diluted average number of shares outstanding 40,973 40,680 40,066 40,022 41,017
Number of employees 17,500 17,500 18,700 19,700 15,700
Backlog from continuing operations (f) $ 186,222 $ 157,777 $ 214,124 $ 256,745 $ 227,541
===================================================================================================================================
(a) In order to comply with the Financial Accounting Standards Board (FASB)
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," 2001, 2000 and 1999 information has been reclassified for
comparative purposes.
(b) Includes SGB Group Plc which was acquired June 16, 2000.
(c) "Return on sales" is calculated by dividing income from continuing
operations by revenues from continuing operations.
(d) "Return on average equity" is calculated by dividing income from continuing
operations by quarterly weighted average equity.
(e) "Total debt to total capital" is calculated by dividing the sum of debt
(short-term borrowings and long-term debt including current maturities) by
the sum of equity and debt.
(f) Excludes the estimated amount of long-term mill service contracts, which
had estimated future revenues of $3.4 billion at December 31, 2003. Also
excludes backlog of the Access Services Segment. These amounts are
generally not quantifiable due to the nature and timing of the products and
services provided.
-9-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, as discussed more
fully herein.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include statements
about our management confidence and strategies for performance; expectations for
new and existing products, technologies, and opportunities; and expectations
regarding growth, sales, cash flows, earnings and Economic Value Added (EVA(R)).
These statements can be identified by the use of such terms as "may," "could,"
"expect," "anticipate," "intend," "believe," or other comparable terms.
Factors which could cause results to differ include, but are not limited to: (1)
changes in the worldwide business environment in which the Company operates,
including general economic conditions; (2) changes in currency exchange rates,
interest rates and capital costs; (3) changes in the performance of stock and
bond markets that could affect the valuation of the assets in the Company's
pension plans and the accounting for pension assets, liabilities and expense;
(4) changes in governmental laws and regulations, including taxes and import
tariffs; (5) market and competitive changes, including pricing pressures, market
demand and acceptance for new products, services and technologies; (6)
unforeseen business disruptions in one or more of the many countries which the
Company operates due to political instability, civil disobedience, armed
hostilities or other calamities; and (7) other risk factors listed from time to
time in the Company's SEC reports. The Company cautions that these factors may
not be exhaustive and that many of these factors are beyond the Company's
ability to control or predict. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The Company undertakes no
duty to update forward-looking statements.
EXECUTIVE OVERVIEW
The Company's full year 2003 revenues and net cash provided by operating
activities reached record levels at $2.1 billion and $262.8 million,
respectively. Driving the revenues increase were strong results from the Mill
Services Segment which showed year-over-year revenues growth of $130.7 million
or 19%. Also contributing to the achievement of record revenues were increases
in the Access Services Segment of $31.2 million or 5%, and in the Harsco Track
Technologies (HTT) Division of $15.9 million or 10%. The positive effect of
foreign currency translation increased revenues in the Mill Services and Access
Services Segments by $76.7 million and $46.3 million, respectively.
Additionally, the positive effect of foreign currency translation increased 2003
consolidated revenues by $126.2 million when compared with 2002.
This strong revenues growth was somewhat tempered by increased pension expense;
the continued slowdown in the non-residential construction markets served by the
Company, which negatively impacted the operating income of the Access Services
Segment; and a continued depressed manufacturing environment in the U.S., which
negatively impacted the operating income of the Gas and Fluid Control Segment
and the IKG Industries Division. These factors contributed to a reduction in
operating income and income from continuing operations of $2.1 million and $1.4
million, respectively, when compared with 2002.
REVENUES BY REGION
- ----------------------------------------------------------------------------------------
TOTAL REVENUES
TWELVE MONTHS ENDED PERCENTAGE GROWTH FROM
DECEMBER 31 2002 TO 2003
(DOLLARS IN MILLIONS) 2003 2002 VOLUME CURRENCY TOTAL
- ----------------------------------------------------------------------------------------
U.S. $ 902.4 $ 903.2 (0.1)% 0.0% (0.1)%
Europe 873.8 773.6 (0.8) 13.8 13.0
Latin America 100.3 94.5 13.5 (7.4) 6.1
Asia - Pacific 88.1 73.9 6.3 12.9 19.2
Other 153.9 131.5 4.2 12.8 17.0
- ----------------------------------------------------------------------------------------
Total $2,118.5 $1,976.7 0.8% 6.4% 7.2%
========================================================================================
-10-
2003 HIGHLIGHTS
On a macro basis, the following significant items impacted the Company during
2003 in comparison with 2002:
Company Wide:
- -------------
o Increased pre-tax defined benefit pension expense of $17.4 million due to
the decline in equity markets prior to 2003 and lower interest rates which
affected the SFAS No. 87 pension expense computation for 2003.
o The benefit of foreign currency translation resulted in an overall increase
in pre-tax income of $11.9 million.
o A pre-tax benefit of $4.9 million from the termination of certain
postretirement benefit plans.
Mill Services Segment:
- ----------------------
(IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Revenues $ 827.5 $ 696.8
Operating income 85.9 73.5
==========================================================================
o The benefit of foreign currency translation resulted in increased revenues
and operating income of $76.7 million and $10.2 million, respectively.
o Continued strong volume and new business increased revenues and operating
income $30.2 million and $6.3 million, respectively.
o The acquisition of the industrial services unit of C. J. Langenfelder and
Sons, Inc. increased Segment revenues by $23.1 million.
o Pre-tax defined benefit pension expense increased $6.2 million.
Access Services Segment:
- ------------------------
(IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Revenues $ 619.1 $ 587.9
Operating income 37.4 41.7
==========================================================================
o Pre-tax defined benefit pension expense increased $7.5 million.
o The continued slowdown in the non-residential construction markets served
by the Company, especially in the U.S., resulted in decreased revenues and
operating income of $19.9 million and $6.3 million, respectively. This
slowdown had a significant negative effect on rental rates on equipment
rentals, which is the highest margin product line of this Segment.
o The benefit of foreign currency translation resulted in increased revenues
and operating income of $46.3 million and $3.3 million, respectively.
Gas and Fluid Control Segment:
- ------------------------------
(IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Revenues $ 335.1 $ 350.6
Operating income 17.0 23.0
==========================================================================
o Increased competition (from both international and domestic competitors)
and decreased demand for certain valves and composite-wrapped cylinders
reduced revenues and operating income by $30.2 million and $8.2 million,
respectively.
o Increased demand for propane tanks, cryogenics and cylinders increased
revenues and operating income by $12.5 million and $3.0 million,
respectively.
o Pre-tax defined benefit pension expense increased $1.6 million.
-11-
Other Infrastructure Products and Services ("all other") Category:
- ------------------------------------------------------------------
(IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Revenues $ 336.8 $ 341.4
Operating income 34.0 37.6
==========================================================================
o Revenues and operating income from the IKG Division decreased due to the
depressed U.S. manufacturing environment and reorganization costs.
o Continued and consistent profitable results from the Reed Minerals and
Patterson-Kelley Divisions were attained.
o Improved international demand for rail equipment sales of the HTT Division
increased export sales by $30.8 million.
o Pre-tax defined benefit pension expense increased $1.9 million.
OUTLOOK, TRENDS AND STRATEGIES
Looking to 2004 and beyond, the following significant items, trends and
strategies are expected to affect the Company in comparison with 2003:
Company Wide:
- -------------
o A continued focus on expanding the higher-margin industrial services
businesses, with a particular emphasis on growing the Mill Services Segment
through additional services, new contracts and strategic acquisitions.
o Continued international diversification through growth in the Mill Services
Segment; targeted niche acquisitions in the Access Services Segment;
increased export sales in the manufacturing businesses; and increased
production at international manufacturing facilities.
o Continued focus on Economic Value Added (EVA(R))-positive investments and a
reduction in capital employed to improve EVA.
o A target of $280 million in cash provided by operating activities for 2004,
which would be another record.
o Reduction of debt to the extent possible. The Company has approximately $70
million of debt that can be paid prior to maturity. The balance of the
debt, principally the (pound)200 million notes and the $150 million notes,
cannot be paid until maturity in 2010 and 2013, respectively.
o Due to structural changes in the Company's pension plans, pension expense
is expected to stabilize or decrease slightly in 2004. These structural
changes include the replacement of the majority of the U.S. defined benefit
pension plans and certain international defined benefit pension plans with
defined contribution pension plans, effective January 1, 2004.
o A continued benefit from favorable foreign currency translation is
expected. However, should the U.S. dollar start to strengthen, particularly
in relationship to the euro or U.K. pound sterling, the effect of this
benefit would diminish.
o Reduced interest expense is expected due to the September 2003 refinancing
of the Company's $150 million ten-year notes at a lower interest rate. This
interest expense reduction may be offset due to the foreign currency
translation effect on international interest expense.
o Cost reductions and Six-Sigma continuous process improvement initiatives
across the Company should further enhance margins. This includes improved
supply chain management and outsourcing in the manufacturing businesses.
o An increase in general and administrative expenses is expected related to
external audit fees and internal costs for compliance with Section 404 of
the Sarbanes-Oxley Act of 2002.
o Higher fuel, transportation and material costs, particularly steel prices,
could increase the Company's operating costs and reduce profitability. To
the extent that such costs cannot be passed to customers, operating income
and results of operations may be adversely affected.
Mill Services Segment:
- ----------------------
o Global steel production is forecasted to rise in 2004, and bidding activity
for new mill services contracts and add-on services is strong.
o Increases in steel prices and worldwide demand could provide increased
production volumes and additional opportunities for mill services
contracts.
o The risk remains that certain Mill Services customers may file for
bankruptcy protection in the future which could have an adverse affect on
the Company's income.
Access Services Segment:
- ------------------------
o The outlook for non-residential construction spending is expected to
modestly improve. The benefits of this will likely affect late 2004 and
2005 results.
-12-
o There is continued concern over the competitive environment in the United
States. International competitors have invested heavily in the U.S. access
services market, substantially increasing the supply of certain types of
rental equipment.
o The international defined benefit pension expense has grown significantly
and disproportionately to the domestic defined benefit pension expense over
the past few years. Effective January 1, 2004, structural changes have been
made to several of the Company's pension plans whereby both domestic and
international employees of this Segment will have defined contribution
pension plans. This is expected to make future pension expense more
consistent with prior years and more predictable.
Gas and Fluid Control Segment:
- ------------------------------
o This Segment is expected to remain the Company's most challenging business
in 2004. However, an overall net improvement is expected to be led by the
propane tank product line along with modest improvements from the cryogenic
and composites product lines.
o Increases in steel prices and worldwide demand for steel could have an
adverse effect on raw material costs, and this Segment's ability to obtain
the necessary raw materials.
Other Infrastructure Products and Services ("all other") Category:
- ------------------------------------------------------------------
o A continued positive outlook is anticipated for railway track services and
equipment sales as international orders continue to grow.
o The IKG Industries industrial grating division is expected to return to
profitability.
o Increases in steel prices and worldwide demand for steel could have an
adverse effect on raw material costs, and both HTT's and IKG's ability to
obtain the necessary raw materials.
o Continued strong results are expected from the Reed Minerals and
Patterson-Kelley Divisions.
RESULTS OF OPERATIONS FOR 2003, 2002 AND 2001
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 2003 2002 2001 (A)
---------------------------------------------------------------------------------------------------
Revenues from continuing operations $ 2,118.5 $ 1,976.7 $ 2,025.2
Cost of services and products sold 1,604.4 1,481.8 1,516.4
Selling, general and administrative expenses 330.0 312.7 314.3
Other expenses 7.0 3.5 22.8
Operating income from continuing operations 173.9 176.0 167.7
Interest expense 40.5 43.3 53.2
Provision for income taxes from continuing operations 41.7 42.2 38.6
Income from continuing operations 87.0 88.4 74.6
Income (loss) from discontinued operations 5.2 1.7 (2.9)
Net income 92.2 90.1 71.7
Diluted earnings per common share 2.25 2.21 1.79
Effective income tax rate for continuing operations 30.7% 30.9% 32.6%
Consolidated effective income tax rate 31.0% 31.0% 32.5%
===================================================================================================
(a) In order to comply with the Financial Accounting Standards Board
(FASB) Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," 2001 information has been reclassified for
comparative purposes.
-13-
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
2003 vs. 2002
- -------------
Revenues for 2003 were up $141.8 million or 7% from 2002, to record levels. This
increase was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN REVENUES 2003 VS. 2002
---------------------------------------------------------------------------
$126.2 Effect of foreign currency translation.
30.2 Net increased volume, new contracts and price changes in
the Mill Services Segment.
20.4 Net effect of business acquisitions and dispositions.
Increased revenues of $23.1 and $6.4 million in the
Mill Services and Access Services Segments,
respectively, partially offset by decreased revenues of
$9.1 million in the Other Infrastructure Products and
Services ("all other") Category.
19.6 Net increased revenues in the Harsco Track Technologies
(HTT) Division due principally to rail equipment sales.
(19.9) Net decreased revenues in the Access Services Segment due
to continued slowdown in the non-residential
construction markets.
(19.3) Net decreased revenues in the Gas and Fluid Control
Segment due to increased competition and decreased
demand.
(18.3) Decreased revenues of the IKG Industries Division due to
decreased demand and to a lesser extent, the sale of
the bridge decking product line in January 2002.
2.9 Other (minor changes across the various units not already
mentioned).
---------------------------------------------------------------------------
$141.8 Total Change in Revenues 2003 vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Revenues for 2002 were down $48.5 million or 2% from 2001. This decrease was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN REVENUES 2002 VS. 2001
---------------------------------------------------------------------------
$(50.0) Net decreased revenues in the Gas and Fluid Control
Segment due to the continued recessionary environment
in the manufacturing sector, primarily in the United
States, that impacted most product lines of this
Segment. These decreases were only partially offset by
higher demand for valves.
(23.3) Net reduced revenues in the Access Services Segment due to
continued weakness in the non-residential construction
markets due to generally unsettled economic conditions.
(21.8) Decreased revenues of the IKG Industries Division due to
the sale of the bridge decking product line in January
2002 and decreased demand.
(6.6) Net reduced revenues in the HTT Division due principally
to decreased contracting services related primarily to
a maintenance contract with a U.S. railroad that was
completed in December 2001.
30.5 Effect of foreign currency translation.
24.5 Net increased volume, new contracts and price changes in
the Mill Services Segment. The overall increase is a
combination of increased international revenues
partially offset by decreased domestic revenues
principally due to steel mill customer plant closures
in 2001.
(1.8) Other (minor changes across the various units not already
mentioned).
---------------------------------------------------------------------------
$(48.5) Total Change in Revenues 2002 vs. 2001
===========================================================================
-14-
COST OF SERVICES AND PRODUCTS SOLD
2003 vs. 2002
- -------------
Cost of services and products sold for 2003 increased $122.6 million or 8% from
2002, slightly higher than the 7% increase in revenues. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN COST OF SERVICES AND PRODUCTS SOLD 2003 VS. 2002
---------------------------------------------------------------------------
$95.6 Effect of foreign currency translation.
17.5 Net effect of business acquisitions and dispositions.
11.8 Increased costs due to increased revenues (exclusive of
effect of foreign currency translation).
7.8 Increased defined benefit pension expense due to financial
market conditions and lower interest rates in 2001 and
2002 which affected the SFAS No. 87 pension expense
computation for 2003.
(10.1) Other (due to stringent cost controls, process
improvements, reorganization actions and minor changes
across the various units not already mentioned).
---------------------------------------------------------------------------
$122.6 Total Change in Cost of Services and Products Sold 2003
vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Cost of services and products sold for 2002 decreased $34.6 million or 2% from
2001, consistent with the 2% decrease in revenues. This decrease was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN COST OF SERVICES AND PRODUCTS SOLD 2002 VS. 2001
---------------------------------------------------------------------------
$(59.2) Reduced costs due to decreased revenues (exclusive of
effect of foreign currency translation).
(16.1) Elimination of goodwill amortization as a result of
implementing SFAS No. 142.
22.9 Effect of foreign currency translation.
10.5 Increased defined benefit pension expense due to financial
market conditions and lower interest rates in 2001
which affected the SFAS No. 87 pension expense
computation for 2002.
7.3 Other (due to product mix and minor changes across the
various units not already mentioned, partially offset
by decreased variable costs due to lower sales,
stringent cost controls, process improvements and
reorganization actions).
---------------------------------------------------------------------------
$(34.6) Total Change in Cost of Services and Products Sold 2002
vs. 2001
===========================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2003 vs. 2002
- -------------
Selling, general and administrative expenses for 2003 increased $17.3 million or
6% from 2002, less than the 7% increase in revenues. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS 2003 VS. 2002
---------------------------------------------------------------------------
$19.7 Effect of foreign currency translation.
9.9 Increased defined benefit pension expense due to financial
market conditions and lower interest rates in 2001 and
2002 which affected the SFAS No. 87 pension expense
computation for 2003. This increased pension expense
was spread across all operations, with $8.0 million of
the increase in the Access Services Segment.
(3.5) Reduction in provisions for uncollectible accounts
receivable due to significant charges in 2002 for Mill
Services customers that were experiencing financial
difficulties including bankruptcy.
(8.8) Other (due to continuing cost reduction, process
improvement and reorganization efforts).
---------------------------------------------------------------------------
$17.3 Total Change in Selling, General and Administrative
Expenses 2003 vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Selling, general and administrative expenses for 2002 decreased $1.6 million or
0.5% from 2001, less than the 2% decrease in revenues. This decrease was
attributable to the following significant items:
---------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS 2002 VS. 2001
---------------------------------------------------------------------------
$(5.8) Reduction in provisions for uncollectible accounts
receivable due to significant charges in 2001 for Mill
Services customers that were experiencing financial
difficulties including bankruptcy.
9.2 Increased defined benefit pension expense due to financial
market conditions and lower interest rates in 2001
which affected the SFAS No. 87 pension expense
computation for 2002.
4.8 Effect of foreign currency translation.
(9.8) Other (due to continuing cost reduction, process
improvement and reorganization efforts).
---------------------------------------------------------------------------
$(1.6) Total Change in Selling, General and Administrative
Expenses 2002 vs. 2001
===========================================================================
-15-
OTHER EXPENSES
This income statement classification includes impaired asset write-downs,
employee termination benefit costs and costs to exit activities, offset by net
gains on the disposal of non-core assets. During 2003, the Company continued its
strategy to streamline operations. This strategy included the consolidation,
closure and sale of certain operating locations and continued headcount
reductions in both administrative and operating positions. These actions
resulted in net Other Expenses of $7.0 million in 2003 compared with $3.5
million in 2002 and $22.8 million in 2001.
2003 vs. 2002
- -------------
Other Expenses for 2003 increased $3.5 million or 100% from 2002. This increase
was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN OTHER EXPENSES 2003 VS. 2002
---------------------------------------------------------------------------
$3.5 Decline in net gains on disposals of non-core assets. This
decline was attributable to a $2.7 million net gain
that was realized in 2002 from the sale of an equity
investment within the Mill Services Segment and $1.9
million gain on the sale of a product line in the Other
Infrastructure Products and Services ("all other")
Category that were not repeated in 2003.
0.8 Increase in costs to exit activities.
0.3 Increase in other expenses.
(1.1) Decline in employee termination benefit costs.
---------------------------------------------------------------------------
$3.5 Total Change in Other Expenses 2003 vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Other Expenses for 2002 decreased $19.3 million or 85% from 2001. This decrease
was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN OTHER EXPENSES 2002 VS. 2001
---------------------------------------------------------------------------
$(15.0) Decline in impaired asset write-downs. Impaired asset
write-downs in 2001 included $8.0 million related to an
under-performing plant associated with the Company's
roofing granules business. The plant was sold in 2002.
In addition, 2001's expense included $4.8 million of
impaired asset write-downs in the Mill Services Segment
related to fixed plant and equipment associated with
steel mill customers which filed for reorganization
proceedings under local laws principally in the United
States and Asia.
(3.0) Decline in employee termination benefit costs.
(1.3) Decline in costs to exit activities, other expenses and
increased net gains on the disposal of non-core assets.
---------------------------------------------------------------------------
$(19.3) Total Change in Other Expenses 2002 vs. 2001
===========================================================================
For additional information, see Note 15, Other (Income) and Expenses, to the
Consolidated Financial Statements under Part II, Item 8, "Financial Statements
and Supplementary Data."
- --------------------------------------------------------------------------------
INTEREST EXPENSE
2003 vs. 2002
- -------------
Interest expense in 2003 was $2.8 million or 6% lower than in 2002. This decline
was due to approximately $58 million in reduced average annual borrowings and
lower average annual interest rates on certain borrowings (e.g., commercial
paper) partially offset by an increase of $2.3 million due to the effect of
foreign currency translation.
2002 vs. 2001
- -------------
Interest expense in 2002 was $9.9 million or 19% lower than in 2001. This
decline was due to approximately $110 million in reduced average annual
borrowings and lower average annual interest rates partially offset by an
increase of $1.1 million due to the effect of foreign currency translation.
- --------------------------------------------------------------------------------
-16-
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS
2003 vs. 2002
- -------------
The decrease in 2003 of $0.5 million or 1% in the provision for income taxes
from continuing operations was due to decreased earnings from continuing
operations for the reasons mentioned above and a decreased effective income tax
rate. The effective tax rate relating to continuing operations for 2003 was
30.7% versus 30.9% for 2002.
2002 vs. 2001
- -------------
The increase in 2002 of $3.6 million or 9% in the provision for income taxes
from continuing operations was due to increased earnings offset by a decreased
effective income tax rate. The effective income tax rate relating to continuing
operations for 2002 was 30.9% versus 32.6% for 2001. The decrease in the income
tax rate was due principally to the elimination of goodwill amortization for
book purposes in accordance with SFAS No. 142.
- --------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
2003 vs. 2002
- -------------
Income from continuing operations in 2003 was slightly below 2002 levels despite
increased revenues. This decrease of $1.4 million or 2% results from increased
pension expense and reduced interest income of $1.5 million. This reduced
interest income related to lower average annual interest rates. These items were
partially offset by the positive impact of foreign currency translation and the
termination of certain postretirement benefit plans.
2002 vs. 2001
- -------------
Income from continuing operations in 2002 was significantly above 2001 levels
despite a decrease in revenues. The increase of $13.8 million or 18% results
from the items discussed above, including decreased asset write-downs as well as
a reduced equity loss in affiliates. The reduced equity loss in affiliates was
due primarily to $2.9 million of pre-tax losses during 2001 associated with the
Company's S3Networks equity investment. This investment was disposed of in 2001.
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
2003 vs. 2002
- -------------
Income from discontinued operations for 2003 increased $3.5 million or 208% from
2002. This increase was attributable to the following significant items:
---------------------------------------------------------------------------
CHANGE IN INCOME (LOSS) FROM DISCONTINUED OPERATIONS
IN MILLIONS 2003 VS. 2002
---------------------------------------------------------------------------
$5.2 After-tax income due to favorable developments in the
Company's Federal Excise Tax (FET) litigation. For
additional information on the FET litigation see Note
10, Commitments and Contingencies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data."
(1.7) Decline in after-tax income related to the sale of the
Company's Capitol Manufacturing business during 2002.
---------------------------------------------------------------------------
$3.5 Total Change in Income (Loss) from Discontinued Operations
2003 vs. 2002
===========================================================================
2002 vs. 2001
- -------------
Income from discontinued operations for 2002 was $4.6 million higher than 2001's
loss of $2.9 million. This increase was attributable to the following
significant items:
---------------------------------------------------------------------------
CHANGE IN INCOME (LOSS) FROM DISCONTINUED OPERATIONS
IN MILLIONS 2002 VS. 2001
---------------------------------------------------------------------------
$3.6 After-tax gain recognized on the sale of the Company's
Capitol Manufacturing business, of which a substantial
part of the assets was divested in the second quarter
of 2002.
1.0 Decline in after-tax loss from operations of the Company's
Capitol Manufacturing business, due to the sale in the
second quarter of 2002.
---------------------------------------------------------------------------
$4.6 Total Change in Income (Loss) from Discontinued Operations
2002 vs. 2001
===========================================================================
- --------------------------------------------------------------------------------
-17-
NET INCOME AND EARNINGS PER SHARE
2003 vs. 2002
- -------------
Net income of $92.2 million and diluted earnings per share of $2.25 in 2003
exceeded 2002 by $2.1 million and $0.04, respectively, due principally to
increased income from discontinued operations partially offset by decreased
income from continuing operations for the reasons described above.
2002 vs. 2001
- -------------
Net income of $90.1 million and diluted earnings per share of $2.21 in 2002
exceeded 2001 by $18.4 million and $0.42, respectively, due principally to
decreased provisions for uncollectible accounts receivable; decreased Other
expenses related to restructuring activities; decreased interest expense; and a
lower effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's principal sources of liquidity are cash from operations and
short-term borrowings under its various credit agreements, augmented by cash
proceeds from asset sales. Principal borrowings for working capital requirements
are commercial paper. During 2003, record cash flows from operations of $262.8
million enabled the Company to make significant progress toward its strategic
objectives. This included net cash payments to reduce debt of $86.2 million,
increased capital expenditures of $29.5 million for growth in the Company's
industrial services businesses and two industrial services acquisitions totaling
$23.5 million. Since peaking in mid-2000 in connection with the SGB acquisition,
the Company has reduced its total debt by almost $300 million or approximately
31% as of December 31, 2003.
The Company's strategic objectives for 2004 include generating a record $280
million in cash from operations, augmented by $30 million in targeted asset
sales. The Company's strategy is to redeploy excess or discretionary cash to
grow primarily the mill services business and to further reduce debt. The
Company has targeted $125 million for growth capital investments and
acquisitions and $40 million for debt reduction.
As of December 31, 2003 the Company had approximately $70 million of debt that
can be paid prior to maturity. The balance of the debt, principally, the
(pound)200 million notes and the $150 million notes, cannot be paid until
maturity in 2010 and 2013, respectively. The Company also plans to continue its
history of paying dividends to shareholders.
-18-
CASH REQUIREMENTS
The following summarizes the Company's expected future payments related to
contractual obligations and commercial commitments at December 31, 2003.
CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2003 (A)
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1-3 4-5 AFTER 5
(IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS
-----------------------------------------------------------------------------------------------------------------------------
Short-term Debt $ 14.9 $ 14.9 $ -- $ -- $ --
Long-term Debt
(including current maturities and
capital leases) 598.7 14.3 56.5 19.8 508.1
Pension and Other Post-
retirement Obligations (b) 154.4 24.4 47.8 44.3 37.9
Operating Leases 141.9 48.3 49.0 21.5 23.1
Purchase Obligations 88.0 84.4 3.0 0.6 --
Foreign Currency Forward
Exchange Contracts 78.4 78.4 -- -- --
Other Obligations (c) 0.1 0.1 -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $ 1,076.4 $ 264.8 $ 156.3 $ 86.2 $ 569.1
=============================================================================================================================
(a) See Note 6, Debt and Credit Agreements; Note 7, Leases; Note 8,
Employee Benefit Plans; and Note 13, Financial Instruments, to the
Consolidated Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data," for additional disclosures on
short-term and long-term debt; operating leases; pensions and other
postretirement benefits; and foreign currency forward exchange
contracts, respectively.
(b) The total obligation for Pension and Other Postretirement
Obligations is based on actuarial calculations and represents the
obligation recorded on the Company's balance sheet. Payments due by
period are based on the expected undiscounted amounts to be paid in
the years shown. The amount shown in the After 5 years column is the
remaining balance of the obligation as calculated at December 31,
2003. It is not practicable to estimate the actual amount to be paid
after five years.
(c) Other contractual obligations are not deemed to have a material
impact on the Company and are not discussed in detail.
COMMERCIAL COMMITMENTS - The following table summarizes the Company's
contingent commercial commitments at December 31, 2003. These amounts are not
included in the Company's Consolidated Balance Sheet since there are no current
circumstances known to management indicating that the Company will be required
to make payments on these contingent obligations.
COMMERCIAL COMMITMENTS AS OF DECEMBER 31, 2003
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
TOTAL AMOUNTS LESS THAN 1-3 4-5 OVER 5 INDEFINITE
(IN MILLIONS) COMMITTED 1 YEAR YEARS YEARS YEARS EXPIRATION
------------------------------------------------------------------------------------------------------------------------------
Standby Letters of Credit $ 88.5 $ 84.8 $ 3.3 $ 0.4 $ -- $ --
Guarantees 22.9 3.5 -- 0.4 0.1 18.9
Performance Bonds 107.8 96.4 1.6 -- -- 9.8
Other Commercial Commitments 11.1 -- -- -- -- 11.1
------------------------------------------------------------------------------------------------------------------------------
Total Commercial Commitments $ 230.3 $ 184.7 $ 4.9 $ 0.8 $ 0.1 $ 39.8
==============================================================================================================================
Performance bonds include an $80 million security bond and standby letters of
credit include a $9 million letter of credit both related to the Federal Excise
Tax litigation discussed in Note 10, Commitments and Contingencies, to the
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Consolidated Financial Statements under Part II, Item 8, "Financial Statements
and Supplementary Data." Certain guarantees and performance bonds are of a
continuous nature and do not have a definite expiration date.
SOURCES AND USES OF CASH
The primary drivers of the Company's cash flow from operations are the Company's
strong sales and income, particularly in the services businesses. Additionally,
returns on capital investments made in prior years, for which no cash is
currently required, are a significant source of cash. Depreciation related to
these investments is a non-cash charge. The Company also continues to maintain
working capital at a manageable level.
Major uses of cash include payroll costs and related benefits; raw material
purchases for the manufacturing businesses; income tax payments; interest
payments; insurance premiums and payments of self-insured casualty losses; and
facility rental payments. Other primary uses of cash include capital
investments, principally in the industrial services businesses; debt payments;
and dividend payments.
RESOURCES AVAILABLE FOR CASH REQUIREMENTS - The Company has various credit
facilities and commercial paper programs available for use throughout the world.
The following chart illustrates the amounts outstanding on credit facilities and
commercial paper programs and available credit at December 31, 2003.
SUMMARY OF CREDIT FACILITIES AS OF DECEMBER 31, 2003
-----------------------------------------------------------------------------------
FACILITY OUTSTANDING AVAILABLE
(IN MILLIONS) LIMIT BALANCE CREDIT
-----------------------------------------------------------------------------------
U.S. commercial paper program $ 350.0 $ 9.3 $ 340.7
Euro commercial paper program 125.8 26.1 99.7
Revolving credit facility (a) 350.0 -- 350.0
Bilateral credit facility (b) 25.0 3.4 21.6
-----------------------------------------------------------------------------------
TOTALS AT DECEMBER 31, 2003 $ 850.8 $ 38.8 $ 812.0(C)
===================================================================================
(a) U.S.-based Program
(b) International-based Program
(c) Although the Company has significant available credit, it is the
Company's policy to limit aggregate commercial paper and credit
facility borrowings at any one time to a maximum of $375 million.
See Note 6, Debt and Credit Agreements, to the Consolidated Financial Statements
under Part II, Item 8, "Financial Statements and Supplementary Data," for more
information on the Company's credit facilities.
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at December 31, 2003:
U.S.-BASED
LONG-TERM NOTES COMMERCIAL PAPER OUTLOOK
---------------------------------------------------------------------------
Standard & Poor's (S&P) A- A-2 Stable
Moody's A3 P-2 Stable
Fitch (a) A- F-2 Stable
---------------------------------------------------------------------------
(a) The Company's (pound)200 million notes are not rated by Fitch.
The euro commercial paper market does not require commercial paper to be rated;
accordingly, the Company's euro-based commercial paper program has not been
rated. In the third quarter of 2003, S&P, Fitch and Moody's all reaffirmed their
stable outlooks for the Company. A downgrade to the Company's credit rating
would probably increase the costs to the Company to borrow funds. An improvement
in the Company's credit rating would probably decrease the costs to the Company
to borrow funds.
-20-
WORKING CAPITAL POSITION - Changes in the Company's working capital are
reflected in the following table:
DECEMBER 31 DECEMBER 31 INCREASE
(DOLLARS ARE IN MILLIONS) 2003 2002 (DECREASE)
-----------------------------------------------------------------------------------------
Current Assets $ 764.4 $ 702.4 $ 62.0
Less: Current Liabilities 495.1 473.8 21.3
-----------------------------------------------------------------------------------------
Working Capital $ 269.3 $ 228.6 $ 40.7
Current Ratio 1.5:1 1.5:1
=========================================================================================
Working capital increased 18% in 2003 due principally to the effect of foreign
currency translation. Foreign currency translation changes were due principally
to the weakening of the U.S. dollar in relation to the British pound sterling
and the euro. Also contributing to the increase in working capital was the
acquisition of the mill services unit of C. J. Langenfelder & Son, Inc.
CERTAINTY OF CASH FLOWS - The certainty of the Company's future cash flows
is strengthened by the long-term nature of the Company's mill services
contracts. At December 31, 2003, the Company's mill services contracts had
estimated future revenues of $3.4 billion. Of that amount, over $800 million is
projected for 2004 and approximately 60% is expected to be recognized by
December 31, 2006. In addition, the Company had an order backlog of $186.2
million for its manufacturing businesses and railway track services.
The types of products and services that the Company provides are not subject to
rapid technological change which increases the stability of related cash flows.
Additionally, each of the Company's businesses is among the top three companies
(relative to sales) in the industries the Company serves. Due to these factors,
the Company is confident in its future ability to generate positive cash flows
from operations.
CASH FLOW SUMMARY
The Company's cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statements of Cash Flows, are summarized in the
following table:
SUMMARIZED CASH FLOW INFORMATION
(IN MILLIONS) 2003 2002 2001
---------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $ 262.8 $ 253.7 $ 240.6
Investing activities (144.8) (53.9) (125.2)
Financing activities (125.5) (205.5) (99.2)
Effect of exchange rate changes on cash 17.6 8.4 (5.2)
---------------------------------------------------------------------------------------------
Net change in cash and cash equivalents $ 10.1 $ 2.7 $ 11.0
=============================================================================================
CASH FROM OPERATING ACTIVITIES - Cash provided by operations in 2003 was a
record $262.8 million, up $9.0 million from 2002. The increased cash from
operations in 2003 resulted from the following:
o Positive year-over-year changes in inventories due principally to
planned reductions in inventories at IKG Industries and
international mill services locations.
o Timing of accounts payable disbursements.
o Timing of funding of pension and insurance liabilities for which
expense was recorded during the year but for which payments will be
made in subsequent years.
o Partially offsetting these increases were recorded sales (accounts
receivable) for which cash will not be received until 2004. As an
example, the Harsco Track Technologies Division recorded a $21.1
million increase in sales in December 2003 compared with December
2002. A significant portion of those sales will be collected in
2004.
CASH USED IN INVESTING ACTIVITIES - Capital investments for 2003 were
$143.8 million, up $29.5 million from 2002. Investments were made predominantly
for the industrial services businesses with 60% in the Mill Services Segment.
The Company also invested $23.5 million on two industrial service acquisitions.
These acquisitions included the domestic mill
-21-
services unit of C.J. Langenfelder & Son, Inc. and a small product line for the
international access services business. Proceeds from sales of assets decreased
$40.9 million. This decrease, on a comparative basis, included the sale of
Capitol Manufacturing and a product line of the Harsco Track Technologies
Division in 2002. In 2004, the Company plans to continue to invest in
high-return projects, principally in the industrial services businesses.
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions at December 31, 2003.
DECEMBER 31 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Notes Payable and Current Maturities $ 29.1 $ 34.1
Long-term Debt 584.4 605.6
--------------------------------------------------------------------------
Total Debt 613.5 639.7
Total Equity 777.0 644.5
--------------------------------------------------------------------------
Total Capital $ 1,390.5 $ 1,284.2
Total Debt to Total Capital 44.1% 49.8%
==========================================================================
The Company's debt as a percent of total capital decreased in 2003 due
principally to the Company's continued debt reduction combined with the increase
in the cumulative translation adjustment equity account and increased retained
earnings. Due to the Company's significant net investments in Europe and the
United Kingdom, foreign currency translation increases in the euro and the pound
sterling had a positive effect on total equity.
DEBT COVENANTS
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Based on balances at December 31, 2003, the Company could
borrow approximately $550 million and still be within its debt covenants.
Alternatively, keeping all other factors constant, the Company's equity could
decrease by $300 million and the Company would still be within its covenants.
CASH AND VALUE-BASED MANAGEMENT
In 2004, the Company plans to continue with its strategy of selective investing
for strategic purposes. The goal of this strategy is to improve the Company's
Economic Value Added (EVA(R)) under the program that commenced January 1, 2002.
Under this program the Company evaluates strategic investments based upon the
investment's economic profit. EVA equals after-tax operating profits less a
charge for the use of the capital employed to create those profits (only the
service cost portion of pension expense is included for EVA purposes).
Therefore, value is created when a project or initiative produces a return above
the cost of capital. In 2003, the Company as a whole exceeded its EVA
improvement target by 125%.
Through the Company's use of EVA to evaluate all capital expenditures, the
Company targets its capital investments where management expects they will
create the greatest positive EVA. In 2003, the Company made approximately 60%
and 30% of its capital expenditures in the Mill Services and Access Services
Segments, respectively. The investments in these segments continue to show
positive results as the Mill Services and Access Services Segments generated
approximately 50% and 30% of the Company's 2003 cash from operations,
respectively. Additionally, both these Segments had improved EVA in 2003 when
compared with 2002. In 2004, the Company is again targeting the industrial
services businesses for the majority of its capital investments.
The Company is committed to continue paying dividends to shareholders. The
Company has increased the dividend rate for ten consecutive years, and in
February 2004, the Company paid its 215th consecutive quarterly cash dividend.
The Company also plans to continue paying down debt to the extent possible.
The Company's financial position and debt capacity should enable it to meet
current and future requirements. As additional resources are needed, the Company
should be able to obtain funds readily and at competitive costs. The Company is
well-positioned and intends to continue investing strategically in high-return
projects, reducing debt and paying cash dividends as a means to enhance
shareholder value.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and
-22-
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent liabilities. On an on-going basis
the Company evaluates its estimates, including those related to pensions and
other postretirement benefits, bad debts, goodwill, long-lived asset valuations,
inventory valuations, insurance accruals, contingencies and income taxes. The
impact of changes in these estimates, as necessary, is reflected in the
respective segment's operating income. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. Management has discussed the development and selection of
the critical accounting estimates described below with the Audit Committee of
the Board of Directors and the Audit Committee has reviewed the Company's
disclosure relating to these estimates in this Management's Discussion and
Analysis of Financial Condition and Results of Operations. These items should be
read in conjunction with Note 1, Summary of Significant Accounting Policies, to
the Consolidated Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data."
PENSION BENEFITS
The Company has noncontributory defined benefit pension plans throughout the
world. The largest of these plans are in the United Kingdom and the United
States. The Company's funding policy for these plans is to contribute amounts
sufficient to meet the minimum funding pursuant to U.K. and U.S. statutory
requirements, plus any additional amounts that the Company may determine to be
appropriate. The Company made cash contributions to its defined benefit pension
plans of $23.6 million and $10.1 million during 2003 and 2002, respectively.
Additionally, the Company expects to make $24.0 in cash contributions to its
defined benefit pension plans during 2004. The Company accounts for its defined
benefit pension plans in accordance with SFAS No. 87, "Employer's Accounting for
Pensions" (SFAS 87), which requires that amounts recognized in financial
statements be determined on an actuarial basis. A minimum liability is required
to be established on the Consolidated Balance Sheet representing the amount of
unfunded accumulated benefit obligation. The unfunded accumulated benefit
obligation is the difference between the accumulated benefit obligation and the
fair value of the plan assets at the measurement date. When it is necessary to
establish an additional minimum pension liability, an equal amount is recorded
as an intangible pension asset limited to unrecognized prior service cost. Any
excess amount is recorded as a reduction to shareholders' equity in accumulated
other comprehensive expense, net of deferred income taxes, in the Consolidated
Balance Sheet. At December 31, 2003 and 2002, the Company has a gross minimum
pension liability of $233.9 million and $236.2 million, respectively. These
adjustments impacted accumulated other comprehensive expense in the
shareholders' equity section of the Balance Sheet by $1.5 million of
comprehensive income, net of deferred income taxes, and $146.7 million of
comprehensive expense, net of deferred income taxes, at December 31, 2003 and
2002, respectively. When and if the fair market value of the pension plans'
assets exceed the accumulated benefit obligation, the reduction to shareholders'
equity would be fully restored to the Consolidated Balance Sheet.
Management has implemented a three-part strategy to deal with the adverse market
forces that have increased the unfunded benefit obligations over the last
several years. These strategies included pension plan design changes, a review
of funding policy alternatives and a review of the asset allocation policy and
investment manager structure. With regards to plan design, the Company amended a
majority of the U.S. defined benefit pension plans and certain international
defined benefit pension plans so that accrued service will no longer be granted
for periods after December 31, 2003, although compensation increases will
continue to be recognized on actual service to-date. In place of these plans,
the Company has established, effective January 1, 2004, defined contribution
pension plans providing for the Company to contribute a specified matching
amount for participating employees' contributions to the plan. Domestically,
this match will be made on employee contributions up to four percent of their
eligible compensation. Additionally, the Company may provide a discretionary
contribution of up to two percent of compensation for eligible employees.
Internationally, this match is up to six percent of eligible compensation with
an additional two percent going towards insurance and administrative costs. The
Company believes this new retirement benefit plan will provide a more
predictable and less volatile pension expense than existed under the defined
benefit plans.
CRITICAL ESTIMATE - PENSION BENEFITS
Accounting for pensions and other postretirement benefits requires the use of
actuarial assumptions. The principal assumptions used include the discount rate
and the expected long-term rate of return on plan assets. Each assumption is
reviewed annually and represents management's best estimate at that time. The
assumptions are selected to represent the average expected experience over time
and may differ in any one year from actual experience due to changes in capital
markets and the overall economy. These differences will impact the amount of
unfunded benefit obligation and the expense recognized.
-23-
The discount rates as of the September 30, 2003 measurement date for the U.K.
pension plan and the October 31, 2003 measurement date for the U.S. pension
plans were 5.7% and 6.25%, respectively. These rates were used in calculating
the Company's projected benefit obligations as of December 31, 2003. The
discount rates selected represent the average yield on high-quality corporate
bonds as of the measurement dates. The weighted average of these assumed
discount rates for the year ending December 31, 2003 was 5.9%. The weighted
average assumed discount rate at year-end 2003 compares with the weighted
average assumed discount rates of 6.0% and 6.5% for the years ending December
31, 2002 and 2001, respectively. Annual pension expense is determined using the
discount rate as of the beginning of the year, which for 2004 is the 5.9%
assumed weighted average discount rate. Pension expense and the projected
benefit obligation generally increase as the discount rate selected decreases.
The expected long-term rate of return on plan assets is determined by evaluating
the portfolios' asset class return expectations with the Company's advisors as
well as actual, long-term, historical results of asset returns for the U.S.
pension plans and the U.K. pension plan. The pension expense increases as the
expected long-term rate of return on assets decreases. For fiscal 2003 the
weighted average expected long-term rate of return on asset assumption was 8.0%.
The weighted average assumption for the U.S. and U.K. has been lowered to 7.9%
for fiscal 2004. This rate was determined based on a model of expected asset
returns for an actively managed portfolio.
Based on these updated actuarial assumptions and the structural changes in the
pension plans mentioned previously, the Company's 2004 pension expense is
expected to stabilize. This is in comparison to the increase in pension expense
from 2002 to 2003 of $20.4 million that resulted from lower interest rates and
unfavorable investment performance during 2000, 2001, and 2002. Additionally,
the increase in pension expense from 2001 to 2002 was approximately $20 million.
Changes in the related pension benefit costs may occur in the future due to
changes in the assumptions and due to changes in returns on plan assets
resulting from financial market conditions. Holding all other assumptions
constant, a one-half percent increase or decrease in the discount rate and the
expected long-term rate of return on plan assets would increase or decrease
annual fiscal 2004 pre-tax defined benefit pension expense as follows:
APPROXIMATE CHANGES IN PRE-TAX DEFINED BENEFIT
----------------------------------------------
PENSION EXPENSE
---------------
U.S. PLANS U.K. PLAN
---------- ---------
Discount rate
-------------
One-half percent increase Decrease of $2 million Decrease of $4 million
One-half percent decrease Increase of $2 million Increase of $4 million
Expected long-term rate of return on plan assets
------------------------------------------------
One-half percent increase Decrease of $1 million Decrease of $2 million
One-half percent decrease Increase of $1 million Increase of $2 million
Should circumstances change that affect these estimates, changes (either
increases or decreases) to the unfunded obligations may be required and would be
recorded in accordance with the provisions of SFAS 87. Additionally, certain
events could result in the pension unfunded obligation changing at a time other
than the annual measurement date. This would occur when the benefit plan is
amended or when plan curtailments occur.
See Note 8, Employee Benefit Plans, to the Consolidated Financial Statements
under Part II, Item 8, "Financial Statements and Supplementary Data," for
additional disclosures related to these items.
NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable are stated at their net realizable value through
the use of allowances for doubtful accounts. These allowances are maintained for
estimated future losses resulting from the inability of customers to make
required payments on notes or accounts receivable. The Company has policies and
procedures in place requiring customers to be evaluated for creditworthiness
prior to the execution of new service contracts or shipments of products. These
reviews are structured to assist in minimizing the Company's risk related to
realizability of its receivables. Despite these policies and procedures, the
Company may still experience collection problems and potential bad debts due to
economic conditions within certain industries (e.g., construction and steel
industries) and countries and regions (e.g., U.S., U.K., Middle East, etc.) in
which the Company operates. At December 31, 2003 and 2002, receivables of $446.9
million and $388.9 million, respectively, were net of reserves of $24.6 million
and $36.5 million, respectively.
-24-
CRITICAL ESTIMATE - NOTES AND ACCOUNTS RECEIVABLE
A considerable amount of judgment is required in assessing the realizability of
receivables, including the current creditworthiness of each customer, related
aging of the past due balances and the facts and circumstances surrounding any
non-payment. The Company's provisions for bad debts during 2003, 2002 and 2001
were $3.4 million, $6.9 million and $12.6 million, respectively. Included in
these provisions for bad debts were net (reversals) and provisions for steel
mill customers of $(1.5) million, $1.9 million and $8.1 million in 2003, 2002
and 2001, respectively. The 2003 amount includes approximately $1.9 million in
net reserve reductions related to changes in estimates during the year due
principally to the recovery of receivables related to a customer that had
previously filed for bankruptcy protection.
During the last three years, approximately 40 U.S. steelmakers and several
international steel producers have filed for bankruptcy-court protection, some
of which were the Company's customers. The Company evaluates its reserve
requirements for bankrupt steel customers based upon contractual rights and
obligations, the rights and obligations under the respective country's
bankruptcy laws, details of the proposed reorganization plan, and our hi